David R. Henderson  

WSJ's "Roll Your Own" Deficit Reduction

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The Wall Street Journal has on its site a list of options for reducing the projected $1-trillion-plus federal budget deficit for 2020. It's a list of cuts in discretionary spending, cuts in so-called "entitlement" spending, and increases in taxes. I don't know if you can get there without a subscription to the WSJ, but here's the link.

What I found, and I noticed this with a similar New York Times link two years ago, is how easy it is to get the deficit down to "only" a few hundred billion with no major tax increases. I say "easy" meaning, not that it's easy politically, but that one can do it without causing major hardship and disruption.

Why did I "settle" for a few hundred billion rather than a zero deficit? Three reasons. First, because I wanted to avoid major tax increases. Second, if you get the budget deficit down to under $300 billion, then even a modest inflation rate of 2% in 2020 will eat away the existing federal government debt so that the net increase in real debt is zero or negative.

The third reason that I "settled," though, was that the Wall Street Journal rigged it that way by severely limiting the options. I was hoping to get a chance to bring home all the U.S. troops from around the world but it didn't give that option. I wanted to end the absurdly expensive Joint Strike Fighter airplane program: again, according to the Journal, no can do. I was hoping to get rid of the Department of Energy and the Department of Education and Homeland Security, but, again, it didn't give that option. I wanted to cut the State Department in half (hey, I felt modest this morning and so I didn't go further.) Again, it didn't give that option.

Note that the WSJ categorizes "increasing passenger fees for airport security and air traffic control" as a budget cut. Not quite. It's a tax increase.

Try your hand at it and see how you do. Report back in the comments if you care to.

HT to Greg Mankiw.


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CATEGORIES: Fiscal Policy , Taxation



COMMENTS (13 to date)
Kevin writes:

I achieved similar results. My impression is that, limiting yourself to moderate, popular options makes closing the deficit functionally impossible.

Dave T writes:

I agree with Kevin's observation -- but what I don't understand is why there isn't more cuts on the table.

We are spending over $80 billion a year on the farm bill (which is currently expired, awaiting the House to renew) -- why don't just eliminate that?

I would love to see someone put a full detailed list of ALL THE THINGS the federal government does -- and lets go through it LINE BY PAINFUL LINE and choose what to eliminate, or what to cut and by what percent.

Mike W writes:

Here's a longer list of spending and revenue options from the CBO:

http://www.cbo.gov/publication/22043

David R. Henderson writes:

@Dave T,
Good point.
@Mike W,
Thanks. How does this one compare to the CBO study that the NY Times references (if you have time to answer)? It's here.

Daublin writes:

I found it pretty easy to find collections of spending cuts that, as a total package, I expect would be acceptable to the broad American public. Like David, I found the main changes had to be on the spending side.

The claim that such packages are unpopular is not quite right. I believe that most of the American public--college kids being an exception--perfectly understand budgets, and will willingly accept an overall reduction so long as it appears to have been spread around to spending on the whole.

What is impossible is getting our dysfunctional government to follow through with one of these plans. One of the most basic functions of any governing body is to apportion the budget, and the American government is refusing to even try.

Thomas Sewell writes:

For those that may doubt the problem is spending vs. taxes and/or tax cuts, see this spending vs revenue chart.

The 1991 Bush Senior tax rate increases didn't increase revenue. To think tax rate increases will solve anything just doesn't take into account history. People's behavior will change. Economic behavior will change.

Looking at the chart, revenue is actually up in constant dollars since the start of Reagan's term. Well more than the population is up.

Spending is just up way, way more. David's discussion is the right one. What specifically shall we cut from spending? Tax rates aren't going to really matter.

Nicholas Weininger writes:

If you cut-and-paste the URL from the address bar after making your choices, people can see what choices you made (the information is encoded in the "fragment" after the # character in the URL). For instance, here was my first try:

http://projects.wsj.com/my-deficit-plan/#sel=1a8aca6-19eb1ebe-12

As you say, this version is much harder to balance without tax revenue than the NYT's version. This is partly because they don't offer as many military cuts but also partly because they don't offer as many entitlement cuts for the non-poor elderly. I suppose this is not surprising, given that military-industrial-complex personnel and affluent old people are large chunks of the WSJ's readership base.

Doug writes:

Even if you get the current deficit down to $0 it's not good enough. Official federal debt alone is 108% of GDP. The government's average net interest expense is currently 0.23%. Historical average rate is 5%, and 10% is certainly not unheard of, especially if the money supply expansion turns into inflation at historical money velocity levels.

Furthermore the average duration of US public debt is less than 3 years, meaning that if interest rates rose the impact would be felt on the budget almost immediately. Even a return to normal 5% interest rates would add $800 billion to the deficit in this short period (plus more compounded over time as we borrowed more to pay back our own interest).

Remember the Fed's current plan is to scale back its balance sheet to historical levels from 2015-2018. The return to normal interest rates could very easily happen within this presidential term.

It's not enough to cut the current deficit to zero, you must also have a contingency to generate at least another $800 billion or more for the interest rate scenario. Or the alternative is the US could start shifting its public debt to long-dated 30 year bonds now. But even this would require at least another $400 billion in budget surplus as 30 year bonds yield 250 basis points more than the current Federal debt (and probably more once the yield curve shifts to reflect the change).

Ken B writes:

I save 824B without making any tough decisions or 'sacrifices'. I'm sure I could cut more, but I wanted a quick& easy run through just to judge the terrain.

MikeP writes:

Where's phasing out the employer provided health insurance deduction? That's $250 billion a year, and I would have a surplus if I could select it.

This is not only a huge source of revenue and a correction of bad social engineering via taxes, but it would also have beneficial secondary effects as the reduction in inflation due to subsidizing insurance among the young and healthy would accrue to costs for Medicare and Medicaid.

8 writes:

I believe the WSJ site is only considering fiscal cliff issues, so the options are limited.

nholzric writes:

I got it down to $389B

I'm surprised to find my choices were driven more by "does this option improve incentives?" than "we don't have enough revenue, should we spend it on this?"

Also, I don't want to touch military families benefits, I guess I have a special interest group too.

Question: I "decided" to eliminate the state and local tax deduction because I want people to feel the cost of their local government. Is this a "tax increase" libertarian-minded people can support?

john hare writes:

The fastest way to get spending under control would be to give congressmen a percentage of the spending cuts in their own district.

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