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Until both political parties make a serious effort to improve the performance of government while shrinking its swelling deficits, Americans will watch both their quality of life and their country's standing in the world erode. Returning to fiscal responsibility while safeguarding needed public services and investments won't be easy, but it isn't impossible. Here's how it can be done.
Living Beyond Our Means
Some waste can surely be cut. Ending the wars in Iraq and Afghanistan, slashing pay to overpriced contractors and eliminating unnecessary weapons systems could perhaps save 2% to 3% of GDP each year. These are areas where the U.S. is squandering its income and blood, yet the President's proposed budget for fiscal year 2011 would actually increase military spending to more than $750 billion, from around $720 billion this year. Military spending dwarfs almost everything else. In the White House's proposed budget, military spending would be nearly six times the federal outlay for education and 26 times the outlays for development assistance and humanitarian aid--despite the fact that the Administration often promotes development as a central pillar of our national-security strategy.
Medicare and Medicaid could surely be made more efficient, but cost cutting would only partly offset the rising bills that are inevitable given our aging population. We're not going to find great net savings in the core entitlement programs even if we reform them. And eliminating the infamous earmarks would save around $11 billion, or less than 1% of the budget deficit.
At the state level, the fiscal situation is equally dire, though because of budget-balancing rules, most states are slashing public services rather than running large deficits. It's not just California; dozens of states are grappling with a combined deficit of tens of billions of dollars. Police, public health, education, roads, libraries and other services are all on the chopping block. The states currently collect an additional 10% or so of national income in tax revenue and receive about 3.5% of national income in transfers from Washington. The total tax take, federal plus state, amounts to 28% to 30% of GDP. That is more than 10 percentage points lower than the average total revenue collections in Europe.
Is There a Middle Path?
Given those realities, any talk of new tax cuts to solve the economic crisis, an idea supported by many Republicans, is fiscal fantasy. But so too is Obama's campaign pledge of tax cuts for all households earning less than $250,000 per year. That promise is impossible to honor if the government is going to maintain a shred of fiscal responsibility. We can and should claw back about 0.4% of GDP in revenue from taxpayers who make more than $250,000, as Obama has proposed. But even with rollbacks of tax cuts for the rich, the fiscal gap will remain enormous.