U.S. Fiscal Balancing Act: T-t-t-tip on the tightrope

The fiscal status of the U.S. is undeniably on a tight rope. Whether it’s high or low – the level of the U.S. debt ceiling and its recent raise, does nothing to effectively address the U.S. deficit (spending) problems that drive U.S. debt.

Only a few weeks ago key policy questions were focused on the deficit reduction packages for raising the debt ceiling. In my opinion, much of this discussion was focused more on the advantages of political ends, rather than economic ends (e.g. how will this really impact the deficit?). Now that Congress has raised the debt ceiling, the more relevant question is “what next?” What does Obama mean when he speaks of a ‘balanced budget’ approach? Will the Joint Selection Committee be effective at resolving our debt spending problem? Are tax cuts or spending increases a better recipe for reductions in debt to GDP ratio? I will, in a series of forthcoming posts, attempt to shed perspectives on these questions surrounding the U.S. deficit/debt problem.

Fortunately, the U.S. is not the first country to experience problems with deficits and debt; we can learn from history.  Alesina and Ardagna have collected data on episodes of large deficit reduction efforts in OECD countries from 1970 to 2007:

Source: Mercatus Center

They find that fiscal adjustments based on spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. They also note that fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases.

Although there’s widespread evidence showing the actual impacts of various deficit reduction programs, the real U.S. deficit problem has less to do with whether we know what the policy solution is and more so whether there is sufficient political will to implement those solutions. Obama said it best in 2006:

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills.

Without institutional reform, constitutional amendments constraining spending, or reforms to entitlement programs (Social Security, Medicare, etc.), our efforts to successfully address U.S. deficit/debt will continue to create barriers to true economic growth.

On the same note, Janelle Monet’s TIGHTROPE conveys my sentiments towards this issue better than any administrative speech or academic paper. But everyone has their own way of understanding and seeing.

See I’m not walkin’ on it
Or tryin’ to run around it
This ain’t no acrobatics
You either follow or you lead, yeah
I’m talkin’ bout you,
I’ll keep on blaming the machine, yeah
I’m talkin’ bout it,
T-t-t-talkin’ bout it
I can’t complain about it
I gotta keep my balance
And just keep dancin on it

You gotta keep your balance
Or you fall into the gap
It’s a challenge but I manage
Cause I’m cautious with the strap
Doing damage to your canvas that a doctor cannot patch
See why you don’t want no friction
Like the back of a matchbook
That I pass as I will forward you
And your MacBook
Clothes shows will shut you down
Before we go-go backwards
Act up, and whether we high or low
We gonna get back up
Like the Dow Jones and NASDAQ

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