This year, instead of being on the floor of Congress with the rest of the cabinet, I will be watching on television with the rest of the country. Instead of knowing what is coming, I can write about what I hope the president will say. My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit.
I am not talking about two paragraphs lamenting the problem and vowing to fix it. I am looking for pages and pages of concrete proposals that the administration is ready to fight for. The recommendations of the bipartisan National Commission on Fiscal Responsibility and Reform that the president created are a very good place to start.
The need for such a bold plan is urgent — both politically and economically. Voters made it clear last November that they were fed up with red ink. President Obama should embrace the reality that his re-election may depend on facing up to the budget problem.
The economic need is also pressing. The extreme deficits of the last few years are largely a consequence of the terrible state of the economy and the actions needed to stem the downturn. But even with a strong recovery, under current policy the deficit is projected to be more than 6 percent of gross domestic product in 2020. By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P.
Such deficits are not sustainable. At some point — likely well before 2035 — investors would revolt and the United States would be unable to borrow. We would become the Argentina of the 21st century.
So what should the president say and do? First, he should make clear that the issue is spending and taxes over the coming decades, not spending in 2011. Republicans in Congress have pledged to cut nonmilitary, non-entitlement spending in 2011 by $100 billion (less if recent reports are correct). Such a step would do nothing to address the fundamental drivers of the budget problem, and would weaken the economy when we are only beginning to recover.
Instead, the president should outline major cuts in spending that would go into effect over the next few decades, and that he wants to sign into law in 2011.
Respected analysts across the ideological spectrum agree that rising health care spending is the biggest source of the frightening long-run deficit projections. That is why the president made cost control central to health reform legislation. He should vow not just to veto a repeal of the legislation, but to fight to strengthen its cost-containment mechanisms.
One important provision of the law was the creation of the Independent Payment Advisory Board, which must propose reforms if Medicare spending exceeds the target rate of growth. But the legislation exempted some providers and much government health spending from the board’s purview. The president should work to give the board a broader mandate for cost control.
The fiscal commission recommended that military spending — which has risen by more than 50 percent in real terms since 2001 — grow much more slowly in the future. It also proposed thoughtful ways to slow the growth of Social Security spending while protecting the disabled and the poor. And it recommended caps on nonmilitary, non-entitlement spending.
President Obama needs to explain that while these cuts will be painful, there is no way to solve our budget problem without shared sacrifice. At the same time, he should give a ringing endorsement of government investment in infrastructure, research and education, which increases productivity and thus improves both our standard of living and the budget situation over time. And, following the fiscal commission, he should ensure that spending cuts not fall on the disadvantaged.
Finally, the president has to be frank about the need for more tax revenue. Even with bold spending cuts, there will still be a large deficit. The only realistic way to close the gap is by raising revenue. Some of it can and should come from higher taxes on the rich. But because there are far more middle-class families than wealthy ones, much of the additional money will have to come from ordinary people. Since any agreement will have to be bipartisan, Congressional Republicans will have to come to terms with this fact as well.
AGAIN, the fiscal commission has made sensible proposals. It recommended broad tax reform that lowers marginal tax rates and cuts tax expenditures — deductions and exemptions for mortgage interest, employer-provided benefits, charitable giving, and so on. Such tax reform cannot be revenue-neutral — it needs to increase tax receipts. But it can make the system simpler, fairer and more efficient while doing so.
Limiting the exemption of employer-provided health benefits would have the further advantage of making companies and workers more cost-conscious about health care.
Another revenue measure should be a tax on polluting energy. Basic economics says that something that has widespread adverse effects should be taxed. A gradual increase in the gasoline tax would raise revenue and encourage the development of cleaner energy sources. A broader carbon tax would be even better.
None of these changes should be immediate. With unemployment at 9.4 percent and the economy constrained by lack of demand, it would be heartless and counterproductive to move to fiscal austerity in 2011. Indeed, the additional fiscal stimulus passed in the lame-duck session — particularly the payroll tax cut and the unemployment insurance extension — is the right policy for now. But legislation that gradually and persistently trims the deficit would not harm the economy today. Indeed, it could increase demand by raising confidence and certainty.
The president has a monumental task. It’s extremely hard to build consensus around a deficit reduction plan that will be painful and unpopular with powerful interest groups. The only way to do so is to marshal the good sense and patriotism of the American people. That process should start with the State of the Union.
Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.
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