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Political debates · Deficit reduction |
| Terminology |
| Inflation · Balance of payments |
Deficit reduction in the United States refers to taxation, spending, and economic policy debates and proposals designed to reduce the Federal budget deficit and move the United States to a sustainable fiscal path. Government agencies including the Government Accountability Office (GAO), Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S. Treasury Department have reported that the federal government is facing a series of important financing challenges. In the short-run, tax revenues have declined significantly due to a severe recession and tax policy choices, while expenditures have expanded for wars, unemployment insurance and other safety net spending.[1][2] In the long-run, expenditures related to healthcare programs such as Medicare and Medicaid are projected to grow faster than the economy overall as the population matures.[3][4]
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A budget deficit refers to expenditures that exceed tax collections during a given period, requiring borrowing to fund the difference. The U.S. federal government has run annual deficits in 36 of the past 40 fiscal years, with surpluses from 1998-2001. Tax revenues averaged approximately 18% GDP from 1971-2010, with expenditures around 21% GDP, resulting in an average annual deficit of around 3% GDP. For example, in 2010 revenues were $2.16 trillion and outlays were $3.46 trillion, resulting in a deficit of $1.3 trillion or 9.4% GDP.[5]
Debt represents the accumulation of deficits over time. Debt held by the public, a partial measure of the U.S. national debt, rose in dollar terms each year except during the 1998-2001 surplus period. Measured as a percentage of GDP, debt held by the public ranged between 23% and 50% during the 1971-2007 period, then rose significantly in the wake of the financial crisis and recession of 2008-present, ending 2010 at 62.1% GDP or $9.0 trillion.[6]
Economic growth and employment are key factors driving recent deficits. The Congressional Budget Office (CBO) estimated in October 2011 that approximately one-third of the deficit projected for fiscal year 2012 is due to economic factors, which have caused safety net expenditures to increase and tax revenues to decline with high unemployment.[7]
The U.S. last balanced its budget in 2001. Between 2001 and 2010, spending increased by 5.6% GDP (from 18.2% GDP in 2001 to 23.8% GDP in 2010), while revenues declined by 4.6% GDP (from 19.5% GDP in 2001 to 14.9% GDP in 2010), resulting in a 9.4% GDP deficit. Medicare/Medicaid spending increased by 1.9% GDP and defense spending increased by 1.7% GDP. Individual income tax revenues fell by 3.5% GDP and payroll taxes fell by 0.8% GDP.[8][9]
Economist Paul Krugman summarized these causes in May 2011: "What happened to the budget surplus the federal government had in 2000? The answer is, three main things. First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs."[10]
A high debt level may affect inflation, interest rates, and economic growth. A variety of factors are placing increasing pressure on the value of the U.S. dollar, increasing the risk of devaluation or inflation and encouraging challenges to dollar's role as the world's reserve currency. If another currency or basket of currencies replaced the dollar as the reserve currency, the U.S. would face higher interest rates to attract capital, reducing economic growth for the long-term. The Economist wrote in May 2009:
Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. Given the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate. Investors are increasingly alive to this danger...[11]
The Government Accountability Office (GAO), the federal government's auditor, argues that the U.S. is on a fiscally "unsustainable" path and that politicians and the electorate have been unwilling to change this path.[12] The 2010 U.S. budget prepared by the President indicated annual debt increases of nearly $1 trillion annually through 2019, projecting the total U.S. national debt to grow to $23.3 trillion by 2019.[13] Further, the subprime mortgage crisis has significantly increased the financial burden on the U.S. government, with over $10 trillion in commitments or guarantees and $2.6 trillion in investments or expenditures as of May 2009, only some of which are included in the budget document.[14]
The U.S. also has a large trade deficit, meaning imports exceed exports. Such deficits are only possible if there is a large foreign investment, or a capital account surplus. The balance of payments identity requires that a country (such as the USA) running a current account deficit also have a capital account (investment) surplus of the same amount. In 2005, Ben Bernanke addressed the implications of the USA's high and rising current account (trade) deficit, resulting from USA imports exceeding its exports. Between 1996 and 2004, the USA current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP.[15]
Debt levels may also affect economic growth rates. Economists Kenneth Rogoff and Carmen Reinhart reported in 2010 that among the 20 advanced countries studied, average annual GDP growth was 3–4% when debt was relatively moderate or low (i.e. under 60% of GDP), but it dips to just 1.6% when debt was high (i.e., above 90% of GDP).[16]
The CBO reported several types of risk factors related to rising debt levels in a July 2010 publication:
In addition to the debt increase required to fund government spending in excess of tax revenues during a given year, some Treasury securities issued in prior years mature and must be "rolled-over" or replaced with new security issuance. During the financial crisis, the Treasury issued a sizable amount of relatively shorter-term debt, which caused the average maturity on total Treasury debt to reach a 25-year low of just more than 50 months in 2009. As of late 2009, roughly 43% of U.S. public debt needed to be rolled over within 12 months, the highest proportion since the mid-1980s. The relatively short maturity of outstanding Treasury debt, coupled with the increased reliance on foreign creditors, puts the U.S. at greater risk of sharply higher borrowing costs should risk perceptions change abruptly in credit markets.[16]
Several government agencies provide budget and debt data and analysis. These include the Government Accountability Office (GAO), the Congressional Budget Office (CBO), the Office of Management and Budget (OMB), and the U.S. Treasury Department. These agencies have reported that the federal government is facing a series of critical long-term financing challenges. This is because expenditures related to entitlement programs such as Social Security, Medicare, and Medicaid are growing considerably faster than the economy overall, as the population grows older.
These agencies have indicated that under current law, sometime between 2030 and 2040, mandatory spending (primarily Social Security, Medicare, Medicaid, and interest on the national debt) will exceed tax revenue. In other words, all "discretionary" spending (e.g., defense, homeland security, law enforcement, education, etc.) will require borrowing and related deficit spending. These agencies have used such language as "unsustainable" and "trainwreck" to describe such a future.[12]
While there is significant debate about solutions,[18] the significant long-term risk posed by the increase in entitlement spending is widely recognized,[19] with health care costs (Medicare and Medicaid) the primary risk category.[20][21] In a June 2010 opinion piece in the Wall Street Journal, former chairman of the Federal Reserve, Alan Greenspan noted that "Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit."[22] If significant reforms are not undertaken, benefits under entitlement programs will exceed government income by over $40 trillion over the next 75 years.[21] According to the GAO, this will cause debt ratios relative to GDP to double by 2040 and double again by 2060, reaching 600 percent by 2080.[12]
In 2006, Professor Laurence Kotlikoff argued the United States must eventually choose between "bankruptcy", raising taxes, or cutting payouts. He assumes there will be ever-growing payment obligations from Medicare and Medicaid.[23] Others who have attempted to bring this issue to the fore of America's attention range from Ross Perot in his 1992 Presidential bid, to motivational speaker Robert Kiyosaki, and David Walker, former head of the Government Accountability Office.[24][25]
Thomas Friedman has argued that increasing dependence on foreign sources of funding will render the U.S. less able to act independently.[26]
Moody's Investors Service warned in March 2010 that the United States' AAA-rated U.S Treasury bonds, while currently not in danger, could be downgraded in the future if the U.S. government failed to rein in public debt, saying that growing the economy cannot be the only solution.[27]
There is a significant difference between the reported budget deficit and the change in debt. The key differences are: 1) The Social Security surplus, which reduces the "off-budget" deficit often reported in the media; and 2) Non-budgeted spending, such as for the Iraq and Afghanistan wars. The debt increased by approximately $550 billion on average each year during the 2003–2007 period, but then increased over $1 trillion during FY 2008.
The cumulative debt of the United States in the past eight completed fiscal years was approximately $4.3 trillion, or about 43% of the total national debt of ~$10.0 trillion as of September 2008.[28][29][30]
Budgeted net interest on the public debt was approximately $240 billion in fiscal years 2007 and 2008. This represented approximately 9.5% of government spending. Interest was the fourth largest single budgeted disbursement category, after defense, Social Security, and Medicare.[31] Despite higher debt levels, this declined to $189 billion in 2009 or approximately 5% of spending, due to lower interest rates. Average interest rates declined due to the crisis from 1.6% in 2008 to 0.3% in 2009.[32]
During FY2008, the government also accrued a non-cash interest expense of $212 billion for intra-governmental debt, primarily the Social Security Trust Fund, for a total interest expense of $454 billion.[33] This accrued interest is added to the Social Security Trust Fund and therefore the national debt each year and will be paid to Social Security recipients in the future.
Public debt owned by foreigners has increased to approximately 50% of the total or approximately $3.4 trillion.[34] As a result, nearly 50% of the interest payments are now leaving the country, which is different from past years when interest was paid to U.S. citizens holding the public debt. Interest expenses are projected to grow dramatically as the U.S. debt increases and interest rates rise from very low levels in 2009 to more typical historical levels. CBO estimates that nearly half of the debt increases over the 2009–2019 period will be due to interest.[35]
Should interest rates return to historical averages, the interest cost would increase dramatically. Historian Niall Ferguson described the risk that foreign investors would demand higher interest rates as the U.S. debt levels increase over time in a November 2009 interview.[36]
Various financial indicators may provide an early warning that market forces are reacting to an increasing level of debt. Examples include Treasury security interest rates (yields), Treasury auction results, credit default swap spreads, and TIPS spreads.
In April 2011, rating agency Standard & Poor's (S&P) issued a "negative" outlook on the U.S. "AAA" (highest quality) debt rating for the first time since the rating agency began in 1860, indicating there is a one in three chance of an outright reduction in the rating over the next two years. According to S&P, meaningful progress towards balancing the budget would be required to move the U.S. back to a "stable" outlook. Losing the AAA rating would likely mean higher interest rates and the sale of treasury bonds by entities required to hold AAA securities.[37] The S&P press release stated: "We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."[38] In June, Moody's followed suit, warning that if Congress did not quickly raise the debt ceiling above $14.3 trillion, the agency might reduce the debt rating. Moody's also commented on the political process, warning that the heightened polarization on both sides increased the risk of a default.[39] However, on August 5, 2011, S&P made the decision to give a first-ever downgrade to U.S. sovereign debt, lowering the rating one notch to a "AA+" rating, with a negative outlook.[40] S&P stated that "[w]e lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process."[40]
Strategies for addressing the deficit problem may include policy choices regarding taxation and spending, along with policies designed to increase economic growth and reduce unemployment. These policy decisions may be evaluated in the context of a framework:[41]
Historically, government spending has not declined year-over-year in nominal terms since at least 1971. However, by limiting the rate of growth in discretionary spending (defense and non-defense) while growing revenues, the budget was balanced from 1998-2001. From 1990 to 1999, discretionary spending grew by a total of 14%, while revenues grew 77%. In contrast, from 2000-2009, discretionary spending grew by a total of 101% while revenues grew only 4% (see graphic at right).[44]
In January 2008, then GAO Director David Walker presented a strategy for addressing what he called the federal budget "burning platform" and "unsustainable fiscal policy." This included improved financial reporting to better capture the obligations of the government; public education; improved budgetary and legislative processes, such as "pay as you go" rules; the restructure of entitlement programs and tax policy; and creation of a bi-partisan fiscal reform commission. He pointed to four types of "deficits" that make up the problem: budget, trade, savings and leadership.[21]
Economist Paul Krugman has recommended a series of policy and economic actions to address the budget deficit. He wrote in February 2011: "What would a serious approach to our fiscal problems involve? I can summarize it in seven words: health care, health care, health care, revenue...Long-run projections suggest that spending on the major entitlement programs will rise sharply over the decades ahead, but the great bulk of that rise will come from the health insurance programs, not Social Security. So anyone who is really serious about the budget should be focusing mainly on health care...[by] getting behind specific actions to rein in costs."[45]
Economist Nouriel Roubini wrote in May 2010: "There are only two solutions to the sovereign debt crisis — raise taxes or cut spending — but the political gridlock may prevent either from happening...In the US, the average tax burden as a share of GDP is much lower than in other advanced economies. The right adjustment for the US would be to phase in revenue increases gradually over time so that you don't kill the recovery while controlling the growth of government spending."[46]
David Leonhardt wrote in The New York Times in March 2010: "For now, political leaders in both parties are still in denial about what the solution will entail. To be fair, so is much of the public. What needs to happen? Spending will need to be cut, and taxes will need to rise. They won’t need to rise just on households making more than $250,000, as Mr. Obama has suggested. They will probably need to rise on your household, however much you make...A solution that relied only on spending cuts would dismantle some bedrock parts of modern American society...A solution that relied only on taxes would muzzle economic growth."[47]
Fed Chair Ben Bernanke stated in April 2010: "Thus, the reality is that the Congress, the Administration, and the American people will have to choose among making modifications to entitlement programs such as Medicare and Social Security, restraining federal spending on everything else, accepting higher taxes, or some combination thereof."[48]
Journalist Steven Pearlstein advocated in May 2010 a comprehensive series of budgetary reforms. These included: Spending caps on Medicare and Medicaid; gradually raising the eligibility age for Social Security and Medicare; limiting discretionary spending increases to the rate of inflation; and imposing a value-added tax.[49] Journalist Robert J. Samuelson also recommended a ten-point deficit reduction plan.[50]
Paul Krugman wrote in August 2011: "What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems."[51]
Economist Robert Reich wrote in September 2011 that political policies have resulted in relatively stagnant U.S. wages for the middle class since 1979 and record income inequality. Despite more women entering the workforce to provide two family incomes, U.S. consumption became increasingly debt-financed and unsustainable. He advocated higher taxation on the wealthy, stronger safety nets, strengthening labor unions (which represented less than 8% of the private labor force), Medicare for all, raising the average wages in trading partner countries, and a focus on education.[52]
Economist Michael Spence explained in August 2011 that over the 1990-2008 period, job creation was almost entirely in the "non-tradable" sector (which produces goods and services that must be consumed domestically, like healthcare) with few jobs created in the "tradable" sector (which produces goods that can be sold internationally, like manufacturing). He stated that job creation in both sectors is necessary and that various factors, such as the housing bubble, hid the lack of job creation in the tradable sector. He stated: "We’re going to have to try to fix the ineffective parts of our educational system...We’re under-investing in things like infrastructure...we’ve just been living on consumption and we need to live a little bit more on investment, including public-sector investment." He also advocated tax policy changes to encourage hiring of U.S. workers.[53]
Former Treasury Secretary Lawrence Summers mentioned the importance of economic growth and job creation as critical to addressing the deficit issue during July 2011.[54] The President's 2012 budget forecasts annual real GDP growth averaging 3.2% from 2011-2021 (3.7% from 2011–2016 and 2.6% from 2017-2021.)[55] The change in real GDP was -0.3% in 2008, -3.5% in 2009 and +3.0% in 2010. During 2011, real GDP increased at an annual rate of +0.4% during the first quarter and +1.0% during the second quarter.[56]
Conservative organizations such as the U.S. Chamber of Commerce have advocated growth and employment strategies based on a reduction in government regulations; empowering state education systems; teacher pay for performance strategies; training programs better focused on available jobs; creation of a private and public infrastructure bank to finance investments; tax rate reductions for corporations; free trade agreements; and reducing labor union power.[57]
Actions can be taken now to encourage economic growth while implementing measures that reduce future deficits. Ben Bernanke wrote in September 2011: "...the two goals--achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery--are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives."[58]
CBO has reported that if current laws are allowed to take effect as scheduled (e.g., if significant tax cuts expire at the end of 2012 and the Budget Control Act of 2011 is implemented) the short-term deficit problem essentially goes away by 2021, assuming a return to pre-crisis growth rates.[59] Since the path forward on healthcare cost reform is unclear and other countries have much lower costs relative to GDP with comparable results on key measures, various studies could be conducted today to determine future policy actions.[60][61]
During January 2010, the National Research Council and the National Academy of Public Administration reported a series of strategies to address the problem. They included four scenarios designed to prevent the public debt to GDP ratio from exceeding 60%:
- Low spending and low taxes. This path would allow payroll and income tax rates to remain roughly unchanged, but it would require sharp reductions in the projected growth of health and retirement programs; defense and domestic spending cuts of 20 percent; and no funds for any new programs without additional spending cuts.
- Intermediate path 1. This path would raise income and payroll tax rates modestly. It would allow for some growth in health and retirement spending; defense and domestic program cuts of 8 percent; and selected new public investments, such as for the environment and to promote economic growth.
- Intermediate path 2. This path would raise income and payroll taxes somewhat higher than with the previous path. Spending growth for health and retirement programs would be slowed, but less than under the other intermediate path; and spending for all other federal responsibilities would be reduced. This path gives higher priority to entitlement programs for the elderly than to other types of government spending.
- High spending and taxes. This path would require substantially higher taxes. It would maintain the projected growth in Social Security benefits for all future retirees and require smaller reductions over time in the growth of spending for health programs. It would allow spending on all other federal programs to be higher than the level implied by current policies.[62][63]
Significant reduction in deficits occurs if laws already on the books in 2011 are allowed to take effect. Over the 2012-2021 period, an estimated $1.2 trillion in spending reductions will occur if the Budget Control Act of 2011 is allowed to take effect. Further, expiration of the Bush Tax Cuts and other tax cuts passed during President Obama's administration are scheduled to occur in 2012, which add $4.7 trillion in revenue over a decade. According to CBO, letting current laws take effect will bring the budget into primary balance (i.e., excluding interest) by 2014.[64]
Specifically, allowing laws on the books in 2011 to take effect would reduce future debts by up to $7.1 trillion:
The CBO provides a report discussing the cost and revenue impact of various budget options annually.[66] The CBO also estimated in 2007 that allowing the 2001 and 2003 income tax cuts to expire on schedule in 2010 would reduce the annual deficit by $200–300 billion.[67] In addition, CBO reported that annual defense spending has increased from approximately $300 billion in 2001 (when the budget was last balanced) to $650 billion in 2009.[68]
Rep. Paul Ryan (R) has proposed the Roadmap for America's Future, which is a series of budgetary reforms. His January 2010 version of the plan includes partial privatization of Social Security, the transition of Medicare to a voucher system, discretionary spending cuts and freezes, and tax reform.[69] A series of graphs and charts summarizing the impact of the plan are included.[70] Economists have both praised and criticized particular features of the plan.[71][72] The CBO also did a partial evaluation of the bill.[73] The Center for Budget and Policy Priorities (CBPP) was very critical of the Roadmap.[74] Rep. Ryan provided a response to the CBPP's analysis.[75]
The House of Representatives Committee on the Budget, chaired by Paul Ryan, released a budget resolution in April 2011, titled The Path to Prosperity: Restoring America's Promise. The Path focuses on tax reform (lowering income tax rates and reducing tax expenditures or loopholes); spending cuts and controls; and redesign of the Medicare and Medicaid programs. It does not propose significant changes to Social Security.[76] The CBO did an analysis of the resolution (a less rigorous evaluation than full scoring of legislation), estimating that the Path would balance the budget by 2030 and reduce the level of debt held by the public to 10% GDP by 2050, vs. 62% in 2010. The Path assumes revenue collection of 19% GDP after 2022, up from the current 15% GDP and closer to the historical average of 18.3% GDP. A grouping of spending categories called "Other Mandatory and Defense and Non-Defense Discretionary spending" would be reduced from 12% GDP in 2010 to 3.5% by 2050.[77] Economist Paul Krugman called it "ridiculous and heartless" due to a combination of income tax rate reductions (which he argued mainly benefit the wealthy) and large spending cuts that would affect the poor and middle classes.[78][79]
The Republican Party website includes an alternative budget proposal provided to the President in January 2010. It includes lower taxes, lower annual increases in entitlement spending growth, and marginally higher defense spending than the President's 2011 budget proposal.[80] During September 2010, Republicans published "A Pledge to America" which advocated a repeal of recent healthcare legislation, reduced spending and the size of government, and tax reductions.[81] The NYT editorial board was very critical of the Pledge, stating: "...[The Pledge] offers a laundry list of spending-cut proposals, none of which are up to the scale of the problem, and many that cannot be taken seriously."[82]
President Obama established a budget reform commission, the National Commission on Fiscal Responsibility and Reform, during February, 2010. The Commission "shall propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers." Unfortunately the Commission was unable to garner the required supermajority of its members in support of its proposals, and disbanded without issuing an official report to Congress.[83] The final, failed draft report, which received 11 of the required 14 votes for approval, was released to the public in December 2010.[84]
The Commission released a draft of its proposals on November 10, 2010. It included various tax and spend adjustments to bring long-run government tax revenue and spending into line at approximately 21% of GDP. For fiscal year 2009, tax revenues were approximately 15% of GDP and spending was 24% of GDP. The Co-chairs summary of the plan states that it:
The Center on Budget and Policy Priorities evaluated the draft plan, praising that it "puts everything on the table" but criticizing that it "lacks an appropriate balance between program cuts and revenue increases."[86]
President Obama outlined his strategy for reducing future deficits in April 2011 and explained why this debate is important: "...as the Baby Boomers start to retire in greater numbers and health care costs continue to rise, the situation will get even worse. By 2025, the amount of taxes we currently pay will only be enough to finance our health care programs -- Medicare and Medicaid -- Social Security, and the interest we owe on our debt. That’s it. Every other national priority -– education, transportation, even our national security-–will have to be paid for with borrowed money." He warned that interest payments may reach $1 trillion annually by the end of the decade.
He outlined core principles of his proposal, which includes investments in key areas while reducing future expenditures. "I will not sacrifice the core investments that we need to grow and create jobs. We will invest in medical research. We will invest in clean energy technology. We will invest in new roads and airports and broadband access. We will invest in education. We will invest in job training. We will do what we need to do to compete, and we will win the future." He outlined his proposals for reducing future deficits, by:
President Obama's actual 2012 budget proposal was defeated in the Senate by a margin of 0-97 votes.[88]
President Obama announced a 10-year (2012–2021) plan in September 2011 called: "Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction." The plan included tax increases on the wealthy, along with cuts in future spending on defense and Medicare. Social Security was excluded from the plan. The plan included $3,670 billion in deficit reduction over 10 years, offset by $447 billion in deficit increases (spending and tax cuts) for the proposed American Jobs Act, for a net deficit reduction of $3,222 billion. If the recently passed Budget Control Act of 2011 is included, this adds another $1,180 billion in deficit reduction for a total of $4,403 billion. Plan estimates indicate that if all these measures were implemented, the deficit in 2021 would be 2.3% GDP or $565 billion. Key categories of savings over the 10 years included in the $3,670 billion are:
The Center on Budget and Policy Priorities supported the proposal, stating: "President Obama proposed a balanced and well-designed package today that would boost economic growth and jobs in the short run while stabilizing federal debt as a share of the economy after 2013. By keeping federal debt held by the public from growing as a share of the economy, the President's proposal would meet the definition of a 'sustainable budget' that economists often use." [90]
The Congressional Progressive Caucus (CPC) consists of 75 members of the House of Representatives and one senator. It proposed "The People's Budget" in April 2011, which includes the following recommendations, which it claims would balance the budget by 2021 while maintaining debt as a % GDP under 65%:
The Economic Policy Institute, a liberal think tank, evaluated the proposal.[92] The Economist also discussed it.[93] Economist Paul Krugman wrote in April 2011: "It’s worth pointing out that if you want to balance the budget in 10 years, you pretty much must do it largely by cutting defense and raising taxes; you can’t make huge cuts in the rest of the budget without inflicting extreme pain on millions of Americans."[94]
The Peter G. Peterson Foundation solicited proposals from six organizations, which included the American Enterprise Institute, the Bipartisan Policy Center, the Center for American Progress, the Economic Policy Institute, The Heritage Foundation, and the Roosevelt Institute Campus Network. These proposals were reviewed by a former CBO director and the Tax Policy Institute to provide a common scoring mechanism. The recommendations of each group were reported in May 2011.[95]
The Bipartisan Policy Center sponsored a Debt Reduction Task Force, co-chaired by Pete V. Domenici and Alice M. Rivlin. This panel created a report called "Restoring America's Future," which was published in November 2010. The plan claimed to stabilize the debt to GDP ratio at 60%, with up to $6 trillion in debt reduction over the 2011-2020 period. Specific plan elements included:
Then OMB Director Peter Orszag stated in a November 2009 interview: "It's very popular to complain about the deficit, but then many of the specific steps that you could take to address it are unpopular. And that is the fundamental challenge that we are facing, and that we need help both from the American public and Congress in addressing." He characterized the budget problem in two parts: a short- to medium-term problem related to the financial crisis of 2007–2010, which has reduced tax revenues significantly and involved large stimulus spending; and a long-term problem primarily driven by increasing healthcare costs per person. He argued that the U.S. cannot return to a sustainable long-term fiscal path by either tax increases or cuts to non-healthcare cost categories alone; the U.S. must confront the rising healthcare costs driving expenditures in the Medicare and Medicaid programs.[98]
Fareed Zakaria said in February 2010: "But, in one sense, Washington is delivering to the American people exactly what they seem to want. In poll after poll, we find that the public is generally opposed to any new taxes, but we also discover that the public will immediately punish anyone who proposes spending cuts in any middle class program which are the ones where the money is in the federal budget. Now, there is only one way to square this circle short of magic, and that is to borrow money, and that is what we have done for decades now at the local, state and federal level...So, the next time you accuse Washington of being irresponsible, save some of that blame for yourself and your friends."[99]
Andrew Sullivan said in March 2010: "...the biggest problem in this country is...they're big babies. I mean, people keep saying they don't want any tax increases, but they don't want to have their Medicare cut, they don't want to have their Medicaid [cut] or they don't want to have their Social Security touched an inch. Well, it's about time someone tells them, you can't have it, baby...You have to make a choice. And I fear that—and I always thought, you see, that that was the Conservative position. The Conservative is the Grinch who says no. And, in some ways, I think this in the long run, looking back in history, was Reagan's greatest bad legacy, which is he tried to tell people you can have it all. We can't have it all."[100]
Harvard historian Niall Ferguson stated in a November 2009 interview: "The United States is on an unsustainable fiscal path. And we know that path ends in one of two ways; you either default on that debt, or you depreciate it away. You inflate it away with your currency effectively." He said the most likely case is that the U.S. would default on its entitlement obligations for Social Security and Medicare first, by reducing the obligations through entitlement reform. He also warned about the risk that foreign investors would demand a higher interest rate to purchase U.S. debt, damaging U.S. growth prospects.[101]
Economist Herbert Stein is quoted as saying: "Trends that can't continue, won't." In May 2011, the Wells Fargo Economics Group wrote that: "The failure to control spending will result in some combination of higher inflation, higher interest rates, a weaker dollar, weaker economic growth and, hence, a lower standard of living in the United States..."[102] Thomas Friedman wrote in September 2011: "But as long as every solution that is hard is off the table, then our slow national decline will remain on the table."[103]
According to a CBS News/New York Times poll in July 2009, 56% of people were opposed to paying more taxes to reduce the deficit and 53% were also opposed to cutting spending. According to a Pew Research poll in June 2009, there was no single category of spending that a majority of Americans favored cutting. Only cuts in foreign aid (less than 1% of the budget), polled higher than 33%. Economist Bruce Bartlett wrote in December 2009: "Nevertheless, I can't really blame members of Congress for lacking the courage or responsibility to get the budget under some semblance of control. All the evidence suggests that they are just doing what voters want them to do, which is nothing."[104]
A Bloomberg/Selzer national poll conducted in December 2009 indicated that more than two-thirds of Americans favored tax increases on the rich (individuals making over $500,000) to help solve the deficit problem. Further, an across-the-board 5% cut in all federal discretionary spending would be supported by 57%; this category is about 30% of federal spending. Only 26% favored tax increases on the middle class and only 23% favored reducing the growth rate in entitlements, such as Social Security.[105][106]
A Rasmussen Reports survey in February 2010 showed that only 35% of voters correctly believe that the majority of federal spending goes to just defense, Social Security and Medicare. Forty-four percent (44%) say it’s not true, and 20% are not sure. [107] A January 2010 Rasmussen report showed that overall, 57% would like to see a cut in government spending, 23% favor a freeze, and 12% say the government should increase spending. Republicans and unaffiliated voters overwhelmingly favor spending cuts. Democrats are evenly divided between spending cuts and a spending freeze.[108]
According to a Pew Research poll in March 2010, 31% of Republicans would be willing to decrease military spending to bring down the deficit. A majority of Democrats (55%) and 46% of Independents say they would accept cuts in military spending to reduce the deficit.[109]
The CBO reported in September 2011 that: "Given the aging of the population and rising costs for health care, attaining a sustainable federal budget will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:
During testimony before the Congressional Joint Deficit Reduction Committee in September 2011, CBO Director Douglas Elmendorf counseled members of Congress to make decisions about the role of the federal government, then make policy choices to obtain the revenue necessary to fund those roles, to put the U.S. on a sustainable fiscal path.[111]
How urgently should the U.S. put plans in place to address it's budget challenges? Fed Chair Ben Bernanke stated in January 2007: "The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago."[112]