It is well-recognized that the U.S. will face a day of reckoning for its burgeoning debt, which hit a record $22 trillion earlier this year. The ballooning indebtedness will send America into decline unless steps are taken to address the structural imbalance between spending and revenue. Politics has been a big hindrance to implementing a plan to reduce the national debt.
In his new book, Fiscal Therapy: Curing America’s Debt Addiction and Investing in the Future, economist William Gale provides a plan that he believes both conservatives and liberals can embrace. Gale, chair of Federal Economic Policy at the Brookings Institution and co-director of the Urban-Brookings Tax Policy Center, joined the Knowledge at Wharton radio show on SiriusXM to share his ideas. (Listen to the podcast at the top of this page).
An edited transcript of the conversation follows.
Knowledge at Wharton: We all know that the country has rising debt and that it’s a significant problem, yet there isn’t enough being done to address it. Why?
William Gale: Well, that is an understatement. Indeed, there are active efforts to oppose doing anything about it right now, but even in the best of times for dealing with fiscal problems — long-term issues in particular — politicians are hesitant to jump in.
Knowledge at Wharton: Where are your greatest areas of concern about the debt?
Gale: In terms of the debt itself, we are on an unsustainable path. That doesn’t mean we’re going to face a crisis anytime soon, but something’s got to give. We need to adjust spending downward and raise taxes. The idea behind the book is these are necessary changes, but we can use them as an opportunity to do a lot of good things.
Knowledge at Wharton: In the book, you discuss taxes and investing in the future. Can you touch on those?
Gale: There are these twin problems I focused on. If you just think about the budget, then you’re naturally led to spending cuts and tax increases. But when you start thinking about the way we tax and the way we spend, it’s pretty obvious we’re not doing the right structural changes even apart from the level of taxes and spending.
On spending, we need to be doing more on the investment side. On taxes, we need to be taxing things that have less deleterious economic effects, like a consumption tax and a carbon tax. So, we need to change the structure of taxes and spending, as well as the levels of taxes and spending.
Knowledge at Wharton: Let’s talk about entitlement spending because that’s obviously a concern with health care. Where do we need to go with entitlement spending with the different programs that are in play here?
Gale: The two major entitlements are Social Security and Medicare. Lots of times people say entitlements as a polite way of saying Social Security and Medicare. They create different situations. Social Security has always been a program that stood on its own two feet. A couple of years ago, I was on a commission that the Bipartisan Policy Center ran, and it came up with a bipartisan Social Security proposal that would, among other things, raise the retirement age, raise the payroll cap and provide a balanced reform to put Social Security on a long-term, financially firm ground.
“The situation we face now is totally different from any historical debt situation we’ve faced in the past.”
On Medicare, the problem is a little different. Health care spending, which is huge, needs to be reined in. There’s a lot of spending in health care that, according to empirical research, is not justified. There are a lot of ways that we pay providers based on their inputs rather than the quality of the outcome. Medicare pays 25% more for the same drugs than Medicaid or the Veterans Affairs health program, and there’s no reason for that other than politics. So, I believe we can save some money there, too.
On health, the primary budgetary concern is cutting spending, controlling spending, but at the same time, we want to be sure that we’ve extended health insurance coverage as far as we possibly can. I don’t think those goals are contradictory, but they make the problem harder.
Knowledge at Wharton: There’s been a lot of discussion about the potential of Social Security becoming insolvent around 2034. What are your concerns about that program?
Gale: That might be the good news in all of this, because the trust fund running out of money in 2034 for Social Security or 2026 for Medicare might be the type of thing that forces policymakers to take action.
You never want to wish for a crisis, but the problem politically with this long-term fiscal issue is their backs are never really against the wall. They can always wait one more day. They can always put it off. The trust fund exhaustion dates provide hard constraints where they have to do something. They may not do the right thing at that point, but they have to do something.
Knowledge at Wharton: Where do you see the most reasonable and acceptable, but also possible and positive, investments in the future for this country?
Gale: There are three things that are critical to do. First, invest more in children — their education, preschool programs, families with kids, child care — the whole panoply of programs and options for investing in children. The argument there is both an equity one, where the kids’ status in life does not really depend on things they do. It depends on their parents and their community, and so on. But it’s also an efficiency argument. We, as a nation, are wasting resources by not making sure that our kids are getting the best education and child care possible.
Investment in infrastructure is No. 2. Everybody knows we have lagging infrastructure issues. Everyone can think of their favorite example, whether it’s John F. Kennedy Airport or a bridge or a road somewhere.
The third thing is that we need to start financing those things with a carbon tax, for example, which would help in dealing with climate change but would also help on the fiscal side. If I had to choose three of the many proposals in the paper to do now, those would be the most urgent ones.
Knowledge at Wharton: If we can put together a plan that addresses these areas, are we talking about slowing the national debt, stopping it or reducing it?
Gale: The current baseline projection is that the debt will rise from about 80% of [gross domestic product] now to about 180% of GDP in 30 years, by 2050. The proposals in the book get it down to 60% by 2050, which is less than it is now, more than it has been in the past. But it gets it down to a steady, sustainable 60% of the GDP. I think it’s the right long-term goal.
If somebody told me the long-term goal should be 80% or 100%, I couldn’t prove them wrong. But the notion that it would be going to 180% and rising after that seems definitely wrong, and I don’t know anyone who doesn’t think that.
Knowledge at Wharton: You also examine this from a historical perspective. For many decades, the national debt was under control and really only had a rise when we saw a war of some kind, then we were able to get it under control again. But it was really around the time of President Reagan when we started to see debt going up for something other than military conflict.
Gale: That’s right, and there are two aspects of this that I think are important from the fiscal history side. By the way, I wrote the fiscal history chapter because I thought if I looked back over a couple of hundred years of history, I would find the answer as to what we need to do. And that turned out to be wrong.
There are two aspects of the history. One is that debt can be useful. We use it to finance big spikes in national defense or big initiatives or to fight recessions and so on. It’s not like all debt is bad. Two is that the situation we face now is totally different from any historical debt situation we’ve faced in the past. That’s kind of what I was disappointed about when I wrote the fiscal history chapter, because right now we’ve got this built-in, chronic imbalance between taxes and spending.
“The fiscal problem is so big that we can’t finance it just on the backs of the wealthy.”
There’s no war that’s going to end that will bring the budget back into line. There’s no recession that’s going to end that will boost revenues. We’ve just got the government spending more than it’s taking in revenues — basically now and into the future — and by increasing amounts into the future. That creates a different set of concerns, a different set of constraints than ending a war or ending a depression.
Knowledge at Wharton: We are spending more than we’re taking in right now, which is important in the context of the tax cuts enacted by the current administration. Where we are headed in the future with this?
Gale: The economy is booming right now and has grown the last couple of years, yet the deficit has gone up, not down. Normally, the deficit goes down as the economy booms because revenues come in and government safety-net program spending goes down. But because of the tax cuts and other things, deficits have continued to rise.
We’re in the midst of good times — at least in the economy as a whole — and the debt is high relative to historical standards. We’ve never had deficits this high on a sustained basis when the economy was so strong, so if and when the economy turns down, then we’re in real trouble. That’s why looking ahead a little bit right now, which is what I’m trying to do in the book, is a useful exercise.
Knowledge at Wharton: How do we start to think about reducing the debt? As you said, it’s really not a consideration right now.
Gale: The first step is to disavow people of the notion that there are easy ways to do this. Cutting foreign aid, cutting government workers’ salaries, reducing the subsidy to public TV or Big Bird — it’s just not going to do it. That’s a rounding error in the budget. We need to reform Social Security and Medicare in ways that respect the anti-poverty roles that those programs play. I don’t want to decimate those programs. I want to reform them but keep the crucial elements.
The other is, and there’s no way around this, we need to raise taxes. In the process, we need to reform taxes as well. But the big moving parts here are a value-added tax, which is a national consumption tax, a carbon tax, and then changes to existing taxes — the income tax and the corporate tax.
Knowledge at Wharton: How will this mix of ideas affect the average citizen in the next five, 10, 15 years?
Gale: I don’t have formal estimates of this, but everything that I understand and everything that I was trying to push in the proposal leads to the following: Low-income households are going to be better off. There is a variety of programs for them that will help them invest in their own career and future. High-income households will be paying significantly more in taxes, which I think is justified on several grounds, namely the fact that it’s the only way to get them to share in the fiscal burden, and their income has gone way up even though their tax rates haven’t.
“We’ve never had deficits this high [in a strong economy] so if and when the economy turns down, then we’re in real trouble.”
The big moving part is the middle class. I think that the middle class will have to pay more taxes under these proposals. What they would get in exchange for that would be a stronger economy, more economic mobility, less diffuse income distribution. But the issue is that the fiscal problem is so big that we can’t finance it just on the backs of the wealthy. It’s the middle class that’s been benefiting all these years from many of these programs, and there’s just no way to get there from here just by raising taxes on high-income households.
Knowledge at Wharton: The idea of where we want to see the economy down the road with some of these elements playing in, can you go back in history and pinpoint a similar time?
Gale: Some of the elements have been the same in the past. For example, after Reagan cut taxes, there was this series of bipartisan deficit reduction proposals that took place starting in 1982 and going all the way through 1997. They turned the deficit situation in 1982 — which [Reagan’s first budget director] David Stockman described as “deficits as far as the eye can see” — to a situation by the end of the century where we had surpluses as far as the eye could see.
That’s a model for what we could do now in the future, but it’s the best we’ve done in the past. But even if we did that, it would not be enough because the debt is so much higher right now to begin with. The demographic forces were moving in our favor in the 1980s and 1990s as the baby boomers moved into the labor force and bought houses and had kids. Now demographic forces are working against us as the baby boomers are retiring.
Knowledge at Wharton: We also need to stay away from something as large and destructive as the Great Recession.
Gale: That’s right. This is an interesting point. The economy is more important than the budget, right? Saving the budget and destroying the economy in the process would not be what most people consider a win. We have to respect the fact that the budget is part of the bigger economy and think first of what’s best for the economy, and then try to control the budget.
Knowledge at Wharton: You mentioned people being left behind, and that’s been a concern for quite some time. Again, it speaks to what is going on in Washington, D.C. We know that people are being hurt, yet not enough is being done to address some of these issues.
Gale: I agree totally. We have widening income distribution. We have lagging wages at the bottom. We have whole groups of families and kids and neighborhoods that are cut off from the economic advancement that the rest of the country is experiencing. I think this is important, not just for raw economic reasons, but broader political, cultural, social and moral reasons. If we’re going to be the greatest economy in the world, it needs to be that way for almost everybody, not just for a few.