Maya MacGuineas is director of the Fiscal Policy Program at the New America Foundation, where Marc Goldwein is a policy analyst.
Now is clearly not the time to balance the budget—even the most adamant deficit hawk knows that. But economic recovery will not be as simple as merely running up the government's credit card and calling it a day. Certainly, the U.S. economy is in very bad shape—but so too is the fiscal health of the country.
The deficit estimate for this year is an eye-popping $1.2 trillion even before the stimulus package is accounted for. As Congress passes its $789 billion behemoth, policymakers will have to walk the fine line between stimulating the economy enough to get it growing without destabilizing it from excessive borrowing.
The risk of ignoring the gaping budget deficit is that once the economy is back on track we will merely have bubble hopped from a stock market bubble, to a housing bubble, to a government debt bubble—and the bursting of the debt bubble will not be pretty, since there will be no one left to bail us out.
The most promising approach for meeting the competing priorities of short-term stimulus and fiscal responsibility is to implement a stimulus plan that would spend what is needed now but require that the new borrowing be paid for over time, once the economy has recovered. Few specifics for actually paying for any of these plans have been offered. Here are some ideas to pay for the type of plan Congress appears poised to pass:
Tax Cuts: The stimulus package includes around $250 billion in individual tax cuts, and another $20 billion in corporate breaks. Congress should offset the individual cuts by changing the way the government calculates inflation, which many economists believe is overstated. By indexing tax brackets, Social Security, and other government programs using the more accurate "superlative-CPI," enough in savings to finance the tax cuts over ten or so years. Additionally, business tax breaks could be paid for by targeting some tens of billions of dollars a year the government spends on "corporate welfare" through the Advanced Technology Program, Economic Development Administration, Export-Import Bank, Private Investment Corporation, and other programs.
Food Stamps and Unemployment Insurance: The stimulus package includes large expansions of "automatic stabilizers," such as food stamps and unemployment insurance, costing nearly $75 billion. Congress should offset these costs by reducing farm subsidies. Not only does the farm sector benefit considerably from food stamp increases, current farm subsidies are economically distortionary, go mostly to large agro-businesses, and inhibit international trade. This is the perfect time to dramatically reduce an unfair and outdated slice of the budget pie. In return, we could easily generate tens of billions in savings.
Healthcare Spending: Between increased Medicaid matches, health information technology investments, and insurance subsidies for the unemployed, the stimulus bill will spend around $150 billion on healthcare. These changes should be paid for by leveraging health IT to reduce payments for over-treatment and preventable medical errors, and by penalizing providers who do not update their IT systems. Additional savings should come from reducing reimbursement rates for high cost providers and reducing Medicare payments for some elective procedures.
Aid to the States: Almost all states are required to balance their budgets annually, so when the economy sours, they raise taxes and cut spending—the opposite of what is needed. To ameliorate this tendency, included in the stimulus bill are direct and indirect payments to states for education, law enforcement, and general aid. We should offset these costs—around $100 billion—by reducing the state and local tax deduction, which is not only regressive but provides a back-door subsidy to high-tax states. Replacing the tax deduction with a 15 percent credit, for instance, would easily raise over $150 billion in 10 years.
"Green Investments" and Infrastructure: A large chunk of the stimulus package will be focused on making changes to U.S. energy and environmental policy and improving our crumbling infrastructure. From "retrofitting" projects, to highway construction, to modernizing the energy grid, the total package will cost around $200 billion. To finance the "green" investments, we should increase the gas tax. If the country is to truly commit to updating our energy policy, a gas tax is not just logical but an almost necessary component of a comprehensive policy. Increasing the gas tax by a mere 5 cents per gallon would raise $10 billion a year. Additional savings could come from cutting wasteful pork barrel projects, and by reforming government contracting, which President Obama has already derided as wasteful and bloated.