Cutting the Deficit in Three Easy Steps

In a speech at George Washington university today, President Obama unveiled his plan to pay down the federal debt. Last week, Rep. Paul Ryan (R-WI) proposed his own debt reduction plan, which as I wrote not only relied on completely unrealistic economic assumptions, but would also reduce Medicare benefits and gut the regular operations of the federal government while cutting taxes for the wealthy.

Obama’s proposal may not be perfect, but it is better. As I’ve argued before, the U.S. is not broke. The federal government’s budget problems are serious, but not as pressing as we are generally told. In fact, as Ezra Klein says, if we simply do nothing—that would mean, of course, not extending any of the Bush tax cuts, even those that benefit the middle class—our deficits will more or less go away. As Austin Frakt says, that’s because according to the Congressional Budget Office last year’s health care reform bill actually raises enough revenue to pay for health care costs.

Nevertheless, as Obama pointed out in his speech, the interest we pay on the federal debt alone could soon reach $1 trillion. It may be that we should focus on improving the economy and reducing unemployment now—although as Nobel-Prize-winning economist Joseph Stiglitz has argued, it should be possible to invest in the economy and reduce the debt at the same time. But one way or another, the U.S. will have to do something to pay down its debt soon. Obama’s plan is on the right track. The truth is that what we have to do is pretty simple.

Cut defense spending.

The fact is that we are still preparing for a war with the Soviet Union, which collapsed 20 years ago. We spent $698 billion on defense last year, including the money we spent in Iraq and Afghanistan. That’s around 43% of the world’s total defense spending, and an 81% increase on the decade. Our massive military budget is a legacy of the Cold War. Since the end of WWII, we have been the world’s policeman, and have relied on our military predominance to project power.

But the Cold War is over. We no longer have to prepare for a conventional war against the Soviets. While China presents a growing challenge to our military supremacy, their economy is still just 40% the size of ours, and they spend a much smaller portion of their GDP on defense. In fact, Chinese defense spending accounts for just over 7% of the world’s total, or about 1/6 what we spend. Russian defense spending, meanwhile, has dropped dramatically since the end of the Cold War, to less than 4% of the world’s total. Most of the other major spenders—the U.K., France, Germany, and Japan—are our allies. There is simply no serious military threat to our supremacy.

Cutting the defense budget is politically difficult to do. But we can certainly afford to reduce the size of forces designed to fight a large conventional power like the Soviets. And while we should still certainly prepare to fight the kind of wars against insurgent forces that we are fighting around the world, we should rely less on in the future on using our military to project our power around the world. Obama proposes cutting $400 billion from our defense budget over 12 years. We should be able to cut even more than that.

Lower health care costs.

The real problem with Medicare is that health care is expensive and becoming more expensive quickly. Cutting Medicare benefits—as Paul Ryan proposes to do—won’t solve the basic problem. The fact is that seniors, like all Americans, need health care they can afford. That’s very much the government’s problem. And the truth is that anyone who wants to win elections will have to do something to make sure seniors can continue to afford health care.

This is the problem that last year’s health care bill—which the Congressional Budget Office says would reduce the deficit $130 billion over a 10-year period—seeks to address. Obama’s new budget proposal proposes to do more to control health care costs. We clearly should be able do more, since there’s no fundamental reason that health care should cost much more in the U.S. than in the rest of the developed world, when it is not appreciably better for most of us.

Increase taxes.

That’s right, I said it. We don’t pay enough in taxes. Obama is right to say that increasing taxes has to be part of the answer. Tax rates in the U.S. are extremely low compared to the rest of the developed world. But we still expect our government to do just as much as their governments. Tax rates in the U.S. are also low by historical standards, because even as everyone claims to worry about the deficit, we keep cutting taxes. Taxes are lower as a percentage of GDP today than they have been at any time since 1950, when our military was much smaller than it is today. If we want a strong, effective government, we’re going to have to raise taxes to pay for it.

We should particularly raise taxes on the rich—not continue to cut them, as Paul Ryan wants to do. The rich are simply the people who can most easily afford to pay more taxes. And the idea that cutting taxes on the rich benefits all of us by “trickling down” to the middle class is pure fantasy. The truth is that while the rich do face a higher effective tax rates, the top tax rate on the rich is the lowest it has been since 1931, even though they have been taking home a larger and larger share of our national income over the last thirty years.

One of the ways we can do this is to simplify the tax code, and stop using tax incentives to make social policy. While it’s tempting to use Congress’ power to tax as a social engineering tool, it doesn’t work all that well, and it allows special interests to build all sorts of loopholes for themselves into the tax code. And, of course, it also makes paying taxes a nightmare. Simplifying the tax code would mean eliminating the myriad tax breaks that primarily benefit the rich and allow some rich people to pay lower taxes than people who make much less.

Photo credit: Pete Souza