Between Obama and Romney, who proposes a fiscal policy agenda that’s the “most fiscally responsible?” That’s not that easy to answer, because “fiscal responsibility” is more than just deficit reduction, and “most” depends on the baseline–i.e., compared with what?
Neither is the “most fiscally responsible of them all” certainly, because as my Concord Coalition colleague Josh Gordon writes, neither candidate is embracing a specific “go big,” “grand bargain” approach–at least not yet. (This is an election season, after all.)
While Romney has called for cuts of five percent to non-defense discretionary spending (without providing details about where the cuts would fall), he has also supported an increase in defense spending, and restoration of the Affordable Care Act’s (ACA) Medicare cuts. When pressed, the campaign has avoided going into further detail about where all this would come out. In fact, unlike recent past presidential candidates, Romney has not produced even a bare bones outline showing the relative impact of his proposals on the budget. He has certainly given insufficient detail to establish that he has a credible plan to balance the budget.
One only needs to look at Rep. Ryan’s budget to see that even with large cuts to non-defense discretionary spending and Medicaid, it is mathematically suspect to promise a balanced budget without higher revenues — as the Ryan budget doesn’t achieve balance until 2040. Assuming that the gap can be made up with consistently above-average economic growth is an unrealistic dodge to avoid hard policy choices.
Aside from the overall goal, major questions remain about individual components of Romney’s fiscal proposals. The most discussed of these is his three-part tax plan. In short, Romney has promised to: 1) reduce all federal income tax rates by 20 percent after extending the expiring “Bush tax cuts”; 2) reduce taxes on the middle class (defined as individuals earning less than $250,000) and; 3) not increase the deficit — achieving revenue neutrality by reducing the tax expenditures benefiting the wealthy (except for the tax breaks favoring capital income).
These three parts of Romney’s plan are mathematically incompatible. The non-partisan Tax Policy Center has amply demonstrated why this is so, and no credible studies have shown otherwise. When pressed for an explanation of their assumptions, of the tax expenditures they would target, or which of the three parts would be jettisoned if the numbers don’t ultimately work, the Romney-Ryan campaign has avoided an answer.
Finally, the Romney plan for controlling health care costs in the federal budget also leaves many unanswered questions. The immediate result of his proposal to repeal not just the new spending within the ACA, but also the ACA’s Medicare cost savings and tax increases, would be to actually increase the deficit. Moreover, repeal of the ACA’s cost control experiments and pilot projects would needlessly inhibit research into ways that the health care system might be reformed to provide better value for our health care dollars. Given that we know very little on how to control systemic health care costs, this would also severely limit the possibilities for success of Romney’s own proposals to remake Medicare and Medicaid.
And regarding President Obama’s fiscal policies, Josh emphasizes that just because the President has had to be more specific (in submitting budget proposals every year), doesn’t mean it all adds up to a big-enough, fiscally-responsible-enough plan:
To the President’s credit, he supports negotiating a long-term, bipartisan “grand bargain” on fiscal issues with both spending cuts and new revenues. Yet, such explicit support has come only after his initial tepid reaction to the Simpson-Bowles report when it was released. Nevertheless, if Obama is re-elected, the upcoming fiscal cliff will give the nation’s political parties a chance to negotiate a major budget deal. This will test whether the President will fulfill his promise to have flexibility and put all options on the table. Unfortunately, during the campaign season, he and Vice President Biden have taken some options to reform Social Security (raising the retirement age) and Medicare (premium support) off the table. This will make achieving a bargain more difficult.
On taxes, the President has been similarly contradictory. He has argued for the need for more revenue, yet has ruled out tax increases for anyone earning less than $250,000. He has also proposed some new tax breaks even while arguing that others should be scaled back. On the corporate side, he has been as vague as Gov. Romney in detailing how he would pay for his proposed rate reduction.
Obama’s proposal to limit itemized deductions in the top two income tax brackets is a start on reform that broadens the tax base, yet the proposal has been made in every budget submission of his presidency and has gone nowhere. He has not supported a broader fundamental reform like the forward-looking plans recommended by the Simpson-Bowles and Domenici-Rivlin panels — where major tax expenditures are eliminated or scaled back and better targeted.
Obama’s contradictions are likely to impede a grand bargain. Furthermore, Obama’s promise not to increase taxes on anyone within a very expansive definition of the “middle class,” makes it very difficult to make the tax code more efficient.
Finally, the President’s health care reform agenda is mainly focused on implementing the Affordable Care Act (ACA). Proper implementation is a worthy goal and will be necessary for the ACA to have any chance of remaining effectively deficit-neutral. Yet, for the nation to control health care costs over the long term, more legislation needs to be enacted. Medicare in particular needs further reform.
And then there’s the tricky part–that “fiscal responsibility” means more than just mechanically reducing the budget deficit. It means getting to “fiscal sustainability,” which is just as much about strengthening and growing the economy as it is about holding down the public debt. (Both the numerator and the denominator in the sustainability goal of stabilizing the ratio of debt-to-GDP matter.) The economy part (the denominator) is a particular challenge these days, because we’re still in a period where we are still recovering from an unusually severe recession that has been unusually resistant to the usual stimulus treatments, which come (naturally) in the form of deficit-financed policies. At the moment, our economy still needs counter-cyclical fiscal policy (hence, all the calls to not let ourselves go over the “fiscal cliff”), but over the longer term after we hopefully get back to higher (”full”) employment, our economy will need higher national saving, in both the public and private sector, to keep growing its supply side (productive capacity). So we still need deficits now, but significantly lower deficits later, and we need to be mindful that not all forms of deficit spending (or tax cuts) are created equal in terms of economic effects on either the supply or the demand sides of our economy.
I think this tricky part of having to worry about the economic (and not just budgetary) effects of these fiscal policy choices is what Princeton economics professor Alan Blinder is getting at in his Wall Street Journal op ed, where he expresses his pro-Obama opinion:
For stimulus, we could do a lot worse than to enact President Obama’s American Jobs Act, which he proposed about a year ago. It consisted of about $250 billion in tax cuts and about $200 billion in spending, most of it well targeted on creating jobs. But Republicans rejected the act outright.
For deficit reduction, I believe the nation eventually will come around to something resembling the Simpson-Bowles plan, which was rejected by both parties (with Rep. Paul Ryan voting against it) when Alan Simpson and Erskine Bowles proposed it in 2010. Although President Obama didn’t embrace Simpson-Bowles in 2010, his current 10-year deficit-reduction plan is a first cousin. Any such plan would “pay for” the American Jobs Act many times over.
For his part, Mitt Romney rejects any short-term fiscal stimulus, attacks the Fed for trying to speed up the recovery, and proposes large, new, permanent tax-rate reductions—beyond even the Bush tax cuts—which would almost certainly bust the budget again. He claims the rate cuts can be paid for by closing loopholes. But several neutral third parties have demonstrated that his numbers don’t add up.
So the Romney plan would provide neither the short-run stimulus nor the long-run deficit reduction we need, while the Obama plan would provide both. Which plan is better? I guess the answer to that is an opinion, not a fact.
To counter Blinder’s opinion, a pro-Romney economist would surely claim that Romney will cut spending by much more than Obama would, which means the Romney-proposed tax cuts will be more affordable, plus such an economist would likely also throw in a supply-side growth story that claims that revenues would actually rise when tax rates are cut (even before any base broadening). (I welcome readers’ suggestions as to which actual conservative economist’s commentary is the best counter to Blinder’s.)
This election does offer a stark choice in terms of fiscal policy paths. Obama is clearly for a larger, more active role of government in our economy and society. Romney clearly wants to reduce the influence of government, especially regarding tax burdens. Unfortunately, with neither of them is it clear that they have the political will and talent to raise the taxes or cut the spending needed to make their plans consistent with deficit reduction. So we’ll have to just wait and see how the election turns out, and then hope that whoever wins will do better on “fiscal responsibility” than their campaign talk suggests, once the campaign is finally over.