Eight Keys To Addressing The Deficit

By Richard Trumka
Campaign for America's Future
June 30, 2010

	Testimony before the President's National 
	Commission on Fiscal Responsibility and Reform 

http://www.ourfuture.org/blog-entry/2010062630/eight-keys-addressing-deficit

Mr. Chairman and Members of the Commission, I know my
time is short, so I will limit my testimony to eight
key points:

First, stabilizing the national debt is a means to an
end, not an end in itself.

This is an excerpt of testimony delivered before the
White House National Commission on Fiscal
Responsibility and Reform on June 30, 2010.

The goal of our national economic policy should be
sustainable, broadly shared prosperity. To achieve that
goal, there is no question that we need to stabilize
the national debt as a share of our economy over the
long term. But stabilizing the debt is simply a means
to achieve our goal of sustainable, broadly shared
prosperity, and we should reject approaches to debt
stabilization that take us away from that goal.

Which approaches would help us achieve sustainable,
broadly shared prosperity? I can think of a few:
providing the economic stimulus necessary to erase our
10.4 million jobs deficit and avoid a double-dip
recession; investing in the 21st century infrastructure
necessary to support stronger economic growth in the
long term; further reducing excess health care cost
growth; asking Wall Street and the small minority of
Americans who benefited most from the economic policies
of the past 30 years to pay their fair share for
rebuilding the economy; and avoiding austerity measures
that increase economic inequality, which played a key
role in precipitating the current economic crisis.

Second, let's be honest about what the problem is.

We need to be clear that President Obama is not to
blame for getting us into this mess. Two weeks before
he took office, the Congressional Budget Office (CBO)
projected a budget deficit of $1.4 trillion for
2009-and annual deficits averaging well over $1
trillion for the coming decade.

We should be honest about what's causing deficits over
the next ten years. According to the Center on Budget
and Policy Priorities, "The tax cuts enacted under
President George W. Bush, the wars in Afghanistan and
Iraq, and the economic downturn together explain
virtually the entire deficit over the next ten years."
And "without the economic downturn and the fiscal
policies of the previous administration, the budget
would be roughly in balance over the next decade."

Although more than half of the 2009 deficit is due to
the recession, Council of Economic Advisers Chair
Christina Romer points out that "in the absence of
[Bush administration policies that we failed to pay
for], we could have had an economic downturn as severe
as the current one and responded to it as aggressively
as we have, all while keeping the budget roughly
balanced over the next ten years [2010-2019]."

We should also be honest about what's causing projected
deficits over the long term. We do not face a crisis of
entitlement spending generally, caused by the
retirement of the Baby Boomers. In the long term, we
face a crisis of public and private health care costs
growing faster than GDP, especially after 2035. Social
Security has its own source of dedicated funding and is
not responsible for our unsustainable long-term debt,
and spending on other entitlements is projected to fall
as a share of the economy over the long term.

Third, premature withdrawal of economic stimulus
threatens to throw the global economy into a double-dip
recession, or worse.

Already we can see how exaggerated fears and
misinformation about deficits are leading to premature
withdrawal of the economic stimulus that so far has
prevented another Great Depression.

The Recovery Act was necessary because of a massive
shortfall of aggregate demand, which resulted from high
levels of unemployment and the loss of $12 trillion in
wealth from the collapse of the real estate and stock
market bubbles.

The Recovery Act did exactly what it was supposed to
do. It increased the number of people employed by up to
2.8 million in the first quarter of 2010, increased the
number of full-time jobs by up to 4.1 million, and
increased real GDP by up to 4.2%. But it wasn't big
enough to restore all the jobs that were lost or to
make up for the massive shortfall of aggregate demand.

Without a significant reduction in the trade deficit,
only economic stimulus in the form of deficit spending
can make up for the remaining shortfall of aggregate
demand until private sector demand regains its footing.

But instead, we are heading in the opposite direction.
We are prematurely withdrawing economic stimulus,
allowing the Recovery Act to phase out and standing by
passively as state and local governments plan budget
cuts that will cost us 900,000 jobs.

Last month's jobs report sends a strong signal that
private sector job growth remains exceedingly weak and
may fall further as the stimulus provided by the
Recovery Act tapers off this year.

By withdrawing economic stimulus, we run the risk not
only of prolonging the jobs crisis for several more
years, but also of bringing about a "double-dip"
recession-or even what Nobel Laureate Paul Krugman
calls "a third Depression."

This is a monumental blunder of global economic policy
that bears an uncomfortable similarity to mistakes made
by the U.S. in 1937, when premature fiscal contraction
deepened and prolonged the Great Depression, and by
Japan in the 1990s, when premature fiscal contraction
led to a lost decade of economic stagnation.

There is no good economic policy reason that requires
fiscal contraction at this time-neither concerns about
inflation (which is practically non-existent), nor
about long-term interest rates (which are extremely low
by historical standards), nor about the crowding out of
private investment (because so much labor and capital
is unemployed), nor about the long-term debt (on which
short-term stimulus has a small impact).

In other words, we can do something about the jobs
crisis if we choose to. But we do have to
choose-between providing more stimulus, on the one
hand; or causing more joblessness, more wage cuts, more
poverty, more inequality, more foreclosures, more waste
of human potential, and more suffering, on the other.

Fourth, stronger economic growth, job growth, and wage
growth are needed to stabilize the debt.

Just as the economic crisis itself bears much of the
blame for projected deficits over the next ten years, a
double-dip recession-or several more years of meager
job growth-would have a similarly harmful impact on
future deficits.

According to Paul Krugman, "Both textbook economics and
experience say that slashing spending when you're still
suffering from high unemployment is a really bad idea.
Not only does it deepen the slump, but it does little
to improve the budget outlook, because much of what
governments save by spending less they lose as a weaker
economy depresses tax receipts."

To a great extent, the size of the deficit depends on
employment and growth. When employment and growth are
weak, tax revenues are low and social assistance
expenditures are high. When employment and growth are
strong, the reverse is true.

Moreover, as Christina Romer has pointed out, failure
to bring down unemployment quickly enough in the short
term can result in permanently higher rates of
unemployment, which would reduce federal tax revenues
and increase federal expenditures. In other words,
failure to provide additional stimulus in the short
term threatens our fiscal sustainability in the medium
and long term.

These are some of the reasons why President Obama said
last weekend that "our fiscal health tomorrow will rest
in no small measure on our ability to create jobs and
growth today."

And these are some of the reasons why White House
economic adviser Larry Summers said recently that
"spurring growth, if we can achieve it, is by far the
best way to improve our fiscal position" because "it is
not possible to imagine sound budgets in the absence of
economic growth and solid economic performance"; and
therefore "it would be penny-wise and pound-foolish not
to take advantage of our capacity to encourage near-
term job creation."

Strong economic growth is equally important in the long
term. Long-term deficit projections are based on
assumptions about U.S. economic growth. If we achieve
higher than expected growth, then projected deficits
will not loom quite so large and stabilizing the debt
will be a less daunting challenge.

In short, we must have a job-centered approach to
stabilizing the national debt, which would bring us
closer to our goal of sustainable, broadly shared
prosperity.

Fifth, Wall Street should pay to build a 21st century
infrastructure that will lead to long-term economic
growth.

To achieve higher levels of economic growth, we have no
choice but to abandon the failed economic policies of
the past.

For decades the U.S. has pursued an economic growth
strategy based on low wages and debt-fueled consumption
that was financed by asset bubbles (first stocks, then
real estate). We no longer have the option of
perpetuating this obsolete strategy, whose failures
have been exposed by the economic crisis.

We must identify new sources of economic growth for the
future. One thing economists can agree on is that a
modern, well-developed infrastructure is key to
productivity growth in the private sector, to U.S.
competitiveness in the global economy, and therefore to
long-term economic growth.

Yet today we face a $2.2 trillion deficit in 20th
century infrastructure that is crumbling and in
disrepair, and a broad array of 21st century
infrastructure-especially in transportation,
communications, and clean energy-that is waiting to be
built. Failure to invest in rebuilding our
infrastructure for the 21st century will result in
lower rates of economic growth-and therefore lower tax
revenues.

Washington Post columnist Steven Pearlstein agrees that
this is the ideal time to "invest heavily in public
infrastructure that has been badly neglected over the
past 30 years. I'm referring not only to roads and
bridges but also to airports and air traffic control
systems, urban transit, high-speed rail, schools and
university facilities, national laboratories, national
parks, `smart' electric grids, broadband networks,
green generating plants, and health information
networks. Properly chosen, these projects can have huge
long-run economic payoffs while tangibly improving the
lives of all Americans. They're the kind of government
spending today's voters can get excited about while
also leaving a valuable legacy for future generations
-- along with the debt that was used to finance them.
And if they wind up creating some jobs at a time when
millions of people are unemployed, so much the
better.It's time to settle up and get on with the more
exciting challenge of shaping our long-term economic
future."

Of course, rebuilding our infrastructure for the 21st
century will require higher levels of public
investment. The example of the postwar boom-when an
economic strategy of broadly shared prosperity with
strong unions and shrinking inequality paid off
enormous dividends-shows us the way forward. High
levels of public investment fueled robust GDP and job
growth in the postwar period that reduced the debt-to-
GDP ratio from over 100% after the war to less than 30%
in the 1970s.

After the jobs crisis is behind us and economic
stimulus is no longer needed, higher levels of public
investment in infrastructure will need to be paid for.
This will require new sources of federal tax revenue.
Federal revenues are now at their lowest share of GDP
(14.4%) since 1950, and effective tax rates applicable
to high-income taxpayers (earning over $250,000 in 2009
dollars) reached their lowest level in at least half a
century in 2008.

The question we now have to answer is who should pay
for the urgent task of rebuilding our economy for the
21st century-the small minority of Americans who
benefited from the economic policies of the past 30
years, or the vast majority of Americans who have seen
little reward for their hard work.

We believe it is only fitting to ask Wall Street to pay
to rebuild the economy it helped destroy. One way to do
that would be through a Financial Speculation Tax (FST)
-a tiny 0.05% tax on transactions of stocks, options,
futures, credit default swaps, and other derivative
instruments. The $100 to $300 billion in additional tax
revenue per year that this tax would generate could be
used to fund higher levels of public investment, and
the tax itself would curb unproductive speculation that
is harmful to the economy.

It would also be fitting to ask the wealthiest
Americans who benefited most from the failed economic
policies of the past 30 years to pay their fair share
for rebuilding the 21st century economy and stabilizing
the national debt. For example, a surtax of 1%-5.4% on
earnings over $350,000 would raise close to $600
billion over 10 years. Other proposals to make the tax
code more progressive enjoy broad public support.

Sixth, efforts to stabilize the national debt should
not increase income inequality.

The alarming growth of economic inequality was a
contributing factor to the economic crisis. Faced with
stagnating wages, many workers responded by incurring
more and more personal debt, often based on their home
equity. At the same time, the shift of income to top
earners contributed to excessive speculation and asset
bubbles.

While a jobs-centered approach to debt stabilization
would help reverse income inequality and bring us
closer to sustainable, broadly shared prosperity,
several approaches now under discussion in the debate
over deficit reduction would take us in the opposite
direction.

These approaches include prolonged unemployment, which
would permanently cripple the earnings potential of
millions of workers, exert downward pressure on
workers' wages, and condemn millions of children to
poverty unnecessarily; cuts to Social Security
benefits; and cuts to Medicare benefits.

Seventh, we must reduce health care costs even
further-without cutting benefits or compromising the
quality of care.

Before health reform was enacted, it was widely
recognized that long-term deficits were driven by
health care cost growth in excess of GDP growth. The
economist Henry J. Aaron wrote, "over the next four
decades, growth of health care expenditures accounts
for more than all" of the increase in [CBO's] projected
long-term deficits."

According to Christina Romer, "Some of this is the
result of the aging of the population. But the far
greater source is the fact that health care costs, both
public and private, are rising much faster than GDP."

Health reform is expected to reduce excess health care
cost growth, but not eliminate it entirely. Additional
reforms will be necessary.

Reducing excess cost growth can and should be
accomplished without cutting benefits. Approaches that
should be considered include (1) Medicare drug price
negotiation; (2) easing restrictions on imports of
prescription drugs; (3) expanding proven Medicare
payment and delivery reforms; and (4) offering the
choice of a public health insurance plan option that
would offer premiums 10% below private insurance and
would reportedly reduce the federal deficit by $110
billion over 10 years.

So we face a choice between reducing health care cost
growth in ways that cut benefits for working people and
compromise the quality of their care; or in ways that
challenge the pharmaceutical companies, the insurance
companies, and other powerful economic interests. Only
the latter approach is consistent with sustainable,
broadly shared prosperity.

Eighth, Social Security benefits are not the problem
and must not be cut.

Social Security has its own dedicated source of funding
and is not responsible for our long-term debt problem.
The Social Security trust fund is projected to grow
from $2.5 trillion in 2009 to $3.8 trillion in 2020,
and its surpluses are invested in government bonds that
have to be repaid just like any other government bonds.
Social Security has no borrowing authority and cannot
pay benefits if its trust funds are empty.

Creating the false impression that Social Security is a
principal contributor to the growth of budget deficits,
or lumping Social Security together with Medicare as
part of a general "entitlements crisis"-is a sleight-
of-hand designed to build public support for the
unpopular Wall Street agenda of cutting Social Security
benefits and/or privatizing the program. We cannot
allow deficit reduction to be used as an excuse for
either.

It is especially inappropriate to cut benefits for near
retirees who have suffered the most from the recent
loss of their retirement savings in the collapse of the
stock market and real estate bubbles.

In fact, Social Security should be strengthened to
compensate for the decline of traditional pensions and
for the stock market losses of retirement savings
plans. Social Security benefits are about one third
lower than the average of 30 OECD countries.

We need to remember that Social Security functions as a
powerful counter-cyclical stabilizer during recessions.
Every month, millions of Social Security checks are
quickly cashed to pay for goods and services, flowing
through communities and fueling the economy.

The modest 75-year shortfall in Social Security's
finances can be easily addressed and does not require
benefit cuts (such as reducing adjustments for
inflation or reducing starting benefits) or raising the
retirement age. One proposal to bolster Social
Security's finances that would be consistent with
sustainable, broadly shared prosperity is raising the
cap on taxable wages to 90% of earnings, or lifting the
cap altogether.

                     ***

In the short term, we have a jobs crisis-not a debt
crisis. The best way to improve our fiscal situation is
through stronger job growth. However, given the massive
shortfall of aggregate demand, additional deficit
spending is necessary in the short term to bring down
unemployment and avert a double dip recession, which
would only make deficits worse.

After the jobs crisis is behind us, we will need more
tax revenues to pay for the higher levels of public
investment in 21st century infrastructure that are
necessary to create good jobs, ensure long-term
economic growth, and improve our global
competitiveness. Additional health reforms will also be
necessary to further reduce excess health care cost
growth.

Stabilizing the national debt over the long term can be
a means of achieving sustainable, broadly shared
prosperity. But exaggerated fears of deficits and the
debt should not be used as a pretext to increase
inequality and thereby repeat the mistakes of the past
that brought us to the precipice of global depression.

_____________________________________________

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