Eliminating the deficit may be harder than you think

I’d encourage all readers who are closely following the so-called “fiscal cliff” negotiations to take a look at this great interactive feature at the Wall Street Journal today: Make Your Own Deficit-Reduction Plan

The biggest items in the federal budget, which will run a deficit of more than $1 trillion this year, are three of the most popular areas of spending: Medicare, Social Security, and national defense. The other 30 percent or so of the federal budget includes similarly popular line items like the national parks, road repair and construction, and education. Sure, we could shift some of the transportation and education budgets back to the states, but that would just shift the burden of taxpayers, who would inevitably end up paying more in state taxes to get the services they now take for granted.

Cuts to Medicare and Social Security are especially problematic. The growing cost of those programs is not because individuals are taking advantage of them — it’s a demographic problem. We have more Americans living longer, combined with spiraling private sector health care costs and fewer younger workers to support the level of benefits that today’s seniors take for granted.

Increasingly, I think that we should just let all the tax cuts of the last 12 years expire. At the same time we should allow some of the mandatory cuts to remain in effect. When I did the interactive above, I took a more measured approach to tax increases and I couldn’t get the deficit below $100 billion. That’s perhaps a sustainable level of debt, but it’s hardly comforting.

In other words, I’m increasingly of the mind that we should just go over that so-called cliff and see what happens. At least then we’ll be on a path to balanced budgets.

Over the long term, we still need to address the cost of Medicare (today’s average 65-year old will get far more in benefits than he or she paid into the system). Some of the problem could be addressed through various cost controls, and we could also ask wealthier seniors to pay higher premiums, co-pays, etc. We should also make some measured cuts in the rate of growth of defense spending. And eventually we might need to bump up the age for full Social Security benefits.

If you believe taxes should remain where they are right now, you’re going to have a very very difficult time balancing the budget, even if you’re willing to make deep cuts to Medicare, Social Security, and defense.