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Home / Guest Commentary / Ezra Klein: 15 budget ideas that are better than sequester plan
Let’s get something straight: Sequestration doesn’t prove that the government is broken or that it can’t get anything done. If anything, it proves the opposite. This is the American government working. Compromising, even.

Ezra Klein: 15 budget ideas that are better than sequester plan

Let’s get something straight: Sequestration doesn’t prove that the government is broken or that it can’t get anything done. If anything, it proves the opposite. This is the American government working. Compromising, even.

In the summer of 2011, both parties came together and agreed that they wanted to reduce the deficit. If they couldn’t compromise on a more appealing policy, then they would use sequestration, which was itself a compromise. The plan called for deep, across-the-board cuts in defense and discretionary domestic spending, with no consideration given to merit. The two parties could, at any moment, choose to end sequestration by passing a one-sentence law repealing it. That they’re not passing that law or some alternative is a choice — evidence that the parties prefer sequestration to any other option.

What sequestration does prove is that the American government is dumb. There have been three major deficit-reduction packages in the past three years. The first passed in 2011 and set limits on discretionary spending over the next decade. Next came the tax increases in January’s fiscal-cliff deal, by which part of the tax code reverted to its state prior to the administration of President George W. Bush. Now we have sequestration, with automatic, across-the-board cuts.

The total deficit reduction in these three policies is well over $3 trillion, which gets close to stabilizing our debt-to-gross domestic product ratio for the next decade (though not thereafter). What all these policies have in common is that they’re brain-dead ways to reduce the deficit.

Better ways

Michael Greenstone, an economist at the Massachusetts Institute of Technology and director of the Hamilton Project, anticipated that. So about six months ago he approached 15 experts and asked them for their best policy proposals, which had to meet two conditions. First, they had to reduce the budget deficit. Second, they had to have “broader positive effects,” such as helping the economy, increasing government efficiency, slowing global warming — that sort of thing. “The point is we can do good for the budget and do good for the longer-run American economy,” Greenstone said.

The result is “15 Ways to Rethink the Federal Budget,” a 110-page guidebook for the undead on how to reduce the deficit.

Perhaps the best and most obvious idea is a carbon tax. Adele Morris, policy director for the Climate and Energy Economics Project at the Brookings Institution, proposes a $16- a-ton carbon tax that would lower the corporate tax rate, include a rebate to low-income households and cut the deficit by about $200 billion over 10 years — all while helping fight global warming, which is a far greater threat than the deficit.

A much milder alternative comes from Harvard University’s Joseph Aldy. He proposes cutting fossil fuel subsidies out of the tax code. That would raise more than $40 billion over the next decade while slightly reducing greenhouse-gas emissions.

Dana Goldman, of the University of Southern California, and Harvard’s Michael Chernew have a plan to move Medicare to a “bundled payment” system, which would pay medical providers a lump sum for care rather than a per-service fee. There are many devils lurking in details here — particularly how you measure and share information about the quality of care — but if managed well, the changeover could save $100 billion while giving providers a much-needed reason to begin managing disease and disability in a coordinated way.

Long view

Speaking of disability, Harvard’s Jeffrey Liebman and the Office of Management and Budget’s Jack Smalligan propose three projects to test ways to reconfigure the disability system to help injured workers get back to work sooner and in better health. The ideas wouldn’t save much in the next decade — $10 billion to $15 billion, the authors estimate — but if they produced a better disability system, the long-term dividends could be huge for both workers and the buget.

Diane Lim, the chief economist at Pew Charitable Trusts, proposes converting the various deductions in the tax code to 15 percent, nonrefundable tax credits. The resulting tax code would be simpler and much more progressive. Oh, and it would raise $2.7 trillion, much of which we could use to lower marginal tax rates.
Pia Orrenius and Madeline Zavodny, of the American Enterprise Institute, and Giovanni Peri, of the University of California at Davis, have an innovative proposal to auction off temporary work visas, which would help allocate them more efficiently while raising $7 billion to $12 billion for the federal government. If the system worked, it would also provide valuable information — through rising or falling visa prices at auction — about the demand for foreign workers and thus how to set the parameters of our immigration system.

The point isn’t that each and every one of the Hamilton Project’s ideas is great. It’s that each is an attempt to formulate intelligent policy that will make the country better as it makes the deficit smaller. That’s a far cry from sequestration — and the last few years of policy making generally — in which Washington appears to have resigned itself to deficit reduction through almost exclusively bad, dumb ideas.

Ezra Klein is a Bloomberg View columnist. The opinions expressed are his own.

About Ezra Klein

3 comments

  1. Why is it no one questions the need for deficit reduction? We’ve been led to believe all sorts of disastrous things will happen if the Federal Government fails to reduce the deficit.
    Professor L. Randall Wray writes, “With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since.

    Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.

    The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction.

    Some claim that if the government continues to run deficits, some day the dollar’s value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today’s value. If you have dollars you don’t want, please send them to me.

    Claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, tell me why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?”

    Roosevelt Institute Braintruster L. Randall Wray is Professor of Economics at the University of Missouri-Kansas City.

  2. Of course, in the real world the Republicans have already stone walled some of these proposals and would obstruct and prevent the passage of any of them. How smart is it to propose things which don’t have a snowball’s chance in the Gobi Desert during global warming?

  3. What’s dumb is trying to balance the budget with radical spending cuts during what I still consider a deep recession with millions out of work or working in part time and/or extremely low pay jobs. The best way to ease out of deficits under current conditions is togrow out of it with economic growth through getting America back to work at jobs which pay a living wage. If that means that Jamie Dimon, Lloyd Blankfein and their ilk have to pay themselves $8 million a year instead of $20 million I can live with that. Contrary to insider Washington received wisdom our deficits are not a serious immediate problem and they’re not the result of wild spending by the Obama Administration. It’s mostly the result of the Great Recession, caused by the reckless gambling with other people’s money by our American plutocrats, which reduced tax receipts and required additional support payments for things like unemployment compensation. Once again, the truly smart way to attack our budget deficits is to get America back to work, but now I’m getting as unrealistic as Klein since the Republicans will block those efforts,too.

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