Thursday, November 11, 2010

Update on Fiscal Consolidation: The Draft Report of The President's Debt Commission

My initial reaction to yesterday's draft report of the bipartisan National Commission on Fiscal Responsibility and Reform is very positive. It has already been called "unacceptable" by both the left and the right, which pretty much proves it is on the right track.

The version I downloaded from the New York Times is marked "DO NOT QUOTE CITE OR RELEASE," so I will play be the rules for the moment and forgo line-by-line comments. However, if you read my post on growth-friendly fiscal consolidation a few days ago, you will know that one thing I like about the draft NCFRR report is its focus on tax reform. The draft shows that taking the ax to tax expenditures makes it possible to cut both personal and corporate tax rates and at the same time improve revenue collection. That's a real winner.

I also like its endorsement of an increase in the gasoline tax. The increase in the gas tax will be panned by the "affordable energy" lobby, but, as I have argued before, affordable energy is something we cannot afford. However, I would go beyond draft report in that I would prefer a broader-based energy tax or carbon tax to steer non-transportation sectors, as well as transportation, toward an energy mix more consistent with national security and environmental realities.

I also like the realistic goals set by the draft report. It rejects some of the pie-in-the-sky demands of the Tea Party right, including an annually balanced budget and a near-mythical 20% cap on federal government spending. Given the demographic realities of an aging population, we are not going to get back to 20% no matter how hard we try. Can't be done, won't be done. So stop talking about it. Also, instead of focusing on headline budget balance, the draft report is sophisticated enough to realize that the really important thing for sustainability is a small primary surplus. If that goal is achieved, small annual deficits in the overall budget are consistent not just with long-run fiscal sustainability, but with gradual reduction in the debt as a share of GDP.

There must be something I don't like about the draft, right? OK, here is one. Although the draft endorses substantial cuts in defense spending, its proposals focus mainly on waste in the defense department. They don't touch the hot iron of what we should actually be doing with our armed forces. I think foreign policy and national security strategy have to be dragged into the budget discussion at some point. To put it bluntly: Are our adventures in Iraq and Afghanistan really cost-effective as ways of protecting the homeland? A few courageous voices on the right, notably Rand Paul, are willing to discuss this issue, but I suppose it is too much to hope for the NCFRR to take it on.

Follow these links for related slide shows on tax reform, affordable energy, and the primary deficit.


  1. Personally I thought the so called report was a whitewash of government misspending...

    The fact is that unless ALL of the federal 'nanny state programs' are cut out completely this sad excuse for financial band aid will fall apart in the very near future...

    Gasoline tax increase? Why?

    Why give an incompentent government more money to misspend?

  2. Juandos-- Thanks for your views. Let me invite you to amplify your remarks by posting a comment with a list of the specific "nanny state programs" you would like to target. Please include the amounts spent on each and the total. That would make an interesting supplement to the co-chairs' report. I would like to see how the math works out.