March 2011

CRFB Hosts "Human Side of the Fiscal Crisis" Event

On March 10, the Committee for a Responsible Federal Budget hosted a terrific event entitled America at a Crossroad: The Human Side of the Fiscal Crisis. The event was made possible by the MacArthur Foundation. The purpose was to bring together the major stakeholders and experts on the issues of fiscal reforms, to discuss the benefits of early action to avert a fiscal crisis (whether sudden or gradual) and the calamitous effects a crisis would have on everyday Americans.

The event began with introductory remarks by Bill Frenzel, one of CRFB’s co-chairs, and the event’s moderator, Ruth Marcus of the Washington Post. Next, CRFB’s own Anne Vorce, who was the project's director, presented her paper that served as the framework for the day’s discussions. She argues that there are two reasonably likely but different scenarios:

. In Scenario One, we risk "Fiscal Gridlock", in which our policymakers do not change our current fiscal path. (Our debt is now projected to rise forever, which experts consider unsustainable). As most experts note, staying on our current fiscal course would eventually take a devastating toll on everyone in society: people's standards of living would be reduced gradually over time or suddenly through a fiscal crisis or crisis with fiscal dimension.

. In Scenario Two, our leaders enact a fiscal recovery package, which would put us back on a sustainable budget track. While there are many ways to build a fiscal recovery package, the scenario envisions an optimal multiyear program (to spread the burden of adjustment over time, especially as our economy continues to struggle) with everything on the table (to spread the burden of adjustment but also to convince markets of our seriousness and to enshrine the concept of fairness for the American people). There are many significant hurdles to overcome before arriving at that second outcome. But as Anne said, “As tough as it will be to fix our problems, failing to fix them would be even worse.”

With that, the first of four panels began. The first panel addressed the topic of “The High Cost of Doing Nothing for Everyday Life and the U.S. Economic Future.” On the panel were former SEIU President and current Georgetown Public Policy Institute Fellow Andy Stern, Lenny Mendonca of McKinsey Global Institute, and Derek Thompson of The Atlantic. While the panelists clearly recognized the enormous difficulties of achieving political agreement on the way forward, each speaker's bottom line was that we will see considerable payoff for our future living standards from tackling our fiscal challenges.

The second panel was about “The High Cost of Doing Nothing for the Generations and the Vulnerable.” The panel--including John Rother of AARP, Ryan Shoenike of Young Americans for Debt Awareness, and Deborah Weinstein of the Coalition for Human Needs--discussed issues of intergenerational fairness and protecting the most vulnerable among us from harmful cuts.

A subtheme for the first two panels was the need to look more closely at the composition of our fiscal policies, so that we can figure out how to achieve higher returns (to growth, our fiscal accounts and society) from investments in education, infrastructure, and R&D. The importance of tackling our tax expenditures problem as part of much-needed fiscal modernization was also mentioned. (Tax expenditures are special targeted - and inefficient - tax breaks which account for forgone revenue roughly equal to the total amount of individual income taxes paid. This is alot of money to give up - especially since it really distorts our tax code.  As a consequence, tax rates are higher than they could otherwise be for the average taxpayer. See our thoughts on that subject here.)

The third panel looked at what the United States can learn from other countries who have gone or are going through fiscal adjustment. The panel (“International Examples: What To Do and What Not To Do”) featured Martin Baily of the Brookings Institution, Carlo Cottarelli of the IMF, and Peter Matheson of the UK Embassy. Cottarelli made the essential point that there will be short-term pain and economic contraction as part of fiscal consolidation, but those are "trivial" in comparison to the effects of a fiscal crisis. And even in the absence of a crisis, large amounts of debt will cause domestic interest rates to rise, crowding out private investment and stifling economic growth. The other panelists used their knowledge of European fiscal reforms to offer suggestions for the American case--such as phasing in consolidation and establishing budgetary frameworks, as in the British case (similar to the recommendations of the Getting Back in the Black report).

The final panel -- titled “How We Move Forward and Lessons From the Past”--included Norman Ornstein of AEI, Bill Hoagland of CIGNA, Joseph Minarik of the Committee for Economic Development, and Scott Bittle of Public Agenda--focused on the political challenges we now face as we try to move forward fiscally.  The importance of adopting fiscal rules to reinforce or anchor fiscal decisions was also discussed.

In sum, the event brought together an all-star cast of experts and key players, who offered valuable perspectives on our fiscal challenges. (The rich trove of event material can be read here.) The difficulty we all face now is achieving agreement on how to move forward. The event reminded us that there is very powerful motivation to move forward sooner rather than later: most people would be less well off if our leaders failed to put this nation back onto a sustainable fiscal path, and took action only when forced to do so in a crisis. When we fiscal wonks talk about problems related to our unsustainable debt-to-GDP ratio, we are in fact talking about real people and their lives.

Note: This blog has been updated from its original posting.

House Budget Committee Holds Hearing on “Lifting the Crushing Burden of Debt”

Today the House Budget Committee convened a hearing on the burden of mounting national debt on the country and how to address it. The committee heard from a panel of four witnesses, including CRFB President Maya MacGuineas.

Committee Chair Paul Ryan (R-WI) opened the proceedings by stating that “I don’t think there is any serious debate over the urgency of these challenges. I doubt anyone here would dispute the fact that, if we fail to act, we are inviting a debt crisis with potentially catastrophic consequences.” Ryan also mentioned that the debt is the most predictable crisis the United States has ever faced, and noted we still have the time to act. Yet he questioned whether we have the resolve and called on the parties to work together. He closed by saying,

The stakes in this challenge are no less than the unique American legacy of bequeathing to our children a more prosperous nation than the one we inherited.

In his opening statement Ranking Committee Member Chris Van Hollen (D-MD) said,

We all agree that our current long term debt trajectory in unsustainable and unacceptable. And I believe we all agree that it is important to come together now to develop and enact a sensible plan to reduce that debt in a steady and predictable manner. We should have a healthy discussion on what such a plan would look like.

Van Hollen went on to say that debt reduction actions should not harm the fragile economic recovery. He also noted that the Bowles-Simpson Fiscal Commission recommended revenue increases in addition to discretionary and mandatory spending cuts.

In her testimony, CRFB’s Maya MacGuineas noted that U.S. debt is higher as a percentage of the economy than it ever has been in the post-World War II era and that it is rising with no end currently in sight. She said that debt at the levels we are heading for will destroy economic growth and slash vital investments and standard of living. The solution is a multi-year, comprehensive fiscal plan that deals with each area of the budget. And the sooner it is enacted the better.

MacGuineas laid out two paths we could take:

Under one, fiscal consolidation is used as part of an economic strategy that also includes preserving—and in many cases, increasing—productive public investments and a sound safety net and fundamentally reforming our tax code to enhance competitiveness. The economy and U.S. standard of living would benefit from having taken thoughtful preemptive actions. Under the other, we delay due to the difficult policy choices and political stalemate, which causes the debt to continue to grow, pushing up interest rates and payments, squeezing out more important priorities, choking off economic growth and affecting working families, and ultimately leading to a vicious debt spiral, which damages the entire economy and country. And under that scenario we still have to make the same difficult spending and tax choices we face now—but they would have to be larger and more painful.

She then discussed five areas where debt causes substantial problems.

  1. Economic: increased borrowing and debt will crowd out private investment as interest rates rise—adversely affecting economic growth and living standards.
  2. Budget: increased interest payments on the debt will squeeze out room for productive public investments and tax cuts.
  3. Fiscal: as interest payments take up a larger share of the federal budget, our ability to respond to unforeseen events is compromised.
  4. Psychological: uncertainty surrounding our fiscal course erodes confidence among businesses and consumers, impairing their ability to make long-term investments.
  5. Intergenerational: higher debt levels threaten the well-being of future generations, pushing the costs to our children and grandchildren.

Without changes, there will be a crisis of some sort. We need to devise a fiscal plan now with a goal along the lines of stabilizing the debt at 60% of GDP within a decade and then lowering it further thereafter. All areas of the budget must be on the table.

MacGuineas went on to say that the debt threat provides us with an opportunity to restructure our budget to promote investment in areas such as infrastructure, research and education over consumption. She also mentioned the need for entitlement and tax code reform. She specifically mentioned the need to tackle tax expenditures (see some ideas here).

Carmen Reinhart of the Peterson Institute for International Economics discussed the historical research she has conducted on the links between public debt and economic growth. The research she performed with Harvard’s Ken Rogoff strongly suggests that economic growth is significantly impacted when a nation’s government debt reaches 90 percent of GDP. She stated in her testimony that more recent research suggests that the threshold may in fact be lower, perhaps in the 70-80 percent range. She closed her remarks by saying:

The sooner our political leadership reconciles itself to accepting adjustment, the lower the risks of truly paralyzing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret it. This time is not different.

Former CBO Director Douglas Holtz-Eakin of the American Action Forum stated that “[t]he outlook for deficits and debt threatens the nation’s prosperity and freedom. Changing the fiscal course should be our top national priority.” Additionally, he argued that cutting spending now would help, not harm the economy. He also called for corporate tax and entitlement reform and said that time is running short for action.

John Podesta of the Center for American Progress took issue with Holtz-Eakin’s contention that the debt is caused purely by too much spending and that substantial cuts now would not harm the delicate recovery. He did agree with all the panelists that we are on an unsustainable fiscal course. He commended the bipartisan group of senators working on a comprehensive fiscal plan and noted that difficult choices on both sides of the budget ledger will be required. He also targeted tax expenditures and mandatory spending for reform. And he said that budget process reform will help instill fiscal discipline. (The Peterson-Pew Commission on Budget Reform has ideas for budget process reform here.)

Under questioning from members of the committee, the panelists were in general agreement that time is running out to act. Reinhart said that we have less than five years. Chairman Ryan and Doug Holtz-Eakin agreed that just showing leadership now would send the right message and buy us some more time. This is along the lines of the “Announcement Effect” – which posits that adopting a credible plan now will show creditors that we are serious about addressing our debt. MacGuineas warned that the markets are watching us and are concerned about the ability of our political process to respond properly. Reinhart described a possible “debt by a thousand cuts scenario” where the economy is slowly choked by debt, like in the case of Japan.

All the panelists agreed on the need to reform tax expenditures and there was general agreement on the need for a fiscal plan. MacGuineas said that better public understanding, leadership and bipartisanship are required to develop a needed fiscal plan.

Pimco Eliminates Government Debt Holdings and Spain Gets Downgraded

PIMCO founder Bill Gross - the managing director of the world's largest bond fund - made headlines today when it was reported that he eliminated all US government-related debt from his Total Return Fund last month. The fund totals $237 billion, and Gross had already cut its holdings of government debt to 12 percent in January.

In a statement made earlier this month, Gross said that yields on U.S. Treasuries may be too low to sustain current demand for U.S. debt. This comes as the Federal Reserve is nearing the end of its second phase of quantitative easing, whereby the Fed will have invested about $600 billion in U.S. debt by June. Gross asked, "Who will buy Treasuries when the Fed doesn't? ...The question really is at what yield and what are the price repercussions if the adjustments are significant."

This move from PIMCO seems to largely reflect an improving economic recovery, as other investments become relatively more attractive than U.S. debt as risk-aversion slowly recedes. This is a positive development (for the economy, not the budget) as recent safe-haven effects have pushed interest rates on U.S. debt to incredible lows. Although a move like this will help drive interest rates up as investments move out of government holdings and into more productive private investments, higher interest rates will mean larger yearly interest payments on our existing debt--squeezing out the budgetary room for other spending priorities.

It is unclear the extent to which this move may reflect longer-term worries about the safety of investing in U.S. debt. In either case, we need to enact a comprehensive plan to ensure that U.S. government debt will always be a good investment and to keep interest rates (and payments) as low as possible.

NPR also reported on another issue concerning U.S. government bonds, specifically the concern that "nervous investors would likely ditch Treasuries en masse as the US government gets closer to the debt ceiling". (Click here to read CRFB's view on approaching the debt ceiling)

In other news, investors will most likely reduce their holdings of Spanish debt for different reasons. Moody's has downgraded Spain's sovereign debt rating from AAA to Aa2, citing concerns about the potential cost to the government of restructuring the country's central banking system. They estimate it will cost up to 40 or 50 billion euros, as compared to the Spanish government's cost estimate of only 15 billion euros.

CBO Releases Budget Options Report

Today, CBO released an updated version of its giant compilation of potential savings from various spending and tax options. The report covers all areas of the budget--from domestic discretionary, to defense, to mandatory programs, to taxes and tax expenditures. The report includes some previous options with updated cost estimates in addition to many new budget options.

There's certainly a ton to sort through in this report, so make sure to keep checking back to The Bottom Line for more commentary and analysis.

 

House Budget Committee Hearing Today on Debt Burden

Today is a busy day for budget and fiscal policy, especially for us at CRFB. Not only do we have our "The Human Side of the Fiscal Crisis" forum today, but CRFB President Maya MacGuineas will testify at a House Budget Committee hearing on "Lifting the Crushing Burden of Debt" at 10 am. 

Ms. MacGuineas will be joined by Doug Holtz-Eakin of American Action Forum; John Podesta from the Center for American Progress; and Carmen Reinhart from the University of Maryland. A live webcast of the hearing can be accessed here and written statements will be available here.

CRFB will also live Tweet the hearing @BudgetHawks (http://twitter.com/budgethawks) under #debtburden.

Human Side of the Fiscal Crisis Event Today

CRFB today is hosting a timely and unique policy forum on "The Human Side of the Fiscal Crisis." The event kicks off at 9 am and features a stellar lineup of participants from a wide array of backgrounds and perspectives.

The event will examine two divergent paths for the U.S. -- action or inaction -- and how each will affect a variety of groups and generations. The event will be moderated by Ruth Marcus of The Washington Post and speakers include CRFB co-chair and former Congressman Bill Frenzel; SEIU President Emeritus Andy Stern; Lenny Mendonca of McKinsey Global Institute; Derek Thompson of The Atlantic; John Rother of AARP, Ryan Schoenike of Young Americans for Debt Awareness; Deborah Weinstein of Coalition on Human Needs; Norman Ornstein of AEI; William Hoagland of CIGNA; Joe Minarik from the Committee for Economic Development; and Scott Bittle of Public Agenda.

CRFB's Anne Vorce will present her new paper on "America's Fiscal Choices at  a Crossroad." And CRFB will annouce and show the winning videos from our "Voices of America" fiscal video contest. Full program and live webcast available here.

The live feed is also embedded below and we will live Tweet @BudgetHawks (http://twitter.com/budgethawks) under #fiscalchoices.

 

Free video chat by Ustream

A Tale of Two Spending Bills

It was the best of times, it was the worst of times? Let's just go with the worst of times.

In a mostly symbolic vote, the Senate failed to adopt either the Continuing Resolution setting federal spending for the remainder of the fiscal year that was passed by the Republican-controlled House, H.R. 1, or the Senate Democrats' alternative, in the form of an amendment from Senate Appropriations Committee Chairman Dan Inouye (D-HI). The vote was designed to show exactly what everyone in Washington already knew: neither option is going to happen, so it's time to move on.

The Inouye amendment would have cut about $5 billion from current spending levels, while the House bill would have cut around $58 billion. Clearly, there is a wide gap between both sides that needs to be closed quickly: the current CR funding the government expires on March 18. The Republican proposal failed by a vote of 44-56 and the Democratic one by a vote of 42-58.

There are bigger budget fish to fry, so a compromise would be the best way to go about building some trust between key stakeholders--something that will be required to tackle the larger portions of the budget, namely entitlements and tax reform, and to develop a longer term fiscal plan.

Not only is the debt limit increase just around the corner, but the deadline for the FY 2012 budget resolution, as set in the 1974 Budget Act, is only a month away--although Congress rarely meets this deadline. Congress has some serious work to do on getting control of the budget, and that includes budget process reform. The fact that we’re now in March debating spending levels for the rest of the year—levels which should have been agreed upon nearly a year ago—shows how dysfunctional the process is.

We need to be focusing on next year’s budget and how we’re going to control exploding deficits and debt down the road. Decisions our leaders make now will help determine whether we look back upon this time as "the age of foolishness" or "the age of wisdom."

Bowles and Simpson Launch Moment of Truth Project

In an effort to maintain the momentum created by the President's Fiscal Commission, the commission's co-chairs -- former Sen. Alan Simpson and former White House chief of staff Erskine Bowles -- have reunited to create the Moment of Truth Project. Named after the Commission's final report, the project aims to increase awareness of our country's fiscal challenges, educate people about the choices we face in dealing with them, and promote action on reducing the national debt and deficit. It also hopes to use the Fiscal Commission as an example and framework for how bipartisan agreement on a comprehensive fiscal plan is possible -- after all, the final report did get votes from a bipartisan majority of 11 of the 18 commissioners, including 5 Republicans, 5 Democrats, and 1 independent.

The event began with remarks from the co-chairs, who managed to get some laughs from the audience despite the serious nature of the issues. The introductions were followed by speeches from three senators who voted for the Commission plan: Sens. Tom Coburn (R-OK), Mike Crapo (R-ID), and Kent Conrad (D-ND). All gave high praise to the work of the co-chairs and the report they developed. While they might not agree with everything in the plan, there was strong emphasis on the need to put aside partisan differences and put the best interests of the nation first.

Following these initial speakers was a panel discussion featuring David Gergen (a veteran of political affairs and now a professor at Harvard), Jeffrey Liebman (also a Harvard professor), and Donald Marron (director of the Tax Policy Center). Jeff Liebman called the report an "extraordinary document" because it makes a serious effort to address our deteriorating fiscal outlook and it garnered bipartisan support, making it "politically feasible."

Following the panel discussion and wrapping up the event were remarks from Sen. Dick Durbin (D-IL), who also served on the Commission and voted for the final report, and Sen. Mark Warner (D-VA), who is leading an effort with Sen. Saxby Chambliss (R-GA) as part of the "Gang of Six" trying to craft legislation based on the Commission's recommendations.

The overall message of the event was that the problems we face are serious, but we can solve them if we are willing to work together. Hopefully the Moment of Truth Project will be able to call greater attention to this critical issue and continue to advance the debate. The Commission can and should serve as an example of how lawmakers from opposite ends of the political spectrum can come together and agree on a serious proposal that would get a handle on our unsustainable deficits and debt. There are many plans to choose from, as you can see in CRFB's table of fiscal plans here, but the Moment of Truth proposal is garnering bipartisan support from lawmakers.

We hope Congress and the White House will show true leadership and work to develop, debate, and decide on a credible and comprehensive plan to put us on the path to a sustainable fiscal future.

Congressional Hearing on Fiscal Commission Plan and Launch Event of the Moment of Truth Project

Two important events are lined up for today. First, the Senate Budget Committee will hear testimony from Erskine Bowles and Senator Alan Simpson, co-chairs of the President's Fiscal Commission. They will speak about the final report of the commission, The Moment of Truth.

Speaking of The Moment of Truth, after the Senate Budget Committee hearing, Bowles and Senator Simpson will remain on Capitol Hill for an event at 2pm to launch the Moment of Truth Project. The project is an effort co-chaired by both Erskine Bowles and Senator Alan Simpson which seeks to build on the momentum and prospects for bipartisan compromise created by their work as co-chairs of the Fiscal Commission.

The event will feature comments from several Senators who supported the final commission plan, as well as from David Cote, David Wessel, Donald Marron, Jeffrey Liebman, and David Gergen. Click here for more event details.

A webcast of the Senate Budget Committee hearing will be posted on the SBC website. Also be sure to check out CRFB's twitter page (@BudgetHawks), where we will be live tweeting both events.

Photo credit: Alex Brandon, AP.

Spotlight on the States: Wisconsin

Given the recent events in Wisconsin, we decided that the Spotlight on the States series should take a brief trip over to the Badger State.

Like the rest of the country, Wisconsin's state budget has certainly felt the effects of the recent economic recession. A report published by the Pew Center on the States in 2009 ranked Wisconsin's budget situation as one of the ten worst in the country, and pointed to the loss of one-eighth of its manufacturing workforce and 140,000 jobs as major contributors to its fiscal problems. The slow economy also drove down tax collections by 11.2 percent, which didn't help either.  

Previous Gov. Jim Doyle (D) and the state legislature began the 2009-2011 budget process facing a record $6.6 billion shortfall. They attempted to reduce the budget deficit by raising $2.1 billion in taxes and fees, reducing state spending and aid, and with federal stimulus money. As stated in the State of Wisconsin Annual Fiscal Report, published by the State Controller’s Office in October 2010:

"The impact of the nation’s worst economic crisis in decades continued to be felt in FY 2010. As in FY 2009, decreases in tax collections were met with increases in demand and need for assistance. In order to meet this challenge, state government spending was cut deeper than ever before. All state programs, with very few exceptions, were cut at least 1 percent from base. Many programs were cut by an additional 5 percent or more. State employees were directed to take 8 furlough days in each fiscal year of the biennium in addition to rolling back funding related to a planned 2 percent pay increase. School aid was cut by 2.5 percent, the first time this program has been reduced."

Today, Wisconsin faces a budget shortfall of $137 million (just shy of 10 percent of the budget) for the remaining fiscal year (which ends June 30) and a $3.6 billion shortfall over the next 2 years (six percent of the budget) in a $59 billion 2012-2013 budget. In an attempt to put the state back on a sustainable fiscal path, and more specifically to address this year's shortfall, newly-elected Gov. Scott Walker (R) introduced what he called a "Budget Repair Bill" last month. The bill requires government workers to contribute 5.8 percent of their salary toward pensions--which has sparked a back-and-forth about whether pension benefits are paid for by taxpayers or employees--and increases contributions to health care premiums from 6 percent to at least 12 percent. It also limits public employee collective bargaining rights, with the exception of police, firefighters, and other public safety employees, which is the provision that has sparked the current protests, as the unions are willing to accept the other changes. 

Nevertheless, Gov. Walker has said that enacting these reforms would save $30 million this fiscal year and thousands of state and local jobs. He also said that he could pledge there would be no layoffs or furloughs for state employees. This did not comfort the thousands of government employees who swarmed the state's capital, protesting that the Governor's budget bill is more geared to political ends than fiscal ones.  

In his March 1st budget address, (postponed from February 22), Gov. Walker outlined some of the details of his full proposal. The biennial budget balances the $3.6 billion two-year deficit and reduces the structural deficit--deficits even under normal economic conditions and full employment--by 90 percent, from $2.5 billion to $250 million. It also reduces overall state spending by $4.2 billion (6.7 percent) over the biennium. Other highlights of the legislation include:

  • $1.25 billion in reductions in aid to local governments
  • $834 million in reduction in aid to public schools
  • $80.6 million in tax cuts for FY 2012, including elimination of the capital gains tax for investors with long-term (5 or more years) investments in Wisconsin-based businesses
  • $500 million in Medicaid spending cuts through various reforms
  • $200 million in funding for the "public-private agency" the Wisconsin Economic Development Corporation
  • Various reforms to state agencies, including a 10% across-the-board cut to non-personnel budgets of most agencies and elimination of all positions that have been vacant for over a year

Gov. Walker also talked about the controversial Budget Repair Bill in his address, and said that the savings from the bill would more than offset the budget cuts to local governments, and that they would actually see an increase in revenues and savings of $150 million over the next 2 years if the bill was approved.  

The events surrounding the Wisconsin budget have started a serious debate across the country and even inspired similar protests in other states. This raises the question: Will closing fiscal gaps in Washington, DC and state capitals encourage bipartisan cooperation on solutions, or will we see more Wisconsins? Let's hope for the former.

‘Line’ Items: Stopgaps, Limits, Higher Powers and the Moment of Truth

Lots of Stopgaps, Little in Closing the Fiscal Gap – Washington averted a government shutdown last week by agreeing on a two-week continuing resolution (CR) that cuts $4 billion in spending. This is the fifth stopgap measure funding the federal government since the 2011 fiscal year began on October 1, 2010. The posturing and procrastination so far have resulted in little in the way of reducing our mounting national debt. Meanwhile, serious work on areas outside of domestic discretionary spending that represent a large portion of the budget and could significantly improve our fiscal situation – namely defense, tax reform, and mandatory spending – is required, not to mention that the FY 2012 budget needs attention.

Testing the Waters While the Levees Breach – With the new March 18 deadline fast approaching before the latest CR expires, White House negotiators led by Vice President Joe Biden met with Congressional leaders from both parties on Thursday. The two parties remain far apart. Republicans insist upon the approximately $60 billion in cuts approved by the House while Democrats have countered with $10.5 billion (both figures include the $4 billion in spending reductions already approved). So far, all that can be agreed upon is that the Senate will hold two “test” votes on Tuesday, one on the House-passed bill and on one the Democrats’ proposal. Neither is expected to get 60 votes; perhaps this will encourage the more obstinate legislators on both sides to negotiate. Hopefully, the talks over 2011 spending will set the stage for broader negotiations over our longer-term fiscal problems. We predicted last year that the 2011 budget would be a train wreck; it has been an excruciatingly slow one at that. We need to look away and move on. It’s time for budget process reform that not only makes the process more effective and transparent, but also promotes far-sighted and responsible budgeting.

No Sealing off the Debt Ceiling – With all the attention on avoiding a government shutdown, there has been little talk about the debt ceiling. However, the consequences of not raising the debt limit could make a shutdown look quaint – foreign investors could take their money elsewhere and interest rates could rise. A recent Congressional Research Service report says that reaching the debt limit could incur extra costs for the federal government in the form of interest penalties because certain payments would be delayed. Even worse, a U.S. default is quite likely in such a case, which could roil the global economy (see our debt ceiling primer here). An amendment from Sen. Pat Toomey (R-PA) and Sen. David Vitter (R-LA) that was designed to prevent a default on U.S. debt in case the debt limit was reached by prioritizing payments to creditors (as well as to Social Security beneficiaries) was defeated last week. The Treasury Department again moved back the date (now to April 15) in which the debt ceiling may be reached, and House Majority Leader Eric Cantor (R-VA) said that the House won’t vote on raising the limit until around the same time. April 15 is also the statutory deadline for Congress to produce a Budget Resolution for Fiscal Year 2012. It’s possible that the spending bill for FY 2011, the FY 2012 budget and debt limit increase could converge. One way or another, Washington must deal with the debt limit sooner rather than later. In a recent paper, CRFB expressed the view that failing to increase the debt ceiling would be irresponsible, but so is a refusal to address the nation’s fiscal imbalances. The paper offers some responsible approaches to raising the debt limit.

Social Security: Third Rail or off the Rails? – Social Security has been called the “third rail of American politics” because politicians risk political death in touching the subject. However, because of substantial demographic shifts the Social Security train is headed for a derailment if changes aren’t made to the essential program to strengthen its long-term finances. We are seeing the early signs of a brewing debate over how to address the touchy topic. Last week Congresswoman Cynthia Lummis (R-WY) introduced a bill, H.R. 867, that would gradually increase the early and full retirement ages to 65 and 70, respectively. House leaders have promised that their FY 2012 budget proposal due later this month will include entitlement reform and Budget Committee Chairman Paul Ryan (R-OH) has been conducting “budget boot camps” for the large freshman GOP class to educate them on entitlements and other fiscal topics. On the other side of Capitol Hill, a group led by Sen. Lindsey Graham (R-SC) plans to introduce Social Security reform legislation to enhance its long-term solvency. Meanwhile, lawmakers on the opposite side of the issue are digging in. Last week a group of Democratic senators sent a letter looking for co-sponsors of legislation that would create a procedural point of order making it more difficult to enact any changes to Social Security that would reduce benefits.

Lots of Zeal, but Not So Real – A recent NBC/Wall Street Journal poll indicates that while Americans seriously want to tackle the federal budget deficit, there is a lack of consensus on real solutions. Few of the specific choices provided in the survey received majority support, and those that did are not sufficient to put us on a sustainable fiscal course. Trying our “Stabilize the Debt” online budget simulator provides one with a solid understanding of the difficult decisions that will be required.

Senators Intend to “Hold” the Line on Spending – Last week Senators Tom Coburn (R-OK), John McCain (R-AZ), Jim DeMint (R-SC), John Ensign (R-NV), Ron Johnson (R-WI), Rand Paul (R-KY), Mike Lee (R-UT) and Kelly Ayotte (R-NH) sent a Dear Colleague letter announcing their intention to put a “hold” on legislation that fails to meet criteria they lay out: all new spending must be offset with cuts elsewhere; legislation creating or continuing a program must include a “sunset” date at which time it must be reviewed for renewal; the text and cost of bills must be made available at least three days before they are voted on; any bill creating a new program that replicates an existing one must consolidate the initiatives; and every bill must state how it relates to the Constitution. Many of these ideas are similar to rules passed by the House earlier this year.

Summoning a Higher Power – A group of Evangelicals are seeking a higher authority for deciding how to reduce deficits and debt, and no, we aren’t referring to the CBO. The group last week launched a “What would Jesus cut?” campaign with newspaper ads and wristbands (we want the wristband).

No Labels Seeks No Obstruction – Another group isn’t quite looking to the heavens for answers, but still has lofty ambitions for the fiscal debate. The group, No Labels, held a press conference on Capitol Hill last week to call for bipartisan cooperation to address our fiscal challenges. Using the mantra “everything on the table, everyone at the table” No Labels called on leaders from MoveOn and the Tea Party movement to meet together to talk out their differences.

“Moment of Truth” Gets Its Moment – On Tuesday, the co-chairs of the National Commission on Fiscal Responsibility and Reform, Erskine Bowles and Alan Simpson, will come to Washington, DC to launch a new initiative to promote bipartisan action and a comprehensive fiscal approach. The Moment of Truth Project is named after the Fiscal Commission’s report. The deficit fighting duo will testify before the Senate Budget Committee in the morning and then appear at a forum launching the endeavor later in the day. 

Key Upcoming Dates

March 7-8

  • National Association of Business Economics policy conference: "Balancing Austerity and Growth: Delivering Policies that Work"
  • International Monetary Fund conference: "Macro and Growth Policies in the Wake of the Crisis" - webcast.

March 8

  • Senate Budget Committee hearing on the report of the National Commission on Fiscal Responsibility and Reform with commission co-chairs Erskine Bowles and Senator Alan Simpson, 10 am.
  • Event launching the Moment of Truth Project – to continue the momentum created by the White House Fiscal Commission and promote bipartisan fiscal solutions, 2 pm.
  • Senate scheduled to hold votes on competing continuing resolutions – one that will cut spending by around $60 billion for the rest of the fiscal year and one that will reduce spending by $6.5 billion.

March 9

March 10

  • House Budget Committee hearing on "Lifting the Crushing Burden of Debt" at 10 am.
  • CRFB event - "The Human Side of the Fiscal Crisis"
  • Weekly unemployment claims data released by the Department of Labor.
  • Monthly Treasury statement on the U.S. budget - Department of the Treasury.

March 11

  • Retail sales figures for February from the Department of Commerce.
  • March Consumer Sentiment Index - University of Michigan.

March 17

  • House Budget Committee hearing on “Fulfilling the Mission of Health and Retirement Security” at 10 am.

March 18

  • The current continuing resolution (CR) funding government operations expires. Congress must adopt spending bills funding the federal government for the rest of FY 2011 by then or pass another stopgap measure.

April 15

  • Statutory deadline for Congress to enact a Fiscal Year 2012 Budget Resolution.

April 15 - May 31

  • Period in which Treasury Secretary Geithner says the U.S. will likely reach the debt ceiling (revised).

CNN MONEY EXCLUSIVE: Social Security Needs to be Fixed - So Just Do It

In her latest commentary for CNN Money, CRFB president Maya MacGuineas focuses on the need to reform Social Security. While there has been some momentum behind entitlement reform, partisan bickering and the polarizing nature of these issues have impeded any significant progress. 

Click here to read the full article.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.