Liberal Deficit Plan – The New Silent Majority Speaks

The following appeared this morning in The Fiscal Times:

Liberals unveiled their own deficit reduction plan today that steps up public investment in infrastructure and human capital while relying on defense cuts and tax increases on the well-to-do and corporations to balance the budget by 2018.

The plan goes well beyond what Rep. Jan Schakowsky, D-Illinois, called for several weeks ago, which followed a similar path. In other words, it stands no chance of being passed by the president’s fiscal commission, which reconvenes Tuesday.

Before consigning it to the dustbin of history though, it’s worth considering simply because it raises three important questions that need to be forthrightly answered during any adult conversation – a phrase much in vogue in Washington these days – about a long-term plan to bring deficits under control.

1. Do we want to preserve the federal government’s ability to act as a spender of last resort during economic downturns?
2. Are there some things that the nation needs for long-term prosperity that only the public sector can provide?
3. Should the tax code be used to redress income inequality?

The liberal alternative, authored by Demos, the Century Foundation and the Economic Policy Institute, all left-leaning think tanks, answers those questions with a resounding yes. “There should be no consideration of overall spending reductions until unemployment has fallen to 6 percent and remained at or below that level for six months,” the report said. Fiscal commission chairmen Erskine Bowles and Alan Simpson in their deficit reduction plan offered earlier this month would set a rigid limit on federal spending at 21 percent of gross domestic product (GDP), which would sharply curtail the federal government’s ability to spend during downturns.

The liberal plan also offers a long-term target for deficit stabilization – 90 percent of gross domestic product (GDP) by 2025. That is significantly higher than the 60-percent-by-2024 target offered Erskine-Bowles.

Some historical perspective: the debt-to-GDP ratio remained below 50 percent throughout the Great Depression; peaked near 120 percent after World War II; fell steadily to around 33 percent in 1980; but rose quickly after Ronald Reagan became president and continued except for a few years near the end of Bill Clinton’s term in office. It stood at 57 percent when George W. Bush became president and spiked to 93 percent as a result of the Great Recession that began late in his term.

The liberals want to stabilize near this higher number (no new additional debt, but no pay down, either) because they see a long-term role for public investment in rebuilding America. The Bowles-Simpson plan would use some of its new revenue (from eliminating tax expenditures like corporate tax loopholes and all middle-class tax expenditures like the home mortgage deduction) to both pay down debt and lower income tax rates across the board.

The Bowles-Simpson plan also preserves some room for spending on infrastructure and research and development. But it is nowhere near the amounts called for in the liberal plan, which would use the money raised from higher taxes on corporations (they only remove so-called tax expenditures when they benefit high-income households) to invest in “quality child care, infrastructure, public transit, rural broadband connectivity, and research and development.”

The liberal alternative also steps up a number of income transfer programs like the earned income tax credit. The cash comes from eliminating corporate tax loopholes and a new carbon tax. “Despite having a higher-than-average statutory tax rate, because of preferences embodied in the tax code the United States collects just 2% of GDP in corporate tax revenue, compared with 2.5% across other developed nations,” the report says. “We suggest several changes that would broaden the tax base for corporations, including eliminating fossil fuel production tax credits, limiting the deductibility of financial corporate debt interest payments, closing the dividend loophole for foreign source income, and removing active financing tax deferral for financial firms.”

Translation: tax oil and coal companies, big banks, and the overseas operations of multinational firms while discouraging corporate debt. Instead of using all of that money for deficit reduction, transfer some to low-and-moderate income workers, whose increased consumption will stimulate the economy, and invest in infrastructure that promotes long-term growth.

The plan asserts that too much of the public debate to date has focused on Social Security, which plays only a minor role in the long-term deficits facing the country. Then there’s health care, whose skyrocketing costs will turn everybody’s deficit reduction plans into so much confetti unless brought under control.

The central issues facing the deficit commission and the public are broadly philosophical and concern the role of government in economic life. Liberals see a world of growing income inequality and public squalor amid private plenty that can only be addressed by an activist federal government. Its balanced budget comes from a broadly shared prosperity. Conservatives say shrink the government and the deficit, prosperity will return, and people will take care of themselves (with a lower yet still intact safety net, to be sure).

Where does the public stand in this debate? We’ve had two elections in the last two years that gave two very different answers to that question. Right now, conservatives are ascendant. But many liberals are wondering if they’re the new silent majority. It will probably take another election to find out.