TOWARD A DIFFERENT FISCAL FUTURE

February 9, 2010

In the present economic situation, attempting to reduce the deficit drastically could spell another economic contraction.  One can even make cogent arguments for cutting taxes on business investment and corporate profits, given the importance of an improved investment climate for the recovery, says R. Glenn Hubbard, dean of Columbia University Business School, and former chairman of the Council of Economic Advisers under President George W. Bush. 

Rather, the president and the Congress need to present a credible path toward lower deficits and more effective government.  Such a plan should have several elements, says Hubbard. 

First, introduce specific targets for reducing discretionary spending: 

  • The administration has set too easy a goal for a putative President's Fiscal Commission, likely requiring deficit reduction of only 1 percent of gross domestic product by 2015, to stabilize the debt-to-GDP ratio at more than 70 percent.
  • But this level is even higher than in 1950, when we were paying off debt from World War II.
  • The discretionary spending binge in both the Bush and Obama years offer many opportunities for further cuts.
  • Indeed, holding growth in the nondefense discretionary spending to 2 percent per year, well under present levels, is achievable and would free up funds for our future priorities. 

Second, slow the growth of entitlement spending on Social Security and Medicare: 

  • A good way would be to shave 1 percent per year from projected entitlement growth.
  • It is possible to do so progressively, lowering the growth in benefits for middle- and upper-income households, while strengthening support for lower-income households.
  • Expanded saving incentives and health saving accounts can be used to help more affluent households prepare for retirement.
  • Taken together, these changes offer the greatest chance for reducing long-term spending while holding fast to government's legitimate social insurance role. 

In the end, the reason to get the nation's fiscal house in order is less about deficits or debt as percentage points of GDP than about our future.  We need a healthy, dynamic and innovative economy. We need a safety net for those buffeted by change.  And we need the flexibility to increase support for national defense and other new domestic priorities, says Hubbard. 

Source: R. Glenn Hubbard, "Toward a Different Fiscal Future; Tax increases can't plausibly address the coming entitlement crisis," Wall Street Journal, February 8, 2010. 

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http://online.wsj.com/article/SB10001424052748704041504575045250168889076.html 

 

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