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To Get Our Fiscal House in Order: Put Politics First
This paper is part of an initiative from the Peterson Foundation to help illuminate and understand key fiscal and economic questions facing America. See more papers in the Expert Views: Fiscal Commission series.
Heidi Heitkamp
Earlier this year, the Treasury Department announced that the 2023 deficit had spiked to nearly $1.7 trillion — a historically significant increase driven by falling revenues, rising entitlement spending, and increased costs for servicing our now more than $33 trillion in debt. Rightfully so, this news sparked a fresh round of outcry about the dangers of runaway debt and the need to get our nation’s fiscal house in order. But, before our national leaders jump straight into a policy debate they would be wise to remember the famous words of Abraham Lincoln who said, “Public sentiment is everything. With public sentiment, nothing can fail; without it nothing can succeed.”
It is easy to point to D.C. dysfunction and despair that nothing can be done. But success facing other big challenges shows that progress is possible along the right path. Policymakers lamented the state of our “crumbling infrastructure” for years. America’s dependence on foreign microchip manufacturers and staying in the race with China to dominate the innovation economy seemed utterly daunting. However, small groups of committed, bipartisan lawmakers were able to work together to develop solutions, socialize them with their peers, and ultimately shepherd the Bipartisan Infrastructure Law and CHIPS and Science Act to President Biden’s desk.
The same approach can, and must, work when it comes to our fiscal future. I was encouraged to see that Congress was recently contemplating such an approach with a House Budget Committee hearing on the need for a fiscal commission. Of course, this is not an entirely new approach. In 2010, President Barack Obama created the National Commission on Fiscal Responsibility and Reform (Bowles-Simpson Commission) to, “address the nation’s fiscal challenges by identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.”
The Commission, comprised of a bipartisan group of current and former lawmakers and budgeteers, crafted a thoughtful set of balanced recommendations to put the country on a sustainable fiscal path. Through a combination of discretionary spending restraints, revenue raising tax changes, health and mandatory spending savings, and a combination of Social Security financing and benefit reforms, Bowles-Simpson projected that its plan would have eventually reduced the deficit by $4 trillion and stabilized the debt at 40% of GDP.
While Bowles-Simpson may be a model for identifying policy solutions, it failed to address the political obstacles inherent in any plan that calls for increased revenue and reduced spending.
When you look at the recent budget forecasts, it’s immediately clear that we have a revenue problem. However, income inequality has increased 7.6% since 1993 and everyday Americans are economically pressured making widespread tax increases inappropriate. Mathematically and morally, we need to make changes to the tax code that maintain or improve the progressivity of the tax code, raise additional revenue, and reinforce the social compact. One way to do this would be to level the playing field by eliminating or reducing the different tax treatments for different types of income. Rather than go hunting through the tax code for individual carve outs, the commission could consider a “Buffet Rule”-style reform that ensures millionaires and billionaires pay the same effective tax rate as middle class filers. In 2012, legislation to impose a minimum effective rate of 30% on millionaire filers was projected to raise $47 billion in revenue. Although a commission would not need to adopt this exact proposal, it should follow the spirit of Bowles-Simpson by prioritizing simplicity, and fair, shared, tax burdens.
Revenue will be necessary, but as anyone who has paid serious attention knows, it will not be enough. As economists like Paul Krugman have noted, in some ways the U.S. government is essentially an “insurance company with an army.” The need to find humane ways to rein in entitlement spending is the ultimate deficit-busting challenge. Doing so will take courage and creativity.
It will take courage to have meaningful talks about how to bend the curve of Medicare spending. That means having an honest discussion about end-of-life care. Previous estimates have shown that up to as much as 25% of patient costs to Medicare arise during the final year of life. That spending doesn’t always lead to better outcomes, with more patients spending their days in hospital beds than at home as they might like. While it is easy to shut down a discussion of end-of-life care with “death panel” demagoguery, any serious look at Medicare needs to examine the drivers of health care spending. The commission should look at ways to empower patients with greater advanced directive planning through access to online apps, greater public education, and incentives for planning. It has been estimated that such steps, which keep power in a patient’s hands, could save $15.2 billion over 10 years.
But of course, critics will point out that Bowles-Simpson ultimately failed. Even though 11 of the 18 commissioners voted to adopt the proposal, it did not clear the 14-vote threshold necessary to see its recommendations enacted. Why? It wasn’t the ideas; it was the politics. The fundamental reality is that you cannot substitute process for political will. This is where Lincoln’s lesson comes in. In addition to building the plan, this commission needs to get the American public bought into the understanding that this is a crisis, get voters invested in the outcome, and then go sell the solution.
Rising interest rates have supercharged the debt problem, bringing new attention to the threat of debt crowding out investment — at least in econ wonk circles. The Penn Wharton Business Model projects that following current policy, the U.S. has about 20 years to take action before our fiscal fate is sealed. That may seem like a long time, but in federal budgeting terms it is right around the corner. Yet, while the economy in general continues to rank among voters’ top concerns deficit and debt clock in at only 3%. Before it gets to work on policy, the commission should engage in some real world, retail politics to make it clear to voters that the debt is part of the economic challenge.
The first step is to take the campaign outside the Beltway. The last thing anyone in Washington needs is another decently catered lunch where they can listen to budget experts largely preach to the choir. The new commission needs to fan out across the country and build grassroots support for changes in the way the federal government budgets.
Their first trip should be to college campuses. When the dominoes of our national debt fall, young Americans will be the ones left to pick up the pieces. College students and recent graduates are already struggling with economic anxiety and straining against high costs and financial burdens. The commission needs to undertake the responsibility for educating young Americans about how the economic drag of debt will undermine their job prospects, put a hidden tax of thousands of dollars on their income, and harm their chances of achieving the staples of the American dream like homeownership and a secure retirement. Demographics dictate that young Americans will continue to be catered to by aspirants for higher office. A commission that can convince them to care about the debt will have laid a major brick in the fight for a sound fiscal future.
The commission’s second stop should be in communities of color. Despite overall economic gains, the racial wealth gap has remained troublingly persistent over the past 20 years. In 2019 the median white family had $184,000 in wealth compared to just $38,000 and $23,000 for the median Hispanic and Black families, respectively. The pernicious impacts of the racial wealth gap, including higher barriers to credit, home ownership, and the transfer of intergenerational wealth, as well as negative health outcomes, are well known. However, if we continue to send dollars out the door to service our debt and fail to make the tax code more equitable, we will not have the resources to invest in solving these problems. These are critical dots that the commission must connect to get buy-in from key communities.
Finally, the commission needs to have a straight talk with the sandwich generation. Given their high levels of voter participation and political influence, today’s seniors get significant attention from elected officials. But it’s tomorrow’s seniors that have the most at stake. Middle-aged adults who are currently raising children, paying to take care of aging parents, and trying to plan for their own golden years are feeling pressure from all sides. When they are just trying to make it through the day, it’s little wonder that they have not focused on the need for long-term solutions. The commission needs to level with them about the changes necessary to ensure that while they will not be in the exact same system as their parents, fiscal reform is the only real way to safeguard benefits for their future and to secure a vibrant economy for their children.
Policy plans can come and go, but advantageous political moments like we are in now rarely emerge. It’s time to empower a commission and kick off the campaign.
About the Author
U.S. Senator Heidi Heitkamp served as the first female senator elected from North Dakota from 2013–2019.
During her six years in the U.S. Senate, Heitkamp quickly became a proven negotiator who worked across the aisle to fight for rural America. She personally showed that if senators work together, it can lead to real solutions. Throughout her time in the Senate, Heidi prioritized improving the lives of Indigenous people and working families, stopping human trafficking; guaranteeing affordable health care; addressing childhood trauma; eliminating unnecessary regulation; and securing an energy policy that keeps cost low but achieves climate goals. Providing equal economic opportunity to Rural America continues to be her lifelong pursuit.
Heitkamp previously served as North Dakota’s Attorney General, and elected state Tax Commissioner. She serves on numerous boards including The McCain Institute, The Howard Buffett Foundation, and The German Marshall Fund. She is the founder and Chair of the One Country Project, an organization focused on addressing the needs and concerns of rural America. Heidi was recently named the Director of the Institute of Politics at the University of Chicago, a university she has long been committed to and a place where she enjoys engaging with students over civic discussions while encouraging them to seek opportunities in public service to our country. She also serves as chair of the advisory committee for the Export-Import Bank of the United States and as a contributor to both CNBC and ABC News.