How to Fix the Debt Problem – Without Trashing Government

The United States government, you may have heard, has been running up a pretty major tab. The budget deficit – the amount of money the federal government borrows and spends in a given year over and above what it takes in – cracked a record-breaking $1 trillion in both 2009 and 2010, and the national debt – the rolling total of deficits plus interest – clocks in at $15 trillion, and rising, which makes for some hefty interest payments.

Conservatives believe – or claim to believe – that the deficits and long-term debt pose an existential threat to the nation, one that needs to be tackled right now. They say our messed-up finances are the fault of runaway big-government spending on social programs, and so their solution is to shred the safety net, dismantle Medicare and, ideally, Social Security, and generally reduce government to gasping for air. Tough choices, they say, but there’s no other way.

But, as readers of a new book by Simon Johnson and James Kwak will discover, this analysis is wrong from top to bottom. Out-of-control government is not the cause of the debt (unless you count out-of-control Pentagon spending on two wars); we do not need to act on deficits immediately, although the long-term debt is a genuine problem that needs to be addressed; and the way to get our fiscal house in order is not to slash spending on programs that benefit poor and middle-class Americans.

The book, White House Burning, out today, doesn’t soft-pedal the dangers of running up big deficits indefinitely, but it makes a powerful case that we can get the debt under control in a way that strengthens, rather than rolls back, essential government programs like Social Security and Medicare. Rolling Stone recently got on the phone with Simon Johnson, a former chief economist at the International Monetary Fund, now at MIT, to talk about the national debt and why it matters now and for the future.

The U.S. government has run record deficits in the last few years. What have been the big drivers?

The financial crisis of 2008 was the main factor. Another was the economic recession that followed, which reduced tax revenues and increased government spending on safety-net programs. And perhaps a quarter to a third of the problem can be directly linked to the Bush tax cuts, in 2001 and 2003.

But Republicans say the problem is that the government’s “too big.” Is it too big?

The essential question is not Is government too big? It’s What do you want the government to do? Once you figure that out, I can tell you how to finance it in a responsible way. Spending needs to be controlled, certainly, but much of what the federal government does right now is sensible.

Rep. Paul Ryan’s budget, called “marvelous” by Mitt Romney, boosts military spending and cuts taxes on the rich, while ending Medicare as we know it and slashing government programs that benefit middle class and poor Americans. And it doesn’t appear to do much about deficits. Doesn’t that suggest the real game here is downsizing government, not taming the debt?

Yes. The rhetoric is about bringing down debt, but they want to shrink the government. House Republicans are saying, “This is deficit cutting, it’s a responsibility,” and under that guise they want to cut Medicare and other programs. We need to be careful with our public spending, absolutely; but we’ve veered off in this other direction, where Republicans are obsessing about shrinking the size of the government to an unhealthy degree, and it’s all about cutting taxes and running up deficits.

Republicans and even some Democrats talk as if borrowing is evil in and of itself. But businesses and individuals borrow money all the time; the economy would seize up if they didn’t. So why shouldn’t the government do the same?

If you borrow responsibly and use that money sensibly, that’s fine, that’s a good idea, whether it’s a person, a family, a company or a country. But you have to be careful and understand what you’re doing and why.

Part of the challenge in this debate is that people don’t have a clue what government does, so you get people saying, “Keep your government hands off my Medicare.”

That is absolutely for sure. There’s a huge amount of confusion out there, and that’s a big reason we wrote the book.

If the economy continues to recover, won’t the deficit picture improve?

Yes, although the lack of robust tax revenue base because of the Bush tax cuts is a very important risk that needs to be addressed. If you look ahead 20 or 30 years, or longer, the main problem is the rising cost of health care. The problem there is that society is aging; more people are living longer, we are better able to extend people’s lives, but it’s expensive. 

In the long run, the really big money is going to be sucked up by Medicare. The Republican solution is to partially privatize the program by giving people vouchers to buy their health care. You think that’s a bad idea. Why?

If you take that health care spending off the budget and put it on the families and businesses, you’ll actually increase healthcare costs as a percentage of the economy; individuals have less buying power than does the federal government, so they’re going to pay higher prices. Also, the value of the voucher would almost certainly decline over time. I’ve had many conversations with private sector executives on this. This is not what they want; they don’t want to pay higher healthcare costs for current employees or for their retirees. 

But does Medicare need to be radically reshaped, one way or another?

Not at all. We think it should be maintained, and we propose to raise the revenue to maintain it. The problem is there’s no political agreement at all on what to do about it.

What about Social Security? Republicans would love to privatize that, too.

Social Security is better shape, and I actually think the parties are a lot closer together than they are on Medicare. They wouldn’t concede it during election season but I can see them coming to a deal.

In the book you lay out a program for getting the deficits and long-term debt under control – and without rolling back the New Deal. What are the main outlines?

Don’t extend the Bush tax cuts that expire at the end of this year. Increase the payroll tax to help fund Social Security. If you do that, you can achieve up to half of the fiscal adjustment that’s needed by 2030. Now, you may not want to do it all in one go because of where the economy is in terms of recovery, but the president should come back to Congress early in 2013 with a proposed temporary payroll tax cut, and link that to employment; if the economy recovers, payroll tax would go up, but only if the economy recovers.

In addition, you would reduce or eliminate certain tax expenditures – lower the mortgage interest deduction tax; phase out the employer health plan exclusion, a tax credit for businesses for providing health insurance (this makes us unpopular with the left, because unions like this break, but you can do that in a way that protects relatively poor people). Put a higher premium on Medicare Part B and increase the Medicare payroll tax. Increase the maximum capital gains and dividends tax rate; introduce a carbon tax, but rebate half of the proceeds. Charge “too-big-to-fail” banking institutions for anticipated rescue costs. Eliminate some of the tax expenditures that businesses get. Reduce spending on Fannie Mae and Freddie Mac, and on farm subsidies. These are some of the adjustments we would make.

The program in the book is not a massive government expansion. The argument is, let’s defend social insurance programs, and let’s keep the good role of the government roughly speaking as it is, and put its funding on a more sustainable basis. We can absolutely afford it.