Five Steps to Cut the National Debt
Sphere | Dec. 10, 2009
Earlier this week, lawmakers confirmed that they will increase the national debt ceiling by as much as $1.8 trillion – raising it to more than $13 trillion – so the federal government can keep borrowing to cover its huge deficit.
As daunting as those numbers are, Congress has no choice. Fail to raise the debt limit and the government would default on its debt, sparking an immediate financial and economic crisis far worse than the one we just experienced.
But raising the debt ceiling only postpones that crisis. And if lawmakers want to avoid it, they have to get serious about bringing the nation's debt under control.
In the last year alone, the total government debt grew from almost $10 billion to nearly $12 trillion. The total government debt is on course to reach 100% of GDP by the early 2020s. Such high debt levels are likely to slow economic growth, dampen wages and harm jobs. Choosing this path is a sure-fire recipe for lower standards of living in this country.
It is true that much of our recent debt accumulation is either a direct or indirect result of the economic crisis, and acting to cut the debt too soon could damage the precarious economy. But the cost of waiting too long to change course would also be dire.
So, how does the U.S. gets its debt under control? The hard truth is that spending has to be cut and taxes have to go up.
I know, I know, that is exactly the opposite of what politicians like to promise, but there is no getting around it. Here are five ideas we should consider:
1) Raise the retirement age. Over the past 50 years or so, life expectancy has increased from 70 years to 78. Yet the average retirement age has fallen from 65 to 62. Raising the retirement age for Social Security would not only reduce the program's obligations, but would likely encourage people to work longer. And a larger work force means more taxable income and stronger overall economic growth.
2) Cap discretionary spending. Over the past decade or so, discretionary spending has grown far faster than the economy, even excluding defense spending. To ensure that politicians make tough decisions in this area of the budget, we must have strong enforceable spending caps in place. Even just limiting growth rates to levels of inflation could save $1 trillion or more relative to what would otherwise happen.
3) Require well-off seniors to pay more of their share of Medicare. To be affordable, there is no question that Medicare needs a major overhaul. But the chances of us getting there with health care cost control alone are extremely low – some benefits will need to be cut. To protect low-income seniors, we need to boost premiums and cost-sharing for wealthier seniors. That's already started in Medicare Part B, but we have to be more aggressive.
4) Don't extend so many of the Bush tax cuts. By the end of next year, nearly all the tax cuts passed over the past decade will expire. Renewing them all will cost around $2.3 trillion. Renewing them for everyone making less than $250,000 annually – with President Obama proposes – would still cost $1.8 trillion. We should go through the tax cuts one by one to decide which ones are worth keeping and which we simply can't afford.
5) Enact an energy tax. We are unlikely to stabilize our debt with spending cuts alone, and the current tax system is too inefficient to raise all needed revenue. An energy tax can make up some of the difference. By taxing carbon emissions or gasoline, as opposed to work and investment, we can reduce deficits and address climate change without hurting the economy too much.
I recognize that few of these options are easy, and frankly none are popular. Getting our fiscal house in order will be an exercise in hard choices. But our fiscal future depends on it.