The December 2010 report of the bipartisan National Commission on Fiscal Responsibility and Reform, mandated by President Barack Obama, warns that “by 2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security. Every other federal government activity — from national defense and homeland security to transportation and energy — will have to be paid for with borrowed money.”
On its current course, the U.S. can expect a low–growth economy with higher interest rates, limited private sector expansion, tepid job creation, fewer resources for investment and emergencies, increased possibility of inflation and greater risk from foreign investors, who already hold more than half of U.S. national debt. And this scenario does not include a shock to the economy such as might result from further violence and instability in the Middle East.
This is not just a “budget deficit” problem but a crisis of U.S. economic security.
Americans are mostly unaware of the scope and consequences of this crisis. The current budget debate has focused mostly on the need to cut nonsecurity discretionary spending, which is only 12 percent of the president’s proposed $3.7 trillion fiscal 2012 budget. What Congress eventually decides about funding for discretionary programs such as National Public Radio or Planned Parenthood is mostly irrelevant to the crisis at hand, although makes good fodder for the media and the political bases of both parties. The real problem is elsewhere: mandatory spending on entitlement programs, a bloated defense budget, and a broken tax code.
A good start is legislation being drafted by Sens. Saxby Chambliss, R-Ga., and Mark Warner, D-Va., and four of their colleagues (known as the “Gang of Six”), which uses as baseline the recommendations of the National Commission on Fiscal Responsibility and Reform. The commission’s balanced, detailed and realistic proposals include discretionary spending cuts (including defense), comprehensive tax overhaul, health care cost containment, Social Security changes (including increasing the retirement age), mandatory savings and changes to the budget process.
This effort by the “Gang of Six” should not be taken lightly. Compromise carries political risk, especially heading into the 2012 election cycle. Democrats generally consider entitlement changes, and especially Social Security, as third rails. Republicans find it difficult to support tax increases or cuts in defense spending. Both need to give ground.
An encouraging letter last week from 32 Republican and 32 Democratic senators praised the commission and urged Obama “to engage in a broader discussion about a comprehensive deficit reduction package,” including “discretionary spending cuts, entitlement changes and tax reform.”
In search of revenues, one place to start is a tax on gasoline. New York Times columnist Thomas Friedman is a champion of this idea, and its time is overdue. A gas tax may seem heresy given the spike in oil prices because of the volatility in the Middle East. But it would provide revenues for the budget, create incentives for alternative energy development and reduce carbon emissions, which is good for the environment.
Over time, it also should reduce U.S. dependency on Middle East oil, an Achilles’ heel of U.S. energy security and foreign policy. The tax could be phased in slowly, even deferred in the first year or two.
Some argue that a gas tax, budget cuts and entitlement changes might stymie a fragile recovery. But there are no pain-free solutions or short-term fixes to the U.S. economic crisis. The failure to date of the $787 billion American Recovery and Reinvestment Act is case in point. Marketed as a “stimulus” to create jobs, unemployment since passage of the Recovery Act in February 2009 has risen from 8.2 percent to 8.9 percent exactly two years later, while contributing to an unprecedented projected $1.5 trillion deficit for 2011. The Recovery Act passed with no Republican support in the House and only three Republican votes in the Senate, an example of the perils of hard-edged partisan economic policy.
The budget process should provide the means to set U.S. economic policies on a sustained track of fiscal responsibility, growth and international competitiveness. The deficit must be addressed, but is symptom not cause of a larger crisis and broken process. The national commission and the Senate “Gang of Six” have given us a road map for action. Bipartisanship in pursuit of U.S. economic security can and should be both good principle and good practice.
Andrew Parasiliti is executive director of the International Institute for Strategic Studies-U.S.
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