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Our Message to Washington: Time Balance the Budget

Philip Moeller

It's way past time to take a giant step back in the federal fiscal debate. What we have here, as Paul Newman was famously told in the movie Cool Hand Luke, is a failure to communicate. In contemporary lingo, what we have is a huge framing problem.

Republicans are fixated on spending cuts and reducing tax rates that are at historic lows. Democrats are tethered to the idea of protecting and even strengthening the social safety net, even as all forecasts show that entitlement spending is bankrupting the nation. Each camp is packed with its respective interest groups. It's nice that President Obama and Congressional leaders had a friendly meeting last Friday and say they finally are willing to compromise.

But what's needed is a different way of looking at the problem. What is the single long-term achievement that would put the United States on the right path and be a huge confidence boost to businesses, consumers, foreign trading partners, and other governments? It's not the marginal tax rate on wealthy Americans. Nor is it the retirement age for Medicare benefits.

[Read: 3 Post-Election Tax Changes You Need to Know.]

It is, instead, one of the oldest ideas in the book and a return to the days when America was respected for its responsible leadership. It is called a balanced budget. Shoot me for being naive, but creating a binding agreement to close the gap between federal revenues and spending over the next 10 years would provide the certainty that businesses need and the clarity that everyone craves. It would re-frame the arguments in Washington and give both sides an opportunity to seek a higher road in their partisan efforts.

According to the nonpartisan Congressional Budget Office, federal spending in the 2012 fiscal year that ended last September was 22.8 percent of the nation's gross domestic product (GDP). That's above historical trends, mostly because of the recession and government efforts to help cushion people from its effects. Meanwhile, federal revenues were only 15.8 percent of GDP last year. They, too, have been affected by the recession and, yes, they would have been higher if the Bush-era tax cuts had not been extended. But let's shelve that ideological argument for now.

The nation's spending gap, then, is 7 percent of GDP. Whatever your politics, that's simply an unsustainable number. Ever since the United States began running regular deficits decades ago, most economists argued that the United States could run manageable deficits without harming long-term economic growth. That's owing mostly to our unique ability to print money and fund our deficits by selling U.S. securities to investors around the world. Greece, Spain, and other ailing European economies don't have this luxury. Without going off on too much of a tangent, it's not clear how much longer the United States can continue to fund its deficits this way.

[Read: Fiscal Cliff Shouldn't Change Your Financial Plans.]

More practically, the idea of spending more than you take in just doesn't fly with the balanced-budget reality that confronts American families as well as state and local governments. It especially doesn't play well with younger audiences who have more than enough reason to think their financial futures have already been mortgaged to the hilt. Balancing the federal budget would provide a tremendously reassuring message to them.

Closing a 7 percent budget gap will be painful. But we have no choice. American voters understood this when they went to the polls earlier this month. They want leaders in Washington willing to compromise and make tough decisions.

On the brighter side, closing a 7 percent gap in 10 years can be achieved in annual gradual steps. It could even include a near-term stimulus to help create more jobs and push the economy onto a higher-growth trajectory. And an improving economy would naturally help close a fair amount of the gap, unless Congress and the White House trigger another recession by their continued failure to deal with this issue.

[Read: Are Second Terms Good for Stocks?]

If President Obama and leaders of both parties in Congress together embraced a 10-year balanced budget agreement, they know they'd still have the arduous work of figuring out how much of the gap should be reduced through higher revenues and how much through spending cuts (more likely, such "cuts" actually would come in the form of reduced spending growth in future years). There then would be brutal negotiations on the specific tax and spending changes to be adopted.

But a binding balanced-budget framework--with optional triggers to deal with unforeseen events--would force decisions and prevent us from yet again kicking the can down the road. Make it 12 or 15 years if the CBO and other independent experts say that's the fastest we can get there. Is there any doubt that business confidence and stock markets would soar? Or that people would once again be able to make longer-term plans?

Just imagine. A government that acted like an adult, and behaved as a reliable and predictable partner. What a concept!

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