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Fiscal Affairs: The Fetishization of Balance

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I generally don't bother reading Thomas Friedman. A good friend gave me a copy of The World Is Flat, and I started reading it. Somewhere in the first one hundred pages Friedman has an extended discussion of workflow software (as a key enabler of globalization) and I realized that he knew absolutely nothing about workflow software, so I stopped reading it and gave it away.

Another friend pointed out Friedman's op-ed in the Times earlier this week in which he argues for "grand bargains" and "balanced" solutions to, well, all of our problems. For example, he says, "We need a proper balance between government spending on nursing homes and nursery schools -- on the last six months of life and the first six months of life." Despite the nice ring, that's about as empty a statement as you can make about public policy.

But this is the one that really confused me (and my friend):

The first is a grand bargain to fix our long-term structural deficit by phasing in $1 in tax increases, via tax reform, for every $3 to $4 in cuts to entitlements and defense over the next decade.

Where does this $3-4 in spending cuts to $1 in tax increases come from? To put this in perspective, over the next decade, the CBO's alternative scenario (the more realistic one) says that deficits will average 5.3 percent of GDP over the next decade. A major deficit reduction agreement would need to bring this down at least to 2 percent of GDP.* Friedman is basically saying that taxes should go up by about 0.7 percent of GDP and spending should come down by about 2.6 percent. Over the next decade, the Bush tax cuts, if extended, will reduce tax revenues by 2.2 percent of GDP.** So Friedman is really saying that the appropriate level of taxes should be well below Clinton levels and slightly above Bush levels.

In addition, these ratios of tax increases to spending cuts are essentially meaningless. Take Medicare, for example. We could increase the Part B premiums paid by high-income beneficiaries, which, according to conventional federal government accounting, would count as a spending cut. Or we could make Medicare benefits taxable for high-income beneficiaries, which would count as a tax increase. But the two would have exactly the same effect. About two-thirds of all federal spending is direct payments on behalf of individuals (e.g., Social Security checks and Medicare reimbursements). Reducing a direct payment to someone is the exact same as increasing her taxes.

In White House Burning, we propose large reductions in long-term deficits through a long list of policy changes. Many of our proposals count as tax increases from the accounting perspective. For example, we recommend eliminating or scaling back tax breaks for employer-provided health care, mortgage interest, charitable giving, and state and local government borrowing, all of which are implemented through the tax code. All of these tax breaks, however, are really government subsidies, so reducing them should count as spending cuts from an economic perspective.

You may disagree with these proposals, but they should be evaluated based on their impact -- not whether they are labeled as tax increases or spending cuts. By buying into this arbitrary distinction, Friedman is really buying into the Grover Norquist view of the world, in which the only number that matters is total tax revenues.

Finally, however, what's so great about balance? There is a political rationale for the perception of balance, which is that you can't pass anything that appears to favor one side by too much unless you control the White House, the House, and sixty votes in the Senate. But there's no particular reason why the pursuit of balance will produce good policy. To take a particularly vacuous example, Friedman says:

Within both education and health care, we need grand bargains that better allocate resources between remediation and prevention. In both health and education, we spend more than anyone else in the world -- without better outcomes. We waste too much money treating people for preventable diseases and reteaching students in college what they should have learned in high school.

Is he saying that we should improve high school education (who's against that?) but that, to "balance" this improvement, we should have worse college education?

Friedman concludes, "We can't have any of these bargains, though, without a more informed public debate." Fetishizing balance as an end in itself, in order to brand himself as a reasonable centrist who wishes we could all get along, is not going to get us there.

* If you look at the long term, we think that average deficits will have to come down by 5.5 percent of GDP; details are in chapter 6 of White House Burning.

** According to the CBO, the Bush tax cuts are worth $4.4 trillion over the next decade (Table 1-6; that's the incremental effect of the tax cuts on top of indexing the AMT) while GDP will be $202 trillion (Table 1-3).

James Kwak is the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd. This post is cross-posted from The Baseline Scenario.