E.
Activity #3: Stabilize the Debt: An Online Exercise in Hard Choices (10
points)
To start, it's worth thinking about the deficit as
being two different deficits.
The
first is the medium-term deficit, created by the Iraq and
Afghanistan wars, the 2003 Medicare drug plan, the Bush tax cuts, the recession
and the government’s responses, such as the stimulus. It’s a significant sum
but it is much smaller, as a share of the economy, than the deficits that have
hobbled Greece, Ireland and others. It is also smaller than the deficit this
country ran from 1990 to 1994.
The medium-term deficit does not need to be closed immediately, while the economy
remains weak. The co-chairmen of the bipartisan
National Commission on Fiscal Responsibility and Reform,
Erskine B. Bowles and Alan K. Simpson, called for a phased-in program of modestly
higher taxes and cuts to social programs and the military. Some conservatives
have criticized that plan for raising taxes at all, and some liberals dislike
its emphasis on spending cuts and eliminating middle-class tax breaks.
However we close it, the medium-term deficit does not appear to pose a huge
threat to the American economy. Simply letting all of the Bush tax cuts expire,
not just those benefiting the affluent, would nearly do the job.
The long-term deficit is a wholly different story.
It comes from the projected growth of Medicare, Medicaid and, to a lesser extent,
Social Security. It is the result of baby boomers’ having paid far less in taxes
than they will draw in benefits. And the longer we wait to deal with it, the
larger the interest on the national debt will become. That means deficit cutting
will probably be a regular part of politics for the next couple of decades.
One obvious debate will be taxes versus spending. But relying exclusively
on one would be extremely difficult. An approach based only on spending would
mean deep cuts to programs that many Americans consider the essence of government:
Medicare, Social Security and the military, among others. Closing the entire
deficit through taxes would require enormous tax increases, mostly because Medicare
spending is expected to continue growing much faster than income. To keep up,
tax rates would have to keep rising.
The real issues, then, are how much taxes should rise, how much spending should
be cut — and what kinds of each change should take place.
We could choose to raise taxes mainly on the rich, because their tax rates have
fallen steeply over the last few decades while their pretax income has soared.
Or, knowing that many of the rich still have higher tax rates than anyone else,
we could start by saying goodbye to the Bush tax cuts on income below $250,000.
No matter what we decide, we must keep in mind the potential effects on economic
growth. Arguably, economic growth is the most important yardstick for any
plan, because growth can do much to reduce the deficit, as it did after
World War II and in the 1990s.
That helps explain why many economists favor a version of tax reform
that would lower marginal rates and close loopholes. Ordinary tax cuts have
a mixed record on helping the economy; growth after the Bush tax cuts was mediocre,
for example. But tax reform could discourage households and businesses from
changing their behavior, often inefficiently, to qualify for tax breaks. The
Bowles-Simpson plan
suggests several reforms that would raise more tax revenue than today’s code
and help close the deficit.
Of course, when economists say loopholes, they are including the deduction on
home mortgage interest and other popular items. All of us would prefer generous
benefits and low taxes. That’s the problem with deficit cutting: it involves
painful choices, like the ones we’ll see in this assignment.
Step #1
That's where you come in. YOUR CHALLENGE:
Stabilize the US Debt at 60% of GDP by 2024
There are four things you should keep in mind.
-
We’re using percentage of the GDP, rather than a dollar amount,
to measure the debt. Remember that GDP tells us what our total economy
is worth, whether it is growing and by how much. Measuring debt as a
percentage of GDP gives us a clearer picture of that debt in relation
to our economy and to economic growth. Such a calculation allows
us to measure yearly economic growth while still keeping track of debt.
Hypothetically, if debt exceeds GDP, then the debt has become completely
unsustainable by all interpretations.
-
There are two types of spending: direct or
mandatory spending (outside of the appropriations process) and
discretionary spending
(budgeted during the annual appropriations process). Changes to mandatory
spending programs – Medicare, Social Security, etc – require a special
legislative process and are highly controversial. In general, mandatory
spending programs are basically on automatic pilot and grow without
check or review. This simulation does not make distinctions between
discretionary and mandatory spending, and the actual processes required
to make changes in those areas. It is simply designed to allow users
to choose among the various options, and attempt to reach the 60% debt-to-GDP
goal. (This will make a bit more sense to you if you'll look at the
National Budget Process, the link to which is with the Optional
Links above.)
-
Remember that
economic growth is the most important yardstick for any plan
because growth can do much to reduce the deficit, as it has in the past.
Keep our
current economic situation
in mind and don't make any budget decisions that might retard growth.
-
Simulation data and options are updated periodically to reflect new
budget estimates from the
CBO
and the
OMB,
and to remove options that have been enacted into law. That means we’re
faced here with the same choices as Congress.
Step #2
Go to CRFB’s
Stabilize the Debt Budget Simulator.
The screenshot below is of the simulation’s starting page. I’ve marked 6 things
you should notice. (1) Read the introduction and (2) use the link to and read
the FAQs. Pay close attention to (3) the small box in the middle. It tells you
how to play the game. Make sure you understand the instructions. Below that,
use the link to (4) learn more about the federal budget. The (5)
column on the right keeps track of your progress. When you’re ready to start,
(6) use the NEXT button.
When you’ve made your last budget decision, you’ll see a screen like the one
below. Again, I’ve marked 6 things you should notice. At the top of the page,
you’ll see (1) your final results, including (3) a breakdown of your decisions
by category and type. In the middle box, you have a chance to (2) submit
your results and some demographic data to CRFB if you want to do so. Below that
and very important is a link allowing you to (6) view or save as a PDF
your choices. You will need this information for your report to me so save it
before you do anything else. Finally, the column on the right shows (4-5) your
final results.
Step #3
After working through the entire process and looking over your saved results,
reflect back on what you did, why and how successful you were. Send me your
results (#1 below) and a discussion of your choices in the simulation
that addresses points 2-10 below. Your discussion should be thorough, specific,
include relevant concepts from the course material and be free of spelling and
grammar errors.
-
Your Results (Give your specific numbers.): Debt as a percent
of GDP ___________________________
Savings relative to current law in billions ______________
The three categories with your largest
cuts (in order)
(a) _______________ (b) _______________ (c) _______________
-
Looking at the 3 categories in which you made your largest total program
cuts, why
did you choose those program cuts over
others? Do you see any pattern in which programs you cut?
-
Which
individual program cuts and/or tax changes had the largest impact
(in dollar terms) on reducing the
deficit? How realistic would such changes be?
-
How
will
your
program
cuts
and/or tax changes
affect
specific
groups (the elderly, students, environmentalists, savers, the poor, foreign aid recipients, producers, etc.)?
-
What are the tradeoffs of preserving some programs while curtailing
others?
-
Would different program cuts
have had less impact on people’s lives?
-
Look at any program cuts you made in mandatory spending programs.
The simulation allowed you to essentially treat all spending as discretionary
spending but if you had been unable to make those cuts, how much
would it have affected the amount of debt you were able to reduce?
-
From where did your largest savings come – revenue increases or
program cuts? Are you satisfied with that outcome?
-
Which of your decisions might be perceived as being politically motivated?
-
Make specific and detailed connections to course content. Always include
course concepts in your work. If you're reading your margin notes and
watching the presentations, you'll have plenty of material from which
to choose on every activity.
Just for Fun
Although I think CRFB’s simulator is the best available right now, there are
others. If you like this sort of thing you might be interested in trying some
of the following.
Fix the National Debt
Federal Budget Challenge
Federal Balancing Act
The Budget Calculator
The People's Pie
Budget Puzzle: You Fix the Budget
