Why We Must Untie Our Fiscal Straightjacket: A Response to Henry J. Aaron

Abstract

Eugene Steuerle's response to Henry Aaron in a point-counterpoint debate about America's fiscal struggles. 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 and responsesto each other originally appear in the Journal of Policy Analysis and Management. Steuerle, C.E. (2010) "Why We Must Untie Our Fiscal Straightjacket: A Response to Henry J. Aaron." Journal of Policy Analysis and Management, 29(4), 891-893.

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Henry Aaron and I approach fiscal policy in many similar ways. Those who know us also know that we have collaborated on many issues and understandably might wonder why we are Point/Counterpointing here. That said, our approaches differ in two simple ways. From my perspective:

1. The deficit is a symptom of a larger problem. Gaining control over macroeconomic policy, reorienting our budget toward our greatest needs, investing in our children, and escaping our current political straightjacket first requires restoring much more "give" in the budget and leeway for future decision makers.
2. When it comes to policies toward retirement and health, government policy fails not because the annual benefits it provides are too high, but because it has morphed into supporting middle-age retirement, distinguishes inadequately between ability and income in assessing need, and fails to put all health subsidies into controllable, as opposed to open-ended, budgets.

First, some points of agreement. Aaron and I both worry about achieving a sustainable fiscal policy. We both consider forecasts "notoriously inaccurate" and the rise in debt/GDP ratio as more troubling in some ways than it was at the end of World War II. Further, we both think that enacting deficit-reduction policies early but implementing them gradually is feasible and wise and that Social Security is only a moderate (Aaron says "negligible") part of the problem. We both believe that the tax code can be cleaned up considerably, accept the necessity of tax increases, and recognize that cutting back on tax expenditures is equivalent to cuts in spending, not increases in taxes.

Perhaps less obvious, we both believe strongly in progressivity. Like Aaron, I oppose means-testing Social Security if the aim is reducing benefits for some to zero or negligible amounts. Among other reasons, annual income means testing doesn't measure need or ability to pay very well, especially for those not working. Note, however, that Social Security already does and can "means test" insofar as it provides lower rates of return to those with higher lifetime earnings or collects income taxes on benefits.

So what are Aaron and I sparring about? Returning to the five fiscal problems I outlined previously, I favor greater amounts of reform to achieve a more flexible macroeconomic policy, attain clear fiscal sustainability (barely obtaining sustainability by 2025, in my view, does not meet that test), enhance fiscal democracy and leave more decisions to future voters, scale back the fiscal sclerosis that derives from ever-higher emphasis on consumption, and modernize old-age supports by allocating marginal dollars better with equity, progressivity, and efficiency in mind.

(End of excerpt. The full article is available in PDF format.)

For the rest of the debate, see:

• Steuerle essay
• Aaron essay
• Aaron response to Steuerle

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