Download - Citizens Commission Report Final
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REPORT AND
RECOMMENDATIONS
OF THE
CITIZENS COMMISSION
ON JOBS, DEFICITS
AND AMERICAS
ECONOMIC FUTURE
FO
R
OurFuture.org
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The Institute for America's Future is a center of nonpartisan research and education. Its mission is to equip Americanswith the tools and information needed to drive issues into the national debate, challenge failed conservative policiesand build support for the progressive vision of a government that is on the side of working people. To achieve ourmission, IAF spearheads the development of a compelling progressive economic agenda and messagewhichmakes clear what progressives stand for, articulates the philosophy and values underlying these policies, and framesand argues for them in new ways that will resonate with the majority of average Americans. IAF also regularly
convenes and educates progressive leaders, organizations, candidates, opinion-makers, and activists to encourageand facilitate their adoption and use of a common economic agenda and message so that our collective voices echopowerfully. Finally, IAF acts as an incubator of national campaigns in which progressives join together to form policiesthat advance economic prosperity and opportunity for lower and middle income Americans.
1825 K STREET NW SUITE 400 WASHINGTON DC 20006 (T) 202 955-5665 (F) 202 955-5606 WWW.OURFUTURE.ORG
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EXECUTIVE SUMMARY
Te United States continues to suer the aereects o the worst economic recession since the Great
Depression, triggered by a fnancial crisis whose causes were ignored or made worse by elite policymakers
or decades. oday, more than 25 million Americans who are ready and willing cant fnd ull-time work.
Personal wealth has declined sharply, creating an especially uncertain uture or people approaching
retirement age. Confdence is down or both consumers and businesses, which prevents sustained
economic growth.
At the same time, largely due to the severity o the recent recession, a ederal government that enjoyed
record surpluses just 10 years ago now aces record defcits that are spreading alarm and conusion across
the land. Moreover, this severe downturn comes aer a decade that eatured the worst job creation in the
post-war period, declining wages or most Americans, weaker unions conronted by employer attacks on
rights to organize, continued decay o basic inrastructure, an ongoing crisis in public education, record
trade defcits and job loss abroad, and extreme inequality.
Despite the ongoing pain that unemployment is still inicting on individuals and amilies, despite the slow
growth in demand that is hurting small business, despite the wrenching
budget crisis hitting most state governments, and despite the longer
term decline that can no longer be ignored, the debate in Washington
is now dominated by conservative cries or immediate reduction o theederal defcit. Several elite commissionstwo privately fnanced, and
one created by the president and Congresshave eectively shied the
attention o the media to defcits as the primary ocus or public action.
One voice has been conspicuously absent rom most discussion o
defcitsthat o the American people. Polls have shown that the
publics opinion and that o many leading economists are surprisingly well aligned. Te public agrees
with economists who warn that defcit reduction must be perormed judiciously, without restricting
governments ability to create jobs and without damaging needed social programs. Both agree that that we
must make investments vital to reviving Americas long-term prospects.
Te Citizens Commission on Jobs, Defcits and Americas Economic Future was created to oer proposalsthat can return our economy to healthy, sustainable growth, while taking action to reduce defcits and debt
in a way that enhances the uture well-being o the American people. And since the conventional wisdom
is so dominated by a relatively narrow range o opinions, it is our intention that this document will elicit
The Citizens Commission
on JobS, Deficits and
Americas Economic Future
This report was written by Je Madrick, a member of the Commission and Senior Fellow at the Roosevelt Institute with contributions from Roger Hickey, Robert Borosage and Richard Eskow of the Institute for Americas Future, DeanBaker of the Center for Economic and Policy Research, Robert Kuttner of The American Prospect and Demos, andRobert Pollin of the Political Economy Research Institute, with additional work by other members of the commission.
O
ne voice has been
conspicuously absent
rom most discussion o
defcitsthat o the American
people.
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media coverage o an alternative point o viewand that its recommendations will be widely discussed by
civic and business and labor leaders in communities all across the nation.
Tis commission has two major priorities. Te frst is to assure that the U.S. economy recovers ully and
returns to a ast track o growth. Tis is the right way to reduce the current high defcit. Te second is long-
term public investment in sustainable growth, ensuring a healthy economy that can generate adequate
revenue or needed public services. We have outlined three key principles that any plan or growth and
defcit reduction must ollow: Grow the economy. Dont kill growth and jobs in the name o defcit reduction.
arget what truly drives defcits. Dont fx what isnt broken.
Invest in uture sustainable growth while balancing our national accounts.
Tese are not just moral imperatives. Tey are economic prerequisites or successul defcit reduction.
Causes o Current and Future Defcits
Much i not most o the current public discourse is misleading and poorly inormed.
Te ederal defcit tripled between 2008 and 2009, reaching $1.5 trillion and 10 percent o GDP in 2009.
Tis was the culmination o a process that began with the passage o the frst Bush tax cuts, accelerated
with the invasions o Iraq and Aghanistan, and peaked with the economic collapse o 2008. It thereore
ollows that any reasonable short-term plan should ocus the causes o our current defcit. Yet most o the
measures currently being debated ail to do so. Despite the role that tax cuts played in creating todays
defcits, many such plans would lower taxes or the wealthiest Americans while increasing them or the
middle class. Tey would also restrict government eorts to bring us out o our current economic crisis,
weakening the economy and reducing uture government revenues.
Future defcits will be driven almost exclusively by the explosive growth in health care costs. Tose
who advocate or increased austerity are ailing to address the true causes o government spending.
Furthermore, there is no evidence that implementing policies to reduce government defcit would increase
private spending. As we note (see Appendix I), there is ample evidence that such spending cuts wouldcreate more unemployment, making a second recession possible and even likely.
The Lesson o 1937
Te nation has been at a similar juncture beore. Franklin D. Roosevelts New Deal reduced unemployment
rom 25 percent to 10 percent in three years, but he was then pressured to reduce spending beore the
economy was ully stabilized. Te result was another sharp increase in unemployment and a weakened
economy that only improved when the nation entered World War II.
Ten, as now, government spending was one o many legitimate policy concerns. Ten, as now, previous
government eorts had shown signs o success. President Obamas stimulus program created an estimated
3.5 million jobs and would have created more had it been larger. As in 1937, the nations economy remains
ragile and the recovery is not yet complete. More investment is needed. Premature austerity would be as
unwise and counterproductive now as it was then. Plus a nascent and struggling recovery is not sucient
given the decline o the last decade. Premature austerity would terminate any possibility o building a new
oundation or growth and shared prosperity.
Tough weak growth returned by 1934, unemployment was still stuck above 12 percent on the eve o
World War II. It was the massive wartime defcits, (peaking at 28 percent o GDP compared to less than 9
percent today) that fnally produced strong recovery.
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Overview of Recommendations
Tis report o the Citizens Commission on Jobs, Defcits and Americas Economic Future puts orward
a set o proposals that would protect and accelerate the economic recovery while achieving a stable but
sustainable level o debt by 2015. It reduces debt to a manageable level while at the same time providing
a strong program o government investment that will create jobs and ensure ongoing growth. Our plan
achieves that goal without cutting Social Security or capping or voucherizing Medicare (as many
conservative proposals do). It provides immediate eorts to support economic growth, substantialinvestments vital to the strength o our economy, cuts to ederal wasteul spending and a variety o
measures to increase revenues.
An important note: Any plan to substantially reduce the ederal defcit should be deerred until
unemployment has dropped to an acceptable level, which we have defned as 5.5 percent. Our plan is no
exception. Our recommended changes to the 2015 budget should only be implemented i unemployment
has reached that level. We believe it will i our short-term investment recommendations are adopted.
Our recommendations are based on the ollowing principles:
Address the current economic crisis rst. Beore engaging in widespread defcit reduction eorts, we
must institute a program o short-term targeted spending to restart the economy and sustained investment
to begin to support longer-term growth. Key among the ormer is aid
to the states, whose constitutionally mandated budget austerity is not
only inicting painul cuts in social services but also creating a huge
and destructive drag on the national economy. We also must pursue
innovative monetary and credit market policies to move roughly
$2 trillion in idle cash hoards now held by banks and non-fnancial
corporations into productive job-creating private investments.
Tax justice and empowered workers generate prosperity, fairness,
growthand revenues. ax cuts were a major cause o our current
defcit. Any plan that continues or increases tax breaks or the wealthy
will add to the defcit. In an era o excessive inequality, we should endBush era tax cuts or the wealthiest Americans, tax capital gains and
dividends as normal income, tax activities damaging to our economy
like excessive fnancial speculation, and eliminate or reduce tax
expenditures that mainly beneft the wealthy.
To ensure ongoing prosperity, we must also provide ongoing tax relief for lower- and middle-income
households. Tese households will spend, not save, the additional income. We must also take steps to
reduce the war on unions and worker rights (involving corporate action and misguided public policy) that
has been a major actor in preventing working rom getting their share o productivity growth over the
past three decades. Lower taxes and higher wages or working amilies will generate consumer activity that
leads to more growth, more jobs, and more tax revenue.Reduce wasteful government spending without compromising public objectives. Spending cuts
are needed, but we increase, not decrease investments in areas vital to our uture, and insure that any
adjustment not worsen already extreme inequality. We must eliminate spending that is unneeded or
wasteul, reduce obsolete and unneeded military spending, and make prudent cuts in government
expenditures that are not vital to its core mission.
Protect and strengthen Social Security. Social Security retirement benefts are the main source o income
This plan provides
immediate eorts
to support economic growth,
substantial investments vital to
the strength o our economy, cuts
to ederal wasteul spending and
a variety o measures to increase
revenues.
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or most retirees, and most o this income is spent rather than saved. Tis leads to growth and jobs without
adding to the defcit, since Social Security is unded separately. We must remove Social Security rom
defcit cutting exercises, increase its revenues, provide modest beneft increases, and assure the public
that its $2.6 trillion in trust und assets will not be used or other purposes.
Establish realistic and sustainable long-term decit goals. Any long-term defcit plan defcit must be
politically sustainable, fscally sound, and not impose unacceptable levels o hardship. We recommend a
short-term period o imperative recovery expenditures. We seek a gradual reduction in the defcit-to-GDPratio over the coming decade. We recommend an annual defcit target o 3 percent o GDP as a medium
term goal once recovery comes. Tis could be achieved as early as 2015i the economy recovers, and
i we dont choke o that recovery with premature defcit reduction. We are skeptical o targeting a date
certain independent o the condition o the economy. Te test o when to aim or that 3 percent defcit
target is whether unemployment has come down to 5.5 percent. Such a target, over the long term, will
enable us to stabilize the level o debt as a proportion o GDP at sustainable levels, because with high
employment GDP will be growing aster than the debt
Restore the nancial sectors role as an eective engine of growth. Te banking industry used
government-provided economic advantages to engage in reckless speculation, leading to the current
crisis. Banks continue to receive discount money and other government support without adequately
perorming their traditional economic role as lenders. Te fnancial industry has recaptured a high and
economically unhealthy percentage o the nations profts. We recommend a fnancial transactions tax
and programs to encourage increased bank lending in a responsible manner both to ensure our current
recovery and to promote long-term stability.
Te recently enacted Dodd-Frank Wall Street Reorm and Consumer Protection Act does include several
important eatures that could succeed in encouraging long-term fnancial stability. Tese include the so-
called Volcker rule prohibiting proprietary trading by large banks, the requirement that all derivatives
trading be conducted on regulated exchanges, careul oversight o public credit rating agencies, and the
creation o a Consumer Financial Protection bureau. However, details on the implementation o Dodd-
Frank have been le to the discretion o various regulatory agencies, such as the Federal Reserve and the
Securities and Exchange Commission. Tis creates enormous opportunities or the banking industryto weaken the eectiveness o the new regulatory system. o rebuild a healthy economy, ocused on
channeling our enormous fnancial resources into productive investments and job creation, it is imperative
that all the main provisions o Dodd-Frank be strongly enorced immediately and over time.
Address the health-care cost crisis. Alarming long-term projections o growing debt come almost
completely rom uncontrolled growth in health care costs. We do not have an entitlement crisis; we
have an unaordable health care system. Rather than capping, cutting or voucherizing Medicare or
Medicaid, we need continued health care reorms that control costs through changes to the structure o
the medical economysuch as the immediate establishment o a robust public option plan available to
all Americans, direct government negotiation o drug prices, and thorough additional cost-cutting and
quality improvement measures.
Who We Are
Te Citizens Commission is comprised o economic policy experts, such as ormer Secretary o Labor
Robert Reich, Je Madrick and economists Dean Baker, Robert Pollin and Heidi Hartman, and ormer
members o the House and Senate. But perhaps most importantly, many o its members are leaders o
national organizations with enormous reach into American communities, rom labor leaders such as
Larry Cohen and Mary Kay Henry to coordinators o national organizing networks such as Deepak
Bhargava, Angela Glover Blackwell, as well as other leaders whose work engages the grassroots public in
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debates about the economic direction o our country. Te commission was organized by the Campaign
or Americas Future, which has led nationwide public organizing campaigns around the uture o Social
Security, health care, green jobs and the uture o manuacturing.
Note: Our Citizens Commission was inspired to action in part to challenge the one-sided media coverage
lavished on the Simpson-Bowles National Commission on Fiscal Responsibility and Reorm, the Pew-
Peterson Commission on Budget Reorm and the Bipartisan Policy Center Debt Reduction ask Force.
Our deliberations were also inormed by recent work by the Economic Policy Institute, especially theirreport, Americas Economy: A Budget Blueprint or Economic Recovery and Fiscal Responsibility,
published by Demos, EPI and Te Century Foundation on November 29, 2010. As does our commission,
this report outlines policy changes to achieve job growth, long-term public investment and outlines a
defcit reduction plan that achieves primary fscal balance by 2018.
We were also both educated and inspired by the recent set o proposals put orward by a member o the
presidents fscal responsibility commission, Representative Jan Schakowsky. In the best tradition o the
great democratic debates, Rep Schakowskys plan presents a way to reduce the ederal defcit without
making middle-class Americans oot the bill. Schakowskys plan is an alternative to the Bowles-Simpson
plan and would reduce the defcit by $441 billion in 2015, surpassing President Obamas $250 billion
target. Critically, the Schakowsky plan accomplishes defcit reduction without making cuts to essentialederal expenditures that beneft the middle class or are crucial to uture growth.
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banks to lend aer the devastating losses o 2008, even while the banks now hold approximately $1 trillion
in cash reserves, most o which they obtained through borrowing at near-zero rates rom the Federal
Reserve. Consumer debt levels still exceed 120 percent o their income. o reduce them to the levels o
2000 would require consumers to cut $3 trillion dollars o their debt. Te nations savings rate is now rising
as consumers hunker down and pay o debt. Tis necessarily reduces consumption, and will continue to
suppress it. Consumption is the main driver o the economy in the short run.3 Given the widely accepted
wealth eectthat consumer spending is directly related to personal wealth-- the $12 trillion loss o
wealth alone could alone have cause a loss o $400 to $500 billion in purchasing power.
Meantime, the Obama recovery package has mostly been spent and will largely taper o by the end o
2010. Congressional hesitancy to maintain transer payments such as unemployment insurance could also
restrain growth.
Te fnancial system is also still ragile. Te recent estimate o uture bailout unding that will be required
by Fannie Mae and Freddie Mac is one example o the potential disarray another recession could cause is
the recent estimate o uture bailout unding that will be required by Fannie Mae and Freddie Mac. Te
Federal Housing Authority concluded recently that the bailout would cost $6 billion at a minimum i
the economy recovers and housing prices begin to stabilize. I there is ongoing weak growth or another
recession, causing a continued decline in housing prices, the cost could rise to $124 billion.4 Tere are
similar, still larger potential catastrophes awaiting us in the private fnancial sector i there is another
recession.
Causes o the Current Defcit
In fscal year 2009, ending September 30, the annual budget defcit tripled rom its level in 2008 to
$1.5 trillion, or roughly 10 percent o the nations total gross domestic product. Te annual defcit grew
somewhat in fscal year 2010 as a share o GDP. Te debt-to-GDP level rose to 60 percent, compared to 40
percent a short time earlier. Te sudden, spectacular surge raised alarms about government spending and
was used by long-term advocates or fscal austerity as proo o Americas fscal irresponsibility.
But, as noted, the current level o ederal budget defcits is not the result o long-standing national
proigacy. It is the result o the recession itsel, which sharply reduced incomes (and thereore taxrevenues) and raised necessary spending on unemployment insurance, nutrition programs and similar
automatic stabilizers. In coming years, high budget defcits will also be the result o the tax cuts proposed
by President George W. Bush in the early 2000s and war spending in Iraq and Aghanistan. As the Center
or Budget and Policy Priorities points out, these three actors account or almost the entire projected
budget defcit over the next 10 years (Figure 1)5. Te defcit is simply not the result o spending on such
social programs as Social Security or Medicare.
Austerity advocates conuse two dierent issuesshort-term defcits generated by the recession, the Bush
tax cuts and the war spending, with more disturbing long-term projections o defcits and debt driven by
rising health care costs. America does not have an entitlements crisis. America has a broken health care
system with excessive costs and inerior outcomes. Eorts to merely reduce public sector expenditures
such as caps on Medicare and Medicaid spending, cutbacks in veterans health care, increases in out-o-
pocket health care costs, raising premiums or voucher systemswill undermine the eectiveness o these
3 Sherle R. Schwenninger and Samuel Sherraden, A Nation At Risk, New America Foundation, October 2010, http://www.newamerica.net/sites/newamerica.net/les/policydocs/Recovery_At_Risk_Oct_2010.pdf.
4 Benjamin Appelbaum, Fannie and Freddie: 3 Bailout Forecasts, The New York Times, October 22, 2010, p. B1.
5 Kathy Rung and James R. Horney, Critics Still Wrong on Whats Driving Decits in Coming Years: EconomicDownturn, Financial Rescues, and Bush-Era Policies Drive the Numbers, Center on Budget and Policy Priorities, June 28,2010, http://www.cbpp.org/cms/index.cfm?fa=view&id=3036
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programs without lowering overall health costs. Tese measures would shi much more o the cost burden
onto individuals while ailing to fx the undamental deects in our system. Te health care reorm bill
passed earlier this year may be a frst step towards repairing the health care system, but much more will
need to be done.
Any meaningul long-term defcit program must take an objective look at the aws in our current system
and then act accordingly. Tat means taking advantage o the ability o publicly unded health insurance
to control overall costs, negotiating eectively, and thoroughly reviewing other techniques, such as all-payer payment rates and evidence-based medicine, that may play an essential role in reducing costs while
protecting or even improving the quality o care.
Social Programs Are Not the Problem
Many observers carelessly combine Medicare, Medicaid and Social Security as principal causes o the
long-term defcit. Consider this statement by the Peterson-Pew Commissions report, cited earlier: the
combination o population aging and growing health care costs will lead to an unprecedented expansion o
Medicare, Medicaid, and Social Security in particular. Under the Commissions fscal baseline, these three
programs will likely grow rom less than 8.5 percent o GDP in 2008 to 11 percent by 2018 and 17 percent
in 2038.
Te lumping together o the three programs is misleading and, in truth,
irresponsible. Social Security is an insurance program paid or by the
contributions o workers and their employers and the interest earned on
the investment o the Social Security surplus. Most Americans would
probably be stunned to know that Medicare and Medicaid will account
or 85 percent o the increase in these percentages, Social Security only
15 percent. In its June 2010 budget outlook, the Congressional Budget
Oce concluded that,
I current laws do not change, ederal spending on major mandatory
health care programs will grow rom roughly 5 percent o GDP today
to about 10 percent in 2035 and will continue to increase thereaer.Tose projections include all o the eects o the recently enacted health
care legislation, which is expected to increase ederal spending in the
next 10 years and or most o the ollowing decade Under current law, spending on Social Security is
also projected to rise over time as a share o GDP, albeit much less dramatically. CBO projects that Social
Security spending will increase rom less than 5 percent o GDP today to about 6 percent in 2030. And
then it will stabilize at roughly that level. 6
Te increase o roughly 1 percentage point (1.3 percent, to be precise), may surprise readers but most o
the increased payments due to an aging population were already anticipated in reorms undertaken in the
1980s, mostly with the gradual increase in the retirement age to 67. Te remaining gap is relatively easy
to close. In act, raising taxes by 0.6 percent o GDP would do it because there are already Social Security
assets in a trust und or uture benefts.7
Yet the sudden rise in ederal budget defcits has once again made Social Security the avorite target
o defcit cutters. Most o these would sharply reduce benefts or a large proportion o the elderly.
Retirement savings, including 401(k)s, into which many retirees were required to place their unds in
6 The Congressional Budget Oce, The Long-Term Budget Outlook, June 2010, http://www.cbo.gov/ftpdocs/115xx/doc11579/SummaryforWeb_LTBO.pdf.
7 Ibid,. Chapter 3, http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf
Many observers
carelessly combine
Medicare, Medicaid and Social
Security as principal causes o the
long-term defcit. The lumping
together o the three programs
is misleading and, in truth,
irresponsible.
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lieu o guaranteed pension benefts, have allen sharply in value. More important, or most middle-class
households, the collapse o the housing bubble destroyed much o their home equity, or most the major
source o their wealth.
Social Security has played no role in our current defcit and will play only a minor role in the uture. Even
under current projections, Social Security spending will rise by only one percent o GDP over the next
75 years without major changes. Te Social Security program is orbidden by law rom drawing on the
general budget, and the Social Security rust Fund currently has a surplus o $2.6 trillion. Social Securityis supported by payroll taxes specifcally imposed or its use and dedicated strictly or that purpose. Te
baby boom population was already addressed in changes devised in 1983 by the National Commission on
Social Security Reorm (led by ormer Federal Reserve chairman Alan Greenspan and usually reerred to
as the Greenspan commission) and incorporated during the Reagan presidency.
Ensuring long-term actuarial balance or Social Security is and should be a separate exercise rom defcit
reduction, and can be accomplished with minor adjustments, which we describe later in this document.
Finally, it is critical to fnd new sources o tax revenues. Te Bush tax cuts undermined the nations
ability to meets its obligations and invest in itsel. Except or those Americans at the top o the income
distribution, they should be extended until the economic recovery is ully underway. Once the nation is
growing rapidly again, a variety o taxes can and should be thoughtully raised to meet the nations needswhile maintaining its fscal integrity.
The Wrong Direction
Some policymakers are using the recent sharp rise in the ederal budget defcit to propose repeating
the tragic errors o the past. Tis is alarming. Te current defcit was not caused by national proigacy
or excessive reliance on government. It arose aer a decade o lavish tax cuts or the wealthy, a steep
increase in military spending and a severe recession brought on by unchecked speculation and inadequate
government regulation.
Emergency stimulus policies here and around the world broke the all, but were not enough to bring about
a ull recovery. Economic growth remains weak and the pace o job creation is ar too slow. Eight million
jobs were lost in the recession, and job creation is barely keeping up with the pace o new entrants into the
job market. Consumers who suered huge losses in home values and retirement savings are struggling to
pay down debt and prepare or what they ear may be worse to come. Te business sector, uncertain about
consumer spending, is holding $2 trillion in cash reserves. Businesses are reluctant to invest in expansion
or job creation under current conditions, leaving the economy trapped on a path o slow growth or
stagnation. Over 25 million American workers are now either unemployed, underemployed or have simply
given up looking or work.
Worse, this severe economic crisis comes on top o a decade that witnessed the worst job creation in the
post-war period, growing inequality, the collapse o the manuacturing sector and declining wages or
average working amilies. We do not have a ull recovery yet, but ull recovery is not enough. We have to
build a new oundation or long-term growth and prosperity.
Instead, ear about the short-term rise in the defcit is being used by many political leaders to encourage
austerity policies in Washington. Tey claim that such austeritycutting public spending to slash budget
defcitsis the only path to achieving job growth and economic recovery. We believe, and the economic
record demonstrates, that this is precisely the wrong approach. Defcit spendingespecially sustained,
aordable investmentsis urgently needed in the long-short term are to return the economy to sel-
sustaining growth.
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We understand there is a natural human response to tighten the fscal belt when the nations budget defcit
rises. In the name o prudence and a misleading sense o sel-discipline, however, the wrong policies are
already being ollowed again today. Austerity economics is discredited by history and unsubstantiated by
any new acts or theory. I the advocates o austerity now prevail, they will consign American citizens to
a decade or more o stagnating income, millions o lost jobs, social inequity, inadequate investment, and
deteriorating morale. (See Appendix I, Te Danger o Austerity Economics.)
Despite the evidence, which we discuss at greater length later in this proposal, the austerity view haswon inuential converts. Earlier in 2010, President Obama created a National Commission on Fiscal
Responsibility and Reorm ocused on reducing defcits. In addition, at least two privately fnanced and
inuential defcit commissions are attempting to push the national discussion urther in the direction o
austerity. Sweeping Republican gains in the recent election will increase the pressure to cut government
spending.
A premature emphasis on defcit reduction will slow, rather than stimulate, growth. It will increase
unemployment rather then put people back to work. Tis could well push our still-ragile economy back
into recession. It will lead to unnecessary and painul changes in Americas social saety net defcits. It will
short-circuit the investments vital to rebuilding America and erecting a new oundation or long term
prosperity, while ailing to achieve the goal o meaningul defcit reduction.
Many in Americain government, in the media, and in businessail to understand the causes o our
defcit concern, or the economic and political risks posed by the austerity approach. Te current crisis is
occurring aer a generation o disappointing economic perormance or most Americans. Earnings have
grown at historically slow rates, stagnated or allen or most working people, amid rapidly rising costs o
education and health care. Te sense o insecurity over jobs and health insurance is widespread. Policies
that increase unemployment and cut cherished and necessary social programs will inevitably add to the
publics increasing expressions o rustration and anger, emotions weve seen expressed at the ballot box
and in public demonstrations.
We are in a period o tenuous recovery which or many Americans is a time o great hardship. Tis is no
time to practice austerity. Austerity economics is pessimistic economics. It is based on ear not aith. We
must orge ahead as we have done time and time and again in our history.
We are not a poor nation. Despite what the austerity advocates say, we need not behave like one. We can
and will return to growth and prosperity, i we have the courage and resolve to pursue bold policies based
on wisdom and optimism.
Attacking the Root Causes o Defcits
Te current defcit was not caused by Social Security, Medicare or Medicaid. Te record surpluses o the
1990s were turned into large defcits by the Bush tax cuts and the cost o waging two wars. Te eects
o this defcit spending were then made much worse by a devastating recession caused by runaway
speculation and inadequate government regulation. Te recession created the need or major government
programs to repair the damage. Tese expenditures added signifcantly to the defcit, as did the loss orevenue created by millions o lost jobs. Te recession also led to a collapse o demand by consumers and
business,8 creating additional lost government revenue.
Over the next 10 years, anticipated defcits will similarly not be caused by rising costs o social programs.
Rather, the principal sources o the defcits, and growing public debt, remain the recession, war spending,
and the tax cuts o the early 2000s under George W. Bush.
8 The Obama stimulus package of roughly $800 billion technically added to the decit but contributed to ending therecession. Had it not been implemented, the decit would be substantially higher in 2011 and 2012.
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Aer 2020, however, the defcit will indeed grow rapidly, as will the level o ederal debt. Assuming we can
succeed aer 2020 in avoiding another fnancial meltdown similar to 2008-09, the central cause o large
ederal defcits will be the rising costs o American health care. I we can reduce our health care costs to
levels similar to other rich nations, the U.S. Medicare and Medicaid benefts will grow at rates that will
not cause a signifcant long-term defcit problem. I we do not control our health care costs, the economy
will be devastated. Along with insuring a stable, well-unctioning fnancial system through eective
regulations, we must ocus our long-term concerns with fscal defcits on reorming our health-care
system.
Investing in the Future
A robust and ast-growing economy with its benefts widely shared is the way to reduce budget defcits and
maintain fscal strength. It is, indeed, the American way. Coupled with signifcant health care reorm, such
robustness will enable us to enhance not erode social policies. And it will generate the unds necessary to
renew vigorous public investment, including in support o building a viable clean energy economy over the
next generation. Tese priorities have been badly neglected or a generation and we believe is essential i
the nation is to have a prosperous economy again.
Our objective is to show that doing so is entirely practical. We present a pro-growth plan to be put in place
in 2015 (provided there is sucient recovery at that time) that will place sensible, sustainable ceilings onthe ederal defcit and the level o debt-to-GDP while maintaining the nations social programs and also
raising public investment adequately to build the oundation the nation needs to maintain its prosperity.
America must reinvest in itsel. Aer years o neglect, the nation requires rebuilding. Civil engineers grade
our inrastructure a C or a D. Tey say we must invest $200 billion a year to repair and update or a new
century.
College attendance levels stopped rising in the 1990s. Public education, in some cases good, is tragically
inadequate or too many young Americans, especially those who live in poorer neighborhoods. We are not
even doing the basics. For example, the nation has no accessible universal system o pre-school education
despite its vital importance to learning.
Te nations dependence on ossil uel energy cannot continue. Investments in energy eciency
including retroftting our existing building stock, expanding public transportation and upgrading our
electrical grid transmission systemas well as in renewable energy sources, such as wind, solar, and
geothermal powercan reduce that dependence. Tese and related green investment projects can also be a
major new engine o job creation in both the short and long runs.
Tis is not the place to summarize in depth Americas public investment needs. Our objective is to stress
that with careul management, we can meet them. Enough studies suggest that such investment can pay
or itsel with aster economic growth.
Tere is no reason to believe that a 3 percent annual growth rate is the best we can accomplish. Even i it is,
we will do well. But i we invest adequately, we may be able to do better.
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SOCIAL SECURITY: Keeping the Promise
Current defcit debate has ocused too much attention on Social Security, which has no part in this
discussion. Social Security has played no role in our current defcit. Te Social Security program is
orbidden by law rom drawing on the general budget, and the Social Security rust Fund currently has
a surplus o $2.6 trillion. Social Security is supported by payroll taxes specifcally imposed or its use and
dedicated strictly or that purpose. Even under current projections, Social Security spending will rise by
only one percent o GDP over the next 75 years without major changes.
Under current projections, Social Security will be able to pay 75 percent o benefts aer 2037. Yet,
seemingly against logic, many plans propose cutting benefts by an even greater percentage in response.
Tese proposals ail to address the source o this projected shortall. An aging population is not the
cause, since the baby boom population was already addressed 1983 s Social Security Act amendments.
Te growth o the Social Security surplus since the Reagan administration was planned to help absorb
the retirement costs associated with the baby boom. Te projected gap is the result o shiing income
distribution to the nations highest earners, a trend which began in the late 1980s and 1990s. Tis
concentration o wealth at the top, which was not anticipated by the Greenspan Commission or the
Congress in 1983, caused a smaller percentage o income to be covered
by the payroll tax.
9
Applying the payroll tax to a greater percentage oincome will fx any long-term problems with Social Security.
As we have said, long-term actuarial balance or Social Security can be
accomplished with minor adjustments. Increasing payroll tax to cover
100 percent o wages would eliminate 95 percent o the projected long-
term shortall. Proposals to provided additional unds by restoring
estate taxes, taxing stock transers (as Great Britain does), dedicating a
bank speculation tax to Social Security, or giving the rust Fund more
investment exibility could even permit increasing Social Security
benefts. Given the widespread loss o personal wealth caused by
the recent recession, a move o this kind could help ensure a robust
consumer economy in uture years.
Tis is not the place to respond in detail to all the varying proposals to
cut Social Security benefts. But the one oered by Congressman Paul
Ryan as modest reorm o Social Security is the leading example o the extreme dangers posed by these
beneft-cutting ideas. Ryan, as do others, would base uture increases in benefts on ination, not increases
in wages. But historically wages rise signifcantly aster than ination.
Ryan and others argue that they will apply the new calculation based on prices to only those who earn
above a certain minimum wage. Tus, the claim is that it will only aect better-o Americans. In act, the
proposal would cut benefts or tens o millions o middle-income workers such as schoolteachers and
frefghters. Ryan and others, claiming Americans now live longer, also would raise the retirement age
gradually above 67, also with proound eects on uture benefts. But poorer Americans do not live nearlyas long on average as better-o Americans. Te lie expectancy o low-income women, or example, has
actually declined over the last quarter-century.10 Tus, lower income Americans would have their lietime
benefts reduced by ar more than others would.
9 See Bivens, L. Josh
10 Julian Cristia, Rising Mortality and Life Expectancy Dierentials by Lifetime Earnings in the United States, Journalof Health Economics, 28, 2009.
We are deeplyconcerned that Social
Security has become a target
when it does not contribute to
the defcit problem, while with
the real problemhealth care,
which drives the nations long-
term fscal imbalancesis let
unresolved.
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Te Social Security Systems chie actuary fnds that these two changes will ultimately reduce benefts or a
medium earner making about $43,000 a year by roughly 40 percent over time.
Ryan is by no means the only one recommending such proposals under the guise o moderate changes.
Te report rom scholars at the New America Foundation and the Brookings Institution, or example,
makes similar recommendations. So do many others.11
We are deeply concerned that Social Security has become a target when it does not contribute to the defcit
problem. We can only conclude that it seems to be an easy target, while with the real problemhealthcare, which drives the nations long-term fscal imbalancesis le unresolved.
As the Alliance or Retired Americans reminds us:
More than one-third o all people 65 and older rely on Social Security or 90 percent or more o
their income. Without Social Security, 55 percent o severely disabled workers and their amilies
would live in poverty; 47 percent o elderly households would live in poverty; another 1.3 million
children would all into poverty; and 2.4 million grandparent-headed households caring or 4.5
million grandchildren would be deprived o the most important source o income going to these
grand-amily households.12
11 MacGuineas and Galston, op. cit, http://crfb.org/blogs/my-view-maya-macguineas-and-bill-galston.
12 http://strengthensocialsecurity.org/sites/default/les/FactSheet-Social%20Security%202010%20Facts%20and%20Figures.pdf
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HEALTH CARE: THE KEY TO LONG TERM FISCAL
AND ECONOMIC HEALTH
A Crisis in the Making
Health care costs are greatest single obstacle to long-term defcit reduction. Te magnitude o this problem
cannot be overstated. Te ollowing CBO chart tells the story:
Tese costs, i unchecked, are a long-term fnancial catastrophe that threatens both government solvency
and the entire U.S. economy.
No defcit plan is meaningul unless it takes bold steps to address this problem.While the Patient
Protection and Afordable Care Act (PPACA) was a good rst step, much more remains to be done.
If uncorrected, Medicare and Medicaid costs will exceed those of all other government spending in the
next 25 years. When it comes to long-term decit reduction, health care is the problem. Attempts to
balance the budget merely by cutting the portion of these costs paid by government will fail, exacting an
enormous human toll in the process.
A Broken System
Te United States diers rom that o all other developed nations in its reliance on private-sector,
employer-sponsored health insurance. Other dierences include regulatory structure, provider payment
systems, and physician compensation levels. Te results are plainly visible in the chart (Figure 2):
Te United States spent 16 percent o its GDP on health care in 2007, ar higher than the average o 8.9
percent spent by other developing countries, and will continue to lead the pack in orty years. Tis cost
isnt explained by age dierences, as many people assert, since the U.S. has a smaller elderly population
(as a percentage o the total) than Europe or Japan13. Te conclusion is plain: I the U.S. spent the same
percentage o its GDP as the typical developed country with universal coverage, it would have no long-
term defcit problem.
Shifting the Cost Isnt the Answer
Many of the current decit reduction proposals being discussed (e.g. Bowles/Simpson, Rivlin/Domenici)
substitute cost-shifting for cost reduction. Spending caps, premium increases and additional out-of-
pocket costs for patients do not address the global cost problem.14 They merely shift these costs to elderly
13 Pearson, Mark. Written Statement to Senate Special Committee on Aging. OECD, September 2009.
14 Many private-sector health plans relied heavily on a RAND Corporation study which suggested that patients who
Alternative Fiscal Scenario40
30
20
10
1962 1972 1982 1992 2002 2012 2022 2032 2042 2052 2062 2072 2082
Actual Projected
Revenues
Medicare and Medicaid
Social Security
Other Federal Noninterest Spending
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The Wrong Priorities
We fnd that many defcit proposals include some useul ideas but ail to address long-term costs. Indeed,
they mostly kick the can down the road. Bowles and Simpson, or example, simply suggest that Congress
consider the public option i their ideas ail. While their acknowledgement o this ideas importance is
laudable, their priorities are backward: Tey propose to start the process with counterproductive cost-
shiing measures while deerring cost-saving measures.
Te Bowles/Simpson plans strongest cost-cutting proposals involve steep reductions in provider payments,
which will have a dislocating eect when a) many providers reuse to serve Medicare enrollees and b)
providers shi the lost revenue onto private insurers. Teir tort reorm proposal will likely have some
eect on costs, but not as much as many people believe. Te alleged costs o deensive medicine are ar
less than typically assumed, so the savings will not be signifcant.21
A package that relies on caps, premium increases and other cost-shiing techniques will impede growth,
cost jobs and impose painul hardship while ailing to address the underlying problem.
A Better Health Care Plan
Our proposal addresses costs in a comprehensive way:
Implement public option health plan. Create a truly robust public option plan that is available to all
Americans, without the restrictions to access proposed earlier this year.
Annual Savings: $35 billion22
Establish a Medicare Part D public plan to compete with private plans. Te legislation that created
the Part D drug program mandated that drug benefts be oered only through private companies
(nongovernmental entities). A Medicare drug plan should be established to compete with private-sector
plans. Annual Savings: $6 billion23
Pharmaceutical Negotiations. Te Department o Veterans Aairs pays 58 percent less or prescription
drugs than Medicare24 because it is not prohibited by law rom negotiating with pharmaceutical
manuacturers. Tat prohibition should be lied or the Department o Health and Human Services, which
should then be directed to immediately begin direct negotiations with pharmaceutical companies.
Annual Savings: $40 billion25
Study additional cost-saving options. Implement high-level studies o additional cost-containment /
quality-improvement measures such as evidence-based medicine and all-payer programs through grants
to the Agency or Health Care Policy and Research, the Centers or Medicare & Medicaid Services, and
other agencies and private research frms. Cost/Savings: o be determined.
Medicare for All. Lastly, we should set cost containment targets and target dates or health cost reduction
that apply to both private and public spending. Such global spending targets will assure that costs are not
simply shied rom the public to the private sector. Cost containment goals should be set, with target dates
21 See Mello, M. Defensive medicine accounted for 2.4% of health care costs. This practice will never be fullyeliminated. While it can and should be reduced, too much reliance should not be placed on this approach.
22 Lewin Group, Cost Impact Analysis for the Health Care for America Proposal, February 2008, http://www.sharedprosperity.org/hcfa/lewin.pdf, 12.
23 Per Schakowsky proposal
24 No Bargain: Medicare Drug Plans Deliver High Prices. Families USA, 2007.
25 Gellad, Walid et al. What if the Federal Government Negotiated Pharmaceutical Prices for Seniors? An Estimate ofNational Savings. J Gen Intern Med. 2008 September; 23(9): 14351440 (expanded for all populations and consistentw/Dean Baker estimate) http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2517993/
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or achieving them. I these targets are not met, work should begin on cost-beneft and implementation
studies o Medicare or All and other more robust options or controlling health costs.
Cost/Savings: o be determined.
Setting Achievable and Balanced Targets
Te presidents National Commission on Fiscal Responsibility and Reorm has set a goal o eliminating
the primary defcit (beore interest expense on the debt) by 2015. Meeting this arbitrary target will likely
damage the recovery and even increase defcits. We believe we can assure fscal sustainability in a moreconstructive way. But the defcit reduction we propose should not begin until the economic recovery
brings the nation much closer to ull employment. Tis is not likely to occur until 2014 or 2015 under the
best o circumstances.
Te most important question is this: What will drive economic growth, job creation and widely shared
prosperity in the years to come? Conservatives argue that we should simply reduce defcits and wait or
the next economic boom. But the last economic expansion rode on a bubble, inated by unsustainable
household debt and fnancial speculation.
President Obama has called on us to build a new oundation or the economy. Tis requires making
investments vital to our uturein education and training, in research and development, in a modern
inrastructure or the 21st century. It requires ending our addiction to oil, and capturing a lead role in the
green industrial revolution, creating the next generation o green jobs.
It also means ensuring that the new Dodd-Frank fnancial regulations
are implemented in eective ways, to prevent the return o excessive
speculation and fnancial bubbles as our dominant engine o economic
growth.
Study aer study demonstrates that America has a huge public
investment defcit in areas vital to our economy. Some estimates
suggest a shortall in public investment o as much as $500 billion a year
in traditional inrastructure and the green economy. As long as we have
unacceptably high unemployment, outlays or additional investment caneasily be defcit-fnanced. But even once we achieve a robust recovery,
our country can pay or productive public investment by borrowing
moderately.
We must have the confdence to orge our uture. At the end o World
War II, the U.S. was burdened with debt that totaled over 120 percent
o GDP. But we made the investments vital to a new economythe GI
Bill, housing subsidies, the Interstate Highway System, the conversion o military plants, and the Marshall
plan. We did not adopt austerity economics. We ran modest annual defcits over most o the next two-and-
a-hal decades and the debt grew in absolute size, but the economy and the broad middle class grew aster.
By 1970, the debt had been reduced to 35 percent o GDP. Te better way to reduce the defcit as a percent
o GDP is to increase GDP.
Taking the high road to fscal balance
We believe there are three essential guidelines or Americas uture budget policy.
Te right wayin act, the only wayto guarantee the nations fscal sustainability, in the short run and
the long run, is by creating jobs, not destroying jobs. Te most fscally responsible path requires substantial
fscal stimulus now. A new round o spending cuts will be sel-deeating. Te fscal stimulus should also
The presidents fscal
commission has set a
goal o eliminating the primary
defcit by 2015. Meeting this
arbitrary target will likely
damage the recovery and even
increase defcits. We believe we
can assure fscal sustainability in
a more constructive way.
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be accompanied by vigorous monetary and credit market policy measures to encourage private-sector
spending in job-creating investments.
In the long run, the central concern or Americans is rapidly rising health care costs and their impact on
Medicare and Medicaid. Health care in America must be reormed signifcantly over time. Social Security
is not contributing to the defcit and can be made solvent with modest changes, an exercise that should not
be part o defcit-reduction eorts.
Te nations long-term economic growth, and thereore its fscal balance, can only be sustained by seriouspublic investment in education; transportation inrastructure; energy-technology development; and
scientifc, technological and medical research. Tese publicly fnanced investments create jobs and provide
the necessary conditions or uture rapid economic growth.
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THE RIGHT PRIORITIES
Our frst priority is to place the current economic recovery on a frm ooting and to return GDP to its ull
potential. Te short-term defcit is not the nations most pressing concern, a stalled economic recovery is.
Meeting the new fscal commissions arbitrary goal to eliminate the primary defcit by 2015 could result in
slower growth and higher unemployment than is being orecast now by the Congressional Budget Oce.
Te spending cuts and tax increases to meet this target will start to be phased in no later than 2012, a point
at which all projections show the economy will still be well below its potential output.
Te nations long-term budget defcit beyond 2025 poses a serious danger. It must be dealt with, however,
by correcting its true causes, the most important o which are rapidly rising health care costs.
Social equity and the provision o capabilities to all American to lead ull lives should not and need not
be sacrifced in order to solve the defcit problems. Our social contract should not be dismantled as part
o a crusade or austerity. Te workers right to organize, which enhances productivity and wage growth,
should be strengthened, not weakened. In particular, Social Security benefts can be retained and perhaps
even enhanced.
Balancing the ederal budget will not produce the robust growth our country needs over the long term.
For that we will need to fnance a substantial program o public investment, including transportationinrastructure, green energy technologies, education and scientifc research. We can indefnitely tolerate
a moderate defcit o 3 percent o GDP to meet our social and investment needs beginning in 2015 i
economic conditions are strong at that point. Tis defcit level will enable the nation to stabilize ratio
o debt-to-GDP at the debt-to-GDP level likely that that point, roughly 70 percent. Tis compares with
current levels o debt to GDP o 190 percent in Japan, 72 percent in Germany, and 78 percent in France.
The Short-Term Picture
We have used the budget projections o the Oce o Management and Budget, which takes into account
to take into account the
continuation o most o
the Bush tax cuts (or thenon-wealthy) and a three-
year reeze on discretionary
spending.
Te CBO estimates,
with OMB adjustments,
that the economy will
grow moderately in
real terms. Even under
these assumptions, the
unemployment rate will not
all below 6 percent until2015. Te ederal budget
defcit will be 4 percent o GDP in 2014 and onwards.
Federal Budget Projections, 2010-2020
Fiscal Year Decit-to-
GDP ratio
Debt-to-
GDP
Revenues/
GDP
Outlays/
GDP
GDP
Growth
Jobless
Rate
2010 10.6 63.6 14.8 25.4 3.0 10.0
2011 8.3 68.6 16.8 25.1 4.3 9.2
2012 5.1 70.8 18.1 23.2 4.3 8.2
2013 4.2 71.7 18.6 22.8 4.2 7.3
2014 3.9 72.2 19.0 22.9 3.9 6.5
2015 3.9 72.9 18.9 22.9 3.4 5.9
2016 3.9 73.6 19.3 23.1 3.1 5.5
2017 3.7 74.2 19.4 23.1 2.7 5.3
2018 3.7 74.9 19.5 23.0 2.6 5.2
2019 3.9 75.9 19.5 23.7 2.5 5.2
2020 4.2 77.2 19.6 23.7 2.5 5.2
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Tis projection may overestimate growth. Te unknowns about the currently unusual state o the economy
make the outlook especially uncertain and unlikely to conorm to historical patterns. A balance-sheet
recession caused by excessive debt has historically taken longer to right itsel than more typical recessions.
Slow economic growth in the last six months already appears to cast the CBO orecast in doubt.
It is important to understand how much the reduction in defcits depends on growth. A premature turn
to defcit reduction will surely reduce the very growth that the projections rely on, with continued mass
unemployment reducing projected revenues, and increasing outlays. Austerity could easily result in higherdefcits, not lower ones.26
Jobs programs are a key element o any plan to invest in growth. Tese programs can take the orm o
direct government hiring, government contracts with private companies and other initiatives.
Such a fscal stimulus may also appropriately include a policy to encourage banks to lend. Te Federal
Reserve is about to embark on another round o quantitative easing to reduce longer-term interest rates.
But the danger as always is that without adequate demand or goods and services, lowering interest
rates will not alone encourage more borrowingknown as pushing-on-a-string. Tere is a clear and
immediate need or well-designed government programs to encourage greater bank lending, both to
small/medium businesses and to individuals.
One approach would be to combine two initiativesone carrot and
one stickto deliver both lower rates and diminished risk levels or
businesses. Te carrot is an expansion o existing ederal loan guarantees
by $300 billion, which would roughly double the amount total annual
guarantees. Small businesses should be the primary benefciaries. Te
stick is a 1 percent to 2 percent tax on the excess cash reserves now held
by banks, to push the banks to become more bullish on loans or job-
creating investments.27 otal costs o the programresulting mostly
rom loan deaultswould almost certainly be well below one percent
o the ederal budget. Having said this, we recognize a serious stimulus
o up to $500 billion a year is unlikely to be passed by Congress. othe contrary, austerity economics, and the recent Republican victories,
may result in spending cuts well beore the economy returns to solid
growth. I this is the case, that is all the more reason or Congress and
the Federal Reserve to vigorously pursue measures to encourage private-
sector borrowing and lending in support o job-generating private investments.
Te presidential fscal commissions objective is to eliminate any primary budget defcit (the defcit beore
interest rate expenses) by 2015. Te current projection is or a substantial primary defcit in 2015.28 Te
co-chairs o the defcit commission have suggested that spending cuts should not begin until the economy
is strong enough to absorb them, but their proposals will result in recommendations or rapid cuts in
26 A reasonable estimate is that a well-focused stimulus of $500 billion a year over two years, or somewhat more than3 percent of GDP a year, will create some 4-5 million jobs. This will reduce the unemployment rate by up to 3 percentby 2012 or 2013 to close to 5 percent. The unemployment rate can continue to fall by 0.5 percent as the economysustains its growth. We believe a well-constructed stimulus plan designed to produce the maximum number of
jobs should focus on transfers to the unemployed, aid to the states, and some new infrastructure and green energyprojects, and limit cuts in taxes.
27 Robert Pollin, Austerity is not a Solution, Challenge, November-December 2010. Features of this proposal havebeen supported by a wide range of commentators, including former Federal Reserve Vice Chair Alan Blinder (WallStreet Journal 11/16/10, and former Reagan economic advisor Bruce Bartlett (Los Angeles Times, 11/14/10)
28 Private projections by the CBPP.
Apremature turn todefcit reduction will
surely reduce the very growth
that the projections rely on, with
continued mass unemployment
reducing projected revenues,
and increasing outlays. Austerity
could easily result in higher
defcits, not lower ones.
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spending too soon. Te early November proposals o the co-chairmen, in act, recommend cutting as early
as 2011 and 2012. Te recommendations o the Peterson-Pew commission may be even more damaging.
Tey seek to reduce the debt-to-GDP ratio to 60 percent by 2018. According to the Center or Budget and
Policy Priorities, this would require cutting the defcit severely in too short a time, an onerous goal without
serious tax increases, in our commissions view. Te Peterson-Pew Commission also claims it would waituntil the economy is back on track. Again, this will not likely be honored. Te Peterson-Pew Commissions
persistent drumbeat or austerity has had enormous inuence in Washington to the point that added
stimulus now is virtually impossible.29
A Better Approach: Short-Term Investment And Long-Term Balance
We oer the ollowing workable plan to meet our spending goals and retain fscal stability in the longer
run. It is one o many possible permutations with the same general objective: to reach a stable level o debt-
to-GDP that does not rise over time.
We have established 2015 as a target date, based on the strength o the economy at that point. In the event
that the economy grows aster than expected (which is likelier i more stimulus unds are provided), it is
possible that defcit cutting could begin even sooner. Note that the projections in able 1 show that the
amount o public debt as a proportion o GDP held by the public rises to slightly about 70 percent in 2015.
Te ederal budget defcit is roughly 4 percent at this point (the CBO projects it slightly higher).
We believe we can readily reduce the projected defcit in 2015 on balance rom 4 percent to 3 percent with
a package o spending cuts and tax revenues even as we increase government investment substantially by
2.5 percent o GDP a year. Arithmetically, i the defcit remains at 3 percent and nominal GDP growth
equals 4.75 percent, a very reasonable assumption, the debt ratio will remain at roughly 70 percent.30
Tus, through a combination o spending cuts and tax increases, we can reduce the projected defcit,
given our increase in public investment, by 4 percent. We believe we can readily cut spending by a total
o 1 percent, or even 1.5 percent, should the defcit be higher than we anticipate in 2015that is $150
billion to $225 billion in 2015. Tis can be accomplished with substantial cuts in military spending,
already proposed by some, as well as the early stages o health care reorm and reductions in other wasteul
government expenditures.
o fnance the rise in government investment o almost 3 percent o GDP, we would raise tax revenues
29 Kathy Rung, Kris Cox, and James R. Horney, The Right Target: Stabilize the Decit, January 12, 2010, http://www.cbpp.org/les/01-12-10bud.pdf.
30 The tolerable decit is equal to the growth of GDP divided by the new level of GDP, multiplied by the debt-to-GDPlevel. In this case, .7 (.045 divided by 1.045) = 0.3.
Budget Projections Show Decits and Debt
Growing Rapidly As a Share of GDP Through 2050
Social
Security Medicare Medicaid
Other
Program
Outlays
Total
Program
Outlays Revenues Interest
Surplus (+)/
Decit (-)
Debt Held by
Public
(End of Year)
2000 4.2% 2.0% 1.2% 8.7% 16.1% 20.9% 2.3% +2.4% 35%
2010 4.8% 3.1% 2.0% 14.1% 23.9% 15.6% 1.4% -9.7% 62%2019 5.2% 4.1% 2.0% 8.7% 20.0% 17.8% 4.3% -6.4% 86%
2030 5.9% 6.2% 2.6% 7.8% 22.5% 18.0% 7.0% -11.5% 141%
2040 5.9% 7.8% 3.3% 6.9% 23.8% 18.0% 10.8% -16.6% 218%
2050 5.7% 8.9% 3.9% 6.0% 24.5% 18.2% 15.6% -21.9% 314%
Source: Center for Budget and Policy Priorities calculations based on CBO data.
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by the equivalent, or $450 billion in todays economy. We speciy such tax sources in the Summary o
Recommendations section.
Long-Term Spending
Farther into the uture, defcit and debt projections become both less certain and more grim. Te pace o
growth, the distribution o income and taxes, the eect o health care reorms, and the possibility o wars
or recessions make any projections anciul. But, with a shared sense o rough assumptions, most analysts
suggest that by 2030 and beyond, the defcits could rise to well over 100 percent o GDP, and eventually arhigher, i new policies are not put in place. In able 2, below, the Center on Budget and Policy Priorities
(which is slightly more pessimistic about uture tax revenues than the CBO), projects that American debt
will equal more than 200 percent o GDP in 2040 and more than 300 percent in 2050. Te Peterson-Pew
Commission makes similar projections.
By ar, the largest components o the projected explosion o debt are government health care programs and
the rise o interest payments on the growing debt that is created by them. Very quickly, Americans will be
borrowing more just to pay interest, as interest on interest grows rapidly. Te level o interest on the debt is
highly sensitive to whether the levels o debt can be arrested ar sooner. We believe they can.
In short, i health care spending can be contained, the interest paid annually will be sharply contained. We
thereore propose a mix o continued health reorms, building on those recently enacted, that will address
this undamental cause o long-term defcit concern.
Moving Forward
In conclusion, our proposal combines a balanced program o increased tax revenues with judicious
spending cuts, a plan to return the fnancial sector to its rightul role as lender while ending the threat it
poses to recovery, and a plan to address the long-term threat posed by health care spending. Te specifc
details o our proposal ollow.
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and development, public transit, and broadband access.33
Objectives: New jobs or teachers, researchers, auto workers, transit and communication workers;
improved ability to compete in 21st Century economy; private sector job growth in supplier industries and
in businesses in local communities. Investment in green technologies will create new green jobs and will
go ar to move the U.S. economy o o oreign uels and create good jobs or millions o Americans, while
getting us on the road to reversing climate change. Annual Public Investment Cost: $450 billion
in 2015
2. New Revenues For Defcit Reduction, Fairness, and Investing in the Future.
Increase overall tax revenues with a set o reorms that end excessive benefts or the wealthy, protect the
middle class, add jobs, promote growth, and ensure tax airness. We propose a set o revenue increases
and other tax changes that would raise approximately $500 billion in 2015, while protecting the fnancial
security o all Americans. Proposals are listed below with estimated 2015 costs and savings.
End Bush-era tax cuts for the wealthiest 2 percent of Americans.
Revenues: Already included in Obama
budget projections.
Financial Speculation Tax. A tax on fnancial transactions o 0.25-0.50 percent on all transactions wouldhave two benefts. It would reduce the speculation that led to the last recession and contributed to the
current defcit, and it could raise an estimated $130 billion a year.34
Revenues: $130 billion.
Establish a Surcharge on Top Earners. Revenues: $53.2 billion.
Tax capital gains and dividends as normal income. Revenues: $88.5 billion.
Cap Use of Itemized Deductions at 15 percent and Expand Charitable Giving Credit.
Objectives: Revenues or defcit reduction, job creation and investment; support additional charity giving.
Revenues: $87.9 billion.
Additional proposals regarding corporate income and dividends.35
Revenues: $112 billion.
Enact an Estate Tax with a Progressive Schedule of Marginal Tax Rates (per Sanders/Whitehouse bill).
Revenues: $4.5 billion.
Establish a Cap and Trade or Carbon Tax. Revenues: $52 billion.
Repeal tax subsidy for mergers and acquisitions. Revenues: $5 billion.
Increase the Motor Fuels Tax.
Additional Objectives: Decreased use o ossil uels. Revenues: $33 billion
Expand the Earned Income Tax Credit.
Objectives: Help working amilies escape poverty, increase spending to stimulate the economy and create
33 See Americas Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility published by Demos,EPI and The Century Foundation on November 29. for additional detail
34 Baker, Dean, Robert Pollin, Travis McArthur, and Matt Sherman. 2009. The Potential Revenue from FinancialTransaction Taxes. Joint Working Paper 212, Center for Economic and Policy Research and Political Economy ResearchInstitute, www.peri.umass.edu/leadmin/pdf/working_papers/working_papers_201- 250/WP212.pdf
35 ibid.
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jobs. Cost: $1.6 billion.
Make the Child Tax Credit Fully Refundable Cost: $4.2 billion
Permanently Extend the Making Work Pay Tax Credit.
Objectives: ax savings or 96 percent o households, stimulating the economy through purchase o goods
and services. Cost: $36 billion.
otal Net Revenue Increases: $524.3 billion
3. Targeted Cuts to Federal Expenditures
We are proposing a package o cuts that targets wasteul spending, excessive subsidies, ineciencies, and
programs that subsidize corporate activity overseas.
Reduce deense spending per Rep. Barney Frank proposal. Savings: $110.7 billion.
Eliminate Market Access Program or overseas corporate advertising.
Savings: $1 billion.
Eliminate Overseas Private Investment Corporation (OPIC). Savings: $0.15 billion.
Reduce arm subsidies. Savings: $7.5 billion.
(Te ollowing recommendations and those that ollow are per Rep. Schakowsky proposal36:)
Implement GAO Recommendations to Reduce Improper Payments
Savings: $5 billion
Sell excess ederal property Savings: $1 billion
Reduce unnecessary printing costs Savings: $0.4 billion
Other eciencies Savings: $1 billion
otal Savings: $126.75 billion.
4. Added Reorms to Reduce Health Costs and Improve Medical Care
We propose to address health care costs, the single greatest threat to fscal stability and economic growth,
with a bold program that reduces the increase in costs while improving medical quality, personal choice,
and overall economic health.
Implement public option health plan. Immediately address runaway health care costs through the
establishment o a truly robust public option plan; Tis plan should be available to all Americans, and not
limited to those who eligible or health insurance exchanges under current law.
Savings: $35 billion.37
Establish a Medicare Part D public plan to compete with private plans. Te 2003 legislation that
created the Part D drug program explicitly excludes any nongovernmental entity rom oering a
prescription drug plan. We propose (as does Rep. Jan Schakowsky) to allow Medicare to administer this
beneft without the use o private-sector intermediaries.
Savings: $6 billion..38
36 Schakowsky, Rep. Jan.
37 Lewin Group, Cost Impact Analysis for the Health Care for America Proposal, February 2008, http://www.sharedprosperity.org/hcfa/lewin.pdf, 12.
38 Per Schakowsky proposal
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led to a tepid response to the devastation o alling production, ailing banks, and soaring unemployment.
Even Franklin Delano Roosevelt ran or the presidency on a platorm to balance the budget, despite a drop
in the nations gross domestic product o 50 percent and an unemployment rate o 25 percent. But when he
got into oce in 1933, he responded vigorously to the alarming events with new job programs, fnancial
regulations and public investment. Meanwhile, aer making similar contractionary errors, the nations
central bank, the Federal Reserve, also reversed policy.
Te result was that GDP rose rapidly over our years and the unemployment rate dropped by more thanhal. Because the ederal government was relatively small then, however, it could not spend enough to
return national income to its pre-Depression levels quickly. Annual ederal budget defcits never rose
above 6 percent o GDP.
By 1937, the orces o austerity again dominated the public discourse. Te Federal Reserve tightened
monetary policy and the Roosevelt administration cut spending amid new higher taxes. Te result was a
severe economic downturn. Government spending to fnance the war eort created the needed demand
to put America to work again and rise rom the Great Depression once and or all. Te spending also
revitalized and modernized key manuacturing industries. Few economists now disagree with this analysis.
Federal budget defcits soared during World War II, and the total debt required to fnance the war reached
more than 120 percent o GDP by the mid-1940s. Te U.S. did not revert to austerity; rather, governmentexpanded its role. Te economy grew in the 1950s and 1960s at a rate o 4 percent a year on average,
discounted or ination. Tat growth generated better jobs, higher incomes and more tax revenue. Te
level o debt to GDP ell rapidly.
Some economists argue that repeating this perormance may not be possible. But we do not have to. Even
i the U.S. grows at 3 percent a year, a rate widely agreed to as possible, the nations borrowing can be kept
at manageable levels without giving up social benefts or more vigorous public investment.
Crowding Out, Business Uncertainty, And Other False Arguments To Discredit Fiscal Stimulus41
Te central argument advocates o austerity make is that increased government borrowing will result in
higher interest rates and crowd out private borrowing. As one o the new private defcit commissions, the
Peterson-Pew Commission on Budget Reorm puts it, higher rates, can crowd out private investments
and make it more costly to borrow money or everything rom housing to education to business
investments. As higher interest rates choke o investment, productivity growth will rise more slowly (or
even all), and the countrys standard o living will suer.42
But there can only be crowding out when the economy is running at or near its ull potentialthat is,
when labor, equipment, actories, and stores are close to being ully employed. Business will not invest
ully, even when it has the unds, unless it requires more capacity. Te Congressional Budget Oce
estimates the GDP is now 6 percentage points below its potential to produce goods and serviceswhat it
could produce without generating ination.43
Another widespread claim with no credibility is the theory that since government spending must be
paid or eventually, Americans, earing inevitable tax hikes, will not spend but increase their savings to
prepare or the coming taxes. Te government spending will then have no stimulative consequences.
41 Robert Pollin presents a good summary of these issues, Austerity is Not a Solution, Challenge, November-December 2010.
42 Peterson-Pew Commission on Budget Reform, Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt,December, 2009, http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Economic_Mobility/40543%20FR_R1.pdf
43 Dean Baker, The Myth of Expansionary Fiscal Austerity, CEPR, October, 2010, http://www.cepr.net/documents/publications/austerity-myth-2010-10.pdf
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Tis claim, which economists call Ricardian equivalence, is disputed by many economists and has not
been born out empirically. o the contrary, a wide range o studies show that there is a positive impact on
economic growth o such spendingwhat is known as a positive multiplier. I it seems to the casual reader
preposterous that such spending would be precisely oset by savings, it is because it likely is.44
Still another requent concern now raised is that rising budget defcits have made business too uncertain
about economic prospects to invest.45 Business allegedly worries about uture tax increases to pay down
defcits and uncertain new regulations on business. But what drives business confdence is more businessitselthat is, strong sales. Ironically, in the last year, capital investment has strengthened as the economy
recovered. But i growth alters, as it appears likely, confdence and investment will again all together, no
matter how low interest rates are.
Finally, government interest rates are indeed now very low. Right now, three-month reasury bill rates
have been below 0.25 percent or two years. Te rate on fve-year reasury bonds has been trading below
3 percent and occasionally below 2 percent in the same period. Tese low rates leave wide room or
government fnancing now with no ear o crowding out. I and when they turn up, they will do so when
the U.S. economy recovers and nominal GDP rises, meaning increases in tax revenues to cover the higher
interest costs.
Austerity Does Not Work: The Evidence
It is remarkable that so many economists and budget analysts will casually claim that fscal austerity in the
past has resulted in rapid economic growth or many nations. For example, a report rom scholars at the
Brookings Institution and the New America Foundation states, Some believe that fscal discipline would
reduce the rate o economic growth. Again we disagree. Te evidence rom the United States in the 1990s,
as well as rom many European countries in recent decades suggests that implemented prudently, a plan
or fscal restraint could actually promote long-term growth.46 Te Peterson-Pew Commission makes a
similar unqualifed claim, noting that 10 countries have reduced their public debt dramatically as a percent
o GDP. Te principal argument is that cutting spending will reduce interest rates and stimulate investment
and consumer spending.47
A recent careul study by the International Monetary Fund clearly shows, however, that in cases wherefscal austerity was explicitly undertakenthat is, government spending was cutGDP was reduced as a
consequence. As Te Financial imes economics columnist Martin Wol put it, the study demolishes the
arguments or expansionary contractions.48 Cutting spending will slow growth and reduce investment, as
Keynes predicted; alling interest rates may cushion the blow but not reverse the decline. Te IMF ound
that a fscal contraction o 1 percent o GDP would cut GDP itsel by 0.5 percent in each o the next two
years. Whats more, in the current environment, as Wol pointed out, interest rates are so low there will be
no such cushion to soen the blow because they cant all lower.
Why do some studies produce other results? As the IMF and other commentators have noted, they do
not isolate spending cuts but rather ocus on rising or alling defcits and levels o debt, regardless o
the causes. Increases or reductions in defcits can be caused by the business cycle itsel, or example, not
44 See Hemming, Richard, Richard Kell, and Selma Mahfouz. 2002. The Eectiveness of Fiscal Policy in StimulatingEconomic ActivityA Review of the Literature. IMF Working Paper 02/208, http://cartac.org/Userles/le/L-5.1.pdf
45 Niall Ferguson, a historian, expands on uncertainty as the major danger. Todays Keynesians Have Learnt Nothing,Financial Times, July 20, 2010, http://www.ft.com/cms/s/0/270e1a6c-9334-11df-96d5-00144feab49a.html
46 Bill Galston and Maya MacGuineas, The Future is Now: A Balanced Plan to Stabilize Public Debt and PromoteEconomic Growth, October 23, 2010, http://www.brookings.edu/papers/2010/0930_public_debt_galston.aspx
47 Peterson-Pew, op.cit.
48 Martin Wolfe, Britain and America Seek Dierent paths From Disaster, The Financial Times, October 19, 2010,http://www.ft.com/cms/s/0/10dabd3a-dbba-11df-a1df-00144feabdc0.html.
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APPENDIX II: Members of the Citizens Commission on Jobs, Decitsand Americas Economic Future
Robert L. Borosage is the co-director o the Campaign or Americas Future and president o the Institute
or Americas Future. Previously, Borosage ounded and directed the Campaign or New Priorities. In
1988, he was senior issues advisor to the presidential campaign o Rev. Jesse Jackson.
Dean Baker is the co-director o the Center or Economic and Policy Research. He has authored many
books; his latest is aking Economics Seriously. He appears requently on V and radio programs and
writes or his blog, Beat the Press.
Deepak Bhargava is the executive director o the Center or Community Change. He conceived and led
the centers work on immigration reorm, which has resulted in the creation o the Fair Immigration
Reorm Movement (FIRM), and has worked on numerous other issues including aordable housing,
welare and healthcare.
Angela Glover Blackwell is the ounder and president o PolicyLink, a national research and action
institute advancing economic and social equity. She is the co-author o Searching or Uncommon
Common Ground: New Dimensions on Race in America, and serves on the boards o the Childrens
Deense Fund, Levi Strauss and Co., and the Corporation or Enterprise Development.Jef Blum is the executive director o USAction, a grassroots organization active on such issues as
aordable health care, high quality public education, strong environmental policies and air taxation.
Darcy Burner is is the executive director o ProgressiveCongress.org and the Progressive Congress
Action Fund, responsible or strategy and management o the organizations. She ran as a candidate or
Washingtons 8th congressional district in 2006 and 2008.
Larry Cohen is president o the 700,000-member Communications Workers o America. Cohen also
chairs the AFL-CIO Organizing Committee and is the ounder o Jobs with Justice. He was also a ounder
o American Rights at Work.
Teresa Ghilarducci is a labor economist, proessor at Te New School, the Bernard L. and Irene SchwartzChair in economic policy analysis and director o the Schwartz Center or Economic Policy Analysis. She
has authored many books, most recently, When Im Sixty Four: Te Plot Against Pensions and the Plan to
Save Tem.
Heidi Hartmann is the President o the Institute or Womens Policy Research, which she ounded in 1987
and is also a Research Proessor at Te George Washington University. She is Vice-Chair o the National
Council o Womens Organizations and co-editor o the Journal o Women, Politics & Policy.
Mary Kay Henryis President o the Service Employees International Union. She was named one o the
nations op 25 Women in Healthcare or 2009 by Modern Healthcare. Henry began working with the
SEIU in 1979.
Rob Johnson is the executive