The problem is that America has three problems: a short-run jobs problem, a ten-year tax-cut extension problem, and a long-run health-care financing problem.
How Big Is the Deficit, Anyway? « The Baseline Scenario: First, since when is a stable deficit of 2 percent of GDP a national emergency? I agree the situation is not ideal. We won’t have a lot of fiscal space to deal with future shocks (e.g., financial crises), and we’ll be in a race pitting economic growth against the real interest rate on the debt. But at that point we’ll basically be paying interest on stupid policy decisions from the past (take your pick). The real problem is that over the following two decades, things will slowly and then rapidly get worse as more Baby Boomers retire and health care costs continue to increase. But that takes place outside the ten-year window—and it’s mainly a health care problem. So why do we have a joint committee of Congress mandated to slash $1.2 trillion from the budget within that window? I know the political reason, but that doesn’t mean it makes any economic sense.
Second, the not-so-bad scenario… has one major assumption: that we let all expiring tax cuts, well, expire…. President Obama can say: “I have a bulletproof, real plan to bring the deficit down to a sustainable level within this decade. I will veto any tax cut extension unless it is fully offset. The entire existence of a deficit crisis over the next decade is predicated on extending the tax cuts.” (I know, the fact that I used the word “predicated” rules me out as a political speechwriter.) Then he can negotiate from a position of strength. But, of course, we’ve been through this before.
Third, and less importantly: What was S&P thinking? According to their downgrade explanation, the problem is that total government debt (including all levels) is growing from 74 percent of GDP in 2011 to 85 percent in 2021…. The only way they get numbers that high is by working off of an alternative scenario in which all the tax cuts are extended and then assuming poor economic growth….
So if there’s one thing you should take away, it’s this: The ten-year deficit problem is a tax cut problem. No tax cuts, no problem. This won’t solve the all the long-term problems, but it’s a good start.