Beyond the cliff.

• Author: Goldwein, Marc
• Position: FISCAL OUTLOOK

By the time this article is published, policymakers will have already decided how to address the so-called "fiscal cliff" of 2012. Perhaps they punted and the nation is staring down a combination of abrupt and mindless tax increases and spending cuts that must be avoided.

Perhaps the parties came together and agreed to replace the fiscal cliff with a balanced deficit reduction package. Perhaps one side blinked and the other got most of what it wanted. Or perhaps we went over the cliff, and are at this moment falling into a double-dip recession.

One thing can be assumed for sure: we have not yet identified and enacted the structural tax and entitlement reforms necessary to put the country on a sustainable path to reinvigorate long-term economic growth. Whatever was enacted at 2012's end was at best a down payment on the important reforms, which the lawmakers believe can be deliberated and enacted in 2013.

A comprehensive and intelligent deficit reduction plan would look at all areas of the budget, and would make gradual and targeted changes rather than opting for massive amounts of immediate, blunt deficit reduction.

Such a plan need not bring the budget into balance, but it should set the debt on a clear downward path relative to the economy--and it should do so both by slowing the accumulation of debt and increasing growth of the economy.

Such a plan should rein in wasteful and low-priority spending, reform entitlement programs to make them sustainable and raise revenue in the context of pro-growth tax reform.

Reining in Low-Priority Spending

The first leg of the deficit reduction stool--reining in low-priority spending--is perhaps the easiest; and some of this has already been accomplished. Policymakers must ask both what government should be doing and how it can do what it is doing more efficiently.

This process should start by tackling overhead--the already enacted federal employee pay freezes, for starters--and should be accompanied by reductions in printing, travel, transportation and energy costs and a rethinking of the federal work force. It should then identify programs and activities most wrought with fraud and abuse, and identify ways to crack down on these costs.

Next, the process should identify areas where government spending is hurting the economy, not achieving its stated goal, or achieving its stated goal in an inefficient way that can be improved. In addition, policymakers should find those programs or subsidies that benefit the private sector...