[Congressional Record Volume 141, Number 22 (Friday, February 3, 1995)]
[Senate]
[Pages S2119-S2122]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ECONOMISTS OPPOSE BALANCED BUDGET AMENDMENT
Mr. MOYNIHAN. Mr. President, this morning, in a room just off the
Senate floor, a group representing over 450 of our Nation's most
distinguished and respected economists--among them seven Nobel
Laureates--gathered to express their profound and unequivocal
opposition to a constitutional amendment requiring a balanced Federal
budget.
Their conclusions, based not on partisan proclivities, but on decades
of scholarly inquiry in the field of economics, deserve the full
attention of the Senate. I ask unanimous consent that a portion of
their remarks be reprinted in the Congressional Record.
There being no objection, the remarks were ordered to be printed in
the Record, as follows:
Statement of Henry J. Aaron on the Balanced Budget Amendment
The economic, legal, and political arguments against the
balanced budget amendment are powerful, and I hope that these
arguments persuade enough Senators to defeat the amendment in
the Senate. Nonetheless, it is possible that the proposed
amendments will be sent to the states for ratification. My
remarks this morning are addressed to state legislators. They
can be expressed in one word: Beware!
Congress has elected not to include in the draft amendment
any limit on the capacity of Congress to place mandates on
the states. The reason is the supporters of the amendment
knew that they could not count on enough votes to pass the
amendment if such a prohibition were included. Why are
members of Congress unwilling to include such limits in the
amendment but instead are limiting themselves to procedural
limitations, which they are free to change at any time?
The reason, clearly, is that members of Congress understand
that they may wish to carry out policies for which they are
unwilling to vote the taxes that would be required under the
balanced budget amendment. They wish to reserve to themselves
the power to force states and localities to carry out the
Congressional will.
Let me be clear. I believe that unfunded mandates are often
appropriate vehicles for federal action and I oppose
including in the constitution prohibitions or major
constraints on their use. But such mandates, on occasion,
have been used abusively or inappropriately in the past. A
balanced budget amendment make it quite likely that they
would be used far more extensively in the future.
The public mood currently oppose activist policies by the
federal government. But anyone with more than an ounce of
historical perspective should recognize the political styles
change. Should the states ratify the balanced budget
amendment, Congress will predictably and inexorably turn to
mandates on states and localities to carry out the
Congressional will at such time in the future as the public
mood comes once again to favor activist government, By
forcing states to raise taxes to pay for mandated services,
Congress will be able to claim credit, while state officials
take the heat.
In plain English, the balanced budget amendment is a time-
bomb that threatens to undermine state fiscal and
governmental autonomy. State legislators, whether
conservative or liberal, should act as custodians for their
successors whose independence is vital for the health of the
U.S. political system.
____
Statement of Isabel V. Sawhill
There are lots of reasons to be against a Balanced Budget
Amendment to the Constitution. These have been well-
articulated by my colleagues today.
However, in my view, there is only one big reason--and that
is that a Balanced Budget Amendment is a dishonest means of
achieving a worthy goal.
Let me be clear. I am all for balancing the budget. It is
the single most important means we have to put the economy on
a higher growth path and improve standards of living. But
amending the Constitution will not get the job done. Only
doing the job will get the job done.
To use a simple analogy, you can't lose weight simply by
making a New Year's resolution to go on a diet. You can only
lose weight by eating less or exercising more.
Let's have a debate about how fast and when we can safely
take off the pounds. Let's also have a debate about whether
we should eat less or exercise more. But let's not pretend
that resolutions or changing a document as basic as the
Constitution will solve the problem.
It substitutes process for problem-solving, pious words for
specific deeds, public manipulation for restoration of the
public trust.
Thank you.
____
Statement by Paul A. Samuelson and Robert M. Solow
We oppose the Balanced Budget Amendment because we believe
it to be both bad government and bad economics.
At the most fundamental level we think that it is a grave
mistake to involve the Constitution in the year-to-year
making of economic policy. In this case, especially, when the
mere definition of what is allowed and forbidden can never be
unambiguous, it seems damaging and foolhardy to impose a
constitutional mandate whose meaning will have to be
adjudicated on a case-by-case basis by the courts. Federal
judges who have better things to do will have to decide
whether this or that accounting gimmick counts as revenue or
outlay in calculating the balance of the budget. The infinite
inventiveness of accountants can always stay one step ahead
of the judiciary. It is astonishing that conservatives who
think of themselves as strict constructionists can
contemplate
[[Page S2120]] embroiling the Constitution so directly in
matters of everyday politics that should clearly be the
province of legislation.
It is inevitable, and it is clearly intended, that the
constraint imposed by the Balanced Budget Amendment will be
used as an instrument of social policy by denying the Federal
government the means to do things that a majority of Congress
might otherwise wish to do. The result will be legislation by
accounting decisions, reviewed by the courts.
More narrowly, the Amendment is bad economics. It puts more
emphasis on the ritual idea of an annually balanced budget
than it should have. There may be times when it would be best
if the Federal Budget, however defined, should be in
prolonged surplus. The Balanced Budget Amendment does not
forbid this, but there can be no doubt that it works in the
direction of favoring exact balance. The economy may not
always suffer from inadequate national saving, as it does
now. So there may be times when the Federal budget should be
in deficit for a few years. We emphasize that we do not think
this is one of those times, but we can not say it will never
happen.
Many economists have pointed out how perverse the Amendment
can be when the economy falls into recession. Then the
appearance of a cyclical deficit is a desirable, functional
event, not an undesirable one. At such a moment, the higher
taxes or reduced transfers or lower expenditures that would
be needed to restore balance will worsen the recession and do
relatively little to reduce the budget deficit. Of course
some escape mechanisms will be built into the amendment. But
they will inevitably be slow, uncertain in their scope, and
subject to manipulation by a minority. (This would be an
obvious occasion for dissidents to challenge the accounting
conventions in use.)
We are strongly in favor of a gradual, appropriately
flexible program aimed at increasing the national saving rate
by reducing the Federal deficit. This is a hard thing to do,
given the voting public's desire to have public services and
social programs without paying for them by taxes. But that is
the sort of problem democracies have to learn to deal with in
the ordinary way, by legislation and executive action.
Getting the Constitution involved can only subvert our
political system and endanger our economy.
____
Statment of Jeff Faux,
Economists are famous for producing a wide variety of
different answers to the same question.
Yet there are some things on which there is--although never
a perfect consensus--wide agreement. The folly of a Balanced
Budget Amendment to the Constitution is one of them. Even
those who almost always disagree on budgetary and fiscal
policies believe such an amendment would seriously damage the
nation's ability to conduct sensible economic policy.
The Amendment would: make economic policy making more
rigid, legalistic, and slow at a time when domestic and world
markets are increasingly volatile and complex; cripple
efforts to stabilize the business cycle; hamper the public's
capacity for making long-term investments in human and
physical capital; make it almost impossible to coordinate
economic policies with other nations; and, put macroeconomic
policy in the hands of the courts.
The Balanced Budget Amendment is an irresponsible act that
will severely weaken the national capacity to cope with the
economic problems of the 21st century.
____
Statement of Lawrence Chimerine
My name is Lawrence Chimerine. I am Managing Director and
Chief Economist of the Economic Strategy Institute. I
appreciate the opportunity to testify before the Joint
Economic Committee on the advisability of a constitutional
amendment to balance the federal budget.
In sum, my views are as follows:
a. While the Clinton administration economic and budget
program enacted in 1993 has dramatically improved the deficit
outlook, future deficits will still be unacceptably high
without further policy actions. In particular, while the
deficit is now falling, most projections suggest that it will
start rising again in approximately two years, and will
continue to rise substantially into the next decade.
b. Deficits do matter. In particular, cutting the deficit
is the only reliable way to increase our anemic national
saving rate in order to provide for higher investment in the
long term--this is necessary to increase productivity,
improve our international competitiveness, and to create a
rising standard of living for most of our citizens. Cutting
the deficit will also bring down real interest rates and
reduce our dependence on foreign capital, both of which are
also desirable in the long term.
c. There is no simple rule to guide future deficit
reduction. My own view is that a multi-year deficit reduction
program should be enacted as soon as possible to reduce the
projected deficit in ten years by at least one-half, but to
allow for delays of part or all of the policy actions if
economic growth in any year is below a specified minimum
level. This will avoid excessive fiscal drag at a time when
the economy may already be weak, but at the same time will
generate confidence in financial markets that significant
future deficit reduction will occur in order to get the
maximum impact on long term interest rates as soon as
possible.
d. Despite my view that it is important that we bring down
future budget deficits, I am strongly against enactment of a
balanced budget amendment, for several reasons. First,
striving for a balanced budget in the year 2002 may create
too much fiscal drag, especially during the next several
years when the effect of recent increases in interest rates
and other factors begin to slow economic growth. Thus, it may
not be good fiscal policy--at a minimum, it may be necessary
to stretch out the period for reaching a balanced budget
considerably. Secondly, it will be extraordinarily difficult
to achieve a balanced budget in the year 2002 without
decimating some major programs which are important for our
economic and/or social well being, or without significant tax
increases. This would be especially the case if defense,
social security benefits, and some other entitlements, as
well as the now large interest component of federal spending,
are excluded from cuts--this would require extraordinarily
large cuts in other programs. Since many of these programs
affect the poor, many people will be badly hurt, or it will
force state and local governments to sharply raise taxes in
order to reduce their pain. Spending cuts are also likely to
affect programs that are
needed to help build for the future, including public
infrastructure, support for research and development,
education, etc.--this too would be unwise. Third, the
requirement to balance the budget in every year would make
the business cycle worse by requiring spending cuts or tax
increases during recessions, exactly the opposite of sound
macroeconomic policy. Fourth, it will likely result in
budget gimmickry, such as the use of optimistic
assumptions, putting programs off budget, etc. to reduce
the difficulty in actually facing up to the spending cuts
or tax increases that would be required. In the long run
this could actually make future deficits even worse.
e. I am particularly concerned about consideration of a
balanced budget amendment at the same time that there appears
to be a head-long rush to enact sizeable tax cuts and to
increase the defense budget, and to make it more difficult to
raise taxes in the future. Needless to say, the huge revenue
losses from the tax cuts now being proposed will make it even
more difficult to even come close to balancing the budget in
the years ahead, or even in fact to put the deficit on a
downward trend. Furthermore, while no one likes tax
increases, it is not desirable to reduce our future
flexibility on the tax side because we may reach a point
where tax increases are necessary in order to reduced budget
deficits, or to fund vital programs.
the evolution of the deficit problem
Many still believe that the enormous deficits of the last
fourteen years have been the result of overspending by
Congress. However, today's massive deficits, as well as those
during the 1980s, were directly attributable to the misguided
economic policies that were implemented in the early 1980s
under the banner of supply-side economics. Multi-hundred
billion dollar deficits for as far as the eye can see were
predictable at that time because:
1. The mythical spending cuts that would supposedly result
from the elimination of waste, fraud, and abuse were
enormously exaggerated from day one.
2. The incentive effects of supply-side tax cuts were
inconsistent with most empirical evidence, and thus were
enormously overstated.
3. Thus, not only did the big military spending increases
and large tax cuts put massive pressure on the deficit, but
the anticipated spending offsets, and the added revenues from
economic growth, could never and did never materialize.
4. Furthermore, the explosion in health care costs and
other entitlements have pushed the cost of those programs far
beyond earlier expectations.
5. The problem was worsened by the use of extremely
optimistic (and usually inconsistent) economic assumptions,
understatement of program costs, budgetary gimmicks, etc.
which enabled the Reagan administration to consistently
present
budgets that were projected to be in balance, when in truth
there was virtually no possibility of that occurring.
6. Finally, the problem began to feed on itself. The
inaccurate projections created an attitude of indifference
and neglect which prevented any real solution to the deficit
problem, thereby causing the national debt to skyrocket so
that interest on the debt began to grow at an enormous rate.
budgetary myths
The move toward a constitutional amendment to balance the
budget clearly reflects the frustration which currently
exists in the Congress regarding the inability to effectively
deal with the deficit problem, as well as an effort to find a
way to avoid making the hard decisions. It also appears to be
an indirect admission of guilt by the Congress that they in
fact are also responsible for the budgetary mess. The real
problem, as mentioned earlier, was the lack of leadership by
the Reagan Administration during those years, and the
spreading of a number of budgetary myths that perpetuated the
inaction. As indicated earlier, these included the following:
1. Waste, fraud and abuse--the idea that multi-billions
could be saved by eliminating waste, fraud and abuse in
government programs--a painless solution that was absurd from
day one.
2. Tax cuts would pay for themselves (even more than pay
for themselves) because of
[[Page S2121]] strong incentive effects which would create
faster economic growth--there was no legitimate economic
evidence to support the conclusion that the large tax cuts
enacted in the early 1980s would have the huge impact on
savings, investment, and work effort that had been predicted,
nor would it produce the strong economic growth which
underlied economic and budgetary projections at that time. As
a result, it was clear that the tax cuts would result in
substantial revenue losses, which is exactly what happened.
The assertion by many that the problem is not on the revenue
side because tax revenues actually increased as a result of
the tax cuts of the early 1980s is inaccurate. Both personal
and corporate income tax collections as a share of income and
profits respectively are far below where they were a decade
ago--total tax revenues are roughly at the same ratio of GNP
as they were prior to the enactment of the supply-side
program primarily because of the big increase in Social
Security taxes enacted in the mid-1980s, and because of other
tax increases enacted along the way.
3. We will grow our way out of it--this was another form of
the argument stated above, which, as mentioned earlier, was
insupportable from day one.
4. State and local budget surpluses will offset the Federal
deficit--this too was a red herring which was employed by
those who were belittling the deficit in the 1980s. State and
local surpluses were never large enough to come anywhere near
offsetting Federal deficits.
5. Deficits don't matter--when all the arguments mentioned
above turned out to be wrong, it was asserted by the Reagan
administration that deficits don't really matter anyway. They
cited the economic expansion of the 1980s, despite the
deficit, as proof. Of course, as many of us pointed out at
the time, we were able to attract massive sums from overseas
to help finance those deficits and extend the economic
expansion--any reasonable expectation was that the flow of
capital from overseas would eventually fade out, as has now
been the case.
6. The deficit is due to Congressional overspending--once
previous Administrations ran out of rationalizations, the
blame shifting began. The truth is, however, that Congress
has appropriated less money for discretionary programs
(usually in defense) than the Administration asked for in ten
out of the twelve years between 1980 and 1992. In fact,
discretionary non-defense spending and grants-in-aid to State
and local governments were cut substantially during the
1980s, not only relative to earlier current service
projections, but as a share of the total budget, and as a
share of total GNP. Many domestic programs have fallen
sharply in real terms as a result.
We all know why the deficit is still huge and why the
problem has not been addressed. It's because of dishonesty in
the budgeting process, and lack of leadership from previous
Administrations, which resulted in a series of proposed
budgets which purportedly balanced the budget in ``out
years'' based completely on mythical savings, extraordinarily
optimistic assumptions, budgetary gimmicks, program
understatements, etc. The problem was essentially assumed
away. Perhaps Congress should have taken the lead on its own,
but it was unrealistic to expect 535 Senators and
Congressmen, each with their own constituents, to take the
lead on a matter like this.
the current deficit outlook
The Clinton Administration and Congress enacted the most
significant deficit reduction package in 1993 since the
problem developed. The combination of spending cuts and tax
increases enacted will reduce total deficits in the 1994-1998
period by almost $500 billion and will also reduce the level
of the deficit each year beyond that time. Furthermore,
unlike previous attempts to reduce the deficit, this is real
deficit reduction--it was based on realistic economic
assumptions and estimated impacts of the specific policy
actions, so that the actual reduction in the future will
closely match the estimates provided at the time the budget
plan was implemented.
Unfortunately, however, the deficit outlook is still poor.
While the deficit in the next two fiscal years will be about
half of the near $350 billion annual level experienced in the
early 1990s, in great part because of the new deficit
package, as well as because of the economic recovery,
virtually all projections indicate that the deficit will
begin to rise again by fiscal 1997, and all continue to rise
at a substantial rate into the next
century. For example, the Congressional Budget Office is now
projecting that the deficit will rise to over $400 billion
in the year 2004, from the approximately $180 billion
projected for fiscal years 1995 and 1996. These
projections imply increases in the deficit to GDP ratio,
and in the national debt to GDP ratio. In great part, this
reflects the bottoming out of defense spending near the
end of this decade, as well as continued increases in the
cost of the entitlements. Furthermore, this horrendous
deficit outlook is in reality even worse because it
includes sizable surpluses from the Social Security trust
fund--when these trust fund surpluses begin to be paid in
benefits early in the next century, the unified deficit is
likely to skyrocket unless steps are taken to reverse
current trends.
cutting the deficit is important
This outcome is unacceptable. It should now be clear that
these enormous deficits do matter. They have already begun to
slowly suck the vitality out of the U.S. economy by squeezing
out productive investment, keeping real interest rates
extraordinary high, increasing our dependence on foreign
capital, reducing the effectiveness of fiscal policy as a
stabilization tool, and by creating pressures on those
Federal programs that are needed to help build our economy
for the future. In my view, the urgency to reduce the deficit
is even greater now than it was in previous years, for the
following reasons:
1. Personal savings have declined since the 1980s, despite
the supply-side incentives, thus reducing the supply of
domestic savings.
2. The flow of capital from Japan, Germany, and other parts
of the world, which helped fund our deficits in the 1980s
when we were the world's major capital importer, has slowed
dramatically. This is resulting from the fact that many of
those countries are no longer generating surpluses at the
same degree as they were previously, and because other parts
of the world have become large capital importers as well.
3. A consensus is finally developing that the most critical
need in the United States is to improve our productivity and
competitiveness--we can no longer grow, as we did in the
1980s, by building empty office buildings and patriot
missiles, and by leveraging the system, while long-term
growth factors are deteriorating. It is clear that reversing
the weak trend of productivity and improving our
international competitiveness will require substantial
increases in investment, including modernizing our capital
stock, investing in education and job training, and
rebuilding our infrastructure. High real long-term interest
rates, largely caused by massive deficits at a time of lower
domestic savings and a reduced inflow of foreign capital,
will discourage some of our needed investment.
In effect, it is essential that we create invest-led growth
in the United States in order
to begin to build for the future. But to do that, the
federal deficit must be gradually reduced in order to free
up more of our savings to finance private investment, and
to reduce real long-term interest rates. Furthermore, it
is essential that government priorities be changed at the
same time that deficits are reduced--clearly, more federal
spending is needed for rebuilding the existing
infrastructure and developing the infrastructure of the
future, improving the quality of education, funding more
non-defense research and development, and for other such
programs that will both directly improve U.S.
productivity, and help begin to rebuild the U.S. economy.
The challenge of course is how to do both--across the
board spending cuts, or any other method that does not
result in the necessary change in priorities, will not be
sufficient if our objective is to get the U.S. economy on
the right course for the future.
A balanced budget amendment is not the answer.
Despite the urgency of reducing future budget deficits, I
am strongly opposed to the enactment of a balanced budget
amendment. In my judgment, it is simply another gimmick like
those that have been implemented in the last six or seven
years, beginning with Gramm-Rudman, which have had very
little, if any, impact. It will not only be an ineffective
tool in dealing with the problem, but in my view is simply a
way to attempt to avoid what will be difficult choices, and
place the blame for any unpopular spending cuts or tax
increases on a mechanical formula rather than on Presidential
or Congressional decisions. In brief, my concerns, are as
follows:
1. Which budget is to be balanced? Is it the structural
budget deficit, the unified budget deficit,the on-budget
deficit, etc.? Should government investment be included or
excluded? Answers to these and similar questions are not
intuitively obvious.
2. It is likely to encourage even more use of optimistic
forecasts, program underestimation, moving programs off-
budget, and other similar techniques in order to avoid the
tough decisions that will be needed to be made to actually
balance the budget. Thus, the balanced budget amendment has
the potential of making the budget process even more flawed
than it was in the 1980s. We are also likely to see the
adoption of more gimmicks that produce short-term revenue
gains at the expense of revenue loss beyond the balanced
budget period, which will simply make the long-term problem
even worse.
3. There are times when a balanced budget may be
undesirable. These may include periods of recession or slow
growth, wartime periods, or situations when domestic
emergencies might exist. In my view, it will be difficult to
plan for all these contingencies in a balanced budget
amendment, and any effort to offset these factors will be
harmful to the economy. Furthermore, its goal of reaching a
balanced budget in a relatively short period of time may
create too much fiscal drag too rapidly.
4. In my view, if will probably make it more difficult for
us to deal with our other
critical budget problem, namely reorienting our priorities,
because the tendency will be to look for the easiest ways
of cutting the deficit, rather than those that are best
for the economy.
5. What if, in fact, a balanced budget isn't achieved
because the economic assumptions turned out to be incorrect,
even if they were reasonable in the first place? How do we
make adjustments for it? Who gets penalized? These are also
difficult issues that would have to be covered.
[[Page S2122]] 6. Efforts to enact major tax cuts at the
same time that the balanced budget amendment is being debated
is the height of cynicism, especially the tax cuts that have
been proposed in the Republican Contract with America. Those
tax cuts would generate sizable revenue losses, especially in
the out years, making what will already be an extraordinarily
difficult task of substantial deficit reduction (let alone a
balanced budget) in seven years virtually impossible without
almost a near dismantling of government programs except for
social security and national defense. This is the height of
cynicism, as well as horrendously bad social and economic
policy.
It is also important to remember that the Federal budget,
by its sheer size, and because of its role as a stabilization
tool, should not be considered in the same way as an
individual state or local government.
how to cut the deficit
While additional long term deficit reduction is thus
essential, this must be balanced with two other objectives.
First, it is important that we do not further undermine the
use of fiscal policy as a stabilization tool. In particular,
it would be counterproductive to cut the deficit so quickly
that we would dramatically weaken the economy when it is
already operating below full employment. Second, we need to
reduce future deficits in a manner that would not make it
more difficult for us to deal with our other critical budget
problem, mainly reorienting our priorities away from
consumption and more toward public investment and other
expenditures that are needed to support long term economic
growth.
I suggest the following approaches an alternative to a
balanced budget amendment.
1. Unfortunately, there is no precise rule of thumb or
model simulation which can give us the optimum path for
future deficit reduction. In my view, an appropriate
objective would be to cut the $400 billion deficit now
projected by CBO for 2004 in half--this would suggest that
over the next 10 years the nominal deficit would be roughly
flat, implying a gradual decline in the deficit in real
terms, in the deficit as a share of GDP, and even more
importantly, in the debt to GDP ratio. Such a target would
imply putting in place approximately $15-20 billion per year
of budget restraint for each year over the ten year period--
in my judgment, with the
safeguards I will list below, I think this is doable and
will not create too much fiscal drag on the economy.
2. Spending cuts should be the top priority. In view of the
large cuts in non-defense discretionary programs in the
1980s, and given the need to increase spending in some of
these areas, it is unlikely that huge savings will be
realized from this sector of the budget. Thus, spending cuts
must come from additional reductions in military spending,
from an effective health care cost control program, and from
slowing the enormous growth in the entitlements, especially
the pension and health programs. I would suggest that the
concept of entitlements is no longer something that this
country can afford. All of the so-called entitlement programs
must be slowly converted to means testing, either by scaling
back benefits for upper income and high wealth individuals
and/or by increasing taxes on those benefits. We should
reduce (not eliminate) benefits for those who could do with
less--households and individuals with modest means should be
spared. Furthermore, consideration should be given to further
extending the retirement age for full benefits. Scaling back
of health and pension benefits should not apply only to
entitlement programs--public employees are now receiving
extremely generous benefits which are no longer affordable.
Finally, I would suggest that any reductions in social
security benefits partly be earmarked for investments to
build for our future, especially for education and other
programs which benefit primarily younger people. In effect,
we would be reducing benefits for the elderly to be used to
make a better life for their children and grandchildren.
3. Deficit reduction must be fair. In particular, it is now
well documented that most of the benefit of the tax cuts of
the 1980s went to those in the upper income groups--in the
meantime, large social security tax increases and budget cuts
have significantly reduced after-tax incomes for many low and
middle income families. This has only been partly reversed in
the 1993 budget package. Thus, it is important that deficit
reduction be structured in a way that the impact is greatest
on those who can afford it. Many will make the argument that
increases in taxes on upper income individuals will create
huge disincentives for savings and investment and thus would
be counterproductive--however, as we learned in the 1980s,
these arguments are exaggerated. Furthermore, the economy can
not function effectively when a large and increasing share of
purchasing power and wealth is concentrated in relatively few
hands--this holds down demand and thus will prevent long term
growth.
4. The arithmetic is very clear--even with the phasing-in
of entitlement reform and some additional cuts in defense and
non-defense discretionary programs, some tax increases (not
tax cuts) will be needed in order to reduce deficits to
acceptable levels. The assertion that the problem is not on
the revenue side because tax revenues have actually increased
as a result of the tax cuts of the early 1980s is inaccurate.
Both personal and corporate income tax collections as a share
of income and profits, respectively, are below where they
were a decade ago--total tax revenues are roughly at the same
ratio of GDP as they were prior to the enactment of the
supply-side
program primarily because of the big increase in Social
Security taxes enacted in the mid-1980s, and because of
other tax increases enacted along the way.
In my view, increased revenues should come first from
eliminating counterproductive tax expenditures (incentives,
exemptions, etc.) now in place, and then secondly, if more
revenues are needed, from increasing taxes in a progressive
manner on activities that we want to consume less of. Thus,
broadening the tax base and consumption taxes should be
considered before across the board tax increases. In the
former category, some candidates are the following:
eliminating or scaling back the interest deduction on mergers
and acquisitions; scaling back the deduction for corporate
advertising expenses and/or for corporate entertainment; a
lower limit on the mortgage interest deduction than is now in
place; taxation of a portion of corporate health care
insurance premiums (this may also be helpful in controlling
health care costs).
5. Most importantly, I believe that to the extent possible,
a multi-year program designed to bring about the amount of
deficit reduction described above should be adopted as soon
as possible. This would be desirable for several reasons.
First, it would avoid having to go through the torturous
process on an annual basis--the medicine can all be taken at
once. Second, and more importantly, one way to reduce the
effect of fiscal drag on economic growth is to bring interest
rates down as quickly as possible, especially long term
rates--this can be best accomplished if the markets believe
that a credible program to reduce future deficits is in
place. While easier Federal Reserve policy can also help, the
Federal Reserve has lost most of its control over long term
interest rates. Convincing the markets that the federal
demand for credit will be dramatically reduced in the future
will be a more effective way to bring down long term interest
rates than an easier monetary policy.
6. It is possible to design a multi-year deficit reduction
program that can allow some flexibility to deal with
emergencies and recessions. This will prevent fiscal policy
from worsening economic downturns. If these exceptions are
truly limited, they are not likely to undermine the
credibility of the long term program. I suggest that the
deficit reduction program be accompanied with an ``escape
clause'' in the form of a minimum level of GDP or employment
growth, or a threshold unemployment rate, beneath which
future installments of deficit reduction will be delayed or
scaled back in order not to create an even weaker economic
environment. This is particularly important since the current
level of economic activity is so low that the economy is
likely to be underutilized for many years.
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