San Antonio Express-News (Sunday)
Rice prof serious about cutting the deficit
As Congress continues looking mainly at short-term and politically safe “solutions” to the federal budget deficit — but doing very little about it in reality — I went looking for ideas that might actually rein it in.
My search took me to John W. Diamond, an adjunct professor of economics at Rice University, CEO of Tax Policy Advisers LLC and director of the Center for Public Finance at Rice’s Baker Institute for Public Policy. He’s also co-editor of the books “Pathways to Fiscal Reform in the United States” and “Fundamental Tax Reform: Issues, Choices and Implications.”
We spoke after the recent publication of a paper he wrote calling for a commission to address federal deficits in a serious way. This interview has been edited for length and clarity.
Q: You’ve written about working to reduce the federal government deficit, most recently with your paper “It’s Time to Get Serious About The Federal Deficit” for the Baker Institute at Rice University. My question is this: Where is the serious, responsible group — either in Congress or elsewhere — that is working on the deficit in a practical way?
A: There are various groups that are serious on the issue, like the bipartisan Fiscal Policy Act, like the Committee for a Responsible Federal Budget. I think different think tanks — Brookings, Cato, AEI — have different views on what it should look like. They all understand the importance of moving toward a sustainable federal budget. I think across those institutions, including the Baker Institute and myself, we all have different views on what that looks like.
Q: That’s helpful because I approach this topic with some despair. Part of my despair is over my curiosity about where, in Congress, are the responsible groups? This is a loaded question, I understand.
Q:
That’s a tough one. The cynical side of me just wants to jump out and say we don’t have any responsible parties in Congress. But I think that’s incorrect. I think there are individuals in Congress who see this as an important problem. And they’d like to solve it.
Now, Congress as an institution, abstracting away from individual members, seems totally incapable of solving this problem. In fact, all too often what we see from Congress is not only not solving the problem but making the problem worse. You know, Congress never really acts on anything until there’s an emergency, until it’s a crisis. If you can solve a problem now, at a lower cost than if you wait till it’s a crisis, then you should do it now. But the reason we’re going to wait until a crisis is because we can’t come to an agreement now. To me that’s
an institutional failure. But that’s my long answer to your question.
Q: In your new paper, you reference that in 2010 and 2011 there was this commission with the unwieldy acronym the NCFRR.
A:
The National Commission on Fiscal Responsibility and Reform. It was led by former Sen. Alan Simpson and former White House chief of staff under President Clinton Erskine Bowles — the Simpson-Bowles Commission. If we go back to the late 1990s we actually ran surpluses.
And that really goes back to a really strong budget and a strong economy. But it was also really a compromise between Republicans, between Newt Gingrich with the Contract with America and Bill Clinton. They had welfare reform and they cut the capital gains rates. Given the economy at the time, it was a fiscally responsible budget and it led to surpluses for two years in that period.
And then we could go back to when (Ronald) Reagan was in office in the mid-’80s, we had reform. Democrats were in the House and Senate and the president was a Republican. And there was some compromise there. In 1986 we had the Social Security commission because Social Security was running out of money and we extended it by making some changes.
With Simpson-Bowles, what they put out was a pretty comprehensive solution, a bipartisan solution, and it fell one vote short of receiving an up-or-down vote. So how useful was it? Well, my reason for putting it back out there is — it isn’t rocket science. What Simpson-Bowles came out with was pretty good. If there’s a range of potential solutions, it’s definitely somewhere in the middle of that range. And so it’s a great place to start if we’re going to have this conversation again.
Q: I approach this knowing some history but with some current despair. But it doesn’t seem like conceptually it should be complicated. Smart people have thought of this stuff before. I like to take a very complex topic and try to make it super simple. To me, there are two direct ways and one indirect way to address deficit reduction. Method one: higher taxes. The next is lower spending. And the indirect way is higher growth. From your perspective, what is the highest value way to do step one, raising tax revenue?
A:
I use the same framework you just laid out. I would just say that when raising taxes and cutting spending, you want to choose the method that leads to the highest possible growth. The more economic growth we have, the easier it is to solve the problem. Without economic growth, you really can’t solve the problem.
There’s a little bit of a silver lining that if we hit another period of rapid economic growth, you know, this problem could become easier to solve. So it’s not necessarily that the sky is falling. My take is you choose between either revenue increases or spending cuts based on which ones support the highest level of economic growth. You probably don’t want to cut investment in infrastructure that makes private capital more productive, such as roadways. Or investment in research and development or innovation.
We’re going to have to cut our expenditures on Social Security. And we can do that maybe through means-testing. But ultimately that’s a political issue, and politicians can’t do something that almost everyone disagrees with because they’ll be voted out of office.
It’s going to have to be a national conversation, where we agree on what’s the appropriate level. I would have things that I would cut, which
someone else may disagree with. We’re going to have to come to some agreement on how we do that, and how much we do that. But more importantly, I don’t want to give the impression that we have to go out and cut so much that we solve the problem tomorrow. Economic growth actually provides us the opportunity that if we could just get the budget deficit down to 2% per year, and let’s say we get economic growth up to 2.5% per year, then the debt to GDP level is actually coming down very slowly.
In the early 2000s, debt-toGDP ratio was around 35%. That’s not a problem. So let’s just try to get back there in 20 or 40 or 50 years. So we can do it slowly. It doesn’t have to be a one-time hit. We can spread the sacrifice out. Unfortunately, what we’re doing now is we are continuing to take the gains by having really large deficit spending, we’re forcing all the sacrifice on to future generations.
Q: I like that there’s a bit of optimism in what you’re saying.
A:
I mean, look, growth comes from innovation. Growth doesn’t come from government. The government needs to give the private sector the chance to create, innovate and grow. We need government spending that provides the infrastructure and the rules of the game and makes it more beneficial to save, invest and innovate. And then equity. Efficiency is a big consideration, but what we’ve seen across history is that while a market economy is better at producing sustainable longrun growth, it does sometimes lead to unfair or inequitable allocations of resources, and the government should have a limited role in providing a safety net that ensures against the worst-case outcomes and gives people a helping hand up when they need it.
Q: In your paper you point to 2025 as an important tax policy year because it’s the expiration or sunsetting of key parts of the Tax Cuts and Jobs Act of 2017. And what should we know, in advance of 2025, as these parts of the tax code sunset?
A:
What I would like to look for is no more sunsetting. This is my point. Usurious policies are 10-year policies that sunset. Our tax policies are written solely so that they will look cheaper in a 10-year budget window and so that they don’t have to get 60 votes in the Senate. If we want to look forward to something in 2025, let’s start passing permanent tax policies, passing stuff that we intend to keep and not stuff that we are just trying to spend money to get as much political bang for the buck as we can get.
The system definitely incentivizes Congress to think about the current period a lot harder than they do the future period. Now, with the 2017 act, things like the corporate tax rate were permanent, but a lot of the individual side provisions were temporary. So if we get to 2025 and all we do is expand the tax breaks and then don’t expand the things we used to pay for those tax breaks we’re going in the wrong direction, we’re going backward. And that’s why I think we need a 1986-style reform. We need to completely reform the tax system. We need to really focus on increasing efficiency and getting rid of economic distortion. And this would be the perfect time to do it. But to do that, we’ve got to start thinking about it now.