Tax Reform and Fiscal Discipline Needed for Economic Recovery

June 5, 2009

As the administration continues to wrangle with the floundering economy, Federal Reserve Chairman Ben Bernanke has advised that the growing budget deficits have to be cut. Economic Studies director William Gale agrees saying there needs to be a more comprehensive approach to stabilizing the economy.


“Bernanke basically went to the Hill to talk about fiscal policy. That’s something that Alan Greenspan used to do and that Bernanke said he wasn’t going to do. He did it in the middle of a recession where he and all other informed policy-makers know that we need stimulus. Yet, he went and said that ‘we need to impose fiscal discipline.’ I think that message is right. The question is – why did he say it publicly now? And, I interpret that as a very strong statement that the administration does not have a sustainable medium-term or long-term fiscal plan. That, in itself, is becoming a drag on the economy.”

“… In the campaign, Obama very much opposed restricting or reducing the tax subsidy for employer-provided health insurance. What the administration is signaling now is that they would be willing to consider that if someone else proposed it. They aren’t proposing it, but they are willing to consider it and have it on the table if someone else proposes it. That, obviously, is sort of a back-door way of letting the proposal in and I think it’s a proposal that has to be considered. At the very least, we need to curtail and restructure the exclusion. It would be better to replace it with something that is more progressive, less expensive and more focused on getting insurance as opposed to subsidizing ever-larger insurance amounts.”

“… The states are in increasingly dire fiscal situations and it is probably going to get worse before it gets better. That has an important effect on people’s lives. States provide a lot of healthcare, a lot of education, and when there are cuts at the state level it really impacts people’s lives. But the states have limited methods of raising revenue, in part, because they have to compete against all the states around them – so they can’t suddenly just jack up all their rates. All of this, in order of magnitude, is worse in California than anywhere else. We’re not going to resolve this situation with soda taxes or boosting cigarette taxes. We need big structural reforms on the spending side and on the tax side.”