WASHINGTON (
MNI) - The difficulty of the United States' fiscal predicament was on full display several weeks ago during a hearing on budget policy held by Congress's Joint Economic Committee.
Alice Rivlin, the former White House budget director and vice chairman of the Federal Reserve Board, began her opening remarks by gently challenging the title - and perhaps even the premise - of the hearing.
She suggested that the announced topic of the hearing, "Flirting With Disaster: Solving The Debt Crisis," should be amended to "Avoiding Disaster: Growing the Economy and Stabilizing The Debt."
Rivlin argued that a sound fiscal plan would seek faster economic growth that creates more jobs and brings the unemployment rate down to the 5%-6% range. This, she said, should be coupled with a sustainable long-term budget plan that halts the projected rise in the debt-to-GDP ratio and puts it on a downward trajectory by the end of the decade.
"The two goals reinforce each other and neither can be achieved without the other. Weak economic growth - or worse, sliding back into recession - will reduce revenues and make it much harder to reduce or even stabilize the ratio of debt to GDP," she said.
"Stabilizing and reducing future debt does not require immediate austerity - on the contrary, excessive budgetary austerity in a still-slow recovery undermines both goals - but it does require a firm plan enacted soon to halt the rising debt/GDP ration and reduce it over coming decades," she added.
Rivlin argued that a credible budget agreement would include entitlement reforms that slow the growth of health care spending and adjust Social Security so it is put on a firmer financial foundation as well as comprehensive tax reform that generates additional revenue.
"More than enough discretionary spending restraint has already been accomplished. The task remaining is to find agreement on an acceptable set of entitlement and tax reforms," Rivlin said.
Simon Johnson, a professor at MIT and a senior fellow at the Peterson Institute for International Economics, took an even harder line against short-term fiscal consolidation.
"A sudden move towards further tightening fiscal policy in the U.S. would undermine our economic recovery and has the potential to de-stabilize financial markets. We are moving in a precipitate manner towards an excessive and inappropriate degree of immediate austerity," Johnson said.
"There is no meaningful evidence that we 'need' to cut federal deficits dramatically this year or next year or even over the next five years. It is far more important to get the economy back onto a sustainable growth path - and this includes not disrupting the private sector with damaging or disruptive public spending cuts," he said.
Johnson argued that U.S. fiscal policy should have twin goals: reviving growth now and developing long-term controls to limit health care spending as a percent of GDP over the next 20 to 50 years.
Former Senate Budget Committee Chairman Judd Gregg agreed with the general view that the nation's long-term fiscal problems are most concerning, but he signaled a desire to get moving on deficit reduction more immediately than did either Rivlin or Johnson. He said policymakers should try to reduce the debt to below 70% of GDP by 2023 and this would require deficit cuts of at least $2.4 trillion over the coming decade beyond what has been achieved so far.
"Any debt reduction plan needs to primarily focus on changes to those programs that are driving the problem. These of course are the major entitlement accounts, Medicare, Medicaid and Social Security, along with comprehensive tax reform," Gregg said.
Douglas Holtz-Eakin, the former director of the Congressional Budget Office, urged Congress to begin tackling budget deficits immediately, saying at least $4 trillion in additional deficit reduction over the next decade is appropriate.
Holtz-Eakin urged policymakers to focus on entitlement and tax reform but also said that Congress should allow the $1.2 trillion in scheduled across-the-board spending cuts to go forward. He said that sequestration is "an admittedly blunt budgetary policy that is a poor substitute for meaningful reform, but is preferable to no spending reduction at all."
"There is a need to demonstrate that spending will actually be controlled...It is important to recognize the need for some near term reduction in current spending to offset the impact on economic growth that is risked by higher debt," Holtz-Eakin said.
The congressional debate on fiscal policy will resume in April when a House-Senate budget committee is convened, at least briefly, to discuss the fiscal year 2014 budgets of House Budget Committee Chairman Paul Ryan, a Republican, and Senate Budget Committee Chairman Patty Murray, a Democrat.
--MNI Washington Bureau; tel: +1 202-371-2121; email:
jshaw@mni-news.com
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