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The Budget Deficit - Isabel Sawhill - Campaign 2012

The Budget Deficit - Isabel Sawhill - Campaign 2012

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The 2012 presidential campaign is well underway, with Republican primaries already winnowing the field of challengers vying to compete against incumbent president Barack Obama. As the nation struggles with high unemployment, record budget deficits and questions about its future role as a world power, immense challenges await the next president of the United States. But too often, public discussions about the presidential campaign focus on polls and sound bites rather than ideas and information.

On January 19, the Brookings Institution officially launched Campaign 2012, a new project that will identify and address the 12 most critical issues facing the next president. Campaign 2012 will provide recommendations from Brookings experts on the pressing policy challenges facing America in a series of forums over the coming months. Speakers at the first event discussed the key issues of 2012 with a particular focus on the federal budget deficit. The event featured opening remarks from Kenneth Duberstein, former chief of staff to President Ronald Reagan and co-chairman of Brookings’s Opportunity 08 project in the last presidential cycle. Senior Fellow Benjamin Wittes, director of Campaign 2012, introduced the project and John F. Harris, POLITICO editor-in-chief, moderated a panel discussion with Brookings Senior Fellows Ron Haskins, Isabel Sawhill, and William Gale.

For the event, Ron Haskins wrote a policy brief proposing ideas for the next president on reducing the federal budget deficit. The following paper is a response to Haskins’ piece from Isabel Sawhill arguing that while deficit reduction is crucial, near-term economic stimulus is a better prescription for curing the nation’s economic ills. William Gale also prepared a response arguing that tax reform should make the nation’s tax system more equitable and progressive.
The 2012 presidential campaign is well underway, with Republican primaries already winnowing the field of challengers vying to compete against incumbent president Barack Obama. As the nation struggles with high unemployment, record budget deficits and questions about its future role as a world power, immense challenges await the next president of the United States. But too often, public discussions about the presidential campaign focus on polls and sound bites rather than ideas and information.

On January 19, the Brookings Institution officially launched Campaign 2012, a new project that will identify and address the 12 most critical issues facing the next president. Campaign 2012 will provide recommendations from Brookings experts on the pressing policy challenges facing America in a series of forums over the coming months. Speakers at the first event discussed the key issues of 2012 with a particular focus on the federal budget deficit. The event featured opening remarks from Kenneth Duberstein, former chief of staff to President Ronald Reagan and co-chairman of Brookings’s Opportunity 08 project in the last presidential cycle. Senior Fellow Benjamin Wittes, director of Campaign 2012, introduced the project and John F. Harris, POLITICO editor-in-chief, moderated a panel discussion with Brookings Senior Fellows Ron Haskins, Isabel Sawhill, and William Gale.

For the event, Ron Haskins wrote a policy brief proposing ideas for the next president on reducing the federal budget deficit. The following paper is a response to Haskins’ piece from Isabel Sawhill arguing that while deficit reduction is crucial, near-term economic stimulus is a better prescription for curing the nation’s economic ills. William Gale also prepared a response arguing that tax reform should make the nation’s tax system more equitable and progressive.

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Published by: Brookings Institution on Feb 06, 2012
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|1775 Massachusetts Avenue, NW, Washington, DC 20036|202.797.6000|Fax 202.697.6004|brookings edu
 A Perspective on the Budget Deficitand Job Creation
dx
 
Debt and deficits have moved front and center on the
.Ron Haskins calls them the most seriousdomestic problem facing the next president. As he argues, theproblem and its possible solutions are, by now, well known. Theproblem is that the kind of spending cuts and revenue increasesneeded to reduce the red ink are unpopular, and agreementbetween the parties is stymied by their differing views of theproper size and role of government. Haskins argues that despitetheir commitment to limited government, spending has grown asrapidly (or more rapidly) during Republican as during Democraticadministrations. But, he also argues that presidential leadershipis critical and faults President Obama for his failure to takeadvantage of a variety of opportunities to put the nation on abetter fiscal path. In particular, the president failed to endorse thebipartisan proposal put forward by his own fiscal commission.Haskins sensibly argues that presidential candidates should basebudgetary decisions on evidence of effectiveness, should beopen to compromise on the future of the health care system andshould set specific fiscal targets backed up by a trigger that wouldimpose automatic spending and tax increases if the target is notmet.
 
Isabel V. Sawhill
Senior Fellow,Economic StudiesCo-Director,Budgeting for NationalPrioritiesCo-Director,Center on Children andFamiliesThe Cabot Family Chair
 
 
2
I agree with much of what Haskins proposes, but on two key points, I take a differentperspective.First, at least in my view, jobs, not deficits, are the most important domestic problemfacing the country. Republican rhetoric about job-destroying deficits is simply wrong. Yes,we need to rein in deficits and debts over the longer run, and we should take legislativesteps now to insure a fiscally responsible future. But as Michael Greenstone and AdamLooney have shown, it will take five years even under the most optimistic assumptions before the unemployment rate returns to pre-recession levels. The problem is not a lackof capacity for the economy to grow. The problem, as Martin Baily argues in anotherchapter of this volume, is primarily a lack of demand. When businesses and consumersare not spending, government needs to be the spender of last resort. At a minimum, itshould do no harm. Cutting spending or raising taxes when private demand is weak willonly make matters worse. For these reasons, most economists have argued for short-term fiscal stimulus combined with long-term fiscal restraint. Unfortunately, it now appearsthat the short term could easily be as long as five years.Second, I want to defend the p
resident’s record and contrast it with that of his likely
opponent, Mitt Romney. I agree that the president has missed some opportunities
 –
 especially the opportunity to endorse Bowles-Simpson. But, he did put forward a plan foreconomic growth and deficit reduction in September 2011, as well as a deficit reductionframework much earlier in the year. His plan was far more specific than anything anyRepublican candidate has been willing to put on the table. (The House budget plan,authored by Paul Ryan, is an exception but Ryan is not running for president.) Thep
resident’s plan is also, in my view, far more sensible.
He has called for well over $4trillion in debt reduction over the next 10 years, including the $1.2 trillion in discretionarycuts enacted as part of the Budget Control Act, $580 billion in mandatory spending cuts(mostly from Medicare), $1.1 trillion from the drawdown of troops in Iraq and Afghanistan,$1.5 trillion from tax reform, and $430 billion in interest savings. Granted, some of thesesavings were already baked into the cake (for example, the war savings and the BCA
cuts), but let’s compare this plan to what Gov. Romney has proposed. Romney’s fiscal
plan includes a reduction in the corporate tax rate, from 35 to 25 percent, a reduction intax rates on capital gains and dividends (for couples with less than $200,000 in income)and an elimination of the estate tax and of the taxes on high-income households that werepart of health care reform. These are partly offset by an increase in taxes for low-income
 
 
3
Americans. On net, these would increase the deficit by $180 billion in 2015 alone (andcloser to several trillion over a decade),
with 57 percent of the benefits going to the top 1percent 
i
 With his tax proposals producing even more red ink, how then would Gov. Romneyget deficits under control? By calling for some immediate cuts to non-security spendingthat would produce no more than $200 billion in savings over a decade, and by promisingto seek a balanced budget amendment to the Constitution and to limit governmentspending to 20 percent of GDP. The proposed cuts to domestic spending are a tinyfraction of what is needed and pale in comparison to the revenue losses his tax proposalswould create. The balanced budget amendment and the limit on spending are nicerhetoric, but they avoid specifying how any savings are to be achieved and thus leave the
public in the dark about what’s really at stake. In particular, it’s hard to see how limi
tingspending to 20 percent of GDP, which Romney says he would try to implementimmediately, and simultaneously offsetting the reduced revenues from his tax proposals,can be achieved without cutting Medicare, Medicaid and Social Security substantially.
ii
 Even were I not concerned with imposing a burst of fiscal austerity on a very fragileeconomy, I would argue that the president has rightly called for shared sacrifice from thepublic. Gov. Romney, in contrast, is calling for just the opposite: further tax reductions forthose already well-off and draconian cuts in spending that will primarily affect the lessaffluent and programs, such as infrastructure spending, that promote our competitivenessand a healthy recovery.Finally, it is all very well to talk about presidential leadership, but as we should havelearned by now, it is Congress, not the president, that holds the keys to the fiscal kingdom.The election of 2012 is unlikely to resolve this barrier to solving the problem unless voterselect a unified government and give a filibuster-proof margin to the winning party in theSenate. As Tom Mann and Norman Ornstein
have argued so cogently,the most likelyscenario is continuing deadlock as long as Republicans insist on no new taxes. AlthoughDemocrats have been very resistant to cutting Social Security or Medicare, many of them,including President Obama, have made it clear they would be open to doing so, ifrevenues were also on the table. Yet, they face a Republican party united in its oppositionto any new revenues. Some moderates seem to believe that if elected, Romney would be
more “reasonable” than his campaign rhetoric implies. What this assumpt
ion misses is thefact that no president can buck the core principles of his party or completely ignore his

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