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Jason Furman on Fiscal Policy

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"Jason Furman on Fiscal Policy"

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Jason Furman is now Deputy Director of the National Economic Council. Conveniently, he also wrote an article for Slate back in April on what fiscal policy should look like. Thus far, everything that Obama’s done has been something that Furman recommended. But not everything Furman recommended has thus far made it into the budget. So it’s perhaps useful to take a look at what other kinds of ideas are bouncing around. Furman advocates:

  1. “[I]ncreased sin taxes on items like cigarettes” which, as you know, I agree with. I’m not sure how much room there is left to run with federal cigarette taxes before we start producing a counterproductive black market, but there’s a strong case for higher alcohol taxes and a decent case for legalizing-and-taxing marijuana.

  2. He says we should seek “a broader tax base by, for example, reforming the deductibility of the mortgage interest.” This is a very good idea, albeit politically difficult to implement. But insofar as we’re concerned with the long-run deficit, you could use a non-indexed cap such that over the years inflation will slowly phase the deduction out.
  3. On Social Security he says “Two of my favorite options are raising that amount of Social Security payroll that is taxable and indexing benefits and/or taxes to the changing ratio of beneficiaries to workers.”
  4. He calls for “scaling back on weapons systems originally designed to fight pitched battles on the plains of Europe,” which does seem to be the inclination of many inside the administration, but all signs are that they won’t actually seek to cut the defense budget or even to hold the defense budget steady. Instead, the White House will have a battle with the Pentagon over whether a country that accounts for half of global defense expenditures should engage in moderate real increases in defense spending or large real increases in defense spending. I expect fiscally conservative Blue Dog deficit hawks to be outraged by this state of affairs.*

Outside the realm of bullet points, two other things he suggests are switching the measure of inflation to the C-CPI-U and that cuts in small-bore government programs could be valuable “if only to create more confidence in the budget process.” The latter, I think, is something we very well may see. The President loves the line about going through the budget “line by line” and eliminating programs that don’t work, so they probably need to eliminate something or other to be able to keep saying it.

On the inflation index thing, this almost seems like a bipartisan deficit reduction no-brainer. It would, in effect, simultaneously raise taxes and cut spending but could be plausibly portrayed as doing neither—it’s just a technical adjustment to the way the Consumer Price Index is calculated! Of course, you would never want to do something like that as a one-party measure but if there’s ever a bipartisan commission or what have you, then this is a very appealing option. From an ideological point of view, I would say that the problem to watch out for is that you sometimes hear the suggestion that this switch should be made only for Social Security. That’s not something I would want to see progressives agree to. But make the switch across the board and it’s a progressive measure that, in exchange for a mild slowing of the growth in Social Security benefits, would also mildly increase not only the level of Social Security taxes but also income taxes more generally, generating revenue that can be used for all manner of worthy domestic purposes.

* As always, joking; they’re hypocrites!

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