Citizens Commission Report Final

8/8/2019 Citizens Commission Report Final

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REPORT AND

RECOMMENDATIONS

OF THE

CITIZENS COMMISSION

ON JOBS, DEFICITS

AND AMERICAS

ECONOMIC FUTURE

FO

R

OurFuture.org


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The Institute for America's Future is a center of nonpartisan research and education. Its mission is to equip Americanswith the tools and information needed to drive issues into the national debate, challenge failed conservative policiesand build support for the progressive vision of a government that is on the side of working people. To achieve ourmission, IAF spearheads the development of a compelling progressive economic agenda and messagewhichmakes clear what progressives stand for, articulates the philosophy and values underlying these policies, and framesand argues for them in new ways that will resonate with the majority of average Americans. IAF also regularly

convenes and educates progressive leaders, organizations, candidates, opinion-makers, and activists to encourageand facilitate their adoption and use of a common economic agenda and message so that our collective voices echopowerfully. Finally, IAF acts as an incubator of national campaigns in which progressives join together to form policiesthat advance economic prosperity and opportunity for lower and middle income Americans.

1825 K STREET NW SUITE 400 WASHINGTON DC 20006 (T) 202 955-5665 (F) 202 955-5606 WWW.OURFUTURE.ORG


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EXECUTIVE SUMMARY

Te United States continues to suer the aereects o the worst economic recession since the Great

Depression, triggered by a fnancial crisis whose causes were ignored or made worse by elite policymakers

or decades. oday, more than 25 million Americans who are ready and willing cant fnd ull-time work.

Personal wealth has declined sharply, creating an especially uncertain uture or people approaching

retirement age. Confdence is down or both consumers and businesses, which prevents sustained

economic growth.

At the same time, largely due to the severity o the recent recession, a ederal government that enjoyed

record surpluses just 10 years ago now aces record defcits that are spreading alarm and conusion across

the land. Moreover, this severe downturn comes aer a decade that eatured the worst job creation in the

post-war period, declining wages or most Americans, weaker unions conronted by employer attacks on

rights to organize, continued decay o basic inrastructure, an ongoing crisis in public education, record

trade defcits and job loss abroad, and extreme inequality.

Despite the ongoing pain that unemployment is still inicting on individuals and amilies, despite the slow

growth in demand that is hurting small business, despite the wrenching

budget crisis hitting most state governments, and despite the longer

term decline that can no longer be ignored, the debate in Washington

is now dominated by conservative cries or immediate reduction o theederal defcit. Several elite commissionstwo privately fnanced, and

one created by the president and Congresshave eectively shied the

attention o the media to defcits as the primary ocus or public action.

One voice has been conspicuously absent rom most discussion o

defcitsthat o the American people. Polls have shown that the

publics opinion and that o many leading economists are surprisingly well aligned. Te public agrees

with economists who warn that defcit reduction must be perormed judiciously, without restricting

governments ability to create jobs and without damaging needed social programs. Both agree that that we

must make investments vital to reviving Americas long-term prospects.

Te Citizens Commission on Jobs, Defcits and Americas Economic Future was created to oer proposalsthat can return our economy to healthy, sustainable growth, while taking action to reduce defcits and debt

in a way that enhances the uture well-being o the American people. And since the conventional wisdom

is so dominated by a relatively narrow range o opinions, it is our intention that this document will elicit

The Citizens Commission

on JobS, Deficits and

Americas Economic Future

This report was written by Je Madrick, a member of the Commission and Senior Fellow at the Roosevelt Institute with contributions from Roger Hickey, Robert Borosage and Richard Eskow of the Institute for Americas Future, DeanBaker of the Center for Economic and Policy Research, Robert Kuttner of The American Prospect and Demos, andRobert Pollin of the Political Economy Research Institute, with additional work by other members of the commission.

O

ne voice has been

conspicuously absent

rom most discussion o

defcitsthat o the American

people.


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media coverage o an alternative point o viewand that its recommendations will be widely discussed by

civic and business and labor leaders in communities all across the nation.

Tis commission has two major priorities. Te frst is to assure that the U.S. economy recovers ully and

returns to a ast track o growth. Tis is the right way to reduce the current high defcit. Te second is long-

term public investment in sustainable growth, ensuring a healthy economy that can generate adequate

revenue or needed public services. We have outlined three key principles that any plan or growth and

defcit reduction must ollow: Grow the economy. Dont kill growth and jobs in the name o defcit reduction.

arget what truly drives defcits. Dont fx what isnt broken.

Invest in uture sustainable growth while balancing our national accounts.

Tese are not just moral imperatives. Tey are economic prerequisites or successul defcit reduction.

Causes o Current and Future Defcits

Much i not most o the current public discourse is misleading and poorly inormed.

Te ederal defcit tripled between 2008 and 2009, reaching $1.5 trillion and 10 percent o GDP in 2009.

Tis was the culmination o a process that began with the passage o the frst Bush tax cuts, accelerated

with the invasions o Iraq and Aghanistan, and peaked with the economic collapse o 2008. It thereore

ollows that any reasonable short-term plan should ocus the causes o our current defcit. Yet most o the

measures currently being debated ail to do so. Despite the role that tax cuts played in creating todays

defcits, many such plans would lower taxes or the wealthiest Americans while increasing them or the

middle class. Tey would also restrict government eorts to bring us out o our current economic crisis,

weakening the economy and reducing uture government revenues.

Future defcits will be driven almost exclusively by the explosive growth in health care costs. Tose

who advocate or increased austerity are ailing to address the true causes o government spending.

Furthermore, there is no evidence that implementing policies to reduce government defcit would increase

private spending. As we note (see Appendix I), there is ample evidence that such spending cuts wouldcreate more unemployment, making a second recession possible and even likely.

The Lesson o 1937

Te nation has been at a similar juncture beore. Franklin D. Roosevelts New Deal reduced unemployment

rom 25 percent to 10 percent in three years, but he was then pressured to reduce spending beore the

economy was ully stabilized. Te result was another sharp increase in unemployment and a weakened

economy that only improved when the nation entered World War II.

Ten, as now, government spending was one o many legitimate policy concerns. Ten, as now, previous

government eorts had shown signs o success. President Obamas stimulus program created an estimated

3.5 million jobs and would have created more had it been larger. As in 1937, the nations economy remains

ragile and the recovery is not yet complete. More investment is needed. Premature austerity would be as

unwise and counterproductive now as it was then. Plus a nascent and struggling recovery is not sucient

given the decline o the last decade. Premature austerity would terminate any possibility o building a new

oundation or growth and shared prosperity.

Tough weak growth returned by 1934, unemployment was still stuck above 12 percent on the eve o

World War II. It was the massive wartime defcits, (peaking at 28 percent o GDP compared to less than 9

percent today) that fnally produced strong recovery.


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Overview of Recommendations

Tis report o the Citizens Commission on Jobs, Defcits and Americas Economic Future puts orward

a set o proposals that would protect and accelerate the economic recovery while achieving a stable but

sustainable level o debt by 2015. It reduces debt to a manageable level while at the same time providing

a strong program o government investment that will create jobs and ensure ongoing growth. Our plan

achieves that goal without cutting Social Security or capping or voucherizing Medicare (as many

conservative proposals do). It provides immediate eorts to support economic growth, substantialinvestments vital to the strength o our economy, cuts to ederal wasteul spending and a variety o

measures to increase revenues.

An important note: Any plan to substantially reduce the ederal defcit should be deerred until

unemployment has dropped to an acceptable level, which we have defned as 5.5 percent. Our plan is no

exception. Our recommended changes to the 2015 budget should only be implemented i unemployment

has reached that level. We believe it will i our short-term investment recommendations are adopted.

Our recommendations are based on the ollowing principles:

Address the current economic crisis rst. Beore engaging in widespread defcit reduction eorts, we

must institute a program o short-term targeted spending to restart the economy and sustained investment

to begin to support longer-term growth. Key among the ormer is aid

to the states, whose constitutionally mandated budget austerity is not

only inicting painul cuts in social services but also creating a huge

and destructive drag on the national economy. We also must pursue

innovative monetary and credit market policies to move roughly

$2 trillion in idle cash hoards now held by banks and non-fnancial

corporations into productive job-creating private investments.

Tax justice and empowered workers generate prosperity, fairness,

growthand revenues. ax cuts were a major cause o our current

defcit. Any plan that continues or increases tax breaks or the wealthy

will add to the defcit. In an era o excessive inequality, we should endBush era tax cuts or the wealthiest Americans, tax capital gains and

dividends as normal income, tax activities damaging to our economy

like excessive fnancial speculation, and eliminate or reduce tax

expenditures that mainly beneft the wealthy.

To ensure ongoing prosperity, we must also provide ongoing tax relief for lower- and middle-income

households. Tese households will spend, not save, the additional income. We must also take steps to

reduce the war on unions and worker rights (involving corporate action and misguided public policy) that

has been a major actor in preventing working rom getting their share o productivity growth over the

past three decades. Lower taxes and higher wages or working amilies will generate consumer activity that

leads to more growth, more jobs, and more tax revenue.Reduce wasteful government spending without compromising public objectives. Spending cuts

are needed, but we increase, not decrease investments in areas vital to our uture, and insure that any

adjustment not worsen already extreme inequality. We must eliminate spending that is unneeded or

wasteul, reduce obsolete and unneeded military spending, and make prudent cuts in government

expenditures that are not vital to its core mission.

Protect and strengthen Social Security. Social Security retirement benefts are the main source o income

This plan provides

immediate eorts

to support economic growth,

substantial investments vital to

the strength o our economy, cuts

to ederal wasteul spending and

a variety o measures to increase

revenues.


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or most retirees, and most o this income is spent rather than saved. Tis leads to growth and jobs without

adding to the defcit, since Social Security is unded separately. We must remove Social Security rom

defcit cutting exercises, increase its revenues, provide modest beneft increases, and assure the public

that its $2.6 trillion in trust und assets will not be used or other purposes.

Establish realistic and sustainable long-term decit goals. Any long-term defcit plan defcit must be

politically sustainable, fscally sound, and not impose unacceptable levels o hardship. We recommend a

short-term period o imperative recovery expenditures. We seek a gradual reduction in the defcit-to-GDPratio over the coming decade. We recommend an annual defcit target o 3 percent o GDP as a medium

term goal once recovery comes. Tis could be achieved as early as 2015i the economy recovers, and

i we dont choke o that recovery with premature defcit reduction. We are skeptical o targeting a date

certain independent o the condition o the economy. Te test o when to aim or that 3 percent defcit

target is whether unemployment has come down to 5.5 percent. Such a target, over the long term, will

enable us to stabilize the level o debt as a proportion o GDP at sustainable levels, because with high

employment GDP will be growing aster than the debt

Restore the nancial sectors role as an eective engine of growth. Te banking industry used

government-provided economic advantages to engage in reckless speculation, leading to the current

crisis. Banks continue to receive discount money and other government support without adequately

perorming their traditional economic role as lenders. Te fnancial industry has recaptured a high and

economically unhealthy percentage o the nations profts. We recommend a fnancial transactions tax

and programs to encourage increased bank lending in a responsible manner both to ensure our current

recovery and to promote long-term stability.

Te recently enacted Dodd-Frank Wall Street Reorm and Consumer Protection Act does include several

important eatures that could succeed in encouraging long-term fnancial stability. Tese include the so-

called Volcker rule prohibiting proprietary trading by large banks, the requirement that all derivatives

trading be conducted on regulated exchanges, careul oversight o public credit rating agencies, and the

creation o a Consumer Financial Protection bureau. However, details on the implementation o Dodd-

Frank have been le to the discretion o various regulatory agencies, such as the Federal Reserve and the

Securities and Exchange Commission. Tis creates enormous opportunities or the banking industryto weaken the eectiveness o the new regulatory system. o rebuild a healthy economy, ocused on

channeling our enormous fnancial resources into productive investments and job creation, it is imperative

that all the main provisions o Dodd-Frank be strongly enorced immediately and over time.

Address the health-care cost crisis. Alarming long-term projections o growing debt come almost

completely rom uncontrolled growth in health care costs. We do not have an entitlement crisis; we

have an unaordable health care system. Rather than capping, cutting or voucherizing Medicare or

Medicaid, we need continued health care reorms that control costs through changes to the structure o

the medical economysuch as the immediate establishment o a robust public option plan available to

all Americans, direct government negotiation o drug prices, and thorough additional cost-cutting and

quality improvement measures.

Who We Are

Te Citizens Commission is comprised o economic policy experts, such as ormer Secretary o Labor

Robert Reich, Je Madrick and economists Dean Baker, Robert Pollin and Heidi Hartman, and ormer

members o the House and Senate. But perhaps most importantly, many o its members are leaders o

national organizations with enormous reach into American communities, rom labor leaders such as

Larry Cohen and Mary Kay Henry to coordinators o national organizing networks such as Deepak

Bhargava, Angela Glover Blackwell, as well as other leaders whose work engages the grassroots public in


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debates about the economic direction o our country. Te commission was organized by the Campaign

or Americas Future, which has led nationwide public organizing campaigns around the uture o Social

Security, health care, green jobs and the uture o manuacturing.

Note: Our Citizens Commission was inspired to action in part to challenge the one-sided media coverage

lavished on the Simpson-Bowles National Commission on Fiscal Responsibility and Reorm, the Pew-

Peterson Commission on Budget Reorm and the Bipartisan Policy Center Debt Reduction ask Force.

Our deliberations were also inormed by recent work by the Economic Policy Institute, especially theirreport, Americas Economy: A Budget Blueprint or Economic Recovery and Fiscal Responsibility,

published by Demos, EPI and Te Century Foundation on November 29, 2010. As does our commission,

this report outlines policy changes to achieve job growth, long-term public investment and outlines a

defcit reduction plan that achieves primary fscal balance by 2018.

We were also both educated and inspired by the recent set o proposals put orward by a member o the

presidents fscal responsibility commission, Representative Jan Schakowsky. In the best tradition o the

great democratic debates, Rep Schakowskys plan presents a way to reduce the ederal defcit without

making middle-class Americans oot the bill. Schakowskys plan is an alternative to the Bowles-Simpson

plan and would reduce the defcit by $441 billion in 2015, surpassing President Obamas $250 billion

target. Critically, the Schakowsky plan accomplishes defcit reduction without making cuts to essentialederal expenditures that beneft the middle class or are crucial to uture growth.


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banks to lend aer the devastating losses o 2008, even while the banks now hold approximately $1 trillion

in cash reserves, most o which they obtained through borrowing at near-zero rates rom the Federal

Reserve. Consumer debt levels still exceed 120 percent o their income. o reduce them to the levels o

2000 would require consumers to cut $3 trillion dollars o their debt. Te nations savings rate is now rising

as consumers hunker down and pay o debt. Tis necessarily reduces consumption, and will continue to

suppress it. Consumption is the main driver o the economy in the short run.3 Given the widely accepted

wealth eectthat consumer spending is directly related to personal wealth-- the $12 trillion loss o

wealth alone could alone have cause a loss o $400 to $500 billion in purchasing power.

Meantime, the Obama recovery package has mostly been spent and will largely taper o by the end o

2010. Congressional hesitancy to maintain transer payments such as unemployment insurance could also

restrain growth.

Te fnancial system is also still ragile. Te recent estimate o uture bailout unding that will be required

by Fannie Mae and Freddie Mac is one example o the potential disarray another recession could cause is

the recent estimate o uture bailout unding that will be required by Fannie Mae and Freddie Mac. Te

Federal Housing Authority concluded recently that the bailout would cost $6 billion at a minimum i

the economy recovers and housing prices begin to stabilize. I there is ongoing weak growth or another

recession, causing a continued decline in housing prices, the cost could rise to $124 billion.4 Tere are

similar, still larger potential catastrophes awaiting us in the private fnancial sector i there is another

recession.

Causes o the Current Defcit

In fscal year 2009, ending September 30, the annual budget defcit tripled rom its level in 2008 to

$1.5 trillion, or roughly 10 percent o the nations total gross domestic product. Te annual defcit grew

somewhat in fscal year 2010 as a share o GDP. Te debt-to-GDP level rose to 60 percent, compared to 40

percent a short time earlier. Te sudden, spectacular surge raised alarms about government spending and

was used by long-term advocates or fscal austerity as proo o Americas fscal irresponsibility.

But, as noted, the current level o ederal budget defcits is not the result o long-standing national

proigacy. It is the result o the recession itsel, which sharply reduced incomes (and thereore taxrevenues) and raised necessary spending on unemployment insurance, nutrition programs and similar

automatic stabilizers. In coming years, high budget defcits will also be the result o the tax cuts proposed

by President George W. Bush in the early 2000s and war spending in Iraq and Aghanistan. As the Center

or Budget and Policy Priorities points out, these three actors account or almost the entire projected

budget defcit over the next 10 years (Figure 1)5. Te defcit is simply not the result o spending on such

social programs as Social Security or Medicare.

Austerity advocates conuse two dierent issuesshort-term defcits generated by the recession, the Bush

tax cuts and the war spending, with more disturbing long-term projections o defcits and debt driven by

rising health care costs. America does not have an entitlements crisis. America has a broken health care

system with excessive costs and inerior outcomes. Eorts to merely reduce public sector expenditures

such as caps on Medicare and Medicaid spending, cutbacks in veterans health care, increases in out-o-

pocket health care costs, raising premiums or voucher systemswill undermine the eectiveness o these

3 Sherle R. Schwenninger and Samuel Sherraden, A Nation At Risk, New America Foundation, October 2010, http://www.newamerica.net/sites/newamerica.net/les/policydocs/Recovery_At_Risk_Oct_2010.pdf.

4 Benjamin Appelbaum, Fannie and Freddie: 3 Bailout Forecasts, The New York Times, October 22, 2010, p. B1.

5 Kathy Rung and James R. Horney, Critics Still Wrong on Whats Driving Decits in Coming Years: EconomicDownturn, Financial Rescues, and Bush-Era Policies Drive the Numbers, Center on Budget and Policy Priorities, June 28,2010, http://www.cbpp.org/cms/index.cfm?fa=view&id=3036


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programs without lowering overall health costs. Tese measures would shi much more o the cost burden

onto individuals while ailing to fx the undamental deects in our system. Te health care reorm bill

passed earlier this year may be a frst step towards repairing the health care system, but much more will

need to be done.

Any meaningul long-term defcit program must take an objective look at the aws in our current system

and then act accordingly. Tat means taking advantage o the ability o publicly unded health insurance

to control overall costs, negotiating eectively, and thoroughly reviewing other techniques, such as all-payer payment rates and evidence-based medicine, that may play an essential role in reducing costs while

protecting or even improving the quality o care.

Social Programs Are Not the Problem

Many observers carelessly combine Medicare, Medicaid and Social Security as principal causes o the

long-term defcit. Consider this statement by the Peterson-Pew Commissions report, cited earlier: the

combination o population aging and growing health care costs will lead to an unprecedented expansion o

Medicare, Medicaid, and Social Security in particular. Under the Commissions fscal baseline, these three

programs will likely grow rom less than 8.5 percent o GDP in 2008 to 11 percent by 2018 and 17 percent

in 2038.

Te lumping together o the three programs is misleading and, in truth,

irresponsible. Social Security is an insurance program paid or by the

contributions o workers and their employers and the interest earned on

the investment o the Social Security surplus. Most Americans would

probably be stunned to know that Medicare and Medicaid will account

or 85 percent o the increase in these percentages, Social Security only

15 percent. In its June 2010 budget outlook, the Congressional Budget

Oce concluded that,

I current laws do not change, ederal spending on major mandatory

health care programs will grow rom roughly 5 percent o GDP today

to about 10 percent in 2035 and will continue to increase thereaer.Tose projections include all o the eects o the recently enacted health

care legislation, which is expected to increase ederal spending in the

next 10 years and or most o the ollowing decade Under current law, spending on Social Security is

also projected to rise over time as a share o GDP, albeit much less dramatically. CBO projects that Social

Security spending will increase rom less than 5 percent o GDP today to about 6 percent in 2030. And

then it will stabilize at roughly that level. 6

Te increase o roughly 1 percentage point (1.3 percent, to be precise), may surprise readers but most o

the increased payments due to an aging population were already anticipated in reorms undertaken in the

1980s, mostly with the gradual increase in the retirement age to 67. Te remaining gap is relatively easy

to close. In act, raising taxes by 0.6 percent o GDP would do it because there are already Social Security

assets in a trust und or uture benefts.7

Yet the sudden rise in ederal budget defcits has once again made Social Security the avorite target

o defcit cutters. Most o these would sharply reduce benefts or a large proportion o the elderly.

Retirement savings, including 401(k)s, into which many retirees were required to place their unds in

6 The Congressional Budget Oce, The Long-Term Budget Outlook, June 2010, http://www.cbo.gov/ftpdocs/115xx/doc11579/SummaryforWeb_LTBO.pdf.

7 Ibid,. Chapter 3, http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf

Many observers

carelessly combine

Medicare, Medicaid and Social

Security as principal causes o the

long-term defcit. The lumping

together o the three programs

is misleading and, in truth,

irresponsible.


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lieu o guaranteed pension benefts, have allen sharply in value. More important, or most middle-class

households, the collapse o the housing bubble destroyed much o their home equity, or most the major

source o their wealth.

Social Security has played no role in our current defcit and will play only a minor role in the uture. Even

under current projections, Social Security spending will rise by only one percent o GDP over the next

75 years without major changes. Te Social Security program is orbidden by law rom drawing on the

general budget, and the Social Security rust Fund currently has a surplus o $2.6 trillion. Social Securityis supported by payroll taxes specifcally imposed or its use and dedicated strictly or that purpose. Te

baby boom population was already addressed in changes devised in 1983 by the National Commission on

Social Security Reorm (led by ormer Federal Reserve chairman Alan Greenspan and usually reerred to

as the Greenspan commission) and incorporated during the Reagan presidency.

Ensuring long-term actuarial balance or Social Security is and should be a separate exercise rom defcit

reduction, and can be accomplished with minor adjustments, which we describe later in this document.

Finally, it is critical to fnd new sources o tax revenues. Te Bush tax cuts undermined the nations

ability to meets its obligations and invest in itsel. Except or those Americans at the top o the income

distribution, they should be extended until the economic recovery is ully underway. Once the nation is

growing rapidly again, a variety o taxes can and should be thoughtully raised to meet the nations needswhile maintaining its fscal integrity.

The Wrong Direction

Some policymakers are using the recent sharp rise in the ederal budget defcit to propose repeating

the tragic errors o the past. Tis is alarming. Te current defcit was not caused by national proigacy

or excessive reliance on government. It arose aer a decade o lavish tax cuts or the wealthy, a steep

increase in military spending and a severe recession brought on by unchecked speculation and inadequate

government regulation.

Emergency stimulus policies here and around the world broke the all, but were not enough to bring about

a ull recovery. Economic growth remains weak and the pace o job creation is ar too slow. Eight million

jobs were lost in the recession, and job creation is barely keeping up with the pace o new entrants into the

job market. Consumers who suered huge losses in home values and retirement savings are struggling to

pay down debt and prepare or what they ear may be worse to come. Te business sector, uncertain about

consumer spending, is holding $2 trillion in cash reserves. Businesses are reluctant to invest in expansion

or job creation under current conditions, leaving the economy trapped on a path o slow growth or

stagnation. Over 25 million American workers are now either unemployed, underemployed or have simply

given up looking or work.

Worse, this severe economic crisis comes on top o a decade that witnessed the worst job creation in the

post-war period, growing inequality, the collapse o the manuacturing sector and declining wages or

average working amilies. We do not have a ull recovery yet, but ull recovery is not enough. We have to

build a new oundation or long-term growth and prosperity.

Instead, ear about the short-term rise in the defcit is being used by many political leaders to encourage

austerity policies in Washington. Tey claim that such austeritycutting public spending to slash budget

defcitsis the only path to achieving job growth and economic recovery. We believe, and the economic

record demonstrates, that this is precisely the wrong approach. Defcit spendingespecially sustained,

aordable investmentsis urgently needed in the long-short term are to return the economy to sel-

sustaining growth.


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We understand there is a natural human response to tighten the fscal belt when the nations budget defcit

rises. In the name o prudence and a misleading sense o sel-discipline, however, the wrong policies are

already being ollowed again today. Austerity economics is discredited by history and unsubstantiated by

any new acts or theory. I the advocates o austerity now prevail, they will consign American citizens to

a decade or more o stagnating income, millions o lost jobs, social inequity, inadequate investment, and

deteriorating morale. (See Appendix I, Te Danger o Austerity Economics.)

Despite the evidence, which we discuss at greater length later in this proposal, the austerity view haswon inuential converts. Earlier in 2010, President Obama created a National Commission on Fiscal

Responsibility and Reorm ocused on reducing defcits. In addition, at least two privately fnanced and

inuential defcit commissions are attempting to push the national discussion urther in the direction o

austerity. Sweeping Republican gains in the recent election will increase the pressure to cut government

spending.

A premature emphasis on defcit reduction will slow, rather than stimulate, growth. It will increase

unemployment rather then put people back to work. Tis could well push our still-ragile economy back

into recession. It will lead to unnecessary and painul changes in Americas social saety net defcits. It will

short-circuit the investments vital to rebuilding America and erecting a new oundation or long term

prosperity, while ailing to achieve the goal o meaningul defcit reduction.

Many in Americain government, in the media, and in businessail to understand the causes o our

defcit concern, or the economic and political risks posed by the austerity approach. Te current crisis is

occurring aer a generation o disappointing economic perormance or most Americans. Earnings have

grown at historically slow rates, stagnated or allen or most working people, amid rapidly rising costs o

education and health care. Te sense o insecurity over jobs and health insurance is widespread. Policies

that increase unemployment and cut cherished and necessary social programs will inevitably add to the

publics increasing expressions o rustration and anger, emotions weve seen expressed at the ballot box

and in public demonstrations.

We are in a period o tenuous recovery which or many Americans is a time o great hardship. Tis is no

time to practice austerity. Austerity economics is pessimistic economics. It is based on ear not aith. We

must orge ahead as we have done time and time and again in our history.

We are not a poor nation. Despite what the austerity advocates say, we need not behave like one. We can

and will return to growth and prosperity, i we have the courage and resolve to pursue bold policies based

on wisdom and optimism.

Attacking the Root Causes o Defcits

Te current defcit was not caused by Social Security, Medicare or Medicaid. Te record surpluses o the

1990s were turned into large defcits by the Bush tax cuts and the cost o waging two wars. Te eects

o this defcit spending were then made much worse by a devastating recession caused by runaway

speculation and inadequate government regulation. Te recession created the need or major government

programs to repair the damage. Tese expenditures added signifcantly to the defcit, as did the loss orevenue created by millions o lost jobs. Te recession also led to a collapse o demand by consumers and

business,8 creating additional lost government revenue.

Over the next 10 years, anticipated defcits will similarly not be caused by rising costs o social programs.

Rather, the principal sources o the defcits, and growing public debt, remain the recession, war spending,

and the tax cuts o the early 2000s under George W. Bush.

8 The Obama stimulus package of roughly $800 billion technically added to the decit but contributed to ending therecession. Had it not been implemented, the decit would be substantially higher in 2011 and 2012.


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Aer 2020, however, the defcit will indeed grow rapidly, as will the level o ederal debt. Assuming we can

succeed aer 2020 in avoiding another fnancial meltdown similar to 2008-09, the central cause o large

ederal defcits will be the rising costs o American health care. I we can reduce our health care costs to

levels similar to other rich nations, the U.S. Medicare and Medicaid benefts will grow at rates that will

not cause a signifcant long-term defcit problem. I we do not control our health care costs, the economy

will be devastated. Along with insuring a stable, well-unctioning fnancial system through eective

regulations, we must ocus our long-term concerns with fscal defcits on reorming our health-care

system.

Investing in the Future

A robust and ast-growing economy with its benefts widely shared is the way to reduce budget defcits and

maintain fscal strength. It is, indeed, the American way. Coupled with signifcant health care reorm, such

robustness will enable us to enhance not erode social policies. And it will generate the unds necessary to

renew vigorous public investment, including in support o building a viable clean energy economy over the

next generation. Tese priorities have been badly neglected or a generation and we believe is essential i

the nation is to have a prosperous economy again.

Our objective is to show that doing so is entirely practical. We present a pro-growth plan to be put in place

in 2015 (provided there is sucient recovery at that time) that will place sensible, sustainable ceilings onthe ederal defcit and the level o debt-to-GDP while maintaining the nations social programs and also

raising public investment adequately to build the oundation the nation needs to maintain its prosperity.

America must reinvest in itsel. Aer years o neglect, the nation requires rebuilding. Civil engineers grade

our inrastructure a C or a D. Tey say we must invest $200 billion a year to repair and update or a new

century.

College attendance levels stopped rising in the 1990s. Public education, in some cases good, is tragically

inadequate or too many young Americans, especially those who live in poorer neighborhoods. We are not

even doing the basics. For example, the nation has no accessible universal system o pre-school education

despite its vital importance to learning.

Te nations dependence on ossil uel energy cannot continue. Investments in energy eciency

including retroftting our existing building stock, expanding public transportation and upgrading our

electrical grid transmission systemas well as in renewable energy sources, such as wind, solar, and

geothermal powercan reduce that dependence. Tese and related green investment projects can also be a

major new engine o job creation in both the short and long runs.

Tis is not the place to summarize in depth Americas public investment needs. Our objective is to stress

that with careul management, we can meet them. Enough studies suggest that such investment can pay

or itsel with aster economic growth.

Tere is no reason to believe that a 3 percent annual growth rate is the best we can accomplish. Even i it is,

we will do well. But i we invest adequately, we may be able to do better.


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14

SOCIAL SECURITY: Keeping the Promise

Current defcit debate has ocused too much attention on Social Security, which has no part in this

discussion. Social Security has played no role in our current defcit. Te Social Security program is

orbidden by law rom drawing on the general budget, and the Social Security rust Fund currently has

a surplus o $2.6 trillion. Social Security is supported by payroll taxes specifcally imposed or its use and

dedicated strictly or that purpose. Even under current projections, Social Security spending will rise by

only one percent o GDP over the next 75 years without major changes.

Under current projections, Social Security will be able to pay 75 percent o benefts aer 2037. Yet,

seemingly against logic, many plans propose cutting benefts by an even greater percentage in response.

Tese proposals ail to address the source o this projected shortall. An aging population is not the

cause, since the baby boom population was already addressed 1983 s Social Security Act amendments.

Te growth o the Social Security surplus since the Reagan administration was planned to help absorb

the retirement costs associated with the baby boom. Te projected gap is the result o shiing income

distribution to the nations highest earners, a trend which began in the late 1980s and 1990s. Tis

concentration o wealth at the top, which was not anticipated by the Greenspan Commission or the

Congress in 1983, caused a smaller percentage o income to be covered

by the payroll tax.

9

Applying the payroll tax to a greater percentage oincome will fx any long-term problems with Social Security.

As we have said, long-term actuarial balance or Social Security can be

accomplished with minor adjustments. Increasing payroll tax to cover

100 percent o wages would eliminate 95 percent o the projected long-

term shortall. Proposals to provided additional unds by restoring

estate taxes, taxing stock transers (as Great Britain does), dedicating a

bank speculation tax to Social Security, or giving the rust Fund more

investment exibility could even permit increasing Social Security

benefts. Given the widespread loss o personal wealth caused by

the recent recession, a move o this kind could help ensure a robust

consumer economy in uture years.

Tis is not the place to respond in detail to all the varying proposals to

cut Social Security benefts. But the one oered by Congressman Paul

Ryan as modest reorm o Social Security is the leading example o the extreme dangers posed by these

beneft-cutting ideas. Ryan, as do others, would base uture increases in benefts on ination, not increases

in wages. But historically wages rise signifcantly aster than ination.

Ryan and others argue that they will apply the new calculation based on prices to only those who earn

above a certain minimum wage. Tus, the claim is that it will only aect better-o Americans. In act, the

proposal would cut benefts or tens o millions o middle-income workers such as schoolteachers and

frefghters. Ryan and others, claiming Americans now live longer, also would raise the retirement age

gradually above 67, also with proound eects on uture benefts. But poorer Americans do not live nearlyas long on average as better-o Americans. Te lie expectancy o low-income women, or example, has

actually declined over the last quarter-century.10 Tus, lower income Americans would have their lietime

benefts reduced by ar more than others would.

9 See Bivens, L. Josh

10 Julian Cristia, Rising Mortality and Life Expectancy Dierentials by Lifetime Earnings in the United States, Journalof Health Economics, 28, 2009.

We are deeplyconcerned that Social

Security has become a target

when it does not contribute to

the defcit problem, while with

the real problemhealth care,

which drives the nations long-

term fscal imbalancesis let

unresolved.


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15

Te Social Security Systems chie actuary fnds that these two changes will ultimately reduce benefts or a

medium earner making about $43,000 a year by roughly 40 percent over time.

Ryan is by no means the only one recommending such proposals under the guise o moderate changes.

Te report rom scholars at the New America Foundation and the Brookings Institution, or example,

makes similar recommendations. So do many others.11

We are deeply concerned that Social Security has become a target when it does not contribute to the defcit

problem. We can only conclude that it seems to be an easy target, while with the real problemhealthcare, which drives the nations long-term fscal imbalancesis le unresolved.

As the Alliance or Retired Americans reminds us:

More than one-third o all people 65 and older rely on Social Security or 90 percent or more o

their income. Without Social Security, 55 percent o severely disabled workers and their amilies

would live in poverty; 47 percent o elderly households would live in poverty; another 1.3 million

children would all into poverty; and 2.4 million grandparent-headed households caring or 4.5

million grandchildren would be deprived o the most important source o income going to these

grand-amily households.12

11 MacGuineas and Galston, op. cit, http://crfb.org/blogs/my-view-maya-macguineas-and-bill-galston.

12 http://strengthensocialsecurity.org/sites/default/les/FactSheet-Social%20Security%202010%20Facts%20and%20Figures.pdf


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16

HEALTH CARE: THE KEY TO LONG TERM FISCAL

AND ECONOMIC HEALTH

A Crisis in the Making

Health care costs are greatest single obstacle to long-term defcit reduction. Te magnitude o this problem

cannot be overstated. Te ollowing CBO chart tells the story:

Tese costs, i unchecked, are a long-term fnancial catastrophe that threatens both government solvency

and the entire U.S. economy.

No defcit plan is meaningul unless it takes bold steps to address this problem.While the Patient

Protection and Afordable Care Act (PPACA) was a good rst step, much more remains to be done.

If uncorrected, Medicare and Medicaid costs will exceed those of all other government spending in the

next 25 years. When it comes to long-term decit reduction, health care is the problem. Attempts to

balance the budget merely by cutting the portion of these costs paid by government will fail, exacting an

enormous human toll in the process.

A Broken System

Te United States diers rom that o all other developed nations in its reliance on private-sector,

employer-sponsored health insurance. Other dierences include regulatory structure, provider payment

systems, and physician compensation levels. Te results are plainly visible in the chart (Figure 2):

Te United States spent 16 percent o its GDP on health care in 2007, ar higher than the average o 8.9

percent spent by other developing countries, and will continue to lead the pack in orty years. Tis cost

isnt explained by age dierences, as many people assert, since the U.S. has a smaller elderly population

(as a percentage o the total) than Europe or Japan13. Te conclusion is plain: I the U.S. spent the same

percentage o its GDP as the typical developed country with universal coverage, it would have no long-

term defcit problem.

Shifting the Cost Isnt the Answer

Many of the current decit reduction proposals being discussed (e.g. Bowles/Simpson, Rivlin/Domenici)

substitute cost-shifting for cost reduction. Spending caps, premium increases and additional out-of-

pocket costs for patients do not address the global cost problem.14 They merely shift these costs to elderly

13 Pearson, Mark. Written Statement to Senate Special Committee on Aging. OECD, September 2009.

14 Many private-sector health plans relied heavily on a RAND Corporation study which suggested that patients who

Alternative Fiscal Scenario40

30

20

10

1962 1972 1982 1992 2002 2012 2022 2032 2042 2052 2062 2072 2082

Actual Projected

Revenues

Medicare and Medicaid

Social Security

Other Federal Noninterest Spending


19/38


20/38

18

The Wrong Priorities

We fnd that many defcit proposals include some useul ideas but ail to address long-term costs. Indeed,

they mostly kick the can down the road. Bowles and Simpson, or example, simply suggest that Congress

consider the public option i their ideas ail. While their acknowledgement o this ideas importance is

laudable, their priorities are backward: Tey propose to start the process with counterproductive cost-

shiing measures while deerring cost-saving measures.

Te Bowles/Simpson plans strongest cost-cutting proposals involve steep reductions in provider payments,

which will have a dislocating eect when a) many providers reuse to serve Medicare enrollees and b)

providers shi the lost revenue onto private insurers. Teir tort reorm proposal will likely have some

eect on costs, but not as much as many people believe. Te alleged costs o deensive medicine are ar

less than typically assumed, so the savings will not be signifcant.21

A package that relies on caps, premium increases and other cost-shiing techniques will impede growth,

cost jobs and impose painul hardship while ailing to address the underlying problem.

A Better Health Care Plan

Our proposal addresses costs in a comprehensive way:

Implement public option health plan. Create a truly robust public option plan that is available to all

Americans, without the restrictions to access proposed earlier this year.

Annual Savings: $35 billion22

Establish a Medicare Part D public plan to compete with private plans. Te legislation that created

the Part D drug program mandated that drug benefts be oered only through private companies

(nongovernmental entities). A Medicare drug plan should be established to compete with private-sector

plans. Annual Savings: $6 billion23

Pharmaceutical Negotiations. Te Department o Veterans Aairs pays 58 percent less or prescription

drugs than Medicare24 because it is not prohibited by law rom negotiating with pharmaceutical

manuacturers. Tat prohibition should be lied or the Department o Health and Human Services, which

should then be directed to immediately begin direct negotiations with pharmaceutical companies.

Annual Savings: $40 billion25

Study additional cost-saving options. Implement high-level studies o additional cost-containment /

quality-improvement measures such as evidence-based medicine and all-payer programs through grants

to the Agency or Health Care Policy and Research, the Centers or Medicare & Medicaid Services, and

other agencies and private research frms. Cost/Savings: o be determined.

Medicare for All. Lastly, we should set cost containment targets and target dates or health cost reduction

that apply to both private and public spending. Such global spending targets will assure that costs are not

simply shied rom the public to the private sector. Cost containment goals should be set, with target dates

21 See Mello, M. Defensive medicine accounted for 2.4% of health care costs. This practice will never be fullyeliminated. While it can and should be reduced, too much reliance should not be placed on this approach.

22 Lewin Group, Cost Impact Analysis for the Health Care for America Proposal, February 2008, http://www.sharedprosperity.org/hcfa/lewin.pdf, 12.

23 Per Schakowsky proposal

24 No Bargain: Medicare Drug Plans Deliver High Prices. Families USA, 2007.

25 Gellad, Walid et al. What if the Federal Government Negotiated Pharmaceutical Prices for Seniors? An Estimate ofNational Savings. J Gen Intern Med. 2008 September; 23(9): 14351440 (expanded for all populations and consistentw/Dean Baker estimate) http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2517993/


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19

or achieving them. I these targets are not met, work should begin on cost-beneft and implementation

studies o Medicare or All and other more robust options or controlling health costs.

Cost/Savings: o be determined.

Setting Achievable and Balanced Targets

Te presidents National Commission on Fiscal Responsibility and Reorm has set a goal o eliminating

the primary defcit (beore interest expense on the debt) by 2015. Meeting this arbitrary target will likely

damage the recovery and even increase defcits. We believe we can assure fscal sustainability in a moreconstructive way. But the defcit reduction we propose should not begin until the economic recovery

brings the nation much closer to ull employment. Tis is not likely to occur until 2014 or 2015 under the

best o circumstances.

Te most important question is this: What will drive economic growth, job creation and widely shared

prosperity in the years to come? Conservatives argue that we should simply reduce defcits and wait or

the next economic boom. But the last economic expansion rode on a bubble, inated by unsustainable

household debt and fnancial speculation.

President Obama has called on us to build a new oundation or the economy. Tis requires making

investments vital to our uturein education and training, in research and development, in a modern

inrastructure or the 21st century. It requires ending our addiction to oil, and capturing a lead role in the

green industrial revolution, creating the next generation o green jobs.

It also means ensuring that the new Dodd-Frank fnancial regulations

are implemented in eective ways, to prevent the return o excessive

speculation and fnancial bubbles as our dominant engine o economic

growth.

Study aer study demonstrates that America has a huge public

investment defcit in areas vital to our economy. Some estimates

suggest a shortall in public investment o as much as $500 billion a year

in traditional inrastructure and the green economy. As long as we have

unacceptably high unemployment, outlays or additional investment caneasily be defcit-fnanced. But even once we achieve a robust recovery,

our country can pay or productive public investment by borrowing

moderately.

We must have the confdence to orge our uture. At the end o World

War II, the U.S. was burdened with debt that totaled over 120 percent

o GDP. But we made the investments vital to a new economythe GI

Bill, housing subsidies, the Interstate Highway System, the conversion o military plants, and the Marshall

plan. We did not adopt austerity economics. We ran modest annual defcits over most o the next two-and-

a-hal decades and the debt grew in absolute size, but the economy and the broad middle class grew aster.

By 1970, the debt had been reduced to 35 percent o GDP. Te better way to reduce the defcit as a percent

o GDP is to increase GDP.

Taking the high road to fscal balance

We believe there are three essential guidelines or Americas uture budget policy.

Te right wayin act, the only wayto guarantee the nations fscal sustainability, in the short run and

the long run, is by creating jobs, not destroying jobs. Te most fscally responsible path requires substantial

fscal stimulus now. A new round o spending cuts will be sel-deeating. Te fscal stimulus should also

The presidents fscal

commission has set a

goal o eliminating the primary

defcit by 2015. Meeting this

arbitrary target will likely

damage the recovery and even

increase defcits. We believe we

can assure fscal sustainability in

a more constructive way.


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be accompanied by vigorous monetary and credit market policy measures to encourage private-sector

spending in job-creating investments.

In the long run, the central concern or Americans is rapidly rising health care costs and their impact on

Medicare and Medicaid. Health care in America must be reormed signifcantly over time. Social Security

is not contributing to the defcit and can be made solvent with modest changes, an exercise that should not

be part o defcit-reduction eorts.

Te nations long-term economic growth, and thereore its fscal balance, can only be sustained by seriouspublic investment in education; transportation inrastructure; energy-technology development; and

scientifc, technological and medical research. Tese publicly fnanced investments create jobs and provide

the necessary conditions or uture rapid economic growth.


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THE RIGHT PRIORITIES

Our frst priority is to place the current economic recovery on a frm ooting and to return GDP to its ull

potential. Te short-term defcit is not the nations most pressing concern, a stalled economic recovery is.

Meeting the new fscal commissions arbitrary goal to eliminate the primary defcit by 2015 could result in

slower growth and higher unemployment than is being orecast now by the Congressional Budget Oce.

Te spending cuts and tax increases to meet this target will start to be phased in no later than 2012, a point

at which all projections show the economy will still be well below its potential output.

Te nations long-term budget defcit beyond 2025 poses a serious danger. It must be dealt with, however,

by correcting its true causes, the most important o which are rapidly rising health care costs.

Social equity and the provision o capabilities to all American to lead ull lives should not and need not

be sacrifced in order to solve the defcit problems. Our social contract should not be dismantled as part

o a crusade or austerity. Te workers right to organize, which enhances productivity and wage growth,

should be strengthened, not weakened. In particular, Social Security benefts can be retained and perhaps

even enhanced.

Balancing the ederal budget will not produce the robust growth our country needs over the long term.

For that we will need to fnance a substantial program o public investment, including transportationinrastructure, green energy technologies, education and scientifc research. We can indefnitely tolerate

a moderate defcit o 3 percent o GDP to meet our social and investment needs beginning in 2015 i

economic conditions are strong at that point. Tis defcit level will enable the nation to stabilize ratio

o debt-to-GDP at the debt-to-GDP level likely that that point, roughly 70 percent. Tis compares with

current levels o debt to GDP o 190 percent in Japan, 72 percent in Germany, and 78 percent in France.

The Short-Term Picture

We have used the budget projections o the Oce o Management and Budget, which takes into account

to take into account the

continuation o most o

the Bush tax cuts (or thenon-wealthy) and a three-

year reeze on discretionary

spending.

Te CBO estimates,

with OMB adjustments,

that the economy will

grow moderately in

real terms. Even under

these assumptions, the

unemployment rate will not

all below 6 percent until2015. Te ederal budget

defcit will be 4 percent o GDP in 2014 and onwards.

Federal Budget Projections, 2010-2020

Fiscal Year Decit-to-

GDP ratio

Debt-to-

GDP

Revenues/

GDP

Outlays/

GDP

GDP

Growth

Jobless

Rate

2010 10.6 63.6 14.8 25.4 3.0 10.0

2011 8.3 68.6 16.8 25.1 4.3 9.2

2012 5.1 70.8 18.1 23.2 4.3 8.2

2013 4.2 71.7 18.6 22.8 4.2 7.3

2014 3.9 72.2 19.0 22.9 3.9 6.5

2015 3.9 72.9 18.9 22.9 3.4 5.9

2016 3.9 73.6 19.3 23.1 3.1 5.5

2017 3.7 74.2 19.4 23.1 2.7 5.3

2018 3.7 74.9 19.5 23.0 2.6 5.2

2019 3.9 75.9 19.5 23.7 2.5 5.2

2020 4.2 77.2 19.6 23.7 2.5 5.2


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Tis projection may overestimate growth. Te unknowns about the currently unusual state o the economy

make the outlook especially uncertain and unlikely to conorm to historical patterns. A balance-sheet

recession caused by excessive debt has historically taken longer to right itsel than more typical recessions.

Slow economic growth in the last six months already appears to cast the CBO orecast in doubt.

It is important to understand how much the reduction in defcits depends on growth. A premature turn

to defcit reduction will surely reduce the very growth that the projections rely on, with continued mass

unemployment reducing projected revenues, and increasing outlays. Austerity could easily result in higherdefcits, not lower ones.26

Jobs programs are a key element o any plan to invest in growth. Tese programs can take the orm o

direct government hiring, government contracts with private companies and other initiatives.

Such a fscal stimulus may also appropriately include a policy to encourage banks to lend. Te Federal

Reserve is about to embark on another round o quantitative easing to reduce longer-term interest rates.

But the danger as always is that without adequate demand or goods and services, lowering interest

rates will not alone encourage more borrowingknown as pushing-on-a-string. Tere is a clear and

immediate need or well-designed government programs to encourage greater bank lending, both to

small/medium businesses and to individuals.

One approach would be to combine two initiativesone carrot and

one stickto deliver both lower rates and diminished risk levels or

businesses. Te carrot is an expansion o existing ederal loan guarantees

by $300 billion, which would roughly double the amount total annual

guarantees. Small businesses should be the primary benefciaries. Te

stick is a 1 percent to 2 percent tax on the excess cash reserves now held

by banks, to push the banks to become more bullish on loans or job-

creating investments.27 otal costs o the programresulting mostly

rom loan deaultswould almost certainly be well below one percent

o the ederal budget. Having said this, we recognize a serious stimulus

o up to $500 billion a year is unlikely to be passed by Congress. othe contrary, austerity economics, and the recent Republican victories,

may result in spending cuts well beore the economy returns to solid

growth. I this is the case, that is all the more reason or Congress and

the Federal Reserve to vigorously pursue measures to encourage private-

sector borrowing and lending in support o job-generating private investments.

Te presidential fscal commissions objective is to eliminate any primary budget defcit (the defcit beore

interest rate expenses) by 2015. Te current projection is or a substantial primary defcit in 2015.28 Te

co-chairs o the defcit commission have suggested that spending cuts should not begin until the economy

is strong enough to absorb them, but their proposals will result in recommendations or rapid cuts in

26 A reasonable estimate is that a well-focused stimulus of $500 billion a year over two years, or somewhat more than3 percent of GDP a year, will create some 4-5 million jobs. This will reduce the unemployment rate by up to 3 percentby 2012 or 2013 to close to 5 percent. The unemployment rate can continue to fall by 0.5 percent as the economysustains its growth. We believe a well-constructed stimulus plan designed to produce the maximum number of

jobs should focus on transfers to the unemployed, aid to the states, and some new infrastructure and green energyprojects, and limit cuts in taxes.

27 Robert Pollin, Austerity is not a Solution, Challenge, November-December 2010. Features of this proposal havebeen supported by a wide range of commentators, including former Federal Reserve Vice Chair Alan Blinder (WallStreet Journal 11/16/10, and former Reagan economic advisor Bruce Bartlett (Los Angeles Times, 11/14/10)

28 Private projections by the CBPP.

Apremature turn todefcit reduction will

surely reduce the very growth

that the projections rely on, with

continued mass unemployment

reducing projected revenues,

and increasing outlays. Austerity

could easily result in higher

defcits, not lower ones.


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spending too soon. Te early November proposals o the co-chairmen, in act, recommend cutting as early

as 2011 and 2012. Te recommendations o the Peterson-Pew commission may be even more damaging.

Tey seek to reduce the debt-to-GDP ratio to 60 percent by 2018. According to the Center or Budget and

Policy Priorities, this would require cutting the defcit severely in too short a time, an onerous goal without

serious tax increases, in our commissions view. Te Peterson-Pew Commission also claims it would waituntil the economy is back on track. Again, this will not likely be honored. Te Peterson-Pew Commissions

persistent drumbeat or austerity has had enormous inuence in Washington to the point that added

stimulus now is virtually impossible.29

A Better Approach: Short-Term Investment And Long-Term Balance

We oer the ollowing workable plan to meet our spending goals and retain fscal stability in the longer

run. It is one o many possible permutations with the same general objective: to reach a stable level o debt-

to-GDP that does not rise over time.

We have established 2015 as a target date, based on the strength o the economy at that point. In the event

that the economy grows aster than expected (which is likelier i more stimulus unds are provided), it is

possible that defcit cutting could begin even sooner. Note that the projections in able 1 show that the

amount o public debt as a proportion o GDP held by the public rises to slightly about 70 percent in 2015.

Te ederal budget defcit is roughly 4 percent at this point (the CBO projects it slightly higher).

We believe we can readily reduce the projected defcit in 2015 on balance rom 4 percent to 3 percent with

a package o spending cuts and tax revenues even as we increase government investment substantially by

2.5 percent o GDP a year. Arithmetically, i the defcit remains at 3 percent and nominal GDP growth

equals 4.75 percent, a very reasonable assumption, the debt ratio will remain at roughly 70 percent.30

Tus, through a combination o spending cuts and tax increases, we can reduce the projected defcit,

given our increase in public investment, by 4 percent. We believe we can readily cut spending by a total

o 1 percent, or even 1.5 percent, should the defcit be higher than we anticipate in 2015that is $150

billion to $225 billion in 2015. Tis can be accomplished with substantial cuts in military spending,

already proposed by some, as well as the early stages o health care reorm and reductions in other wasteul

government expenditures.

o fnance the rise in government investment o almost 3 percent o GDP, we would raise tax revenues

29 Kathy Rung, Kris Cox, and James R. Horney, The Right Target: Stabilize the Decit, January 12, 2010, http://www.cbpp.org/les/01-12-10bud.pdf.

30 The tolerable decit is equal to the growth of GDP divided by the new level of GDP, multiplied by the debt-to-GDPlevel. In this case, .7 (.045 divided by 1.045) = 0.3.

Budget Projections Show Decits and Debt

Growing Rapidly As a Share of GDP Through 2050

Social

Security Medicare Medicaid

Other

Program

Outlays

Total

Program

Outlays Revenues Interest

Surplus (+)/

Decit (-)

Debt Held by

Public

(End of Year)

2000 4.2% 2.0% 1.2% 8.7% 16.1% 20.9% 2.3% +2.4% 35%

2010 4.8% 3.1% 2.0% 14.1% 23.9% 15.6% 1.4% -9.7% 62%2019 5.2% 4.1% 2.0% 8.7% 20.0% 17.8% 4.3% -6.4% 86%

2030 5.9% 6.2% 2.6% 7.8% 22.5% 18.0% 7.0% -11.5% 141%

2040 5.9% 7.8% 3.3% 6.9% 23.8% 18.0% 10.8% -16.6% 218%

2050 5.7% 8.9% 3.9% 6.0% 24.5% 18.2% 15.6% -21.9% 314%

Source: Center for Budget and Policy Priorities calculations based on CBO data.


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24

by the equivalent, or $450 billion in todays economy. We speciy such tax sources in the Summary o

Recommendations section.

Long-Term Spending

Farther into the uture, defcit and debt projections become both less certain and more grim. Te pace o

growth, the distribution o income and taxes, the eect o health care reorms, and the possibility o wars

or recessions make any projections anciul. But, with a shared sense o rough assumptions, most analysts

suggest that by 2030 and beyond, the defcits could rise to well over 100 percent o GDP, and eventually arhigher, i new policies are not put in place. In able 2, below, the Center on Budget and Policy Priorities

(which is slightly more pessimistic about uture tax revenues than the CBO), projects that American debt

will equal more than 200 percent o GDP in 2040 and more than 300 percent in 2050. Te Peterson-Pew

Commission makes similar projections.

By ar, the largest components o the projected explosion o debt are government health care programs and

the rise o interest payments on the growing debt that is created by them. Very quickly, Americans will be

borrowing more just to pay interest, as interest on interest grows rapidly. Te level o interest on the debt is

highly sensitive to whether the levels o debt can be arrested ar sooner. We believe they can.

In short, i health care spending can be contained, the interest paid annually will be sharply contained. We

thereore propose a mix o continued health reorms, building on those recently enacted, that will address

this undamental cause o long-term defcit concern.

Moving Forward

In conclusion, our proposal combines a balanced program o increased tax revenues with judicious

spending cuts, a plan to return the fnancial sector to its rightul role as lender while ending the threat it

poses to recovery, and a plan to address the long-term threat posed by health care spending. Te specifc

details o our proposal ollow.


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26

and development, public transit, and broadband access.33

Objectives: New jobs or teachers, researchers, auto workers, transit and communication workers;

improved ability to compete in 21st Century economy; private sector job growth in supplier industries and

in businesses in local communities. Investment in green technologies will create new green jobs and will

go ar to move the U.S. economy o o oreign uels and create good jobs or millions o Americans, while

getting us on the road to reversing climate change. Annual Public Investment Cost: $450 billion

in 2015

2. New Revenues For Defcit Reduction, Fairness, and Investing in the Future.

Increase overall tax revenues with a set o reorms that end excessive benefts or the wealthy, protect the

middle class, add jobs, promote growth, and ensure tax airness. We propose a set o revenue increases

and other tax changes that would raise approximately $500 billion in 2015, while protecting the fnancial

security o all Americans. Proposals are listed below with estimated 2015 costs and savings.

End Bush-era tax cuts for the wealthiest 2 percent of Americans.

Revenues: Already included in Obama

budget projections.

Financial Speculation Tax. A tax on fnancial transactions o 0.25-0.50 percent on all transactions wouldhave two benefts. It would reduce the speculation that led to the last recession and contributed to the

current defcit, and it could raise an estimated $130 billion a year.34

Revenues: $130 billion.

Establish a Surcharge on Top Earners. Revenues: $53.2 billion.

Tax capital gains and dividends as normal income. Revenues: $88.5 billion.

Cap Use of Itemized Deductions at 15 percent and Expand Charitable Giving Credit.

Objectives: Revenues or defcit reduction, job creation and investment; support additional charity giving.

Revenues: $87.9 billion.

Additional proposals regarding corporate income and dividends.35

Revenues: $112 billion.

Enact an Estate Tax with a Progressive Schedule of Marginal Tax Rates (per Sanders/Whitehouse bill).

Revenues: $4.5 billion.

Establish a Cap and Trade or Carbon Tax. Revenues: $52 billion.

Repeal tax subsidy for mergers and acquisitions. Revenues: $5 billion.

Increase the Motor Fuels Tax.

Additional Objectives: Decreased use o ossil uels. Revenues: $33 billion

Expand the Earned Income Tax Credit.

Objectives: Help working amilies escape poverty, increase spending to stimulate the economy and create

33 See Americas Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility published by Demos,EPI and The Century Foundation on November 29. for additional detail

34 Baker, Dean, Robert Pollin, Travis McArthur, and Matt Sherman. 2009. The Potential Revenue from FinancialTransaction Taxes. Joint Working Paper 212, Center for Economic and Policy Research and Political Economy ResearchInstitute, www.peri.umass.edu/leadmin/pdf/working_papers/working_papers_201- 250/WP212.pdf

35 ibid.


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jobs. Cost: $1.6 billion.

Make the Child Tax Credit Fully Refundable Cost: $4.2 billion

Permanently Extend the Making Work Pay Tax Credit.

Objectives: ax savings or 96 percent o households, stimulating the economy through purchase o goods

and services. Cost: $36 billion.

otal Net Revenue Increases: $524.3 billion

3. Targeted Cuts to Federal Expenditures

We are proposing a package o cuts that targets wasteul spending, excessive subsidies, ineciencies, and

programs that subsidize corporate activity overseas.

Reduce deense spending per Rep. Barney Frank proposal. Savings: $110.7 billion.

Eliminate Market Access Program or overseas corporate advertising.

Savings: $1 billion.

Eliminate Overseas Private Investment Corporation (OPIC). Savings: $0.15 billion.

Reduce arm subsidies. Savings: $7.5 billion.

(Te ollowing recommendations and those that ollow are per Rep. Schakowsky proposal36:)

Implement GAO Recommendations to Reduce Improper Payments

Savings: $5 billion

Sell excess ederal property Savings: $1 billion

Reduce unnecessary printing costs Savings: $0.4 billion

Other eciencies Savings: $1 billion

otal Savings: $126.75 billion.

4. Added Reorms to Reduce Health Costs and Improve Medical Care

We propose to address health care costs, the single greatest threat to fscal stability and economic growth,

with a bold program that reduces the increase in costs while improving medical quality, personal choice,

and overall economic health.

Implement public option health plan. Immediately address runaway health care costs through the

establishment o a truly robust public option plan; Tis plan should be available to all Americans, and not

limited to those who eligible or health insurance exchanges under current law.

Savings: $35 billion.37

Establish a Medicare Part D public plan to compete with private plans. Te 2003 legislation that

created the Part D drug program explicitly excludes any nongovernmental entity rom oering a

prescription drug plan. We propose (as does Rep. Jan Schakowsky) to allow Medicare to administer this

beneft without the use o private-sector intermediaries.

Savings: $6 billion..38

36 Schakowsky, Rep. Jan.

37 Lewin Group, Cost Impact Analysis for the Health Care for America Proposal, February 2008, http://www.sharedprosperity.org/hcfa/lewin.pdf, 12.

38 Per Schakowsky proposal


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led to a tepid response to the devastation o alling production, ailing banks, and soaring unemployment.

Even Franklin Delano Roosevelt ran or the presidency on a platorm to balance the budget, despite a drop

in the nations gross domestic product o 50 percent and an unemployment rate o 25 percent. But when he

got into oce in 1933, he responded vigorously to the alarming events with new job programs, fnancial

regulations and public investment. Meanwhile, aer making similar contractionary errors, the nations

central bank, the Federal Reserve, also reversed policy.

Te result was that GDP rose rapidly over our years and the unemployment rate dropped by more thanhal. Because the ederal government was relatively small then, however, it could not spend enough to

return national income to its pre-Depression levels quickly. Annual ederal budget defcits never rose

above 6 percent o GDP.

By 1937, the orces o austerity again dominated the public discourse. Te Federal Reserve tightened

monetary policy and the Roosevelt administration cut spending amid new higher taxes. Te result was a

severe economic downturn. Government spending to fnance the war eort created the needed demand

to put America to work again and rise rom the Great Depression once and or all. Te spending also

revitalized and modernized key manuacturing industries. Few economists now disagree with this analysis.

Federal budget defcits soared during World War II, and the total debt required to fnance the war reached

more than 120 percent o GDP by the mid-1940s. Te U.S. did not revert to austerity; rather, governmentexpanded its role. Te economy grew in the 1950s and 1960s at a rate o 4 percent a year on average,

discounted or ination. Tat growth generated better jobs, higher incomes and more tax revenue. Te

level o debt to GDP ell rapidly.

Some economists argue that repeating this perormance may not be possible. But we do not have to. Even

i the U.S. grows at 3 percent a year, a rate widely agreed to as possible, the nations borrowing can be kept

at manageable levels without giving up social benefts or more vigorous public investment.

Crowding Out, Business Uncertainty, And Other False Arguments To Discredit Fiscal Stimulus41

Te central argument advocates o austerity make is that increased government borrowing will result in

higher interest rates and crowd out private borrowing. As one o the new private defcit commissions, the

Peterson-Pew Commission on Budget Reorm puts it, higher rates, can crowd out private investments

and make it more costly to borrow money or everything rom housing to education to business

investments. As higher interest rates choke o investment, productivity growth will rise more slowly (or

even all), and the countrys standard o living will suer.42

But there can only be crowding out when the economy is running at or near its ull potentialthat is,

when labor, equipment, actories, and stores are close to being ully employed. Business will not invest

ully, even when it has the unds, unless it requires more capacity. Te Congressional Budget Oce

estimates the GDP is now 6 percentage points below its potential to produce goods and serviceswhat it

could produce without generating ination.43

Another widespread claim with no credibility is the theory that since government spending must be

paid or eventually, Americans, earing inevitable tax hikes, will not spend but increase their savings to

prepare or the coming taxes. Te government spending will then have no stimulative consequences.

41 Robert Pollin presents a good summary of these issues, Austerity is Not a Solution, Challenge, November-December 2010.

42 Peterson-Pew Commission on Budget Reform, Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt,December, 2009, http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Economic_Mobility/40543%20FR_R1.pdf

43 Dean Baker, The Myth of Expansionary Fiscal Austerity, CEPR, October, 2010, http://www.cepr.net/documents/publications/austerity-myth-2010-10.pdf


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Tis claim, which economists call Ricardian equivalence, is disputed by many economists and has not

been born out empirically. o the contrary, a wide range o studies show that there is a positive impact on

economic growth o such spendingwhat is known as a positive multiplier. I it seems to the casual reader

preposterous that such spending would be precisely oset by savings, it is because it likely is.44

Still another requent concern now raised is that rising budget defcits have made business too uncertain

about economic prospects to invest.45 Business allegedly worries about uture tax increases to pay down

defcits and uncertain new regulations on business. But what drives business confdence is more businessitselthat is, strong sales. Ironically, in the last year, capital investment has strengthened as the economy

recovered. But i growth alters, as it appears likely, confdence and investment will again all together, no

matter how low interest rates are.

Finally, government interest rates are indeed now very low. Right now, three-month reasury bill rates

have been below 0.25 percent or two years. Te rate on fve-year reasury bonds has been trading below

3 percent and occasionally below 2 percent in the same period. Tese low rates leave wide room or

government fnancing now with no ear o crowding out. I and when they turn up, they will do so when

the U.S. economy recovers and nominal GDP rises, meaning increases in tax revenues to cover the higher

interest costs.

Austerity Does Not Work: The Evidence

It is remarkable that so many economists and budget analysts will casually claim that fscal austerity in the

past has resulted in rapid economic growth or many nations. For example, a report rom scholars at the

Brookings Institution and the New America Foundation states, Some believe that fscal discipline would

reduce the rate o economic growth. Again we disagree. Te evidence rom the United States in the 1990s,

as well as rom many European countries in recent decades suggests that implemented prudently, a plan

or fscal restraint could actually promote long-term growth.46 Te Peterson-Pew Commission makes a

similar unqualifed claim, noting that 10 countries have reduced their public debt dramatically as a percent

o GDP. Te principal argument is that cutting spending will reduce interest rates and stimulate investment

and consumer spending.47

A recent careul study by the International Monetary Fund clearly shows, however, that in cases wherefscal austerity was explicitly undertakenthat is, government spending was cutGDP was reduced as a

consequence. As Te Financial imes economics columnist Martin Wol put it, the study demolishes the

arguments or expansionary contractions.48 Cutting spending will slow growth and reduce investment, as

Keynes predicted; alling interest rates may cushion the blow but not reverse the decline. Te IMF ound

that a fscal contraction o 1 percent o GDP would cut GDP itsel by 0.5 percent in each o the next two

years. Whats more, in the current environment, as Wol pointed out, interest rates are so low there will be

no such cushion to soen the blow because they cant all lower.

Why do some studies produce other results? As the IMF and other commentators have noted, they do

not isolate spending cuts but rather ocus on rising or alling defcits and levels o debt, regardless o

the causes. Increases or reductions in defcits can be caused by the business cycle itsel, or example, not

44 See Hemming, Richard, Richard Kell, and Selma Mahfouz. 2002. The Eectiveness of Fiscal Policy in StimulatingEconomic ActivityA Review of the Literature. IMF Working Paper 02/208, http://cartac.org/Userles/le/L-5.1.pdf

45 Niall Ferguson, a historian, expands on uncertainty as the major danger. Todays Keynesians Have Learnt Nothing,Financial Times, July 20, 2010, http://www.ft.com/cms/s/0/270e1a6c-9334-11df-96d5-00144feab49a.html

46 Bill Galston and Maya MacGuineas, The Future is Now: A Balanced Plan to Stabilize Public Debt and PromoteEconomic Growth, October 23, 2010, http://www.brookings.edu/papers/2010/0930_public_debt_galston.aspx

47 Peterson-Pew, op.cit.

48 Martin Wolfe, Britain and America Seek Dierent paths From Disaster, The Financial Times, October 19, 2010,http://www.ft.com/cms/s/0/10dabd3a-dbba-11df-a1df-00144feabdc0.html.


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APPENDIX II: Members of the Citizens Commission on Jobs, Decitsand Americas Economic Future

Robert L. Borosage is the co-director o the Campaign or Americas Future and president o the Institute

or Americas Future. Previously, Borosage ounded and directed the Campaign or New Priorities. In

1988, he was senior issues advisor to the presidential campaign o Rev. Jesse Jackson.

Dean Baker is the co-director o the Center or Economic and Policy Research. He has authored many

books; his latest is aking Economics Seriously. He appears requently on V and radio programs and

writes or his blog, Beat the Press.

Deepak Bhargava is the executive director o the Center or Community Change. He conceived and led

the centers work on immigration reorm, which has resulted in the creation o the Fair Immigration

Reorm Movement (FIRM), and has worked on numerous other issues including aordable housing,

welare and healthcare.

Angela Glover Blackwell is the ounder and president o PolicyLink, a national research and action

institute advancing economic and social equity. She is the co-author o Searching or Uncommon

Common Ground: New Dimensions on Race in America, and serves on the boards o the Childrens

Deense Fund, Levi Strauss and Co., and the Corporation or Enterprise Development.Jef Blum is the executive director o USAction, a grassroots organization active on such issues as

aordable health care, high quality public education, strong environmental policies and air taxation.

Darcy Burner is is the executive director o ProgressiveCongress.org and the Progressive Congress

Action Fund, responsible or strategy and management o the organizations. She ran as a candidate or

Washingtons 8th congressional district in 2006 and 2008.

Larry Cohen is president o the 700,000-member Communications Workers o America. Cohen also

chairs the AFL-CIO Organizing Committee and is the ounder o Jobs with Justice. He was also a ounder

o American Rights at Work.

Teresa Ghilarducci is a labor economist, proessor at Te New School, the Bernard L. and Irene SchwartzChair in economic policy analysis and director o the Schwartz Center or Economic Policy Analysis. She

has authored many books, most recently, When Im Sixty Four: Te Plot Against Pensions and the Plan to

Save Tem.

Heidi Hartmann is the President o the Institute or Womens Policy Research, which she ounded in 1987

and is also a Research Proessor at Te George Washington University. She is Vice-Chair o the National

Council o Womens Organizations and co-editor o the Journal o Women, Politics & Policy.

Mary Kay Henryis President o the Service Employees International Union. She was named one o the

nations op 25 Women in Healthcare or 2009 by Modern Healthcare. Henry began working with the

SEIU in 1979.

Rob Johnson is the executive

Documents

Citizens Commission Report Final