The Scouting Report Web Chat: The U.S. Budget Deficit

While economic policies during the past year have focused on leading the United States from crisis to recovery, longer-term fiscal issues are also becoming more serious. After months of increased spending aimed at pulling the economy out of recession, the soaring U.S. budget deficit has only worsened — projected to total more than $1 trillion for the fiscal year that ends September 30.

Brookings guest scholar and former Member of Congress William Frenzel, along with Politico’s Fred Barbash, answered your questions about the U.S. budget deficit and its link to health care reform and economic growth.

The transcript of this chat follows:

12:29 Fred Barbash-Moderator:  Welcome all to our weekly Brookings-POLITICO live chat. Thanks for participating.

Brookings guest scholar and former Member of Congress William Frenzel is here to answer your questions today. Welcome Bill. Let’s get started.

12:30 Bill Frenzel:  Hi, Fred.   Thanks for having me.

12:30 [Comment From Jason] It seems that the rising cost of health care is a primary culprit in the worsening of the U.S. budget deficit. Will Obama’s proposed health care reforms tackle this problem?

12:31 Bill Frenzel:  It is a primary driver but not the only one.  We spend too much everywhere.   If we spend more on healthcare, we’ll spend more on other things.  The Obama plan isn’t going to do anything other than exacerbate the deficit.

12:31 [Comment From Pekka Mykkänen] Can you explain how the U.S. budget deficit affects and doesn’t affect individual states such as Florida and California that have their own difficulties e.g. when it comes to health care, education and so on?

12:32 Bill Frenzel:  Deficit makes it more difficult for the US government to support state activities, especially at a time when state revenues have fallen as sharply as federal revenues.   The federal cupboard is almost bare.

12:33 [Comment From Daniel Lippman, DC] What do you assess are the prospects for getting financial regulatory reform thru Congress this year? And, the G20 will be talking a lot about rebalancing the world economy with US being less of a consumer and more of a saver. But if you shift that way, couldn’t that hurt economic growth just as we’re getting out of the recession?

12:34 Bill Frenzel:  First, it is *possible* to get regulatory reform this year  but it’s unlikely because it is such a complicated question.   It is even more difficult to get international agreement because of conflicting ideas in the countries.   We’ll get there but it will probably take a couple of years.

12:34 [Comment From Bill in VA] I guess a lot of us don’t understand the problem here–why does it matter what the government spends? Doesn’t the government print the money anyway?

12:35 Bill Frenzel:  Unfortunately, when the government spends more than it takes in, and prints the money that makes up the deficit, the value of the US currency declines, and this becomes an extra tax on everyone, especially the poorest of us.

12:36 [Comment From Joann] Why aren’t more people worried about the expanding deficit?

12:37 Bill Frenzel:  The reason is that Americans have been lulled into a false sense of security by their elected representatives who have lead them to believe there is no tomorrow.   Eventually, the bills have to be paid by our children and grandchildren.   And at that time, the standard of living for all of us will be lowered.   The public is just beginning to get the idea of how bad the problem is.

12:38 [Comment From Eric] Do you think town hall meetings are an appropriate tool for gauging public sentiment on key issues like government spending or health care reform?

12:38 Bill Frenzel:  Town hall meetings are useful for communication between congress members and constituents.  But they are easily subjected to manipulation.   They are a clue to public feeling but not the whole story.

12:38 [Comment From John W. Anthony] Realistically speaking, is there actually a way for the U.S to fix the deficit without losing the position that the U.S has managed to create around the world?

12:40 Bill Frenzel:  The position of the US around the world is beginning to be that of a deadbeat wholly reliant on borrowing from foreigners to meet its daily aspirations.   There is a way to change that American look.   We need to spend less immediately beginning as soon as the recession is over.

12:40 [Comment From Tara] It’s been said that Obama is supposed to cut the deficit in half over the next few years – do you think that will actually happen?

12:41 Bill Frenzel:  His budgets do not indicate that that is going to happen.   Normally, deficits always exceed those promised in presidential budgets, so I would guess the deficit is going to expand rather than contract.

12:41 [Comment From Tara] And futhermore, would it be bad for the ecnoomy if he were to make that happen?

12:43 Bill Frenzel:  I think that it would be good if the economy immediately began to reduce its deficits — even if it had to pass bills that restricted spending in the future and were not effective right now during the recession.   The sooner we enshrine in law some moderation on the part of government spending, the better off we will all be.

12:43 [Comment From Lester] What happened to Republican fiscal discipline? It seems to me like Reagan began a process of lowering taxes without cutting programs and Bush junior did the same thing.

12:44 Bill Frenzel:  Without doing the ancient history of the Reagan adminstration, both parties have had terribly dissappointing records in establishing fiscal discipline.   They may not be equally guilty, but they are both guilty. 

12:44 [Comment From Sally] Again this year Congress failed to pass the bills funding government operations by October 1. What’s the problem here? Are the issues really that difficult? Or is the sprocess broken?

12:46 Bill Frenzel:  The Congress has been pretty well tied-up by healthcare reform.   Because that has been slow and difficult work, other Congressional responsibilities have languished. This is another way of saying Congress has difficulty keeping more than one ball in the air.   It really has little excuse for not passing its appropriation bills.

12:46 [Comment From Tom] What about the argument that as a share of GDP the deficit is really pretty small?

12:48 Bill Frenzel:  When I read this question, I fainted.   Under the Obama budget projections, the ratio of the deficit to the debt held by the public has accelerated tremendously in the last few years and in the next 10 projected years to a point where it is well above our average for the past 50 years.   It is still under what it was in 1945 after the war, but in 5 years — if it were its own counrty — it will be higher than what would be required to be a member of the European Union.   In short, it’s high and rising and it is an unsustainable ratio.

12:49 [Comment From Frank] As I recall you were part of a blue ribbon commission to look at fixing the tax code. Do you have any recommendations on how to close the deficit by bringing in additional revenue?

12:50 Bill Frenzel:  The problem is not that we do not pay enough taxes.   The problem is that we spend too much.   We can add or subtract taxes, raise them or lower them, but over the last 50 years, we have averaged about 18.5 percent of GDP for taxes.   On the other hand we are now spending 11 percent more of GDP than we are willing to tax.   It seems obvious that spending is the problem.

12:50 [Comment From Paula] Obama inherited lots of problems. Do you think he’s going to be able to fix them all?

12:51 Bill Frenzel:  Every president inherits lots of problems.   Most of them fix some of the problems they inherited.   The biggest job is to not make more problems for those who are coming along behind.   Obama will be a success if he doesn’t create many new problems.

12:52 [Comment From Josh] With all of our domestic and international obligations, where do you recommend spending cuts?

12:53 Bill Frenzel:  I recommend spending cuts in every item of the budget except interest and certain foreign treaty obligations.   I believe everything has to be scrutinized including defense, domestic discretionary spending, and entitlements.   Entitlements now make up about 2/3 of our annual expenditures.   If we can’t cut them, we can never balance the budget.

12:53 [Comment From Suzanne] Do you think that all of recent hubub over government spending is just a red herring for killing health care reform? Or is the anger we’re seeing at “tea parties” genuine?

12:53 Bill Frenzel:  No.

12:54 [Comment From Marc] What about Social Security? How big a problem is it and how should we fix it?

12:55 Bill Frenzel:  Social Security is a simple problem compared to healthcare.   It goes into the red in 2016.   It goes totally bust in 2035.   It has to be changed by reducing benefits or by increasing taxes.   I prefer a heavier dose of the former to the latter.

12:55 [Comment From Jay Nargundkar] What will it take to make deficit reduction a priority, both in the eyes of the government, and in the American public?

12:56 Bill Frenzel:  So far the Congress and the President have felt no pressure to reduce the deficit.   They are not going to act until the American public demands action or until we can raise Ross Perot from his political grave.

12:56 [Comment From Yan] Have Americans been saving more during the current recession? Or have bank problems curbed saving?

12:57 Bill Frenzel:  Americans have increased their personal savings and decreased their person expenditures.   However, when our economy returns to normal, most people would bet that American will return to their old-style of high living and low savings.

12:57 [Comment From Matthew (CA)] If we closed corporate tax loopholes wouldn’t that go a long way toward increasing revenue and reducing the defecit?

12:59 Bill Frenzel:  Closing tax loopholes is a slogan that has become the last refuge of scoundrels.   The only one that is worse is that which promises to eliminate fraud, waste and abuse.   If it is desirable to amend the tax code to increase taxes, which some people would call “loopholes,” that can be done but it will have a modest effect on the deficit and on total revenues.   One man’s loophole is another man’s incentive.

12:59 [Comment From Karl Knapstein] What do you think of a flat tax that is equal for all Americans and Corporations?

1:01 Bill Frenzel:  I believe a flat tax is impractical and very expensive — and no country in the world uses it very much to sustain all of its activities.   The flat tax has to be a very high rate of what most people would consider a sales tax and it would have to be administered by the states, who, as in the case of Canada, might not be willing to do so.

1:01 [Comment From Angela] I really think we should cut military spending and increase education spending so schools have the basic necessities. what do you think?

1:03 Bill Frenzel:  I agree that we can spend less on the military.   I have already said that we can spend less on everything.   However, I believe that the cost of education is principally the responsibility of the states.   The US supports Pell grants, college loans, ETC, and I think those are sufficient at this time.

1:04 [Comment From Frank] You’ve mentioned entitlements a couple of times here, as well as Social Security and Medicare. Can you offer specifics of where we can reduce spending there?

1:05 Bill Frenzel:  Social Security, defense, and domestioc discretionary spending are relatively simple. But Medicare is real rocket science! There are a number of ideas on how to bend down the spending curves, but all of them are not totally supported and most are highly criticized. The only one that I have full confidence in reducing cost is to curb medical malpractice suits.

1:06 [Comment From Lester] Is there anything we can to stop freeloaders (like Alaska) from using earmarks to build their own infrastructure – like the Bridge to Nowhere?

1:07 Bill Frenzel:  The way you can do that is to make sure you tell your elected Congress-person neither to ask for or vote for earmarked public works or other private use appropriations. There is a culture in congress that says, I will vote for your boondoggle if you vote for mine. Don’t let any of them get away with any of those kind of actions!

1:08 [Comment From Sally]  I’m with Matthew. I think corporations get too many tax breaks, and have an incentive to move their operations overseas to avoid US taxes. Surely there’s a way to fix that.

1:09 Bill Frenzel:  The Congress and the Treasury work very hard to try to prevent incentives from creeping in to the tax code that encourage companies to move overseas. However, American companies have to be competitive with foreign countries and sometimes that means trying to equalize our tax code with those of our largest competitors. If you have some great ideas, send them on to your Congress-person or Treasury.

1:10 [Comment From Travis] I understand that people want to pay less in taxes. But i’m really hoping that Obama ends tax cuts – it just doesn’t make sense when the government obviously needs money. Tough political move, but what do youthink?

1:11 Bill Frenzel:  I believe that America is not under-taxed but rather it is over-spent. However, I would not object to a deficit-reduction solution that included tax increases, but I would try to be very careful that they were not applied in areas that would make us uncompetitive or give us disincentives to save.

1:11 [Comment From Annie] Are there any other countries that have an extreme deficit like us?

1:12 Bill Frenzel:  Yes.   Japan has a higher deficit in proportion to GDP than we do and a couple of countries in the EU, including Italy and Greece do, too.   Most developed countries have lower ratios than we do.

1:12 [Comment From Xi] Do you think China will ever call us out on our debt? What would happen if it did?

1:14 Bill Frenzel:  China is already complaining about our financing needs and has indicated that it will look elsewhere to invest some of its savings.   Right now, they are still saving enough so that they are obliged to buy our federal debt, but in the future they may have other places to put their money.   At that point, interest rates rise; the dollar drops; inflation soars and we all go underground.

1:15 [Comment From Guest] The world is in a deflationary spiral. As long as that continues, is not printing money a good thing since the orthodox fear is that printing money debases the currency?

1:16 Bill Frenzel:  Debasing the currency is never a good policy.   But the US seems to be pursuing a weak dollar policy now (but does not admit it). But the dollar is at a low ebb compared to the world’s currencies.

1:16 [Comment From Guest] Is not the biggest freelolader the DC Metro area which sucks taxes from the country and spends it in the DC area?

1:18 Bill Frenzel:  I do not think DC is the major culprit.   Compared to Alaska, West Virginia and Mississippi, it is a minor sinner in terms of dollar per capita.   Remember that the federal government occupies some very valuable property non-tax land, and much of the federal payments to the District could simply be considered federal property taxes.

1:18 [Comment From Annie] Interesting. How do these countries deal with their debt?

1:20 Bill Frenzel:  I would rather discuss the countries who have delt with their debt successfully.   And I  would prefer not to emulate Italy, Greece and Japan.   Finland, Australia and New Zealand and others that I cant remember now have done a good job, usually by tightening their belts and cutting expenditures.   They are developed countries with relatively high standards of living who found their citizens didn’t need to be on the dole as much as they had previously thought.

1:20 [Comment From Lee (MMBJack)] How about a reverse income tax to replace all social safety net entitlements other than Social Security? Everybody American entitled to food, shelter, medical care the basics of life?

1:22 Bill Frenzel:  Forty years ago, I supported the negative income tax in a rudimentary form when Richard Nixon proposed it.   Since then, there has been too much water over the dam: reform of the welfare system, refundable tax credits to the those who pay no taxes, and a plethora of food stamps, housing vouchers, etc.   I don’t believe that a negative income tax is now appropriate in the light of what has happened over the last 40 years.

1:22 [Comment From J.Paul.D] Can you explain any ties between our debt and reliance on foreign energy sources?

1:24 Bill Frenzel:  Yes I can.   America imports the majority of its energy supplies.   Energy is expensive.   We expend about 1/4 of the energy in the whole world.   As energy higas, we have a big bill, and we’ve shown no inclination to engage in a lot of savings techniques.   The result is we will continue to pay high prices for energy and we will continue to have a massive trade deficit.

1:25 [Comment From Lester] Should we raise the age at which people become elligible to Social Security and Medicare?

1:25 Bill Frenzel:  Yes.

1:25 [Comment From Guest] China manipulates its exchange rate for trading advantage. One way to keep your exchange rate down is to buy the currency of your trading partner. China bought those T bills to keep their exchange rates down and if they move out of those T bills they lose their trading advantage. Given all that, are we not excessively worried about China’s feelings when we consider the possibility of their withdrawal from the T-Bill market?

1:27 Bill Frenzel:  That’s a complicated question.   China does manipulate the value of its currency and we wish it would not.   So far, they have been willing to let the Renmimbi raise a little bit but they have a long way to go.   Every adminstration works this problem as hard as it can.

1:27 [Comment From Ron]  Not on today’s topic, but do you think Nixon would be considered liberal by today’s standard? Sometimes I look back at his time in office and am surprised at how progressive he could be sometimes.

1:28 Bill Frenzel:  I agree.   Also he was one of the smartest presidents we ever had.   Unfortunately, there were some character flaws.

1:28 [Comment From Brian] Given the other issues on his plate, how important is it for President Obama to lead on the budget deficit? I always thought Congress had the power of the purse. Couldn’t they solve this themselves with pay-as-you-go rules and some Medicare reforms?

1:30 Bill Frenzel:  Congress does have the power of the purse but it invariably needs presidential leadership to do its job property.   I  believe that solving the deficit problem is so far ahead of all the other problems that confront us, that it ought to be the #1 priority of this president or any other.   Reducing the deficit will take cooperation, and courage, factors totally absent from the political scene today.

1:30 Fred Barbash-Moderator:  Thank you Bill Frenzel. Your knowledge on this is breathtaking and thanks for sharing it with us today. And thanks as well to all of our readers, with apolgies for the questions we could not get to.

So long for now. Back next week.

1:30 Bill Frenzel:  Thank you for having me.   I enjoyed it.