Investing for Growth and Security

Besides its investment in people, the federal government makes critical investments in infrastructure and research and development. Because federal spending in these areas has fallen significantly in recent years and interest rates are low relative to historical levels, this chapter proposes sizable increases for both categories. The increases in infrastructure spending will provide the resources needed to restore and update aging roads, bridges, and public transit systems, while the increases in research and development will help the United States to explore cutting-edge technologies. Policymakers should also fund the military’s long-term plans through 2032, as outlined by President Obama, and let spending grow modestly afterward. That would allow for a continuing presence overseas. If a new war broke out, policymakers presumably would provide the additional temporary funds to ensure that America achieved its mission and emerged victorious.

Investing in People

The nation’s most precious asset is its people, but far too many are being left behind. As discussed in Chapter 9, widening income distribution, weak wage growth, and stagnant economic mobility have increased disparities between the rich and poor, made it harder for people to overcome their initial circumstances, and dragged the economy down. Cash-strapped government safety net and education programs are hard-pressed to keep up. Evidence shows that many programs that provide struggling individuals and families with cash, food, healthcare, childcare, education, jobs, and appropriate incentives help beneficiaries and can pay off for society as a whole. To exploit these opportunities, this chapter proposes to increase spending on social policies, focusing on five goals: investing in children, patching holes in the safety net, raising educational attainment, providing jobs and job training to people who need them, and making work pay better.

Epilogue

It is difficult to make predictions, as the saying goes, especially about the future. I don’t know what’s going to happen, but here’s the story I hope historians can tell come 2050. While the economy was strong and interest rates were low, it was easy for Americans to ignore the problems simmering under the surface. The nation’s deficits—including the growing long-term fiscal imbalance and the systematic underinvestment in its own people and infrastructure—were not unknown but were not compelling. (To paraphrase Mark Twain, they were like the weather: everybody talked about them, but nobody did anything about them.)...

The Politics of Deficits, the Deficits of Politics

Long-term fiscal reform raises difficult political problems, as discussed in this chapter. The benefits accrue mainly to people who aren’t old enough to vote currently, including those not even born yet. The costs—benefit cuts and tax increases—are easy to identify and they evoke harsh reactions from those who must burden. Public opinion is conflicted: Americans deplore rising red ink but oppose most spending cuts or tax increases. Rising political partisanship makes compromise difficult in a split government. But when one party controls the government, deficits go up, not down. Nevertheless, a long-term solution should be possible. Fiscal responsibility aligns with both conservative and liberal goals. Citizens of all stripes can support the notion of making life better for their children and grandchildren. Absent a crisis that might bring the sides together, the nation will need strong political leadership and a motivated citizenry to bring about change. .

Solving the Debt Problem Fairly

Who should pay higher taxes and receive fewer benefits? What’s fair? As explored in Chapter 5, debt, taxes, and spending redistribute resources within and across generations. Addressing the debt problem would help future generations – the nation’s children and grandchildren. It is no longer clear that each generation will be better off than the one before it. This makes it all the more important that each generation controls the debt it leaves to the next generation. The United States used to have high income inequality and significant economic mobility: people who worked hard could ascend the income ladder. In recent years, though, the gap between rich and poor has grown dramatically while rates of mobility haven’t improved. Policymakers should narrow inequalityin ways that are productive and fair, investing more in education, healthcare, nutrition, neighborhoods, and employment programs, and judiciously raising taxes on high-income households.

The Challenge

Chapter 3 outlines the fiscal challenge. Under current policies, the debt will rise from about 78 percent of GDP in 2018 to almost 180 percent by 2050. Social Security, Medicare, and Medicaid will grow as the baby boomers retire and healthcare costs will likely rise. Interest payments will rise with higher debt and higher interest rates. Other spending—defense, investment, social programs—will actually shrink relative to the economy. Taxes won’t grow as fast as overall spending, leaving a growing mismatch between what people expect from government and what they contribute. Considering both objective and subjective factors, the optimal debt-to-GDP ratio should be around 60 percent by 2050. That’s high relative to historical norms for the United States, but even so, reaching that goal that would require a 24 percent tax increase or a 21 percent spending reduction, starting in 2021. Delay raises the required adjustment.

Introduction

Even as the U.S. economy hums along, problems loom in the future. Government debt is growing along an unsustainable path, potentially mortgaging the country’s economic future. At the same time, after several decades of stagnating wages and living standards for much of the population, the nation faces increasing needs to invest in education and healthcare, and to bolster public infrastructure and research. How can the United States meet both today’s needs and tomorrow’s obligations? This book offers solutions resting on five guideposts. First, facts and evidence should play a key role in policy analysis and choices . Second, public policy should reflect our values as a people, including freedom, fairness, opportunity, and individual and social responsibility—toward one another, between rich and poor, and from generation to generation. Third, both the private sector and the government can—and must—be part of the solution to our problems. Fourth, taxes and spending are inextricably linked, and policymakers should consider them together. Fifth, we should focus on realistic solutions. The proposals offered here have three core themes: control entitlement spending; invest in the future; and raise and reform taxes. Taken together, the proposals would restore fiscal balance, boost economic growth, reduce economic inequality, improve economic mobility, and raise living standards for future generations.

Taxing Business

Businesses don’t bear the burden of taxes, people do. Nevertheless, taxing businesses sensibly can play a key role in creating a well-functioning economy, as discussed in Chapter 12. Ideally, a business tax would be neutral; it would allow firms to make choices based on economic criteria rather than tax considerations. On that basis, the current system fails dramatically. The major tax overhaul in 2017 helped in some ways but hurt in others. This chapter proposes business tax changes that would raise revenue, make business taxes more neutral, provide better investment incentives, and simplify tax choices.

Taxing People

The income tax is the centerpiece of the federal tax system, as explored in this chapter, raising almost half of all federal revenues and making government policies more progressive. Despite – and in some cases because of – recent changes, the tax is ripe for reform. The proposed reforms would close loopholes, tax income more evenly across various uses, and provide the IRS with the resources to enforce the tax system better. This would raise new revenue, redistribute burdens more fairly, and simplify tax compliance.

Saving Social Security

Social Security is among the nation’s most popular and successful programs, as discussed in Chapter 8, providing crucial income every year for tens of millions of retirees, surviving spouses, dependents, and the disabled. But the program is financially unsustainable. The taxes that today’s workers pay go mainly to cover the benefits of today’s retirees. As a result, the coming rise in the number of retirees relative to workers will leave the program with too little revenue to pay all the benefits workers have earned starting in about 2034. Policymakers should enact a 2016 plan proposed by a Bipartisan Policy Center commission. It would bring Social Security into long-run fiscal balance by raising taxes and cutting benefits in a progressive manner, protecting the poor, raising the retirement age, encouraging people to work longer, and fixing the way Social Security calculates inflation.