By devoting a significant amount of time to deficits and debt in his State of the Union address Tuesday night, President Obama acknowledged that the state of the union is tied closely to the state of the debt and those who deny that the debt is an issue are a distinct minority.
Before discussing his ideas for promoting economic growth for the middle class, the President acknowledged that dealing with the federal budget deficit is a priority.
Our work must begin by making some basic decisions about our budget -- decisions that will have a huge impact on the strength of our recovery.
The President is absolutely right that the economy and the deficit are closely linked. A recent Congressional Budget Office (CBO) report makes it clear that abrupt and senseless deficit reduction like the sequester will harm the economy in the short term while a smarter approach that is more phased in will actually improve economic growth in the longer term. In fact, a companion study to the CBO report found that an additional $2.3 trillion of deficit reduction would not only put debt on a downward path toward 68 percent of GDP in 2023, but would also increase the size of the economy by almost 1 percent in that year. Read a summary and analysis of the report here. Putting in place a long-term deficit reduction plan now could also boost the economy in the short term by reassuring markets that we have our debt under control.
President Obama renewed his call to replace the sequester with a more balanced approach. He specifically mentioned entitlement and tax reform, acknowledging the need to reform entitlements to make their finances stronger for future generations.
Yes, the biggest driver of our long-term debt is the rising cost of health care for an aging population. And those of us who care deeply about programs like Medicare must embrace the need for modest reforms -- otherwise, our retirement programs will crowd out the investments we need for our children, and jeopardize the promise of a secure retirement for future generations.
He also called for fundamental tax reform as a part of a comprehensive approach to reducing the deficit.
To hit the rest of our deficit reduction target, we should do what leaders in both parties have already suggested, and save hundreds of billions of dollars by getting rid of tax loopholes and deductions for the well-off and the well-connected.
Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit. We can get this done. The American people deserve a tax code that helps small businesses spend less time filling out complicated forms, and more time expanding and hiring -- a tax code that ensures billionaires with high-powered accountants can’t work the system and pay a lower rate than their hardworking secretaries; a tax code that lowers incentives to move jobs overseas, and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America.
The Simpson-Bowles plan included a tax reform proposal along these lines that would simplify the tax code, broaden the tax base and lower the deficit and tax rates. It would accomplish these things by eliminating or limiting the tax deductions, credits and other loopholes known as tax expenditures because they are essentially spending through the tax code.
While the President deserves credit for prominently featuring the deficit in his speech, he aimed too low in how much more deficit reduction will be required. He claims that an additional $1.5 trillion in savings will be sufficient because it will stabilize the debt as a share of the economy for the next decade and will result in a total of $4 trillion in deficit reduction when combined with savings already enacted, which is the number originally specified by Bowles-Simpson and other bipartisan plans. However, because of the passage of time, the debt has gotten worse and the Bowles-Simpson target is now closer to $6 trillion. Further, an additional $1.5 trillion would only temporarily arrest the growth of the debt; it would start to rise again at the end of the decade because of the retirement of the baby boomers.
The Committee for a Responsible Federal Budget (CRFB) estimates that an additional $2.4 trillion in deficit reduction is the minimum amount necessary to put the debt as a share of GDP on a downward path over the long term. Read a summary of the analysis here. Several media outlets picked up on this in their post-address fact checking.
In addition, the President made the point that deficit reduction by itself is not a strategy for economic recovery.
Most Americans -- Democrats, Republicans, and independents -- understand that we can’t just cut our way to prosperity. They know that broad-based economic growth requires a balanced approach to deficit reduction, with spending cuts and revenue, and with everybody doing their fair share. And that’s the approach I offer tonight.
Now, most of us agree that a plan to reduce the deficit must be part of our agenda. But let’s be clear, deficit reduction alone is not an economic plan.
He is correct, but a smart, long-term approach to reducing the deficit should definitely be a part of an economic plan. On Wednesday Fix the Debt offered criteria for serious deficit reduction.
It was also encouraging to hear the President stress that all the proposals to boost the economy he laid out in the speech would be fully paid for and would not add to the deficit, but he offered no ideas on how he would pay for them.
The economy and federal budget deficit are also closely tied in the minds of voters. They were the top two issues Americans wanted to hear addressed in the State of the Union, according to a Quinnipiac University poll.
It is time for debt action, not debt denial.