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How to fix the budget deficit

 December 03, 2012 10:16 AM

"And your solution is?" commenter "oy" wanted to know first thing after I posted a piece here on Wednesday that chided Wall Street hotshots Whitney Tilson and Anthony Scaramucci  for putting forth a purportedly bipartisan budget deficit solution that was, I argued, neither bipartisan nor a solution.

Oy has a point. Enough with the catcalls! What is the best way to cut the deficit and render the nation's finances solvent? I'm glad you asked! Here's the Bankstocks five-point plan: 

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1. Make it so that everyone pays something. President Obama likes to yammer on about how the rich need to pay their "fair share" in financing the government—yet how can it be fair that nearly half the country pays no income tax at all? That's incredibly unfair to those of us who do pay taxes. So I propose every earner pay a minimum annual tax, even if it's just $100 at the very low end. No, that wouldn't bring in much money. But, more importantly, it would ensure that everyone gets the message that government isn't free, and has a stake in seeing to it that it runs efficiently and sticks to its knitting. Further in this spirit of inclusion, I also propose that tax rates be raised by 100 basis points across the board (fair share!). That won't bankrupt anyone, but in an economy that generates close to $8 trillion annually in taxable income, would bring in sizable new revenues. You can argue if you'd like that an across-the-board tax hike, even a small one like this, would slow economic growth. Maybe. But the effect would be more than offset by the huge expansionary effect of my next proposal.

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2. Jump-start economic growth. The most effective balm for a high fiscal deficit is an economy that's growing fast. It generates more tax revenues and cuts the need for social-stabilizer spending such as food stamps. So let's put the pedal to the metal! In particular, pull out all the stops in energy production. The U.S is said to have more energy reserves now than any country on earth. We should exploit them to the max. That would generate thousands of energy-related jobs directly. What's more, the resulting drop in energy prices would suddenly make many non-energy-related capital projects economically attractive, as well, leading to even more jobs. The next thing you know, the economy would be roaring, tax receipts would be soaring, and the deficit shriveling. This isn't rocket science. 

3. Reform Social Security the Paul Ryan way. That means grandfathering in participants who are at or near retirement age (55 years old and older, say) and trimming benefits for everyone younger. Those younger workers would then have plenty of advanced warning to make alternative arrangements for retirement, while older workers, who don't have time to put together a Plan B, won't have the rug pulled out from under them. Is this solution unfair to younger workers? You bet. But the fact is that any reform of Social Security (short of outright dissolution of the program accompanied by one-time payouts of accumulated contributions) is going to be unfair to younger workers. Would they prefer national insolvency? Meanwhile, the budget savings that would result from reform would be enormous.

4. Make health insurance more like real insurance. The best way to get health care spending under control is to get as much of that spending as practicable out of the hands of government and into the hands of consumers, and the best way to do that is to ensure that a variety of private health-care policies are available—from gold-plated to bare-bones—to the consumer, that he pays for out of his own pocket. So: first get rid of the tax-preference for employer-based health insurance. Second, make health insurance renewable and portable across state lines, just the way auto and homeowners is. Whatever level or type of coverage the consumer wants to buy should be up to him. I don't know about you, for example, but when I worry about financing my family's health care, it's not footing the $5 co-pays on the generic penicillin for the kids when they get strep that give me the chills. I don't mind paying for that stuff out of my own pocket, just like I pay for my family's food, clothing, and shelter. It's the financial burden that would be associated with a devastating illness or accident—a true catastrophe—that's worrisome. So in the world I'm describing, I'd buy a low-cost, high-deductible plan and would make sure I got the most out of the health care dollars I spent.  I bet a lot of people would make the same decision. The effect on health costs of having consumers foot their own insurance bills would be dramatic. Yes, some people will find themselves in a circumstance in which they won't be able to afford decent coverage. So have the government subsidize ‘em. At least the subsidy would be explicit, not bound up and hidden as it is now in the Medicaid/Medicare/Obamacare morass. (These ideas, by the way, are laid in considerably more style and detail by Cliff Asness here.) 

5. Restore the "temporary" payroll tax cut. In 2011,Congress cut the Social Security payroll tax to 4.2% from 6.2% as a way to spur economic growth. If that cut had a noticeable effect on the rate of economic growth, I'm not aware of it. In the meantime, the government could use those forgone taxes. For decades, the Republic was somehow able to survive when workers kicked in 6.2% of their pay to help fund Social Security. I somehow doubt things will collapse if we restore that rate back to where it was before.

Add up the effects of all this and where exactly would the deficit be in five years? I haven't a clue. But it'd be a lot lower than otherwise, that's for sure, which is more than can be said of the results Tilson's and Scaramucci's plan would likely produce. One of the benefits of being an outsider looking in and kibitzing about ways to narrow the deficit is that I don't have to worry about coming up with a suggestion that might offend one my constituents. Are any of my five points above political non-starters? For all I know, they all are. But they'd go a long way toward fixing our national financial problem. So as the nation hurtles on toward fiscal catastrophe, it might make sense for our political leaders (and colleagues on Wall Street for that matter) to come up with proposals that, while politically risky, perhaps stand a chance of actually working.



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