The American economy is in great shape in many ways. Riding the cusp of an expansion that started in 2009, the stock market is up, consumer confidence is booming, and unemployment has fallen to historically low levels. But dig beneath the surface and trouble looms. America faces two distinct but related challenges that policymakers must address in the coming years if they hope to provide a brighter future for the nation and its people. The first challenge is rising government debt. Federal debt is already higher as a share of the economy than at any time in our history, except for a few years around World War II, when a massive military buildup required immense borrowing. Under current policies, debt will rise steadily to unprecedented levels over the next decade and to unsustainable levels over the next 30 years and beyond. Debt isn’t always bad—we’ve had good reasons to borrow in the past to fight recessions and finance investments. Nevertheless, if we don’t rein in the growing debt, it will slowly but surely make it harder to grow our economy, boost our living standards, respond to wars or recessions, address social needs, and maintain our role as a global leader.
The increase in debt will be driven mainly by an aging population and rising health care costs that boost federal spending on Social Security, Medicare (for the elderly), and Medicaid (for some of the poor and elderly). In addition, tax revenues are not expected to grow very fast. Rising red ink is often described as just a spending problem, but it isn’t intrinsically a spending problem or a tax problem, any more than one side of the scissors does the cutting. It’s the imbalance between the two that creates rising debt. Addressing the debt challenge will require both slowing the spending trajectory and raising taxes. The second challenge is changing the way we tax and spend. The nation has increasingly split into a fractured society with groups separated by disparities in income, education, and opportunity. This growing divide is not only inequitable, it is outright wasteful, reducing opportunities for tens of millions of Americans. To make Americans more productive and expand opportunity, we need more public investment—in education, health, childcare, nutrition, public infrastructure, and scientific research. But public investments in these areas (other than health care) are slated to shrink as a share of the economy to their lowest levels in more than half a century. We need to improve the tax system and raise revenues to finance public investment, encourage growth, and distribute tax burdens fairly both within and across generations. What matters is not just the debt, but how we raise and spend the money. How and when we address these twin challenges will help determine the future we build for ourselves, our children, and future generations. How can we address our rising debt rather than bury ourselves in red ink? How can we invest wisely so our economy does not corrode? How can we refashion taxes and spending to best support opportunity and prosperity? In Fiscal Therapy: Curing America’s Debt Addiction and Investing in the Future, I explore these issues and offer a plan to remedy the problems in ways that would help us build a stronger, fairer economy. The proposals have three core themes:
- Control entitlement spending: The proposals would contain spending growth in Social Security, Medicare, and Medicaid while also preserving and enhancing the programs’ anti-poverty and social insurance roles.
- Invest in the future: By stipulating major new public investment in human and physical capital, the proposals would boost the potential for Americans to lead productive lives.
- Raise and reform taxes: The proposals would raise adequate revenue to pay for government spending in a fair and efficient manner.
If enacted, the plan would put debt on a stable course and would boost economic growth in several ways. By controlling the debt, it would release huge amounts of capital for private investment. Corporate tax changes would boost business investment. New resources for children, education, and the safety net would increase human capital and make workers more productive. Additional public infrastructure and research and development would generate efficiency and innovation. By helping the poor and taxing the rich, the proposals would reduce inequality, increase opportunity, raise economic mobility, and lift living standards for American households. The proposals are realistic and administratively feasible. They largely build off existing programs that have already proven achievable in the United States or around the world. The proposals and the underlying analysis rest on five guideposts: the primary role of evidence and facts; the role of values (I try to be explicit where I am invoking values); the need for both the private sector and the government to be part of the solution; the importance of considering taxes and spending jointly; and the need to focus on realistic solutions, rather than utopian visions. Through our tax and spending policies, we can expand our economy or let it wither; make society more equal, or less; expand opportunity or continue to let tens of millions of struggling families fend for themselves. We do not have to kill government in order to save it. The proposals in Fiscal Therapy offer a way to act responsibly, pay for the government that people want, and shape that government and the economy in ways that better serve us all. Below are 12 facts that inspire the analysis and proposals in Fiscal Therapy and provide guidance for framing the issues presented in the book. The first three set the stage; the rest address particular policy areas.
For details on revenue and spending calculations in Fiscal Therapy, see https://www.brookings.edu/FiscalTherapyCalculations.