How to keep deficits from burning the economy

By Maya MacGuineas, CNNMoney guest columnist

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

President Obama is right when he says that public investments need to be a central part of the nation's economic growth and innovation strategy. Perennial short-termism has left the investment area of the budget dangerously under funded.

Unless we change course with well-targeted investments in human capital, infrastructure and basic R&D, our economy will be left at a severe disadvantage down the (crumbling) road.

Republicans are also right that keeping taxes low and creating a business-friendly environment is necessary to avoid harming competitiveness. In a world of global competition and mobility, ratcheting up tax rates is a losing strategy.

Well, that was easy. All we have to do is spend more on investments and keep taxes low.

But there's one big problem: We deficit hawks are also right that the mammoth debt levels we face will certainly cause a slow burn on the U.S. economy and standard of living -- if not lead to an outright fiscal crisis, if we don't change course.

In order for these three objectives -- investment, low taxes and fiscal responsibility -- to coexist, we need a major restructuring of the nation's budget.

Unfortunately, we did not see that in the president's budget on Monday.

In recent years, we have layered on major new spending programs -- think health care reform, homeland security or the prescription drug program. But we continue to counterbalance them with tepid fiscal planning.

The temporary freezes in mostly the smallest parts of the budget, as President Obama is proposing, and the lip-service to the need for "reforms" do not meet the standard of dramatic anything. Sorry to say, they meet the standard of a punt.

The country needs a fiscal turnaround plan.

The good news is that the fiscal pressures facing the country are starting to force the national discussion away from policies that would enlarge the deficit. I predict, for example, that the $850 billion budget busting tax "compromise" hatched in December will be the last of its kind for some time.

Republicans are starting to suggest specific spending cuts and a bipartisan group in the Senate is poised to introduce the full set of recommendations from the fiscal commission. Adding to the deficit finally seems to be going out of style.

But a turnaround plan doesn't just mean getting the numbers in the budget to add up -- which is hard enough in itself. It requires a fundamental rethinking of national priorities and how we raise and spend our money.

Can we rip away some of our entrenched budget habits in order to create the space for a more appropriate budget for this century's economic challenges and opportunities? Certainly it would require touching many of the budgetary third rails, but the payoff would make it well worth it.

The main change needs to be rethinking entitlements, the programs that operate without a budget and basically on auto-pilot. They are the fiscal elephant in the room.

In a time of limited resources, why spend money on Social Security providing larger benefits for the well-off than for those who depend on the program, or more for retired ladies who lunch than the single working moms?

A true means test for Social Security benefits would free up hundreds of billions of dollars for more investment and deficit reduction. In health care, we need a real budget -- vouchers or another form of rationing and a strict means test.

Bottom line: treating social insurance more like real insurance would free up a tremendous amount of resources to close the fiscal gap, keep taxes low and spend more on needed investments. Oh, and about the purely outdated entitlements like agriculture subsidies? Just end them already!

On the tax side, while it is important how much we tax, it is also important how we tax. The income tax punishes work; the payroll tax is regressive; the corporate tax harms our ability to compete; and the $1 trillion-plus in tax expenditures allow politicians to create a mammoth budget mess by using the tax code to "spend." One could hardly create a worse starting point.

An entirely new tax system, such as a progressive consumption tax, would meet many of the needs of our new fiscal and economic realities.

Such a tax would levy progressive rates on what you spend instead of what you earn and could reward work and savings.

But it could also ask more of the well-off, who, given the tremendous and disturbing growth in income inequality, need to be asked to shoulder more without dampening their incentives to work, build business and provide jobs. Again though, this will require a lot more than just tinkering at the margins.

This isn't the type of thinking you get in the normal budget process. We certainly didn't see it from President Obama's budget on Monday.

But it is true that out of every crisis comes an opportunity. Well, we are on the verge of a fiscal crisis if changes are not made. It is indeed the moment to turn this into an opportunity for a major rethinking of our national priorities and how we budget for them. To top of page

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