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America's Related Fiscal Problems

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Document date: September 08, 2010
Released online: September 08, 2010

Abstract

In a point-counterpoint with Henry Aaron, senior fellow at the Brookings Institution, Eugene Steuerle discusses five pressing fiscal problems facing America, and suggests tax and budget reform options to address these issues. This discourse includes agreement and disagreement, yet is honestly presented without the noise and confusion that often surround these issues. Steuerle’s and Aaron’s essays originally appear in the Journal of Policy Analysis and Management. Steuerle, C.E. (2010) “America’s Related Fiscal Problems.” Journal of Policy Analysis and Management, 29(4), 876-883.


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Does America have a major fiscal problem? I don’t think anyone would say that the answer is “No.” The complication is that the United States, like many OECD countries, has five “fiscal” problems, all intertwined:

  1. Short-term or countercyclical policy. Fiscal policy needs to operate countercyclically, as it did during the recent recession. But now it is scheduled to turn pro-cyclical during an upturn, diminishing flexibility for dealing with the next recession.
  2. Long-term sustainability. The nation’s projected long-term deficits—that is, deficits that will mount if today’s policies don’t change—are not sustainable and threaten our economic viability.
  3. Fiscal democracy. The law now commands such extraordinary commitments of limited revenues to mandated programs—those that by design operate eternally under rules written by yesterday’s legislators and without any vote by newly elected legislatures—that fiscal democracy is at risk.
  4. Fiscal sclerosis. Our budget is for a declining nation—one tilted toward spending more on consumption and less on investment, particularly in our children.
  5. An aged age policy. Total cost aside, our policies toward the elderly can be much more fair and efficient.

These knotted fiscal issues have hit our economy simultaneously and interact multiplicatively. Short-term countercyclical policy, which generally requires rises in the debt-to-GDP ratio to counter recession, can’t work unless that ratio is reduced during good economic times. But, for the first time in U.S. history, large long-term deficits are being predetermined even if future Congresses do nothing, thus constraining short-term policy options. Meanwhile, our down-the-road deficits derive largely from putting into the law unbalanced commitments for low revenues and rising benefits, thus robbing future voters of their say over how to meet new budgetary demands or emergencies. Sclerosis occurs because these commitments increasingly direct revenues toward consumption, less work, and less saving. Finally, our policies toward the elderly increasingly favor those with fewer needs and are programmed to discriminate forever against single heads of household, among other regrettable design features.

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Topics/Tags: | Economy/Taxes | Health/Healthcare | Retirement and Older Americans


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