CONSTITUENT HELP

ISSUES

Tax reform is a major part of any program of fiscal reform. It will contribute to a restoration of American competitiveness and the vibrant economy that goes with it.

The fiscal success we achieved in the early 1990’s was essential to containing budgets that seemed inherently prone to excess. But the great irony of those years was that the surpluses that emerged from 1998 to 2001, partly as a consequence of that success, thoroughly undermined fiscal prudence.

We have now come full circle to a point where, as much as I wish it were otherwise, there is no credible scenario of addressing our current fiscal problems without inflicting economic pain. We have been procrastinating far too long in coming to grips with the retirement of the baby-boomer generation, a fiscal problem that has been visible for decades.

By 2006, with chronic surpluses already a distant memory, the Medicare Trustees indicated, according to calculations by the Council of Economic Advisors, that: The Medicare program does not have enough projected revenue to cover projected future spending . . . A reduction in Medicare Part A expenditures by 51 percent would be necessary to make the Medicare Trust Fund solvent.

But rather than repairing that huge shortfall, and a lesser one in Social Security, we expanded entitlements still further, without a matching source of revenue.

Our major problem is not only that spending has been rising rapidly, but that it has been mainly in the form of entitlements, rather than of discretionary outlays such as war spending or bridge building that cease when the activity comes to an end. Entitlements, however, once bestowed, are very difficult to rescind.

The growth of our economy in the years ahead is bound to slow. Our civilian labor force, short of a major change in immigration, should parallel a slowing in the growth of the working age population, most of whom are already born. Professor Gordon of Northwestern University has concluded that his most recent twenty year forecast of the growth rate of per capita real GDP “represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington.” In the years ahead, increasing entitlements will be pressing against shrinking economic growth.

My preference going forward, as I have noted often, is something akin to the budget recommendations of Paul Ryan, the Chairman of the House Budget Committee. I regret, however, for now at least, that Ryan’s budget lacks the votes for passage. And, as European current experience underscores, delays in implementing policy reform can be destabilizing.

Of the politically feasible budget proposals on the table, that proffered by the Bowles-Simpson National Commission on Fiscal Responsibility and Reform, appears the most substantive. What impressed me most of Bowles-Simpson is that it addresses tax expenditures. Cuts in tax expenditures (mostly subsidies) can be alternatively structured, and viewed, as cuts in outlays rather than a reduction in revenues. Subsidies of whatever stripe, distort the optimum functioning of markets, and ultimately, the standard of living of society as whole.

I do not know whether a U.S. budget crisis is immediately on the horizon or is years off.

What I do know is that if we presume that we have a year or two before starting serious long-term restraint, and we turn out to be wrong in that optimism, the impact on financial markets could be devastating. If we are wrong in being overly fiscally cautious in the year ahead, that is a problem that is readily solvable.