What happens is the federal budget deficit shrinks dramatically between now and 2015? The White House projects that the deficit for this fiscal year will be $759 billion, or 4.7 percent of GDP, an estimate $200 billion less than the estimate it released three months ago. Yet the OMB estimate of cumulative deficits over the coming decade increased from $5.3 trillion to $5.8 trillion. My concern — which I articulated back in May — is that if the deficit continues to shrink between now and the end of the Obama presidency, as seems plausible, Republicans will find themselves in an awkward position, having emphasized deficit reduction over economic growth and job creation in the policies they’ve advanced since the financial crisis. Shifting gears from a narrow fixation on short-term fiscal consolidation towards a broader growth and reform agenda is really important not just because it is more responsive to the most pressing challenges facing the country, but because it is a more robust political strategy in a changing fiscal policy environment. Demographic change all but guarantees that deficits and debt will continue to be a serious challenge until the 2030s or so, when the the bulk of the baby boom generation will have expired. But oblique approaches — higher growth, increasing public sector efficiency, tax reform, etc. – are far more politically attractive than “root-canal economics,” and there is reason to believe that they will also prove more effective.
For example, entitlement reform efforts tend to emphasize spending reductions. As Andrew Biggs argues, however, one can address actuarial imbalances in a program like Social Security while also making it more “user-friendly” and responsive to the needs of vulnerable populations, like low lifetime earners and the oldest old. Similarly, higher education reform can yield savings while also better meeting the needs of students and parents. Andrew Gillen, the head of Education Sector and formerly of the Center for College Affordability and Productivity, has proposed the automatic conversion of student loans into income contingent loans in the event that a student is unable to meet an initial repayment schedule, thus sparing students from heavy penalties and impaired credit. Coupling this reform with Richard Vedder’s recent call for banning colleges and universities from soliciting detailed family financial information (apart from household income, which would be reported by the IRS) would represent a boon to households with children. And a similar logic can be applied to other domains as well. Eric Cantor, the House Majority Leader, has tried to move in this direction with his “Making Life Work” agenda, but he has faced intense resistance from a minority of congressional Republicans. What the rebels need to understand is that we’ve seen this movie before. The GOP failure to address the deficiencies of the individual health insurance market contributed to the political deluge of 2006 and 2008, which in turn led to the Affordable Care Act.