In the next few weeks, the United States will be focused on deficit reduction. Analytically, the task of deficit reduction is simple: cu!ing expenditures and raising taxes. Politically, the task of deficit reduction is enormously difficult, for each cut in expenditure or increase in taxes hurts someone, and typically, some powerful group. Each, pursuing its own interests, has led the country into what is widely viewed as an untenable position. The hope is that a National Commission would devise an acceptable framework for shared sacrifice. It is more likely that that will be the case if there is an enunciated set of criteria against which we can judge proposals.
Different individuals may put more or less weight on different criteria, but behind them all is one core principle: at the head of the list of reforms are measures which increase both efficiency and equity; unacceptable are measures which decrease efficiency and equity.
A few statistics provide some guidance to these deliberations. Median income has declined by some 5% over the past decade—and was even in decline before the recession. Poverty has increased from 11.9% in 1999 to 14.3% in 2009. Median income of males with only a high school education has decreased some 13.5% from 1999 to 2009, as measured in 2009 dollars. The upper 1% of Americans accounted for an average of some 22% of the nation’s taxed income during 2004-2008. 65% of the income growth during the Bush expansion was captured by the top 1% of families.
Given the enormous increase in inequality that has occurred in the United States over the past three decades, any measure that harms those at the boom should also be unacceptable, and measures that impose undue burdens on the middle class should receive careful scrutiny.
There is a further principle which should guide deliberations: what matters is not the deficit itself or the short-run national debt, but long-run levels of the national debt. The country should be looking at its national balance sheet. Debt reflects only the liability side. In assessing the economic strength of a firm, no one would look just at its liabilities; they would also look at its assets. The single-minded focus on deficits and short-run debt is thus fundamentally misguided.