November 2009
Considering a War Tax
Update: An editorial in today's Washington Post discusses the possibility of increasing the gasoline tax to help pay for the troop increase. The editorial mentions that gas taxes enacted in 1940 and 1951 helped to pay for World War II and the Korean War, respectively. The article points out that the federal gas tax has not been raised since 1983, and that a 40-cent increase over five years could help "cover most or all of the war's costs and still leave gasoline prices well short of where they were in the summer of 2008."
Ahead of President Obama’s expected proposal to increase the number of troops in Afghanistan, House Appropriations Committee chair David Obey has joined several other Democrats in proposing a war surtax.
Obey’s motives probably have a lot more to do with his opposition to a troop surge than his fear of borrowing. But that doesn’t mean a proposal to pay for the costs shouldn’t merit consideration. If we are going to engage in more spending, regardless of what kind, it should be paid for. The current debt picture should make those trade-offs painfully clear.
President Obama is expected to propose a 20,000 to 40,000 troop increase. The White House estimates each additional troop would cost roughly $1 million per year (although the Pentagon estimates closer to $500,000), and that the total cost of a troop increase would be between $20 billion and $35 billion per year. This is on top of the $55 billion a year we are already spending on Afghanistan (and related activities), and the addition $100 billion we are spending in Iraq.
The Share the Sacrifice Act of 2010 would impose a three-bracket surtax, set at “applicable tax rates” necessary to fully-finance expenditures related to the war in Afghanistan. Certain taxpayers – in particular members of the military and their families – would be exempt.
Any new initiative the federal government takes, be it an expansion of health care, a tax cut, or a military operation should be paid for.
It would be reasonable for these offsets to occur either as a tax increase, or as a spending cut; and given the amount of waste in the defense budget, there is plenty of room for spending cuts.
But at the end of the day, we can’t pretend that certain measures – even important measures – are free.
Congressman Obey had it right when he declared that “if this war is important enough to engage in the long term, it's important enough to pay for.”
Weekend Editorial Roundup
Here are the highlights from this weekend’s editorials on fiscal and budget policy:
- The Wall Street Journal calls the pharmaceutical industry foolish for believing politicians will keep promises they made to the industry in exchange for support on health care reform. The Journal says lawmakers in the House and Senate will probably abandon promises of no price controls or imports of foreign drugs.
- The New York Times laments the continued weak housing market, noting a Commerce Department report that new-home construction fell sharply in October. Since efforts to stimulate the housing market are failing, The Times argues the government should focus more stimulus funds on job creation instead.
- Although the $700 billion TARP fund was more than needed, The Washington Post encourages Treasury Secretary Geithner to resist Republican calls to end the fund early. The TARP should continue until its scheduled expiration next year in case any other financial institutions need assistance, The Post says.
- The Wall Street Journal condemns the Labor Department for ending a 2008 rule that allowed financial advisors managing 401(k) programs to also advise employees on their investments. The benefits employees gain from financial advice outweigh any concerns over conflict of interest, The Journal argues.
To sign up to receive a daily roundup of news clips on fiscal and budgetary matters, please contact lewisb@newamerica.net.
How to Reduce National Health Spending
The New England Journal of Medicine, last week, had an article by four RAND researchers on Controlling U.S. Health Care Spending. Using Massachusetts as a model to measure national effects, the authors estimated the potential range of impact for eight items. Of them, bundling payments appears to have the most promise, with savings potential of between 0.1% and 5.4%. They find that many items, such as health IT, could either increase or decrease national health spending (the range for Health IT is between a 1.5% reduction and a 0.8% increase).
Thanks to Donald Marron and Bruce Bartlett for pointing this out.
FDIC Deposit Fund Turns Negative
Yesterday, the FDIC reported that the deposit insurance fund fell below zero for the first time since the third quarter of 1992 (during the savings-and-loan crisis). The fund balance, as of the end of the third quarter, stands at -$8.2 billion, including the more than $38 billion set aside for projected losses from bank failures over the coming year.
The economic downturn's onslaught of bank closings combined with the FDIC’s increase of despot insurance from $100,000 to $250,000 on all individual bank deposits have depleted the FDIC's reserves.
To bolster the deposit fund, the FDIC has already approved a measure (as we discussed here) to require insured financial institutions to prepay three year worth of deposit premiums. This will provide the FDIC with around $45 billion at the end of this year.
The FDIC release also reported that quarterly earning of insured banks were over $2.6 billion, above the $4.3 billion in losses during the second quarter. However, 26 percent of all insured banks reported net losses for the third quarter.
Since the beginning of 2008, the FDIC has closed 150 banks--124 of which were in 2009. Visit Stimulus.org for a full list of FDIC bank closings since 2008 and their total costs to the deposit insurance fund.
Federal Officials Pressure ‘Pay Czar’ to Ease Pay Restrictions at AIG
Worry about the government’s investment in AIG has prompted some federal officials to call for easing the restrictions on pay at AIG for 2010, the Wall Street Journal reported.
Last month, the U.S. pay czar, Kenneth Feinberg, announced he cut 2009 compensation, including salaries and stock, for the top 13 AIG employees by 57%. In recent weeks, officials from the New York Fed and the Treasury Department have urged Mr. Feinberg, to avoid making 2010 pay similarly restrictive for some top AIG executives and employees, according to people familiar with the discussions.
Fed and Treasury officials told Mr. Feinberg that tough restrictions could ultimately jeopardize the government's ability to recoup its roughly $90 billion in loans because key employees would leave.
Despite this recent pressure to lower restrictions on pay, some still question whether the government is acting in the taxpayers’ interest.
A report by the special inspector general overseeing the Troubled Asset Relief Program said the New York Fed "refused to use its considerable leverage" to compel AIG's trading partners, including Goldman Sachs Group Inc., to accept lower prices for more than $60 billion in complex securities they insured with AIG.
The U.S. government currently owns 80 percent of AIG. Track all of the ways in which the federal government has provided support for AIG at Stimulus.org.
Interactive and Sharable Graphs Comparing the Health Care Bills
UPDATE: CHARTS AUTOMATICALLY UPDATE AS NEWER LEGISLATION IS PUT FORWARD. CURRENTLY, THEY REFLECT THE MANAGER'S AMENDMENT TO THE SENATE BILL.
Today, US BudgetWatch updated its Charts Comparing Health Care Reform Bills. The publication compares the House and Senate health care bills through two text charts and four graphs, all exploring different metrics.
Here at The Bottom Line, we have republished the graphs in a way that makes them both interactive and sharable. That means you can explore the charts here, or feature them on your own website or blog. As the bills change, we'll update these graphs -- and whatever you have embedded will automatically update with them.
To embed one of the charts into a blog or website, simply click the "Share this chart" link at the bottom left corner of the chart, and then copy the embed code. We only ask that you attribute The Bottom Line or the Committee for a Responsible Federal Budget.
Please feel free to contact us with any questions, and we will respond ASAP. Also check out all the charts, along with their notes and source information, here.
Deficit and Debt Make Headlines
Public concern over the United States’ ballooning deficit and debt seems to be growing. Both the cover of this week’s Economist and the lead story on The New York Times website tackle U.S. borrowing. As of this afternoon, The Times story was one of the site’s most emailed.
As The Times explains, the timing of increased government borrowing poses additional challenges:
The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.
The Economist makes the same argument CRFB President Maya MacGuineas made when testifying before Congress a couple weeks ago. Both argue the U.S. should announce a credible plan to reduce the deficit.
Far from requiring immediate spending cuts or tax increases, a credible plan would reassure markets and allow an orderly exit from fiscal stimulus.
To reduce the debt, The Economist outlines a number of spending cuts and tax increases.
Raising the retirement age for Social Security and Medicare would save money while encouraging Americans to work longer, thereby expanding economic potential. Medicaid could be converted to block grants, compelling states to assume more of the burden of cost control. Other spending should also be vigorously squeezed, to stop federal funds being wasted on highways of dubious value or trade-distorting farm subsidies.
Also a sign that deficit reduction is gaining support, reports indicate that the White House plans to focus on the debt in the state of the union address.
And, another most-read story over at The Wall Street Journal is former CBO director and CRFB board member Douglas Holtz-Eakin’s editorial on “The Coming Deficit Disaster.” He argues that now is the time to deal with the deficit.
Weekend Editorial Roundup
Here are the highlights from this weekend’s editorials on fiscal and budget policy:
- As politicians react to record high levels of unemployment, The Washington Post criticizes lawmakers for grandstanding. With record a budget deficit and interest rates at zero, The Post says, “the limits of prudent government intervention are already being tested,” and politicians should think carefully before enacting new costly stimulus spending.
- The Wall Street Journal denounces the debate over the health care reform bill as a political charade. Moderates will “protest and posture” until the bill is improved, even though the bill is so flawed that politicians should scrap it and start over, The Journal argues.
- The New York Times praises the Senate health care reform bill for including provisions that would reduce cost. The legislation is an improvement over the Senate Finance Committee bill and conservative Democrats should support the Senate bill, The Times says.
To sign up to receive a daily roundup of news clips on fiscal and budgetary matters, please contact lewisb@newamerica.net.
One More FDIC Bank Closing
On Friday evening, the FDIC reported that it has taken over an additional bank (Commerce Bank of Southwest Florida) for a cost to the FDIC of around $24 million. This brings the total number of failed banks in 2009 to 124. Total deposits of all failed banks now equal $115.5 billion for 2009 and over $349 billion since the beginning of 2008, all at an estimated cost to the FDIC of just under $54 billion. Visit Stimulus.org for more details and a full list of FDIC bank closings.
| Total Deposits | Cost to the FDIC | |
| Commerce Bank of Southwest Florida | $76,700,000 | $23,600,000 |
China Worries About U.S. Debt -- SNL Style
Yesterday, Saturday Night Live's opening sketch featured Chinese President Hu Jintao (played by Bill Hader) in a joint press conference with President Obama (played by Fred Armisen). President Jintao expressed deep concern over their holdings of U.S. debt, although President Obama reassured them they "are going to get [their] money back". Watch the sketch here:
Senate Votes to Begin Health Care Debate
Yesterday, the Senate voted 60-39 to begin debating their health care reform bill (all 60 votes were needed for debate to continue). CRFB has put together a chart comparing the House and Senate bills here. We also recommend you check out the following CBO and JCT reports on the Senate bill released in the last few days:
- CBO Analysis of Patient Protection and Affordable Care Act
- JCT Revenue Estimates for Patient Protection And Affordable Care Act
- CBO: Subsidies and payments at different income levels
- CBO: Distribution of individual mandate penalties
- CBO: Effect on the Hospital Insurance (HI) trust fund
- CBO: Effect on projected enrollment in Medicare Advantage plans and subsidies for extra benefits not covered by Medicare
And check our our recent blogs on the bill:
Reports Roundup
A number of very interesting and relevant government reports have come out this week. Check them out:
- GAO: Recovery Act: Recipient Reported Jobs Data Provide Some Insight into Use of Recovery Act Funding, but Data Quality and Reporting Issues Need Attention
- CBO: Information on Medicare's Payments to Physicians and the Budgetary Effects of H.R. 3961, the Medicare Physicians Payment Reform Act of 2009
- CBO: Patient Protection and Affordable Care Act
- JCT: Estimated Revenue Effects Of The Revenue Provisions Contained In The “Patient Protection And Affordable Care Act”
- CMS: Estimated Financial Effects of the "America's Affordable Health Choices Act of 2009"
- CBO: Long-Term Implications of the Department of Defense's Fiscal Year 2010 Budget Submission