What Would I Do About the Debt?

A common refrain in this debate over the debt ceiling was John Boehner's assertion that "at least he had a plan," whereas Obama and the Democrats hadn't offered anything concrete.  This is true.  It's also kind of like saying, "The patient has cancer.  Our proposal is cutting off his head.  Why don't you have a proposal?"  But that got me to thinking about what actually has to be don to reduce the country's long-term fiscal picture.  There are two majors drags on the US's finances, as anyone looking at the numbers can tell.  One is the impact of the recession, and the other is runaway health care expenditures, in the public and especially the private sectors.  Revenue taken in is also inadequate, but that's an easier problem to solve (mechanically if not politically).

But assuming we had to do something, here's what my plan would have included:

1. A trigger for when any tax hikes and spending cuts kick in.  In an economy with already depressed demand, we can hardly afford to depress demand further by cutting spending in a down economy.  So any deal that I wrote wouldn't kick in until unemployment dipped below 6.5% at the most, which would indicate that it might be able to weather contractionary fiscal policy.  In the meantime, I would call for further fiscal expansion to stimulate the economy (fat chance, I know) and get to the point where spending can be cut and taxes raised without harming the economy.

2. Revenues would have to be raised.  I might raise the payroll tax cap, remove a bunch of distortionary subsidies (farm subsidies, capital gains tax hike), and institute a value-added tax, while cutting the income tax rate.

3. Health care would need to be addressed.  This is easier said than done.  I'd institute a panel to work on it.  Not a "bipartisan" panel, but an expert panel comprised of health care economists, practitioners, actuaries and others to look at the current system, identify flawed incentives and sources of waste and recommend ways to fix them.  Health care is, at the end of the day, a technocratic and economic rather than a political problem, so plugging in politicians to fix it is a recipe for disaster.  Especially when those politicians are self-styled "economists" who don't understand the first thing about economics (see: Paul Ryan).

There are some other areas where tweaks could be made-- Social Security could be tweaked around the edges, and defense could be cut, especially the R&D end (we've got billions of dollars in contracts out to defense firms working hard to build sweet weapons to win the Cold War), but the three points I've outlined are the ones that would be crucial to fueling a real recovery.