Event Summary: Restoring Fiscal Sanity 2005: Meeting the Long-Run Challenge

April 14, 2005

Overcoming Political Gridlock Key to Addressing Growing Budget Deficits
Panel on New Brookings Book Focuses on Politics, Health-Care Costs, Tax Reform

A Brookings Institution forum on April 14, 2005, to launch the organization’s new book, Restoring Fiscal Sanity: Meeting the Long-Run Challenge, highlighted the book’s key message — that growing federal budget deficits are unsustainable and pose long-term dangers to the U.S. economy. It focused on the key issues of breaking the political logjam in Washington, containing soaring healthcare costs, and reforming the nation’s tax system.

The United States faces stark choices of either making draconian cuts in government spending to maintain our commitments to the elderly under Medicare, Social Security, and Medicaid; dramatically reforming these entitlement programs; and/or significantly raising taxes, according to Alice Rivlin, Brookings senior fellow and director of the greater Washington research program, and Isabel Sawhill, Brookings vice president and director of economic studies.

In an overview panel, Rivlin noted that, while 42% of federal spending now goes to the three large entitlement programs, on the present trajectory, these programs will consume all federal revenues by 2030. Interest on the debt will soar and continued overseas borrowing may not be sustainable for the long term. Even though a crisis scenario of sharply higher interest rates, a plummeting dollar, and a deep recession may not materialize, continued high budget deficits reduce national savings and growth, and transfer huge cost burdens onto our children and grandchildren. Sawhill described several options, ranging from a “smaller government” scenario in which benefits for the elderly would be sharply reduced, defense spending would be cut in real dollars, and many government programs would be eliminated, to a “larger government” scenario that would allow about 1.5% of GDP to be spent on new initiatives particularly for children, health care, and overseas development assistance, but would require higher taxes.

Former Sen. John B. Breaux and ex-Rep. William E. Frenzel focused on the difficulties of achieving political compromise and taking action on policies to alleviate federal budget deficits. Frenzel, who participates on a tax-reform commission that Breaux co-chairs, was pessimistic given politicians’ and constituents’ desire for more spending and lower taxes, the fact that more than 95% of House Members are in safe districts, and the growing tendency of political leaders to simply attack proposals rather than make counter-proposals or seek constructive compromises. Breaux also emphasized his concern about the lack of dialogue between the two parties and the imperative of acting sooner rather than later on health care, Social Security, and the overall deficit problem. More optimistically, Frenzel cited Herb Stein’s maxim, “That which cannot be continued will someday be stopped.”

The importance of not delaying action, containing rising health-care costs, addressing the need for sufficient federal revenues, and facilitating political compromise and action was the focus of a third panel featuring five of the new book’s authors. Peter R. Orszag, Brookings senior fellow, emphasized four points: We need to take action soon to make changes less jarring; we need to raise national savings through such means as improved IRA and 401(k) plans; we need to protect vulnerable populations by making benefits more progressive; and we need to avoid the palliative of budget gimmicks. Health care — whose costs are projected to rise from one-sixth to one-third of GDP over the next 35 years — threaten our nation’s fiscal solvency, according to Henry Aaron, Brookings senior fellow. Various efforts to contain health-care costs — reducing inappropriate care, means-testing Medicare benefits, raising the Medicare eligibility age, and better assessing the effectiveness of different health-care technologies — were emphasized by Jack Meyer, Brookings visiting fellow, while Aaron added that we need to better target medical services and ensure care for all Americans.

Noting that tax levels are ultimately set by spending decisions, C. Eugene Steuerle, an Urban Institute senior fellow, called for eliminating tax subsidies that could save 2% of GDP, assessing the adequacy of current tax rates, and considering the introduction of a value-added tax (VAT) to address current revenue shortfalls. Ultimately, as Breaux and Frenzel argued, the political gridlock can only be broken if there is a perceived external threat or public pressure, strong presidential leadership, and bipartisanship, according to Ron Haskins, Brookings senior fellow. Haskins concluded by quoting C. Everett Koop, who once said, “We’re now in crisis, but there’s no way we’ll get anywhere until we’re in chaos.”