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Economy & Business

Commenary: How to fix America's debt problem

This article first appeared in the St. Louis Beacon, Oct. 18, 2011 - The U.S. debt problem is getting larger, and we need a serious plan to bring it under control. Since 2008, the national deficit has soared from an average of 2.9 percent of the GDP since 1960 to 10 percent in 2010.

To pay for the deficit, the federal government must borrow. Since the beginning of the recession in 2008, the national debt has ballooned from 40 percent to more than 70 percent in 2011. It had remained below 50 percent of GDP during most of the post-war period until 2008.

As borrowing rises dramatically so does its costs, which increases our deficit or crowds out public spending on education, infrastructure and research and development. Without these investments in our future economic growth, Americans' income will grow much more slowly or not at all. Economists also argue that a high debt to GDP ratio results in crowding out private investment, which also results in lower economic growth.

What should we do?

If you listen to the candidates for the GOP presidential nomination or the Republican majority in the House, all we need to do fix the debt problem is cut taxes and dramatically lower all non-defense spending; they also propose cutting costs in Social Security and Medicare in part through some privatization of these programs.

The Democratic preference is to maintain the status-quo of the big entitlement programs, evenly distribute cuts across defense and non-defense spending, and raise taxes for the wealthiest taxpayers.

Unfortunately, neither strategy by itself will curtail the long-term growth in the national debt. Any serious effort to reduce the debt must include both tax increases and spending cuts.

Fortunately, there is a path forward. Last year, two separate bipartisan commissions studied the problem and offered two different, if in some ways similar, sets of recommendations. Their recommendations, when made, were met by a deafening silence by lawmakers and the media. Now is the time that Congress begins to seriously consider them.

The better known of the two efforts is President Obama's National Commission on Fiscal Responsibility and Reform, sometimes called the Simpson-Bowles Commission, for its two co-chairs, Alan Simpson and Erskine Bowles. Simpson was the former Republican senator from Wyoming and Bowles was President Clinton's former chief-of-staff.

The other commission was the Bipartisan Policy Center's Debt Reduction Task Force, which was chaired by former Republican Sen. Pete Domenici (New Mexico) and President Clinton's Office of Management and Budget director Alice Rivlin.

Both commissions have similar goals in debt reduction. For example, Simpson-Bowles would cut the debt to GDP ratio to 65 percent by 2020 and down to 40 percent by 2035, while Domenici-Rivlin's recommendations would bring down the debt-to-GDP ratio to 60 percent by 2020 and 52 percent by 2040.

Both commissions propose major reductions in spending, although the specifics differ. For instance, Simpson-Bowles favors cutting student loans. They both also recommend restructuring the Social Security system, which would rein costs in by reducing benefits for high-income individuals and gradually increasing their payroll tax, which is used to fund Social Security.

The escalating costs of government health care are also brought under control in both plans. How this would be done includes raising Medicare premiums, imposing a ceiling on overall federal health-care expenditures, reforming the malpractice system and, in the case of Domenici-Rivlin, changing Medicare so patients would have to pay additional costs out-of-pocket.

Both plans make far-reaching modifications in the federal tax code. They operate on the same premise that tax loopholes built into the system to encourage certain types of taxpayer behavior such as buying homes or making charitable contributions end up having the perverse effect of adding billions of dollars of costs. These tax expenditures, as economists call them, can be eliminated, increasing federal revenues while at the same time simplifying and reducing the tax rates. For example, under the Simpson-Bowles plan, the highest marginal income tax rate could come down from 35 percent to as low as 23 percent, depending on whether all current tax expenditure programs are eliminated.

The Obama administration can get out in front on this issue by combining the best elements of both plans. If the GOP chooses to ignore economic reality and insist on spending cuts and no tax increases, the president can point to the findings of the two bipartisan commissions and the neutral Congressional Budget Office to bolster his assertion that a reasonable approach entails a combination of both raising taxes and cutting spending.

My preferred solution would involve cutting federal expenditures, both non-defense and defense. A thorough review should be made to determine where increased efficiencies can be obtained across the board. Defense is the largest item in the discretionary budget so it should receive the most scrutiny.

The entitlement programs, Medicare and Social Security, need to be fundamentally reformed. There is no reason why high-income earners should not pay more in payroll taxes. Furthermore, Social Security benefits for high-income workers should be deferred (the bipartisan plans would actually cut benefits for those earners and that is fine, too). The costs of health care, which have been growing faster than the rate of inflation, need to be brought under control. The Medicare system, a key component of the nation's health care, can be used to control costs.

Perhaps most controversially, taxes on the wealthy should be increased. But before this happens, all of the tax expenditure programs should be eliminated by being phased-out over 5-10 years. In fact, tax rates for high-income individuals will actually decline from their present rate (35 perent) to 30 percent, although the total amount of revenue will be much higher. Cries of "class warfare" should go nowhere when most people learn that the rich will actually pay lower rates than they do now.

Robert A. Cropf chairs the Department of Public Policy Studies at Saint Louis University. 

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