Leaders need to take a long-term look at budget crisis

Contributing WriterDecember 5, 2012 

As just about everyone knows, Republicans and Democrats are squaring off to decide whether to take the nation on a plunge over a so-called fiscal cliff – or come to a screeching halt at the rim by agreeing to sizable spending cuts and tax increases.

If reached, such an agreement could allow us gently to glide down our huge mountain of national debt in a more painless fashion than would the alternative.

While the latter hurl-ourselves-over-the-edge option would quite dramatically reduce our budget deficits – at least temporarily – the consequent “splat” at the bottom (sharp declines in spending) would likely set off a recession.

As December’s clock ticks down, this fiscal cliff drama is capturing the nation’s attention. Yet lost in the fray of national politics is a key aspect of it that deserves more attention than it has received.

According to many, the primary reason to reduce our debt seems to do with the specter of Greece: A growing imbalance between total government spending and total tax revenue leaves us vulnerable to an economic collapse.

Republicans blame excessive spending for this imbalance, while Democrats see tax cuts, particularly among the wealthiest Americans, as the culprits. As we edge toward the cliff, the political standoff is one created by differing views on the relative importance of using tax increases versus spending reductions to reduce our debt.

But the fear that we’ll wind up like Greece if we don’t reduce our debt quickly is an exaggerated one. Japan offers a better point of comparison. Japan manages a debt twice as large as ours with no signs of obvious distress. Look at the extremely low interest rates the United States government pays its creditors and this tells you that our creditors, like those in Japan but unlike those in Greece, just aren’t nervous.

Default is not imminent, so let’s not look to Greece for our motive to reduce the debt. Instead, let’s look to our born and unborn kids and grandkids.

The soundest argument for reducing the federal debt – and one that is not getting as much play as it should – is an intergenerational one: We’re living beyond our means and yet passing the bill to future generations. It’s simply not the sort of legacy we want to leave to them.

What this means in practice is that we should examine the budget deficit not just in terms of taxes versus spending, but also in terms of intended beneficiaries. Deficits that reflect investments in the future are more defensible than are those that improve our standard of living today.

President Barack Obama’s plan to address the fiscal cliff stands as an example of how this latter calculation is missing. According to calculations made by Ethan Pollack of the Economic Policy Institute, Obama’s proposed $3 trillion in spending cuts entails sharp reductions in public investments in infrastructure, education and research and development – so much so that by 2016, the federal government will be making fewer of these longer-term investments than it has in over half of a century.

Moreover, at 1.5 percent of gross domestic product, these public investments will have fallen to only half of what they were in the 1960s and 1970s. Part of our wealth today can be traced to such public investments made on our behalf by our parents and grandparents 50 years ago.

Obama would cut deeply into such public investments while leaving current health care and retirement benefits intact. Although politically expedient, this combination does not address the underlying intergenerational imbalance in our present federal budget.

In terms of tax increases, the Democrats’ exclusive focus on the wealthy is also misplaced (though less so than the Republican’s near complete aversion to tax increases). Both parties should be talking about energy and consumption taxes as a way to foster investment and encourage alternative energy sources, both of which are good for our longer-run well being.

Achieving fiscal balance through spending cuts or tax increases is the question on everyone’s mind these days. Largely missing in this discussion, though, is recognition that we must also balance our interests today with the interests of those who will follow us.

Katie Baird is an associate professor of economics at the University of Washington Tacoma. E-mail her at kebaird@uw.edu.

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