Reducing U.S. debt: Ideas from the Hall of Lame

chart_debt_ceiling_123009.top.gifBy Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- Only in the world of federal debt do tens of billions of dollars amount to little more than rounding errors.

Yet it's the rounding errors that many lawmakers reach for when making impassioned speeches about reducing the debt.

Whatever merit their ideas may have, they don't have a prayer of generating sizeable savings.

Sure, every little bit counts.

But "a little bit" doesn't really move the needle when you're talking about $12 trillion in accumulated debt, several trillion more expected over the next decade and tens of trillions more on top of that due to long-term shortfalls in Medicare and Social Security.

All told, the long-term fiscal shortfall could top $60 trillion over the next 75 years if nothing changes, said Robert Bixby, director of the Concord Coalition, a deficit watchdog group.

That's why deficit hawks talk about the need to narrow the long-term "fiscal gap." That's a measure of how much money is needed every year starting now just to keep the debt-to-GDP ratio where it is today.

Estimates of that gap range anywhere from 4% to 9% of gross domestic product. In a $14 trillion economy, that means to close the gap altogether Uncle Sam would need to come up with $560 billion to $1.26 trillion a year.

With that in mind, here are just a few of the oft-touted ideas for tackling debt that politicians love to pound the table for while avoiding much tougher -- and infinitely less popular - decisions.

Reduce earmarks

There may be a lot wrong with earmarks, but driving U.S. debt into the stratosphere isn't one of them.

An earmark is typically defined as a slice of the money allocated to an agency that a lawmaker or the president requests be set aside for a specific project.

While some earmarks are much harder to justify than others, they don't represent additional spending -- they're a portion of the total amount of spending that lawmakers have already agreed to in a given year.

And what earmark spending there is doesn't represent more than a small percentage of total spending in any given year.

"Those who suggest that earmark reform is the answer to rapidly rising federal debt are unfortunately diverting the public's attention away from the enormous fiscal issues that face our nation," wrote budget expert Charles Konigsberg in his book "America's Priorities."

Cut wasteful spending

Even if everyone agreed on what counts as wasteful spending, eliminating it may not make as big a difference as everyone hopes.

That's because two-thirds of federal spending is mandatory, meaning lawmakers don't get to choose whether or how much to spend on certain budget items such as Social Security and interest on the country's debt.

The other third of the federal budget is so-called "discretionary" spending.

In 2010, the CBO expects discretionary spending will be roughly $1.4 trillion. A little more than half will be on defense, leaving $683 billion for non-defense discretionary items, such as education and transportation.

There's almost certainly some wasteful spending in these areas. But not several hundred billion dollars' worth a year.

The White House budget office has embarked on numerous efforts in the past year to reduce spending, boost efficiencies and curb improper payments. All are important and would be a mean feat if achieved. But their savings -- something close to $20 billion a year -- won't really make a dent in the larger debt problem.

Reduce foreign aid

The moral and strategic benefits of providing economic and humanitarian assistance to other countries may become especially intangible to voters when they themselves are hurting in an economic downturn.

But those who might call for a reduction in foreign aid would hardly hit pay-dirt. In the past 30 years, foreign aid has constituted 1% or less of both the size of the economy and of the federal budget.

Typically, only about $20 billion a year is spent in total on humanitarian and economic assistance, according to Konigsberg.

Pay as you go

There is a push from the administration and from budget hawks for Congress to adhere to so-called pay-go rules, which require that any spending increases or tax cuts be paid for.

That is, if they want to pass a tax cut that would reduce revenue by $100 billion over 10 years, they would need to either cut spending by $100 billion or raise another $100 billion in revenue from another part of the budget.

What pay-go can do is keep the debt situation from getting worse. But it isn't a panacea.

"Pay-go keeps us where we are. It doesn't put us in a better position," said Bixby, a pay-go proponent.

Tax the rich more

Couples making more than $250,000 and individuals making more than $200,000 seem to be lawmakers' answer to paying for ... well, everything. Health reform, tax reform, random other legislative initiatives and, of course, deficit reduction.

The problem is that there's just so much money that can be reasonably squeezed from this very small group of Americans.

"The president thinks we will somehow reduce the deficit and fix the tax code without raising taxes by a dime for those poor souls making a quarter million dollars-a-year or less. Unfortunately, that's 95 percent of us. Can't wait to see how he does it," Howard Gleckman, editor of the blog TaxVox, wrote in a recent blog post.

The need to think (really) big

The only way to really lasso the debt situation, budget experts say, is to make a serious attempt to curb spending growth and boost taxes across the board, but particularly with respect to Medicare and Social Security.

That will inevitably mean a reduction in the benefits promised to future retirees and a host of other castor-oil-type remedies that won't garner much applause from the electorate.

Whether lawmakers will make that happen is an open question, Gleckman suggested.

"As long as politicians believe that fiscal discipline is career suicide, little will change." To top of page

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