Stimulus even a deficit hawk could love

By Maya MacGuineas, CNNMoney guest columnist


Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Am I alone in thinking that all the ideas for economic stimulus and debt control are the handiwork of political pollsters -- and not experts? I know it's election season, but the nature of the discussion pretty much ... um, how to say this? It stinks.

It is particularly alarming since the economic threats the country faces are so real.

In the short-run, the jobs picture is bleak and consumers and businesses aren't spending. In the long run, the growing national debt could lead to many years of substandard growth or even an abrupt fiscal crisis.

The politicized solutions being tossed around fall into one of two camps: stimulus or fiscal responsibility. The economy needs both -- and that's coming from a full-fledged deficit hawk like me.

There's a big risk, however, and it is that we will do additional stimulus now, and then continue to punt on closing the budget gap. After all, pushing through hundreds of billions of dollars in tax cuts and spending is easy. Paying for these measures is the hard part.

Fortunately, there is a solution: Tie stimulus to budget reforms. That would create a "twofer" out of each policy -- first help the economy and then the budget.

Fix No. 1: Aid to states -- with strings attached

The states are hurting badly. They are raising taxes and cutting spending to close their gaps, which is putting pressure on the recovery. And down the road, the states' situation will worsen, as their growing pension obligations -- estimated to be short by $1 trillion -- will push some toward default.

Congress should make significant aid available to state and local governments. But instead of just doling out the money, lawmakers should attach an important condition: States that take the money would be required to reform their pension programs.

It's not a crazy idea. Some are already doing it. Under a plan in Utah, new public sector employees would get a reformed defined-contribution system, which would limit the state's future exposures. Throwing public sector health care reforms into the mix would improve things even further. State policymakers I have talked to would be grateful to be pushed into making these tough political changes they know have to be made.

Fix No. 2: Payroll tax break -- but fix Social Security

Another effective stimulus option is a payroll tax holiday. Employers and employees would be exempt from paying payroll taxes on say the first $50,000 of earnings for a full year, pumping hundreds of billions of dollars into the economy.

But given that Social Security's trustees keep telling us that changes must be made to the nation's retirement system to avert insolvency, making reforms should be part of the deal. An obvious change would be to phase in a future increase in the retirement age to reflect growing life expectancies.

We could speed up the currently slated increase to 67, raise the age further to 68, and then index the age to life expectancy. We just can't afford to pay for people to spend close to a third of their life in retirement. Adjustments to the retirement age are only fair -- especially when combined with an expansion of the disability program to protect people who, due to the nature of their work, can't work longer.

Fix No. 3: Temporary VAT -- but not right away

And if we want to think even bigger, here is another idea: a "temporary consumption tax deficit-surtax." I know, it's a mouthful, but hear me out.

Right now the challenge is to get people to spend more; in a few years the challenge will be to cut the government's deficit.

If we announced a temporary consumption tax, or a VAT, that wouldn't begin until 2013, it would induce people to spend more now. Better buy that new dishwasher before the VAT kicks in!

The temporary consumption tax would also raise money for the government down the road. It is stimulus without spending a dime.

A temporary VAT would also address the problem many of us have with a permanent new consumption tax on top of the existing tax system: that it would take pressure off Congress to cut spending by producing so much revenue. Yet many of the changes that need to be made to programs like Social Security and Medicare will have to be phased in over time. A temporary VAT could fill the hole and buy time until those changes produced enough savings.

One additional condition: The temporary VAT would go away as soon as the budget was balanced (or reached another agreed upon fiscal goal). That way there would be ongoing pressure to cut spending as soon as possible. The entire country would be rooting for policymakers to fix the budget and eliminate the VAT. Suddenly, there would be a built in constituency for fiscal responsibility.

Economic growth will not get us out of this deficit mess, but it will be nearly impossible to fix the budget without fixing the economy first. Stimulus-with-strings attached could be a big part of the fix. To top of page

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