A New ‘Grand Bargain’ For Americans To Reduce U.S. Debt

Published October 11, 2017

The term “Grand Bargain” is now infamously associated with failed budget negotiations between the executive branch and Congress, most notably negotiations between former Republican House Speaker John Boehner of Ohio and President Barack Obama.

The outcome of this failure to agree on a budget has led the federal debt to climb to $20 trillion, and unconstrained growth in deficits and debt is projected to continue in the coming decades. A future recession is likely to be accompanied by sharply higher interest rates and a potential default on the debt.

Brinkmanship over federal budgets has motivated citizens to address the debt crisis by attempting to enact a balanced-budget amendment to the U.S. Constitution. After waiting decades for Congress to pass a balanced-budget amendment, citizens are close to enacting the amendment through an Article V amendment convention.

In our forthcoming book, “Restoring America’s Fiscal Constitution,” we show how fiscal rules could be designed to balance the budget and reduce debt to tolerable levels over a two-decade period. Of course, fiscal discipline will not be easy. It will require a significantly lower rate of growth in federal spending and fundamental reform of government programs, especially entitlement programs, which are the major drivers of federal spending and deficits.

As the federal government is downsized, there will be pressure to shift programs to state and local governments. The precedent for this shift is unfunded liabilities in the Medicaid program. Even states that have had success in reforming Medicaid to reduce costs must allocate larger shares of their budgets to fund a greatly expanded Medicaid program. Unfunded mandates on state and local governments could undermine support for a rules-based fiscal policy at the federal level.

The solution to this fiscal dilemma is a “Grand Bargain” in the form of a new Homestead Act, loosely modeled on the law passed in 1862 that helped fuel America’s post-Civil War growth boom. We estimate the federal government must generate more than half a trillion dollars in savings each year, earmarked for debt reduction, to reach a tolerable level of debt over the next two decades.

As President Donald Trump has suggested, a major source of that savings could be the sale of assets in the public domain, with revenue earmarked for debt reduction. For example, the value of mineral resources now in the public domain is estimated at $55 trillion.

A new Homestead Act could help solve the debt crisis in several ways.

The revenue from asset sales can be earmarked for debt reduction, reducing the negative impact of debt overhang on economic growth. Shifting resources from the public sector to the private sector would result in a more efficient allocation of resources.

Indeed, we should expect the privatization of $55 trillion in energy resources would be accompanied by a revolution of innovation and technological change in the energy industries. Higher rates of economic growth would be essential in bringing the debt-to-GDP ratio down to tolerable levels.

This Grand Bargain would strengthen finances at the state and local level. With energy resources and other federal assets shifted to the private sector, the tax base for state and local governments would expand significantly. That would generate the tax revenues to at least partially offset the financial burden resulting from devolution of federal programs to state and local governments.

We should expect this expanded role for state and local governments to result in greater efficiency in the provision of government services. The precedent for this productivity advance was the modest devolution of federal programs during the Reagan administration. With block grants replacing direct federal funding, state and local governments responded with reforms to deliver government services at lower cost.

An indirect effect of this Grand Bargain would be a restoration of the balance between the federal government, the states, and the people, as it was envisioned in the 10th Amendment to the Constitution.

[Originally Published at Investor’s Business Daily]