Senator Mark Warner, an organizer of the Senate’s "Gang of Six" deficit reduction initiative and a prominent voice on deficit reduction, discussed how the United States can reduce its deficit and improve its long-term fiscal outlook. Carnegie’s Moisés Naím moderated.
A Structural Problem
- Entitlement Spending: The U.S. deficit is not a Democrat problem or a Republican problem; its causes are structural in nature, said Warner. A primary cause of the staggering deficit is entitlement spending, which has significantly increased due to higher life expectancy and the aging of the population. Other factors contributing to the deficit include increased spending on defense and tax expenditures.
- No “Democrat- or Republican-only” Solution: Historically, there has been a period of balanced budgets or surpluses when revenue and spending stood between 19.5 percent and 21 percent of GDP, respectively. Currently, federal revenue and spending stand at around 15 percent and 25 percent of GDP, suggesting that it will take both an increase in revenue and decrease in spending to tackle the deficit problem, explained Warner. Everything, including entitlement and defense spending, must be on the table to reduce the debt, he underlined.
- Low Interest Rates: The only reason the United States has avoided a Greece-like catastrophe is because of an all-time low interest rate, argued Warner. If the U.S. cost of borrowing spikes, the deficit will increase dramatically: every one percentage point increase in the interest rate will increase the deficits by $1.3 trillion over a ten-year period.
Why Act Now?
Conventional wisdom says that a deal can’t be reached until after the November election, but the United States can’t wait to make tough fiscal choices, Warner said.
- Election-year Politics: The United States cannot afford to take every fourth year off from dealing with policy, argued Warner. Furthermore, making tough fiscal choices, including reaching compromises, may not be any easier after the presidential election. Warner added that it is unlikely that there will be any dramatic changes in Congress, produced by one party winning a landslide victory.
- Year's End Fiscal Battle: Expiring fiscal measures—including the Bush-era tax cuts and the payroll tax cut holiday— and changes in capital gains and dividend rates at the end of this year may not force Congress into more thoughtful action, noted Warner. After the presidential campaign season is over, politics may be even more polarized, creating a difficult environment for Congress to find common ground to fix the deficit.
- Fragile Recovery: Contrary to conventional wisdom, a deficit reduction plan will not be a fiscal drag on the recovery, argued Warner. A well-designed deficit reduction plan would not immediately cut back on spending or raise additional revenues overnight. In addition, the plan would help create jobs by providing predictability and facilitating investment of the trillions of private capital sitting on the sidelines. It would also include new tools for growth, such as investment in infrastructure.
- Not Enough Bipartisanship: 45 senators from both parties signed on to the deficit reduction plan, Warner pointed out. There are also about one hundred members in the House, including both Democrats and Republicans, who publicly support the plan.
Window of Hope
Although a significant debt deal will be difficult to achieve in the pre-election period, two external shocks could improve its prospects, suggested Warner.
- Contagion from Europe: Deterioration in Europe’s fiscal crisis and spillovers to the United States could cause interest rates to rise and force the United States to confront its long-term fiscal problems sooner than it expected to.
- First-Item in the Next President: If the Republican Party settles on its presidential candidate, or if the debt is the first action item for the next administration, there could be an opportunity to address the fiscal crisis.
Even if neither of these two scenarios happens, the Gang of Six expects to have a debt-reduction framework ready well before the November election, Warner added.