Fiscal Cliff Deal Falls Way Short: Interview With Alan Auerbach

a | A

By Mark Whitehouse

Alan Auerbach, an economist at the University of California, Berkeley, is one of the country's leading authorities on the state of the U.S. government's finances. For more than two decades, he has been warning about the mismatch between the government's income and obligations. I caught up with him at the annual meeting of the American Economic Association in San Diego to speak about Congress's latest efforts to fix the nation's finances.

Q: How big are the U.S. government's fiscal problems?

A: We're in pretty bad shape. If you compare the obligations the government has taken on -- including social security and old-age health care for future generations -- to the revenue it is likely to raise in the current tax system, it falls short by somewhere between 6 percent and 8 percent of all the country's future economic output. If you wanted to close that fiscal gap by raising taxes alone, you'd have to increase them by roughly 50 percent across the board.

Q: How far do the tax measures in the latest deal to avoid the fiscal cliff go toward closing the gap, compared to a simple extension of the Bush tax cuts?

A: We've achieved very little. The tax increases on the rich are supposed to generate $650 billion over 10 years. That's about four-tenths of a percent of gross domestic product, or about one twentieth of the required adjustment.

Q: In a best-case scenario, how much might Congress achieve this year?

A: Even the most ambitious proposals out there amount to only a quarter or a third of what we need to do. More important, they're focusing largely on the wrong things. A lot of the discussion has been about cuts to defense and discretionary spending. There's no way we can close the gap without addressing Social Security and Medicare. But that takes a lot longer, and politicians are obsessed with immediate cuts.

Q: What would be the optimal way to close the fiscal gap?

A: To rein in spending, we would have to phase in reforms to entitlement programs -- such as doing more means-testing for Social Security and scaling Medicare premiums to income. On the revenue side, we need to raise about an added 2 to 3 percent of GDP without doing too much damage to the economy. This could be achieved by eliminating tax deductions and possibly introducing a value-added tax, which would have the extra benefit of reorganizing our inefficient system of state-level sales taxes.

The wrong way to do it is simply to raise marginal income-tax rates -- which is what we just did in the fiscal cliff deal.

(Mark Whitehouse is a member of the Bloomberg View editorial board. Follow him on Twitter.)


-0- Jan/06/2013 13:57 GMT