September 2009
Progressives and the National Debt
Today, the Center for American Progress and the Center on Budget and Policy Priorities held a forum, “Progressives and the National Debt: Consequences and Solutions.” Panelists included Alan Blinder, Laura Tyson, Roger Altman, Paul Krugman, Robert Reischauer, Senator Mark Warner, David Cutler, and William Gale, among others. Although the event labeled the panels as “progressives,” the discussions reflected notable ideological differences among the speakers.
While deficit reduction is often seen as a centrist or even conservative position, conference panelists highlighted the importance of the issue for progressives. Speakers emphasized that progressives need to recognize the threat the federal debt poses to progressive priorities.
Overall, the majority of panelists agreed that the United States faces a very real and serious fiscal crisis, and if we fail to act to bring down future deficits once the economy recovers, our creditors will force the necessary changes on us. CRFB has argued this exact point many times, and thus called for the adoption of a fiscal consolidation plan. Several panelists even explicitly cited the need for the United States to “pre-commit” to a fiscal reduction program.
The panelists generally saw three possible outcomes in the face of a large and growing debt over the coming years, with speakers differing in which they saw as most likely:
- The economy will give. Either inflation will soar as a reaction to unprecedented measures taken by the government and Fed to restore credit markets and demand (not seen as very likely to occur), or long-term interest rates will rise as creditors demand higher rates in the face of a greater risk that the U.S. government could default, or the dollar will sharply depreciate due to capital flight reflecting loss of confidence in the US economy by US creditors (both foreign and domestic). To stem the sharp and disorderly movement of the dollar, the Fed must increase interest rates but interest rates will rise in any event as savings are withdrawn.
- The political system will give, forcing policies that added to the deficits to sunset
- Congress and the Administration will act responsibly in addressing long-term deficit and debt issues in order to preserve credibility for the U.S. government and economy.
Despite the draconian consequences of failure, nearly every speakers voiced genuine skepticism that the Administration and Congress could produce the kind of deficit reductions needed to restore fiscal sustainability.
The panelists also generally agreed that we must:
- Not withdraw stimulus activities until the economy is on a clear recovery path
- Commit to address fiscal problems once we’re out of the recession
- Stabilize the debt/GDP ratio. To do so, the priorities are to reduce spending, increase revenues, and improve productivity in the health care sector, and changes must happen relatively soon to avoid very painful decisions later.
In addressing these problems, the speakers broached the issue of taxation a few times. William Gale argued that the tax base has become too narrow, creating higher rates than would exist otherwise, while also commenting on the inefficiency and over-complexity of the tax system. He argued that the government’s revenue scheme needs improvement, perhaps from a value-added tax (VAT), because we cannot close the long-term fiscal gap under the present tax system.
Perhaps the most important points made at the forum were that when economies are unstable, collapse can be triggered by non-economic events; and the longer we wait for fiscal retrenchment, the harder and more painful it will become to adopt the necessary changes.
Fiscal Year 2010 is Upon Us
Today marks the end of fiscal year 2009 (FY 2009), and to celebrate the occasion, the Committee for a Responsible Federal Budget has put together a look back over the top ten important numbers from the last year.
CRFB highlights the important numbers from FY 2009, including dollars added to the national debt over the last year ($1,650,971,205,167), the amount spent by the American Recovery and Reinvestment Act (ARRA) so far ($164 billion), and the deficit as a percent of GDP this year (11.2 percent). The rest of our top ten important numbers can be seen in the release.
In remarking on the occasion, CRFB president Maya MacGuineas warned: “Many of the deficit-increasing actions the government has taken were necessary to strengthen the economy. But if not accompanied by efforts to reduce the long-term fiscal gap, they come at the expense of future growth and prosperity. It's not too late to get our fiscal house in order though -- we should make that as our fiscal New Year's resolution.”
Highlights from Bill Frenzel's Brookings Web Chat
CRFB co-chair and former congressman Bill Frenzel answered questions on the U.S. budget deficit in a web chat today hosted by The Brookings Institution. Here are some highlights:
Q: Why does it matter what the government spends. Doesn't the government print the money anyway?
A: Unfortunately, when the government spends more than it takes in, and prints the money that makes up the deficit, the value of the US currency declines, and this becomes an extra tax on everyone, especially the poorest of us.
Q: Why aren't more people worried about the expanding deficit?
A: The reason is that Americans have been lulled into a false sense of security by their elected representatives who have lead them to believe there is no tomorrow. Eventually, the bills have to be paid by our children and grandchildren. And at that time, the standard of living for all of us will be lowered. The public is just beginning to get the idea of how bad the problem is.
Q: With all of our domestic and international obligations, where do you recommend spending cuts?
A: I recommend spending cuts in every item of the budget except interest and certain foreign treaty obligations. I believe everything has to be scrutinized including defense, domestic discretionary spending, and entitlements. Entitlements now make up about 2/3 of our annual expenditures. If we can't cut them, we can never balance the budget.
Q: Given the other issues on his plate, how important is it for President Obama to lead on the budget deficit? I always thought Congress had the power of the purse. Couldn't they solve this themselves with pay-as-you-go rules and some Medicare reforms?
A: Congress does have the power of the purse but it invariably needs presidential leadership to do its job property. I believe that solving the deficit problem is so far ahead of all the other problems that confront us, that it ought to be the #1 priority of this president or any other. Reducing the deficit will take cooperation, and courage, factors totally absent from the political scene today.
G-20 Summit's Fiscal and Financial News
It would be easy to dismiss the recent G-20 Summit in Pittsburgh as just more political babble, more empty business as usual just among more countries – but you would be wrong. The Summit’s agenda was pragmatic and ambitious, perhaps one of the most ambitious in awhile. And, contrary to what some pundits cautioned, the array of possible deliverables in the next year is mind-numbing, from fiscal policy to financial sector reform to energy policy. Now that G-20 leaders have given their seals of approval on a wide-ranging agenda and areas of agreement and disagreement have been sorted out in Pittsburgh, a series of international follow up meetings will take place among cabinet ministers, central bankers, and technical experts.
On fiscal policy, there were hopeful developments. In the “Framework for Strong, Sustainable and Balanced Growth” (described as a new “compact”), G-20 leaders have agreed to set out medium term national policy frameworks based on the shared objective of rebalancing global growth. The frameworks are to cover fiscal, monetary, trade and “structural” (not defined) policies. The idea is that each country’s framework will be presented to and assessed by fellow G-20 partners, with guidance from the International Monetary Fund (IMF). We will hear more in November when a follow up meeting takes place with Treasury Secretary Geithner, other Finance Ministers, and the central bankers.
Why do we call this development "hopeful"? As we emerge from the deepest recession since the 1930s, our confidence in the future (often called "credibility" by taxpayers and creditors) would improve if we thought our fiscal house would be put in order and sensible management take place, so that underlying growth would be stronger in the longer run.
We hope that the national frameworks would include commitments to stimulus as necessary, to exit strategies from stimulus, and to fiscal consolidation (including the tackling of structural problems) to boost sustainable growth. National policies can be expected to vary in terms of timing, content and size, depending on the country.
By placing exit strategies and beyond within a global context, G-20 leaders have highlighted the importance of global economic cooperation in terms of national self interest. National stimulus packages were more powerful because of global coordination, and, similarly, there is concern that uncoordinated withdrawal of that stimulus could have a negative effect on economies trying to recover. In addition, it is hoped that global cooperation will provide political cover to help world leaders implement exit strategies from stimulus, which may not be politically easy. U.K. Prime Minister Gordon Brown recently announced at the annual meeting of trade unionists that to reduce the U.K. fiscal deficit, the top personal tax rate would be increased and spending cuts made (in 2011, it appears); and the Spanish government has announced tax hikes for its 2010 budget, which must be approved by parliament. These announcements have already set off opposition.
G-20 leaders also discussed financial regulatory reform at length. Considerable work remains, and meetings of experts to nail down agreements will be held over the next year, starting with the November meeting of central bankers and finance ministers. Among the critical areas discussed in Pittsburgh were requirements for higher capital levels and increased quality of capital for banks; changes in compensation practice to reflect “long-term value creation”; and the tightening of derivatives market trading (although changes for non-standardized trading, which many consider a feature of today’s financial crisis, would be limited).
Economic Crisis Puts Strain on Social Security
As the Associated Press recently reported, Social Security has come under considerable strain as a result of the economic crisis. Payroll tax revenues have suffered -- both because of lower wages and fewer contributors (due to high rates of unemployment); and at the same time, outlays have increased as many newly unemployed seniors have begun collecting early retirement benefits. As economist Alan Auerbach explained:
"A lot of people who in better times would have continued working are opting to retire...If they were younger, we would call them unemployed."
As we've shown before, the projected fiscal consequences of these two developments is quite large. Instead of running $700 billion surplus over the next decade, the program is now projected to run a $19 billion deficit. And of course, as we go further out, the shortfall is projected to be much larger.
Yet even as the Social Security system is projected to be in deficit over the next couple of years, many have been calling for an ad-hoc benefit increase, in the form of a cost of living adjustment (COLA) -- even though prices in the economy have not increased.
Instead, they should be calling for benefit reductions and or tax increases, to ensure the system doesn't run out of money. Recently, the Employee Benefit Research Institute released a number of options to close Social Security's long-term gap -- and politicians should review them carefully.
It's time to put Social Security reform on the legislative agenda.
CRFB Co-Chair Bill Frenzel to Host Online Chat
UPDATE: Visit The Scouting Report Web Chat: The U.S. Budget Deficit at 12:30 to chat with Former Congrsesman and CRFB Co-Chair Bill Frenzel.
Committee for a Responsible Federal Budget co-chair Bill Frenzel will host an online chat conversation, tomorrow, run by the Brookings Institution. Frenzel will focus on the federal deficit and its connection to health care reform and economic growth. Politico’s senior editor Fred Barbash will moderate.
You can register for and tune into the event here, and submit questions in advance to ScoutingReport@brookings.edu.
US Budget Watch Releases Paper Comparing Health Care Reform Plans
Today, US Budget Watch released a new paper, Comparing Health Care Plans: A Guide to Health Care Reform Proposals, highlighting the ten-year costs and savings of the major provisions from three of the reform bills. Several health care bills have been proposed in Congress over the past few months, but the report focuses on the Senate HELP Committee bill, the Senate Finance Committee bill, and the House Tri-Committee bill.
The three bills seek to address the goals of expanding coverage, improving quality, and reducing costs, which are very often in conflict. Overall, the paper finds that, in its current form, the Senate HELP Committee would add between $611 and $1,111 billion to the deficit over the next ten years—without accounting for an expected $500 billion from expanding Medicaid and any other offsets. The House Tri-Committee bill would add only $239 billion over ten years, while the Senate Finance bill would actually decrease ten-year deficits by $49 billion. The costs and savings under the Senate HELP Committee cannot currently be meaningfully compared to the other two bills, as savings from Medicaid and other offsets are under the jurisdiction of the Senate Finance Committee and not the HELP Committee.
The bills are similar in that they expand coverage, create health insurance exchanges, provide subsidies for lower-income individuals, expand Medicaid, and include savings from Medicare, Medicaid, and new taxes. However, each bill has a distinct overall cost because of different sized subsidies, taxes, and penalties.
The report states that:
“To meet the test of fiscally responsible reform, a plan must go beyond simply offsetting the costs. Because health care is the leading driver of massive, long-term deficits facing the country, reform must also significantly slow the growth of government spending on health care.”
CRFB argues that both short-term and long-term costs must be the focus of any health care reform legislation as negotiations between and within Congress and the Administration continue.
Moody's Still Cautionary on U.S. Debt
Fears over any near-term U.S. inflationary pressures may have eased for the moment. Moody’s recently reassured investors that it didn’t see any problem in the near future for the United States and its growing debt (unlike the United Kingdom which is under pressure to adjust its fiscal policies sooner rather than later.)
However, fears about the medium-term fiscal outlook for the United States as the U.S. economy rebounds remain. In recent weeks, the auctions for Treasury securities have been oversubscribed and the interest rates on short-term (and long-term) Treasury securities remain below historical averages. And last year’s concern over the risk of owning Treasury securities (in 2008, the credit default swap rate for Treasury bills increased nearly sevenfold) seems to have subsided for the moment.
Is this good news or just backing away from the very pessimistic view of the bond vigilantes earlier this year?
Moody’s tempered its announcement with a warning about the medium-term outlook for U.S. fiscal policy. Moody’s hinted that it is “conceivable” that a large and wealthy government could be downgraded if it had “a material and irreversible deterioration in its debt conditions over the next five years or so.” This follows on the June announcement that Moody’s thought the U.S. bond rating of AAA (the highest rating) was “safe” but cautioned that it would be at risk if the United States was “unable to bring public debt back to a downward trajectory.” And since U.S. debt, which will approach 60 percent of GDP in 2009 and then grow to 70 or 80 percent by the end of this decade, policymakers would be wise to read between the lines of Moody’s press release and take action on the U.S. medium-term debt.
One More FDIC Bank Closing
On Friday evening, the FDIC reported that it has taken over an additional bank (Georgian Bank) for a cost to the FDIC of around $892 million. This brings the total number of failed banks since the beginning of 2008 to 111. Total deposits of all failed banks now equal $87.08 billion for 2009 and over $321 billion since the beginning of 2008, all at an estimated cost to the FDIC of just under $48 billion. Visit Stimulus.org for more details and a full list of FDIC bank closings.
| Total Deposits | Cost to the FDIC | |
| Georgian Bank | $2,000,000,000 | $892,000,000 |
Finance Committee to Continue Work on Health Bill Next Week
This has been a big week in the Senate Finance Committee regarding work on the health care reform bill. The Committee endued many all-day sessions this week in their efforts to mark up the health care reform bill. Wrapping up for the week (to resume next Tuesday), the Committee has left a number of amendments yet to be debated.
Over 500 total amendments have been offered to the bill, and Finance Committee Chairman Max Baucus has put considerable pressure on the Congressional Budget Office (CBO) to re-score the bill including the effects of amendments. The sheer number of amendments is the major reason why the panel could not finish its work this week, which was the original goal of Chairman Baucus.
Baucus began the markup process with a $900 billion bill that would expand coverage to approximately all but 5 percent of legal residents. Additionally, it would reduce the federal budget deficit by around $49 billion over ten years. The bill would result in $300 billion in cuts to Medicare spending, and would also levy taxes and fees on healthcare companies to help cover the spending that would be required to cover so many new people in the system.
While it looks like the bill that will come out of Committee could have the support of Republican Senator Olympia Snowe, centrist Democrats Blanche Lincoln and Tom Carper seem to have indicated their support will rely on Baucus’ ability to reduce health care costs and cut the budget deficit. Snowe has also offered a number of amendments that did not come up in discussion this week.
One of the highlights this week was when the Committee took up the task of debating proposals to cut Medicare on Thursday. By a vote of 13-10 they rejected a proposal (brought forward by Senator Bill Nelson) to require pharmaceutical companies to increase the amount of discounts given Medicare on prescription drugs for seniors. This proposal would have cost over $100 billion over ten years. Baucus, Carper, and Menendez voted along with the Committee’s Republicans to reject that proposal, which would have gone against a prior agreement between Baucus, the Administration, and PhRMA, made earlier this summer.
Chairman Baucus postponed a vote that was expected today on a proposal to create a public option that would compete with private insurance companies. It should take place next week.
Meanwhile in the House, Democratic leaders discussed the public option today in a meeting lasting over three hours. The timetable for bringing a measure to the House floor is not yet certain; they are hoping to finish writing their bill next week for submission to the CBO for scoring. Full debate by the House could begin in mid-October.
CRFB will release on Monday a comparative analysis of the Finance Committee bill, the House Tri-Committee bill, and the Senate HELP Committee bill.
People Pay Taxes
The simple truism that tax professors try to teach, and politicians try to ignore, is that people pay taxes. All taxes are passed onto people in one form or another. The corporate income tax for instance, shows up as lower returns for shareholders, higher prices for consumers, and lower wages for workers. People might not see the tax as directly as they do a sales tax, income tax, or payroll tax, but there is no getting around that the burden of shouldering the tax falls to them.
But in politicians’ never-ending attempts to run from the need to raise taxes on—gasp—actual people, many policies are crafted to make it appear that a tax burden falls on less sympathetic entities, such as energy or insurance companies, to take two recent examples.
That is one of the reasons many policymakers prefer a cap-and-trade system to an outright energy tax. Much of the pushback has been political concern that the costs of the trading permits would be passed onto consumers. Well yes, of course they would. That creates much of the benefit since charging people more for using energy would incentivize them to decrease their demand.
Similarly, in the Senate Finance health reform bill, the main tax increase would be on so-called “Cadillac health insurance plans” conjuring up the image of bloated insurance executives and their companies footing the full bill. But companies don’t actually foot tax bills. While the policy change might lead to lower CEO compensation it would surely also lead to the costs being passed on to consumers as well in the form of higher insurance premiums. It’s not a bad policy, we just shouldn’t pretend it holds consumers harmless.
Ideally, we would just implement a straightforward energy tax and tax workers directly for their employer-provided health insurance.
Given that the government needs revenues, there will be more to come. A guest opinion piece in the Financial Times today on the benefits of a transaction tax, argues for an idea we will be hearing much more about in the coming months: levying a new tax on all financial transactions. The case will be made that such a tax is a fair way to make the companies that benefited from “bailouts” repay some of what they owe. There are arguments for and against such a tax, but no one should be persuaded that ultimately it won’t be paid for by people—all taxes are. The considerations should be which people will pay and what the effects on saving versus consumption such a policy would have, not whether companies rather than taxpayers should bear the new burdens.
An interesting and related discussion has been taking place on some of our favorite blogs. Donald Marron has thought through when is a tax a tax here and here, providing some interesting observations about how to navigate the grey lines, and Diane/Economist Mom has wisely concluded she doesn’t care what we call it, we should just do it.
More Pandering to Seniors
Yesterday, the House voted 406-18 to prevent an 8 percent increase in Medicare premiums for 11 millions seniors, many of whom are well-off. At a time when Medicare is on an unsustainable path and budget deficits are out of control, we are very concerned about this provision and others like it. Congress cannot afford to keep making “easy choices” without a risk of breaking the bank. As House Majority Steny Hoyer (one of the five Democrats to courageously vote against the bill) said:
Ladies and gentlemen, I don't know how many of you go to sleep at night worried about whether Ross Perot can pay his premium, but this will freeze Ross Perot's basic premium from going up.
Typically, Medicare premiums are allowed to increase every year as health care costs rise. They are scheduled to do so, under law, so that they continue to cover roughly 25 percent of Medicare’s costs. However, a “hold harmless” provision makes it so premium increases cannot be larger than Social Security’s cost of living adjustment (COLA) for most recipients. But since the economy is experiencing deflation, there is no scheduled COLA, and so roughly three quarters of seniors will not be subject of a premium increase. That leaves the remaining quarter of seniors – mainly those who did not collect Social Security in the previous year, those making above $85,000, and those whose premiums are covered by Medicaid -- paying all the extra costs.
If the bill used general revenue to pay for the costs imposed by the hold harmless provision, that would be one thing. But this bill goes too far by exempting seniors from a premium increase at all, at a time when health care costs are continuing to rise.
Worse still, there is continued political pressure to provide seniors with some type of ad-hoc COLA. As we’ve explained before, the reasons seniors are not getting a COLA is because there isn’t any inflation. In fact, there is deflation; and so the fact that Social Security benefits stay the same actually means that seniors are already receiving a benefit increase, when you adjust for inflation.
The economy is doing badly, and we are all suffering. Seniors have not been insulated from this economic crisis. But at a time when our public resources are becoming scarcer by the moment – and so many of them are already going to retirees – we can’t afford this type of pandering. We need to focus any new spending where it is truly needed, and be honest with the public – even if it isn’t politically popular to do so.