Robert Zoellick, the past head of the World Bank, is fond of telling the story of how the Foreign Minister of Australia said to him a few months ago: “America is one debt deal away from leading the world out of its economic doldrums.”
He is right.
We know the problem. It is that our present rate of accumulating debt due to our historically large deficits will inevitably lead to a fiscal crisis.
Any debt reduction plan needs to primarily focus on changes to those programs that are driving the problem. These of course are the major entitlement accounts, Medicare, Medicaid and Social Security. There is also a need for comprehensive tax reform.
Rising healthcare costs and an aging population are the central drivers of our rising debt trajectory. We cannot continue to let healthcare costs rise faster than our national income.
Smart entitlement reforms need to involve adjustments that grab hold in five years, ten years and fifteen years so that they make these programs sustainable and affordable not only in the next few years, but in the long term.
Debt reduction done right can actually strengthen the economy down the road. A recent analysis from the Congressional Budget Office found that a $2 trillion reduction in primary deficits could boost GNP by nearly 1 percent over 10 years.
The deal that can avoid this crisis is apparent and very doable.
The goal of deficit reduction must be to put the debt on a clear downward path as a share of the economy, this decade and over the long-term. Achieving that goal will require reducing the debt to below 70 percent of the size of the economy by 2023.
The good news is that the president and Congress have accomplished a hard $2.5 trillion-plus of debt reduction already.
Our fiscal problems will self-correct if our government reduces our deficits and debt over the next 10 years by at least an additional $2.4 trillion. Those reforms should also increase in their effectiveness beyond this 10-year window.
A sum of $2.4 trillion may seem like a great deal of money. But when one considers that it is off a base of approximately $40 trillion of spending over the next 10 years, it is definitely manageable.
What is the deal we need? It should obviously start with an agreement to replace the sequester with targeted and effective changes to federal fiscal policy.
The president has proposed a specific and significant action: changing the manner in which the federal cost of living adjustment (COLA) is calculated to make it more accurate.
In their latest framework, former Sen. Alan Simpson and former chief of staff to President Clinton, Erskine Bowles, have put forward $600 billion as a credible and bipartisan target for health savings over 10 years.
Of course, there is also the proposal for approximately $200 to $300 billion in entitlement savings that was reportedly agreed to between the president and the Speaker in the summer of 2011.
Take any permutation of these proposals, add in the CPI change proposed by the president known as “chained CPI,” and throw in a long-term adjustment in the eligibility age for Medicare and Social Security. You immediately have the spending side of a very strong package.
Comprehensive tax reform is also necessary. Reforming the tax code to lower rates and broaden the tax base will be both good for economy and our fiscal health.
There are at least two other crucial points that the deal must include. First, it must be based off an agreement that fixes the size of the government as a percent of GDP. The federal government since the end of World War II through 2007 has been approximately 19.8 percent of GDP. In the last few years it has grown to over 23.5 percent and is still headed up.
Some of this growth is inevitable due to the retirement of the baby boomer generation, which is doubling the number of retirees in our society. Agreeing to fix the size of the government to a percent of the GDP that is closer to its historical range is essential.
Secondly, all entitlement changes that reduce projected spending need to be locked in with a procedural provision that keeps later Congresses from arbitrarily rescinding them.
The opportunity for the deal is sitting there. It is not rocket science. It is very doable. It should be done so that a predictable fiscal crisis can be muted and our nation can move on.
This column was adapted from testimony delivered before the Joint Economic Committee of the United States Congress on March 14.
Judd Gregg is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee and as ranking member of the Senate Appropriations subcommittee on Foreign Operations. He also is an international adviser to Goldman Sachs.