September 20, 2014

Washington Budget Report: June 14, 2010

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Debates Over Deficits and the Economy Often Confuse Short-Term and Long-Term Goals

Deficits remain a big focus in Washington as President Obama, Federal Reserve Chairman Ben Bernanke and members of Congress in both parties have struggled to find the right balance between nurturing the economic recovery and demonstrating fiscal responsibility.

But timing is everything. As explained in a new blog post by Diane Lim Rogers, chief economist for The Concord Coalition, it is possible to argue for effective stimulus measures in the short term while calling for greater fiscal responsibility in the long term. “Fiscal hawks,” she says, “can walk and chew gum at the same time.”

Critics from both extremes, she argues, “basically believe that achieving both goals (short-term stimulus and longer-term fiscal responsibility) isn’t possible, or that greater success at one means failure with the other. So they only push for their favored goal, and with their hyper-partisan rhetoric they dismiss the other goal as stupid and evil.” Amid all this partisanship, she adds, “we risk screwing up on both goals.”

The balance between short-term and long-term priorities was also a central theme in Bernanke’s appearance before the House Budget Committee last week. While he warned that the federal budget appears to be on “an unsustainable path,” the Fed chairman also cautioned that “this very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support.”

Reports From Congressional Budget Office Shed Light on How Well Some Economic Stimulus Policies Work

The Obama administration sent a letter to Congress over the weekend requesting $50 billion in spending to support the economy. This request will likely affect negotiations in the Senate and House over legislation extending some current spending policies and tax cuts.

With so much discussion tying current legislation with claims of boosting the economy, it makes sense to go back and look at the most recent CBO analysis of the types of policies that are most effective as stimulus, as well as review what the CBO has found about the success of the large stimulus package passed early last year.

The CBO found that the 2009 stimulus clearly improved economic growth and employment levels from where they otherwise would have been, even as it added to the long-term debt. However, an important question is whether that trade-off was made for policies the CBO considered most effective. On that, it is clear the bill could have been designed better.

As policymakers debate how much deficit financing is appropriate for short-term economic relief going forward, they must choose carefully, rather than simply enacting or extending current policies that won't have the biggest bang-for-the-buck in positive economic effects short and long-term.

If Successful, New Efficiency Efforts Would Be Steps in the Right Direction

If the Obama administration follows through on its newly announced effort to identify and weed out unproductive federal programs, it could build public confidence and support for more sweeping fiscal reforms in the future.

The White House has asked federal agencies to submit lists of the programs that are “least critical” to their missions and total at least 5 percent of their budgets. Administration officials say they may not just cut back on these programs but eliminate them.

This is one of several recent attempts by the administration to respond to rising public concern about high deficits. Even if these newly announced efficiency efforts succeed, the savings would amount to only a fraction of the money the government will need to address massive projected deficits. But as Steve Winn, Concord’s communications director, notes in a blog posting, these efforts would at least be moving in the right direction. So the administration needs to follow through on them as well as prepare for the heavier lifting to come.

Value-Added Tax Has Potential to Help With Fiscal Challenges But Critics See Many Drawbacks

While advocates of a federal value-added tax (VAT) point to key benefits for a country struggling with big deficits, the idea has drawn strong opposition from both ends of the political spectrum.

A value-added tax could efficiently raise a large amount of money. Although it has some similarities to a retail sales tax, a VAT collects revenue throughout the production process, leaving fewer opportunities for tax evasion. A VAT also gives people an incentive to save and invest, boosting long-term economic growth.

But consumption-based taxes like the VAT can be regressive – claiming a larger percentage of low incomes than high incomes. That worries liberals and could lead lawmakers to exempt goods and services they deem "necessities." Once Congress begins allowing such exemptions, special-interest groups would push lawmakers for more exemptions, which is one of the major problems with the current income tax system.

Many conservatives oppose the suggestion that a VAT could be used to raise additional federal revenue rather than just replace part of the current revenue from other taxes.

Finally, a national value-added tax would probably face opposition from states and local governments that rely on consumption taxes as their major source of revenue.

While The Concord Coalition has not taken a position on a VAT, it believes that it should be on the table for consideration.