Linda J. Bilmes

Costly inheritance

How to tackle the triple root of US debt that has been passed to us

(istockphoto/ Heather Hopp-Bruce/ Globe Staff Illustration)
By Linda J. Bilmes
April 27, 2011

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WITH DEFICIT-reduction fever gripping Washington, it is easy to forget that the stunning turnaround in America’s finances — from budget surpluses in the late 1990s to today’s sea of red ink — is largely the byproduct of successive presidents trying to fix yesterday’s crises.

President Bush launched the wars in Afghanistan and Iraq in response to 9/11, enacted Medicare Part D to help seniors cope with the rising prices of medicines, and cut taxes across the board in an effort to lower tax burdens. President Obama bailed out the banks to save the financial system, rescued the auto industry, and extended tax breaks to pull the economy out of recession.

Some of these efforts, particularly the Iraq debacle, have turned out to be costly mistakes. But the main legacy of good intentions gone awry is a trio of new challenges: too much debt, rising inequality, and military spending that has spun out of control. History has not been kind to nations that suffer growing inequality, overextended armies, and enormous debts.

Our leaders are seemingly fixated on the debt. But we cannot restore the country to solvency without also facing up to the unpleasant siblings of income inequality and military overstretch. The tax cuts of the past decade have resulted in the most unequal distribution of income and wealth since the 1920s. At the same time, military spending — not including the wars in Iraq and Afghanistan — has increased by a trillion dollars — reaching the highest level since World War II.

So far the only choice people have been given is between big spending cuts (the Ryan “plan’’) and not-quite-so-big spending cuts coupled with tax increases on the wealthy (the Obama “approach’’). The problem is that voters have little confidence in the ability of either Democrats or Republicans to solve the underlying troubles. The recent budget spat only reinforced public cynicism, with squabbling over what amounts to loose change taking us to the brink of a government shutdown. More of the same is looming in coming weeks over the extension to the debt ceiling.

There is no way to pay off a $14 trillion debt without raising revenues. But voters just do not believe their extra tax dollars will go toward cutting the deficit. Rather they suspect it will end up funding duplicative government programs or foreign military adventures.

Before the public will embrace higher taxes, Congress needs to demonstrate that it is serious about controlling spending — and not by biting into core programs like Medicare or axing things that are unpopular with the Republican base but cost very little.

Any serious deficit reduction plan must include an overhaul of military programs, starting with putting in place a management accounting system at the Pentagon that shows what activities are being paid for and how much they cost. Even the Pentagon admits that it has “lost visibility’’ on spending. We spend $600 billion per year on the “base’’ military budget — but anything we ask it to do — like fighting wars or distributing humanitarian aid — costs extra. It’s like having a fire department that charges extra if your house catches on fire.

Interestingly, those speaking out most forcibly on this issue include former military officers, analysts at the congressional armed services committees, and the US Government Accountability Office. There is a growing belief that the military-industrial complex has become bloated, wasteful, and is harming rather than helping the nation’s military readiness. For example: Despite the trillion dollars added to the Pentagon’s budget since 9/11, the Navy and Air Force fleets are much smaller than they were 10 years ago. Moreover, if we chip away at spending on diplomacy, foreign language training, and foreign aid, we will sacrifice our “soft power’’ — whereas cutting obsolete heavy weapons programs from the Pentagon and spending a fraction of the money saved on such instruments of “soft’’ influence would strengthen our country while still saving money.

Second, in order to garner support, the president must shift the talk away from tax increases and move to tax reform. Much of the recent debate has centered on repealing the Bush tax cuts for the highest earners. But there is plenty of evidence (including in the bipartisan Bowles-Simpson commission report) that we can have lower tax rates overall and still have higher tax revenues by closing loopholes and cutting out tax breaks for special interests that are of little benefit to the economy as a whole (example: the $5 billion-a-year subsidy for ethanol production). In order to make it explicit that any additional tax revenues would go to debt reduction, the president could propose they be paid into a segregated debt-reduction fund that would devote the money to pay down debt at the end of each fiscal year.

Third, tax reforms need to promote a more balanced distribution of income. Over the past 25 years, the top 1 percent of Americans has grown much wealthier while the middle class has seen its real income fall, and the poor have gotten poorer. The Center for Budget and Policy Priorities estimates that two-thirds of the Ryan plan budget cuts would affect low-income Americans. This misguided effort to fix the budget deficit problem would worsen income inequality and create severe difficulties for America down the road.

The deficit debate is, to use one of Obama’s favorite phrases, a “false choice’’ because this dilemma cannot be addressed in a vacuum. Voters are weary of the partisan battles that focus on the trees rather than the woods. They aren’t ready to buy into the harsh spending cuts proposed by the Republicans. At the same time they rightly have little faith in an approach that relies on tax hikes to paper over the underlying problems. It’s time to think about true tax reform and military reform and tackling the consequences of past mistakes: excessive debt, out-of-control military spending, and a widening gap between the haves and have-nots.

Linda J. Bilmes is a senior lecturer in public policy at the Harvard Kennedy School. She served as assistant secretary of Commerce during the Clinton administration.