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fixing it: Repairing some of the worst Bush administration screw-ups.

Fiscal PolicyFully account for the budget, stick to the budget, and work with the other party.

By Jason Furman
Posted Friday, April 4, 2008, at 7:35 AM ET

With President Bush's approval rating hovering in the 30s, just about everyone has an opinion on what he has done wrong in the past seven years. But not everyone can explain what the next president must do to fix it. So we've called in some experts to tell us. Fixing It is a 10-part series to be published over the course of the week by some of our favorite writers, offering detailed policy prescriptions for the next president, whoever that may be, on how to quickly undo some of the damage that's been wrought. One of our contributors wryly describes the series as "News You Can Use. If You Happen To Be President." Read the other entries here.

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Per Step 1, it would obviously be better for the next administration to set realistic goals and stick to them rather than make heroic claims about deficit reduction premised on implausible and unlikely-to-be-enforced promises about unrealistically low levels of spending in areas like Iraq and the AMT.

Step 3: Be ready to work together with the other party to reduce the deficit. Any one party or branch of government has it within its power to stop the deficit from worsening. But it is hard to imagine a feasible or desirable process to actually reduce the deficit that does not involve both parties and both branches of government. In the past, a number of different bipartisan processes have worked—a commission for Social Security in 1983, a summit at Andrews Air Force Base in 1990, and informal negotiations in 1997. But no process will work without a substantial amount of bipartisan buy-in and a few ideas to start the discussion. Here are some of mine:

  • Health care, health care, health care. The long-run deficit is almost entirely the result of the rapid growth of health spending in both public programs like Medicare and private health insurance. Ultimately, a lasting solution will implement systemwide reforms that change the incentives facing both providers and patients. But there are some simpler steps we could take right now in Medicare. One is to end the practice of paying private managed-care plans more than we pay for people in the government's insurance plan, a step endorsed by Congress' Medicare Payment Advisory Commission. Another is to use a combination of better clinical guidelines, carrots, and sticks to reduce Medicare spending in high-spending areas.
  • Taxes. Fixing our fiscal situation will require higher revenues than we have seen in recent years. One easy step would be allowing the Bush tax cuts for high-income households to lapse in 2010. But this will not be enough. For other steps, policymakers should consider the more economically efficient tax increases supported by economists like former Bush Council of Economic Advisers Chairman N. Gregory Mankiw, such as a carbon tax (or cap-and-trade system with auctioned permits), increased sin taxes on items like cigarettes, and a broader tax base by, for example, reforming the deductibility of the mortgage interest. Finally, we should curb the rapid proliferation of corporate loopholes and corporate shelters—for example, by reducing the ability of companies to report different amounts of profits to their shareholders and the Internal Revenue Service and by no longer allowing American multinationals to deduct the cost of overseas investments without fully paying taxes on the profits they generate.
  • Social Security. Social Security is a smaller source of the fiscal challenge than health care or tax cuts. But it is also a large and important program with well-understood reform options. Two of my favorite options are raising that amount of Social Security payroll that is taxable and indexing benefits and/or taxes to the changing ratio of beneficiaries to workers.
  • Changing the official measure of inflation. Social Security, the tax system, and other aspects of the economy are all indexed to a measure of inflation that is widely acknowledged to overstate the increase in the cost of living. If the government switched to a newer, more accurate measure, it would reduce the growth of Social Security benefits for retirees and raise tax collections—both in a manner consistent with the intentions of policymakers. The budgetary savings from such a policy would accumulate over time.
  • Defense. Defense spending, excluding direct spending on the wars in Afghanistan and Iraq, has increased by an inflation-adjusted $129 billion since 2000. I am no defense expert—that was Monday's topic—but I suspect that while substantial new sums are needed to meet our new challenges, much of this could be funded by scaling back on weapons systems originally designed to fight pitched battles on the plains of Europe. See Phillip Carter and Fred Kaplan for more.
  • Everything else. Compared with health care, taxes, Social Security, and defense, everything else, including farm subsidies, earmarks, student-loan subsidies, and a $2 million scientific program to research grizzly bears, is relatively small but in some cases worth addressing—if only to create more confidence in the budget process.

Step 4: Don't forget what really counts. The stabilization of the long-run deficit is inevitable—policymakers have no choice but to abide by the iron laws of arithmetic. But the most important budgetary issues are the choices policymakers make about how much to invest in research, how much to spend ensuring that everyone has health insurance, and what is done to make our nation more secure. Making these choices will be easier if we start to fix our bigger fiscal problems.

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Jason Furman is a senior fellow and director of the Hamilton Project at the Brookings Institution.
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