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How Democrats Should Handle The Deficit Problem

With the deficit reduction commission still plugging away and expecting to release a report after the elections, the debate on the center-left is shaping up around the desirability of reducing Social Security spending. On the right side of this debate, you have establishment voices like Washington Post editorial writer Ruth Marcus, who insists that cutting Social Security is something akin to a mathematical necessity:

The Tax Policy Center examined what it would take to avoid raising taxes on families earning less than $250,000 a year while reducing the deficit to 3 percent of the economy by decade's end. The top two rates would have to rise to 72.4 and 76.8 percent, more than double the current level. You don't have to be anti-tax zealot Grover Norquist to think this would be insane.
Or ask [AFL-CIO president Rich] Trumka about whether the eligibility age for Social Security, now 62 for partial benefits, should be raised. This former coal miner -- and son and grandson of coal miners -- erupts. His father worked 44 years in the mines, suffering from black lung, "and if you had said to my dad, 'You have to work until you're 63,' that would have been a death sentence." Fair enough. Some people may need special protection.
But, an editor asks, gesturing around the gleaming conference table at the middle-aged assembly, what about those who do not work in such punishing occupations and for whom the current system would provide two, maybe three, decades of benefits? "What's wrong with that?" Trumka asks indignantly. "The rest of the world does that!" Yes, and how are things going in Greece?

This is a highly misleading way to think about the budget. The study that showed that closing the deficit solely by raising taxes on the rich was not a plan to close the deficit by raising taxes on the rich. It was a study designed to show that you can't close the deficit solely by raising taxes on the rich. Accordingly, it limited its parameters entirely to raising upper-bracket tax rates. That's the least-efficient way to capture more revenue from the rich. There's massive revenue to be raised by closing loopholes and other tax preferences that benefit the rich that would leave tax rates at more reasonable levels. And, even if you did choose the least efficient method of simply raising top tax rates, a 76.8% tax rate may be far too high, but it's not "insane." The U.S. had top tax rates over 90% from World War II through 1964, and 70% from 1964 through 1980. Most of those years, especially the 90% years, had phenomenal economic growth. That doesn't make it desirable, but it is a choice, not something that can be dismissed as fantasy.

Marcus's rejoinder about Greece as even more empty. Lots of advanced countries fund public pension systems with retirement ages in the sixties. Only one of those countries is Greece. Greece has become the new bogeyman to explain why any liberal policy proposal is doomed to failure. It's a taunt, not an argument.

So the right side of the continuum argues that cutting Social Security is a mathematical necessity when, in fact, more liberal forms of fiscal responsibility could work just as well. On the left, by contrast, the prevailing attitude is a resolute determination never to cut Social Security benefits:

It's the Democrats who have progressives feeling queasy.
House Majority Leader Steny Hoyer explicitly put the idea on the table as well in a speech last month. "We should consider a higher retirement age or one pegged to lifespan," Hoyer said.
He echoed House Majority Whip James Clyburn, who put it this way: "With minor changes to the program such as raising the salary cap and raising the retirement age by one month every year, the program could become solvent for the next 75 years." One month a year may not sound like much, but if you're 30 years away from retirement, that adds up to almost three years.

The liberals are correct, as I said, that you don't have to cut Social Security benefits. You could reduce the deficit by raising taxes and cutting spending on programs that serve no liberal benefit, like farm subsidies and wasteful defense programs. The problem is, there's no remotely plausible scenario where Democrats could enact a program like that. The public hates raising taxes, and wasteful tax loopholes and programs have powerful constituencies.

Democrats aren't going to have the political strength to seriously raise taxes unilaterally. Meanwhile, Republicans have the mirror-image dilemma. Their hardliners are insisting that the deficit must only be reduced through spending cuts with not a dime of tax hikes, yet they have zero chance to enact a program like this. Basically the only alternatives are: 1) a deal where Democrats give Republicans cover to cut spending in return for Republicans giving Democrats cover to raise taxes, or 2) let the deficit go and hope for the best.

Now, I don't think a deal like #1 is likely oing to happen. The taxophobic wing of the GOP has too much power. But in the off chance that such a deal becomes available, Democrats need to think about which sacrifices they're willing to accept and what price they're going to ask. I think some short-term stimulus to go along with the long-term austerity, and demanding a reasonably progressive distribution of the pain are the goals Democrats should be looking to hold out for. (Even if Republicans walk away from the deal, Democrats should be prepared to make a deal, because the GOP's act of killing it will help show which party is to blame for the deficit.) Simply insisting that you won't accept anything that falls short of the ideal budget you'd write if there were no Republicans is not the smart way to approach this problem.