Cutting the deficit

Peter Orszag lays out the administration's line on the short-term deficit:

Of the $9 trillion in deficits projected over the coming decade, nearly $5 trillion comes as a result of failing to pay in the past for just two policies — the 2001 and 2003 tax cuts and the creation of a Medicare prescription drug benefit.

The cost of the tax cuts will total about $4 trillion over the next decade, including the additional interest on the debt the federal government will have to pay since the tax cuts were deficit financed. The Medicare prescription drug bill will add about another $700 billion to the deficit – bringing us to about $5 trillion total for the cost of just these two policies

In addition, roughly $3.5 trillion can be attributed to automatic economic stabilizers.

As the economy enters recession, certain spending programs, such as unemployment insurance and food stamps, automatically increase and revenues tend to decline. Although this helps to ameliorate the economic downturn by stimulating demand, it also leads to higher deficits.

Finally, there is the Recovery Act which accounts for just 10 percent of the entire deficit over the next decade.

All told, the entire $9 trillion deficit reflects the failure to pay for policies in the past and the cost of the worst economic downturn since the Great Depression and the steps we had to take to combat it.

Like Kevin Drum, I've got no problem with the White House making some real moves to cut the deficit. But the devil is in the details. It would be insane, for instance, to sharply cut spending in the midst of a recession. But it makes sense to build out policies to increase revenues in 2012 or after.

Similarly, there are good ways of decreasing the deficit and bad ways. Cutting Medicaid spending, for instance, would be a bad way. But I'd be glad to see the estate tax restored. Or relatively more of the Bush tax cuts left to expire. Obama should have the courage to say that the promise to avoid raising taxes on people making less than $250,000 was made before the economy collapsed, and that tax rates might have to rise in a couple of years.

Other big revenue raisers could include a tax reform that both transforms the tax code and raises rates and cap-and-trade that auctions off permits. This isn't about some tweaks to discretionary spending. But people shouldn't kid themselves about how hard this will be. Substantially reducing the long-term deficit will require making structural changes in the health-care system far beyond anything we're currently contemplating. We can't tax enough, and we can't cut enough spending, to afford the projected increase in health-care costs. As economist Jon Gruber argued yesterday, the Senate Finance bill is a good start. But it is only a start.

Graph credit: Center for Budget and Policy Priorities.