Update 09-30-10: The Senate passed the CR last night on a 69-30 vote. The House soon followed with a successful 228-194 vote. An amendment from Senator John Thune (R-SD) to cut non-security spending by 5% failed on a 48-51 vote. An amendment from Senator Jim DeMint (R-SC) to extend the CR until February 4 also failed, 39-60.

The Senate today invoked cloture on a stopgap measure to fund government operations when the new fiscal year begins October 1. The continuing resolution (CR) is needed because Congress has been unable to approve any FY 2011 appropriations bills so far.

The resolution will continue funding for most government programs at current levels through December 3. The bill contains some extra provisions that have bipartisan support, heeding the demands of many senators for a relatively “clean” CR with few add-ons, although the White House requested billions of dollars of additional funds in the measure. Some senators also called for the CR to be set at 2008 levels as opposed to the 2010 level, but that showdown apparently has been avoided for now. The desire of most members to return home to campaign seems to ensure a quick and lopsided vote to approve the CR.

Some additional items in the resolution include maintaining the maximum loan limits for Fannie Mae, Freddie Mac, and Federal Housing Authority loans in high-cost areas through September 30, 2011; allowing U.S. Customs and Border Protection to maintain the level of personnel currently in place; and enabling Federal Air Marshals to maintain the existing coverage level for international and domestic flights.

The 84-14 vote sets up a final vote possibly Wednesday, although some are pushing for a vote later this evening. The House is expected to quickly follow suit and then Congress will adjourn until after the mid-term elections.

Congress will address the spending bills and several other measures during a post-election lame duck session.

Not Much Worth Remembering – As September closes this week, it is clear that lawmakers already have one foot out the door; anxious to return home to campaign in an election season unlike any other. The only accomplishment that Congress can point to this month is the passage of a small business package that had been stalled for months. The one item remaining for legislators is a must-pass continuing resolution to fund government when the new fiscal year begins.

Small Business Bill Makes it Through – The president today signed the Small Business Jobs and Credit Act, HR 5297. The House accepted the Senate-passed version last week. While it is technically paid for, one of the offsets is a timing gimmick that means the bill will likely add to the debt in the long run.

Stopgap Funding Measure Will Be Required – Since Congress has been unable to approve of any FY 2011 spending bills, a continuing resolution (CR) will be required to keep the federal government functioning come October 1, the beginning of the fiscal year. That will be the last major piece of business this week for Congress before it can leave town.

Tax Cut Debate Put Off – The Senate has decided to put off the contentious debate over extending the 2001/2003 tax cuts until after the election. Senate Finance Committee Chairman Max Baucus (D-MT) had planned to release his bill last week, but leaders decided to postpone consideration. The House will likely follow suit and not attempt a vote before adjourning for the final campaign push.

No Ducking the Lame Duck – Tax cuts and appropriations bills will be considered during a post-election lame duck session of Congress. Any recommendations from the President’s National Commission on Fiscal Responsibility and Reform possibly will also be considered then, meaning some very important fiscal decisions could be made during this session.

Lawmakers Will Grill DoD on Fiscal Reforms – Defense Department officials will face questions from the Senate Armed Forces Committee on Tuesday over Secretary Gates’ plan to make the Pentagon more efficient. Gates wants the Department to find $100 billion in savings over 5 years.

Today, the House passed HR 5297, the small business bill that had been stalled in Congress for weeks. It is expected that President Obama will sign it into law right away. Meant to provide capital for banks to loan to small businesses, the bill will establish a $30 billion lending fund that will buy equity in community banks and have them pay varying dividends based on how much they increase lending (CBO actually expects this provision to raise $1 billion over ten years). Also, the bill will increase the allowable size of Small Business Administration loans from $2 million to $5 million, fund a State Small Business Credit Initiative, and allow the exclusion of 100 percent of the sale of small business stock from capital gains taxation.

The bill is ostensibly deficit-neutral, with the costs coming upfront, as you'd expect from a stimulus bill. CBO’s most recent cost scoring of the bill, which came a month and a half ago, indicates that the bill will increase deficits in 2011 by about $85 billion. After that, the bill will reduce the deficit in each year, eventually making it deficit-neutral--in fact reducing the deficit by $500 million--by the end of the ten-year outlook.

The bill is paid for with a few tax measures. They include greater reporting requirements (i.e. reducing the tax gap), and a tightening of the cellulosic biofuels credit.

The "paid for" is just on paper though. Since the House simply passed the Senate's version of the measure, it also passed the timing gimmick included in the Senate bill: allowing for more rollovers into Roth IRAs. Since the rollovers are taxable, they would raise revenue over the ten-year outlook. But since withdrawals from Roth IRAs are tax-free and withdrawals from traditional IRAs are not, it would decrease revenues in the future. It's unclear how much this specific provision would cost in the long-run, but it would surely be a net decreaser of revenue. Also, if this provision were excluded from the ten-year cost estimate, the measure would not be deficit-neutral.

We would have preferred the bill to be passed gimmick-free, as the House's original bill was. This is the type of shortsightedness that has plagued fiscal policy for far too long.

Check out Stimulus.org (where we now have this bill posted) for information on all other related recovery measures.

It's that time of year again, when people start asking whether Social Security recipients will receive a Cost of Living Adjustment (COLA).  And it appears that the answer is, once again, "no."  As Donald Marron said on his blog recently:

It looks like 2011 will be another year without a cost-of-living adjustment (COLA) for Social Security recipients. Why? Because consumer prices haven’t yet returned to the peak they reached in the third quarter of 2008, when the 2009 COLA was set.

Provided there is no major increase in the CPI-W in September, Marron is absolutely right. One reason why prices haven't rebounded to their 2008 level is that the 2008 level itself was so high. COLAs are measured by their third-quarter-to-third quarter increase, and, as you might remember, the third quarter in 2008 was when oil prices hit $150 per barrel and gas prices were north of $4 per gallon. The result of this timing was a CPI level that was unusually high, leading to a large 5.8 percent cost-of-living increase for 2009. Prices, especially oil prices, dropped precipitously after the summer of 2008 and they haven't increased to that level since.

Social Security recipients are in better shape now than they could have been. As Marron says, if Social Security benefits simply followed the CPI-W (going up and down in line with overall prices in the economy), they would actually be below 2009 benefit levels right now. But since benefits never are cut, they have stayed flat, meaning that real benefits have actually increased. Normally, COLAs keep real benefits flat. Ironically, deflation leads to a better outcome for seniors' COLAs than inflation does.

The chart below shows how a hypothetical $1,000 benefit in 2005 would increase or decrease based on different COLA rules: the current one that has a zero bound and an alternative one that allows for negative COLAs.

When the no-COLA announcement was made in October 2009 for benefits in 2010, there were many calls for an ad-hoc COLA or a one-time payment to seniors, as the Obama Administration advocated. Luckily, advocates were rebuffed (well, not really--see below). This year seems to be no different; in fact, Rep. Earl Pomeroy (D-ND) beat everyone to the punch by introducing a bill in July that would make a $250 one-time payment in the event of a no-COLA year. In the words of Charles Barkley, "that's a terrible idea."

(It seems that lawmakers were actually able to sneak-in a one-time payment to seniors this year--just under a different guise. Under the health care reform act, Medicare Part D beneficiaries will be receiving a $250 check to help them deal with the "donut hole", or the coverage gap between a beneficiary's maximum deductible under their drug plan and the threshold where catastrophic coverage would kick in. Measures in the health care reform package will gradually close this coverage gap, but to "hold beneficiaries over", the federal government will be sending them $250. "Coincidentally", the Medicare Part D and Social Security cover nearly all of the same people . Even under the guise of health reform, lawmakers just couldn't resist the urge to pander to seniors.)

Politico mentioned the possibility in passing the other day that some lawmakers may support using the credit on the PAYGO scorecard to pay for any sort of COLA measure, though nothing specific has been brought up yet. The $43 billion in "credits" on the PAYGO scorecard are the savings that have been accumulated by bills passed this year; most of the savings come from health care reform. Under the PAYGO law, Congress would technically be able to pass a bill such as the one-time payments using these savings as offsets. (Note that Congress could instead decide to use the PAYGO credit to pay for extending tax cuts  for upper-income earners.) Again, these are all terrible ideas that would reflect poor policymaking and poor fiscal decision making.

But some of these ideas are even worse than others:

• The worst outcome would be an ad-hoc COLA, since such an action would institute a permanent change in the Social Security system by making benefits higher (indefinitely) than they would have been.
• Also very bad would be a one-time payment to seniors that was designated as "emergency spending"--thus waiving the requirement that it be paid for. This would at least be only tempory, but it would add to the debt and set a bad precedent.
• Nearly as bad would be a one-time payment that used credits on the PAYGO scorecard -- that would at least eliminate the ability of lawmakers to use those hard-earned credits for something else.
• Though a one-time payment to beneficiaries that was fully offset would do the least fiscal damange, it is poor policy nonetheless. Such a payment is unjustified given that real benefits will aleady be higher than in 2009. And it will take away a policy change which could have been potentially used for deficit reduction.

Getting the message? Any way you frame it, it's just a bad idea. If prices do not drastically increase this month, any type of COLA or one-time payment to seniors in 2011 would be plain old political pandering.

Many of the credits on the PAYGO scorecard (in fact, over $44 billion) were put there by health reform's savings from Medicare Advantage and cuts to Medicare providers over the coming decade. (Note: these numbers should not be confused with the $143 billion in deficit reduction over ten years.) Those deficit savings were hard-earned, and the public was promised that health reform would reduce the deficit. Policymakers must not use those credits to pay for other initiatives. 

Not making the deficit any worse is the first step--but we need to start lowering them.  Lawmakers must resist the temptation to enact an ad-hoc COLA.

The Center for American Progress released a paper yesterday titled "A Thousand Cuts." The paper aims to show how deep policymakers would have to cut spending to reduce the deficit to primary balance in 2015--the equivalent of finding about $255 billion in savings in the year 2015.

As we said yesterday, the paper presents five budget scenarios for achieving primary balance: 33 percent spending cuts, 50 percent spending cuts, 67 percent spending cuts, 100 percent spending cuts (without tax expenditures), and 100 percent spending cuts (with tax expenditures). The spending reductions are specified while the gap is filled in with unspecified revenue increase.

The following summary table shows the amount (in billions) that their specific proposals would cut in 2015 alone.

Scenario 1 focuses on tax expenditure reduction and defense cuts. It saves $10 billion by eliminating the deduction for business meals and entertainment, $12 billion in troop reduction in Europe and Asia and $25 billion in defense overhead that would otherwise be used to offset additional spending. Scenario 2, closing 50 percent of the gap through spending reductions would build on that by including a $6 billion cut in military compensation and a full ($13 billion) repeal of the exception from passive loss rules for $25,000 of rental loss. The 3rd also includes $9 billion more in cuts from the exclusion of interest on private purpose bonds and $7 billion in additional Federal Highway Administration cuts, and layers on new cuts in non-defense discretionary, including reductions in environmental and conservation related programs.

The 4th scenario has large cuts for many spending areas such as a 75 percent cut in agricultural subsidies and $12 billion from Social Security (by indexing COLA to an improved measure of inflation). There are cuts to 15 different tax expenditures, $96 billion in defense cuts and a full 2.5 percent decrease in non-defense discretionary spending. Of note, however, is the lack of Medicare and Medicaid reductions which CAP states is due to the cuts already in place in the recent health care reform act.

The last scenario drops the $53 billion in savings from tax expenditures. This scenario eliminates the Build America Bonds program ($12 billion) and state grants for rehabilitation services and disability research ($3 billion), reduces defense spending by an additional $14 billion, $2 billion from housing assistance, $600 million from children and families service, completely eliminates the Universal Service Fund ($5 billion more), $13 billion more from the Federal Highway Administration and another $1 billion from the Federal Aviation Administration.

Keep in mind that in the first three scenarios, the goal is not reached through spending cuts alone. Thus, in order to fully reach the overall budget goal under these scenarios, revenues would have to be increased by about $170 billion in the first scenario, $127 billion in the second, and $85 in the third. Moreover, since this is done from the President's budget, this assumes that the 2001/2003 tax cuts for upper-income earners would expire, meaning that the additional needed revenue would have to come from another source. One must also recognize that these revenue numbers and the spending cuts examined by CAP are only for 2015, meaning additional cuts/revenue enhancers would be needed for each additional year.

Lastly, the fifth scenario is indicative of what many policymakers say when they want to reduce the deficit, but not touch revenue.

Regarding the magnitude of the spending cuts in the 3rd, 4th, and 5th scenarios, John Podesta, founder of CAP, stated that:

"We believe that cuts this severe would eviscerate the foundation for future growth and do lasting harm on the health of the American middle class."

We also believe that a more balanced approach--one that includes both spending reductions and revenue increases--represents the most viable solution to controlling our rising debt.

This is an incredibly useful exercise and we applaud CAP for putting forth such a detailed analysis of different approaches to cutting spending. Click here to try to cut the debt yourself.