May 2011

‘Line’ Items: Dark Horse Edition

Not Rounding the Bend Yet – Like the Triple Crown field, the fiscal policy landscape is muddled with several solutions vying to break out from the pack (see a comparison of fiscal plans here). With the Gang of Six at an impasse, no dark horse is emerging yet that can take the roses. Fiscal policy is seemingly mired in the backstretch, moving at a plodding pace. With no breakthroughs expected this week, many are asking: when will we round the bend towards the home stretch?

Presidential Field Taking Shape – While the Preakness saw another dark horse victor this weekend, a potential White House contender who was emerging as the favorite dark horse of many pundits decided not to make the field when Indiana Governor Mitch Daniels, also a former OMB director, opted not to run. Confronting the national debt would have been a key plank in his platform. On the other hand, former Minnesota Governor Tim Pawlenty officially threw his hat in the ring today and in a USA Today op-ed says that he will be straight with Americans concerning the difficult choices that will be required to reduce the debt. Meanwhile, Politico reports that some continue to push House Budget Committee Chairman Paul Ryan to make the race.

Biden Group Back in the Saddle – With the House of Representatives back from its recess, the Biden group will resume its negotiations with a meeting on Tuesday, continuing its effort to forge a deal pairing an increase in the statutory debt limit with significant deficit reduction. While the group so far has only agreed on about $150 billion in savings, a new CRFB analysis of recent fiscal plans finds approximately $1 trillion in common-ground deficit reduction.

Debt Ceiling Watch – Just as anxious spectators who had something riding on the Preakness watched the race with great anticipation, many are keeping an eye on the debt ceiling, but in this case the stakes are much higher. The Treasury Department is now taking "extraordinary measures" to prevent a U.S. default. CRFB is tracking these measures with a new table that will be constantly updated as new actions are taken. Treasury Secretary Geithner says that such measures can hold off a default no longer than early August. CRFB provided some ideas for responsibly raising the debt limit while also addressing the mounting debt.

Coburn Takes Break from Gang of Six – While not completely hanging up his stirrups, Senator Tom Coburn (R-OK) says he is taking a “sabbatical” from the ‘Gang of Six’ senators attempting to forge a bipartisan, comprehensive fiscal plan. He plans to release his own plan this week that he says will include $9 trillion in deficit reduction.

Conrad Pulls Back the Reigns on Senate Budget Resolution – Senator Kent Conrad (D-ND), chair of the Senate Budget Committee, says that there will not be a FY 2012 budget resolution coming from his committee anytime soon. After trying to corral enough votes among committee members to pass a resolution out of the committee, Conrad decided that a budget resolution would best serve as a vehicle for any agreement that the Biden group, or possibly Gang of Six, can come up with.

Senate to Vote on Competing Budgets – The Senate is heading for a dog and pony show over the FY 2012 budget--planning on votes on the budget resolution passed by the House as well as the budget request submitted by the White House earlier this year. Neither one will garner enough votes; it is a maneuver to put senators on the record and show each side that their favored approach cannot be adopted. Meanwhile, the House will move on with its portion of the process, with the full House Appropriations Committee set to mark up the FY 2012 appropriations bills for Homeland Security and Military Construction-VA on Tuesday.

More Contenders About to be Added to the Field – The second annual Fiscal Summit hosted by the Peter G. Peterson Foundation will take place on Wednesday in Washington, DC. In addition to remarks from former President Bill Clinton and other luminaries, several new fiscal plans from various groups will be released.

Eye on the CPI – No, its not the latest crime drama on TV. The consumer price index (CPI) is the inflation measure used to adjust portions of the budget and tax code to reflect increases in the cost of living. A recent paper recommends changing to a more accurate measure (chained CPI) that could save some $300 billion over the next decade. It's not quite sweeps weeks material, but the idea is getting increased attention as policymakers look for new ways to cut the deficit. This horse may just break out of the pack.

Key Upcoming Dates

May 24

• Meeting of the Biden group of budget negotiators.

• House Appropriations Committee meeting to approve of FY 2012 subcommittee allocations and to mark up the Homeland Security and Military Construction-VA appropriations bills at 9:30 am.

• House Ways and Means Committee hearing on tax reform lessons from abroad at 2 pm.

• House Appropriations Committee agricultural subcommittee markup of the FY 2012 agriculture appropriations bill at 4pm.

May 25

2011 Fiscal Policy Summit in Washington, DC.

• Senate Homeland Security and Governmental Affairs Committee hearing on ending duplication in federal government at 10 am.

August 2

• Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then.

OMB Attacks Improper Payments Again

We talked a lot last year about OMB efforts to improve government efficiency, culminating in the Improper Payment Elimination and Recovery Act in July. Well, the Administration is at it again, making new measures to cut down on improper payments--payments made to the wrong person, for the wrong reason, or for the wrong amount.  Improper payments totaled $125 billion in 2010, and the Administration goal is to cut them in half by 2012. OMB has developed four new pilot projects to help both the Federal government and state governments cut down on these errors and reach the stated goal, mostly through better sharing of data. They are the following:

  1. Through the Centers for Medicare and Medicaid Services (CMS), States will test how sharing a Medicaid provider enrollment system among a group of states may help Federal and State governments strengthen their abilities to detect and prevent provider fraud, while increasing administrative efficiencies.
  2. The Department of Labor will lead a project to test new ways to reduce overpayments in the unemployment insurance program by helping States access new data sources to more quickly identify beneficiaries who are most likely to be newly employed.
  3. Through the Food and Nutrition Service at the Department of Agriculture, States will test sharing benefits information, which could reduce duplicate payments, make it easier and quicker for a participant to find out whether they are eligible, and allow people in need to continue to receive benefits in the event of a disaster.
  4. The Department of the Treasury will test how they can apply their existing debt collection systems to help States collect outstanding debt that includes Federal dollars.

The more that can be done to cut these improper payments, the better. Even though it won't come close to solving our fiscal problems, there is no reason to not continue to reduce these errors.

CRFB Identifies $1 Trillion-Plus in Common-Ground Savings

In a release today, CRFB highlighted the overlapping policies between the most prominent fiscal plans, identifying over $1 trillion in commonalities.

CRFB argues that what the country really needs is a $4 trillion-plus deficit reduction plan. But given time constraints and the need to raise the debt ceiling as soon as possible, lawmakers should at least be looking at substantial down payments in areas where consensus already exists. The more savings, the better.

Click here to see the full table of overlapping policies.

Senate Republicans Introduce Medicaid Block Grant Legislation

Yesterday, Senators Tom Coburn (R-OK), Richard Burr (R-NC), and Saxby Chambliss (R-GA) released a proposal to reform the Medicaid program. Their proposal is in some ways similar to the Medicaid changes incorporated in the House Republican budget.

Their proposal would create a block grant for most of Medicaid starting in 2013. Just about all services provided under Medicaid and CHIP would be included in these grants, with the exception of acute care for low-income elderly individuals and the disabled, who would be held harmless or enrolled into managed care. As you would expect from a block grant proposal, states will have the ability to set eligibility criteria and determine benefit levels and other details of the provision of care. In addition, the legislation would repeal the health care law (PPACA), except for the fraud provisions. Another section of the law would give states incentives to limit medical malpractice costs. 

The funding levels for these block grants is based on total Medicaid spending in 2010 (excluding money from the stimulus bill), with the allocations to states based on the number of residents who are at or below the Federal poverty level. Once the initial block grants are made in 2013, they would be adjusted by changes in the CPI-U and population growth -- as the House Republican proposal would.

Although there is no score provided, given the information available, our very rough estimate is that this block granting proposal would reduce spending by about $400 billion. Repealing the health reform legislation, conversely, would increase the deficit by about $200 billion. Therefore, on net, our guess is that these changes would result in about $200 billion in deficit reduction over ten years. There may be additional savings from placing dual eligibles in managed care and encouraging state tort reform, but we do not have enough information to estimate these savings.

The graph below shows total Medicaid spending under current law, if the health care law were repealed, and if the repeal were combined with the block granting measures proposed by Senators Coburn, Burr, and Chambliss. Once again, note that the block granting numbers are very rough estimates.


We applaud the three Senators for putting out another plan to get Federal health care costs under control. Since that area of the budget is the biggest driver of our long-term deficits, any reform proposals in health care programs are certainly welcome additions to the ongoing budget debate.

Secretary Geithner on Our Fiscal Challenges

Earlier this week, Treasury Secretary Tim Geithner gave a speech about the unsustainability of our country's current fiscal path. Speaking at the Harvard Club in New York City, Secretary Geithner talked about the severity of our fiscal problems, the consequences of delaying action, and what will ultimately have to be done to restore fiscal responsibility. He also laid out the important points of the President's deficit-reduction framework, including his proposed debt-reduction enforcement mechanism (see here and here for more ideas on debt failsafes and triggers).

Further underscoring the depth and seriousness of our fiscal problems, Secretary Geithner said:

"Our fiscal problems are so pressing that they threaten to undermine the foundations of our future economic strength, our ability to protect our national security interests, and our capacity to sustain the commitments made by 13 presidents over 75 years to provide economic security to the poor and the elderly. We now borrow 40 cents for every dollar we spend, and under current policies, our total federal debt burden will be almost as large as the entire American economy within the next decade. We do not have the option of leaving this problem to another day, another Congress, another President."


Click here to read the full text of Secretary Geithner's speech.


Spotlight on the States: Ohio

Taking a break from all the recent developments in the budget and fiscal policy world, we take a quick turn to our Spotlight on the States blog series to see what budget battles in Ohio have been focusing on, and the possible solutions.

Back in March, Gov. Kasich proposed a $55.5 billion biennial budget ($26.9 billion in FY 2012, $28.6 billion in FY 2013) that attempts to close an $8 billion shortfall (15 percent of the budget). Gov. Kasich doesn't directly raise taxes (more on that later); instead, he balances the budget through a combination of spending cuts, privatization, and cutting funds for local governments.

Ohio's trouble for this biennium -- like many other states -- comes from the fact that they have relied on federal stimulus money to plug their fiscal holes in the past two years. With that money (mostly dedicated to education and Medicaid) drying up at the end of June, or the end of FY 2011 for states, Gov. Kasich is counted on to make his state's fiscal position more sustainable.

He proposes numerous reforms to Medicaid, involving greater use of managed care and reductions in provider payments, among other things. All in all, these reforms are expected to save the state $1.4 billion over the next two years. But even with the reforms, Medicaid still increases significantly from the previous cycle. The same cannot be said of other categories. Compared to 2009-2010 levels, Gov. Kasich cuts education spending by $700 million in 2012, although this is accounted for by the State Fiscal Stabilization Fund money from the federal government drying up. Other general areas of the budget, such as transportation and justice programs, also receive small cuts.

While Gov. Kasich does not propose any explicit tax increases, he does raise revenue in a somewhat backdoor manner. Ohio currently has three revenue sources -- the commercial activities tax (CAT), the kilowatt-hours tax (KWH), and the natural gas distribution tax -- that are partially designated to local governments to compensate them for lost revenue due to state tax changes in the past decade. Kasich proposes to gradually increase the share of those taxes that are designated to the state's General Fund (eventually reaching 100 percent in ten years). This would act as a revenue boon for the state, but a de facto funding cut for local governments. In total, reducing the local government reimbursements would reduce the state's deficit by $1.4 billion over the next two years.

Gov. Kasich's budget passed the Ohio House two weeks ago, but it still needs to be passed by the Senate. However, there has been an important development in Ohio's budget: the passage of a bill to limit public employee compensation. Similar to the one that generated so much controversy in Wisconsin, the bill -- which was signed into law by Gov. Kasich on March 31 -- limits the ability of public employees to collectively bargain and bars them from being able to strike, in addition to other compensation cuts. A fiscal analysis from the state government claims that this move would have saved the state $191.3 million in FY 2010.

And like Wisconsin, Ohio's budget battle features Gov. Kasich's spending-cut-only path to balance.  We'll see how it plays out.

A Few Interesting Reports from CBO

In the past few days, CBO has released a few documents that might be of interest to budget wonks.

The first is a further analysis of the final FY 2011 spending agreement that was passed a month ago. The estimate not only shows CBO's updated discretionary spending estimates for this year, but also what discretionary spending will be over ten years using CBO's baseline convention of inflation growth.

The big headline grabber was the fact that the spending deal will actually increase outlays in 2011 by $3 billion relative to CBO's March baseline, because more of the defense budget authority will be used in FY 2011 than originally projected. However, budget authority for this year is still reduced by $23 billion ($25 billion from non-defense programs and a $2 billion increase for defense). Over the ten-year period of 2012-2021, outlays would be $122 billion lower and budget authority would be $183 lower than the March baseline. Of course, as with any projection of discretionary spending, these savings are only hypothetical: discretionary spending for those ten years will be set by future Congresses in those years.

The second interesting piece is a Senate Finance Committee testimony by CBO's own Joseph Kile on imbalances in the highway trust fund and how to pay for future highway spending. As a result of spending boosts over the past decade, outlays on highways have been greater than revenues from the fuel taxes (the big one being the 18.4 cent gas tax) that pay for them; the result is that there have been some transfers of general revenue to the trust fund since 2008, the latest being tacked on to the HIRE Act from last March. Because of the current law shortfall in the Trust Fund, it is expected to fall to zero by 2013. Kile's testimony sums up federal spending on highways and reviews the options available to pay for that spending, including altering user fees, motor fuel taxes, a vehicles miles traveled (VMT) tax, and general revenues from taxpayers. 

Be sure to check out both of these documents if you're interested in a few of the nuances of the budget.


Trustees Report Strengthens Case for Retirement Age Increase

Last week, several bloggers, commentators, and columnists went after Al Simpson for talking about increases in life expectancy at birth (since this measure is affected by child mortality rates), arguing instead that the better measure is life expectancy at age 65 . From that standard, life expectancy has only increased by 5-6 years since Social Security began, which they argue undercuts the justification for an increase in the retirement age.

CRFB responded to these criticisms, arguing that in fact looking at life expectancy at 65 has its own set of flaws (since it doesn't account for the fact that Social Security is meant to insure working adults against the risk of old age) and that the right measure to look at is life expectancy at age 20 -- which has grown substantially. We also pointed out that raising the retirement age is one of the best options for improving retirement security and economic growth at the same time, and is actually progressive rather than regressive.

Social Security Trustee Chuck Blahous also responded to these criticisms, arguing that even life expectancy at age 65 has seen tremendous growth -- far more than the scheduled and proposed increases in the normal retirement age since 1940. He pointed out that when you account for the fact that the eligibility age has actually dropped from 65 to 62, under the Simpson-Bowles proposal "workers would be able to claim benefits earlier, collect them for longer, and receive substantially higher annual benefits regardless of the age of claim, than could workers in 1940"

And finally, Andrew Biggs, former Deputy Commissioner of the Social Security Administration, made the case that in evaluating reform proposals we need to make sure we account for future changes in life expectancy (especially since something like the Simpson-Bowles proposal doesn't raise the retirement age to 69 until the 2070s). By 2050, he explained "life expectancies as of 65 will be around 8.1 years longer than when the program started. That’s an increase of 59 percent in the benefits that would be paid over a full lifetime, compounded by a relatively lower number of workers available to pay those benefits."

With the new Trustees report out, it appears that Biggs' point is even more true than he had originally thought.

As we showed last week, Social Security's 75-year actuarial shortfall has increased from 1.92 percent of payroll last year to 2.22 percent this year. Fully half of that increase is a direct result of faster projected growth in life expectancy.



Compared with last year’s report, life expectancy projections are now 7 months higher on average (for males) over age 65 over the next 75 years -- though the increases in projections are seen more in earlier years than later years. In total, life expectancy at 65 (for males) increased by 6 years between 1940 and 2011, while the normal retirement age has only increased by 1 year (2 by 2022). By the time the normal retirement age has increase by 4 years (to 69) under the Simpson-Bowles proposal, in the 2070s, life expectancy at age 65 will have increased by 9.5 years. In other words, even when using standard of life expectancy at age 65, the number of years people spend in retirement will continue to grow -- even setting aside the fact that we probably should be looking at life expectancy at age 20.

Given that life expectancy has grown faster than the retirement age and will continue to grow under every standard, indexing the retirement age to longevity should hardly be considered a radical reform. It's time to get serious about Social Security reform, and finding ways to honestly address to costs of an aging population should be at the center of that discussion.



Low-Hanging Fruit for Debt Ceiling Discussions

Update: Check out our release on these "commonalities" here.

As Vice President Biden and several members of Congress continue working toward a solution that responsibly raises the debt ceiling, several congressional leaders have been throwing around the idea of a serious "down payment" on reducing deficits and debt in exchange for votes to raise the ceiling. Here at CRFB, we have argued that, ideally, lawmakers would enact a multi-year debt reduction plan that looks at each area of the budget for savings. But we recognize that there might not be enough time for a comprehensive deal like that before we run the risk of defaulting.

If a down payment is now going to take center stage, a good place to start would be to take a look at where there's already consensus. A Washington Post article today notes that negotiators in the Biden discussions have identified as much as $200 billion in overlapping savings over ten years. We estimate it to be quite a bit larger.

The four central fiscal plans in town -- the President's Framework, the House Republican Budget, the Fiscal Commission's plan, and the Debt Reduction Task Force -- tend to agree on a sizable list of deficit-reducing policies. These range from supporting some type of discretionary caps, to reducing farm subsidies, to selling excess government assets, to in-school interest subsidies. All in all, we estimate that all of these policies add up to somewhere between $1.1 and $2.6 trillion in primary savings over ten years, depending on the extent they are implemented.

Raising the debt ceiling in a timely manner must be a central priority for lawmakers, but so too must wrestling control of our budget away from automatic pilot. If lawmakers chose to go the "down payment" route instead of a comprehensive plan or enacting yearly deficit or debt targets, then they must revisit the true drivers of our long-term imbalances.

Deficit-Reducing Policies Savings (Billions)
President's Framework House Republican Budget Fiscal Commission Debt Reduction Task Force
Low High
Discretionary Caps $580 $1,600 X X X X
Reduce Farm Subsidies  $5 $35 X X X X
Enact Tort Reform  $0 $55 X X X X
Reform PBGC  $5 $10 X X X X
Eliminate In-School Interest Subsidies on Student Loans  $20 $65 X X X  
Auction Spectrum Licenses $25 X  X X  
Sell Excess Federal Property $10 $15 X X X  
Reduce Health Fraud and Correct Overpayments $10 $35 X X X  
Eliminate Fossil Fuel Tax Preferences $20 $40 X  ?  X  X
Reduce Medicare Payments to Drug Companies  $55 $110 X   X X
Reduce State Medicaid Gaming $25 $50 X   X  
Increase Federal Civilian Pension Contributions  $65 $120   X X  
Use Chained CPI for All Inflation-Indexed Programs* $255     X X
Increase Medicare Cost-Sharing $25 $130     X X
Total Primary Savings  $1,100 $2,545        
Interest Savings^ $200 $500        
Total Savings $1,300

Note: All numbers rounded to nearest $5 billion.
*CBO estimates that switching to the chained CPI would increase revenues by $87 billion, reduce Social Security outlays by $112 billion, and reduce other spending by $56 billion over ten years. To read more about the merits of switching to the chained CPI, see the Moment of Truth project's latest paper.
^Estimated very roughly from a rule of thumb based on CBO's interest estimates for alternative policies not in the current law baseline.


It's frustrating that the places where there is consensus, between at least three of the plans, tend to ignore Social Security imbalances and health care spending, which are set to be among the largest drivers of future deficits. Especially now that the Trustees of the Social Security and Medicare programs have given lawmakers yet another warning about the unfunded future obligations, discussions need to focus on shoring up the funding gaps in these programs. (Click here for our analysis of the Social Security Trustees report.) Doing so would help considerably in putting our budget on a sustainable path.

If lawmakers were to enact all of the changes above it would represent a healthy start, but would not be sufficient to stabilize the debt over the long-term. Further measures would be needed -- including Social Security and health care reform as we note above, and reforming the tax code. A process (such as a debt failsafe) can help to force and enforce such actions, but at the end there is no substitute for political courage.

The Other Trustees Report

Last Friday, CRFB highlighted the 2011 Social Security trustees report in a paper outlining the projections and important changes from last year. We found the program to be on an unsustainable path, even more so than last year's Trustees estimated. But there's another program growing unsustainably that the Trustees also oversee -- Medicare.

Friday's Trustees report found that Medicare Part A (Hospital Insurance, or HI) faces a 75-year actuarial imbalance of -0.79 percent of taxable payroll (compared to -0.66 percent last year), which makes it 40-50 percent as large as the Social Security shortfall (based on CRFB estimates of the two shortfalls as percents of GDP). Because the HI program has a much smaller trust fund balance, it is expected to become insolvent in 2024 -- which is five years earlier than last year's report and 12 years earlier than Social Security's insolvency date. However, just looking at HI does not tell the whole story of Medicare's financial outlook.

Medicare Part A makes up less than half of total Medicare spending; the rest comes from Part B (physician services) and Part D (prescription drugs). These programs have no dedicated revenue source and rely on general revenues from the Treasury and participant premiums.

Under current law assumptions, combined Medicare costs will rise from its current 3.7 percent of GDP to 4.0 percent by 2020, and 5.9 percent by 2050 before leveling off at around 6.2 percent at the end of the 75-year window. This path is quite similar to last year's projections.



However, these current law numbers are highly unrealistic. They assume that Medicare providers under Part B will face a 30 percent cut next year, per the sustainable growth rate formula (SGR), despite the fact that politicians have provided annual "doc fixes" for the past decade. They also assume all the savings from the Affordable Care Act -- particularly, continued reductions in provider payment growth rates -- will continue indefinitely. Past experience has shown that the former will certainly not happen, and most experts believe that the latter cannot continue forever (though there is disagreement on how long they can continue). As Richard Foster, the chief actuary of Medicare, explains:

Without major changes in health care delivery systems, the prices paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services would be less than half of their level under the prior law.

The report mentions an illustrative alternative scenario like they had last year, though it has not yet been published as a separate report yet. Under this illustrative scenario, which is described in the Trustees report, lawmakers would continue to pass doc fixes and the provider payment reductions from ACA would be fully implemented for the first ten years, then phased out over fifteen years. With these assumptions, spending would increase to 10.4 percent of GDP in 2080 (compared to 6.2 percent under current law) and the HI actuarial shortfall would be 2.15 percent of taxable payroll (compared to 0.79 percent under current law). This highlights the need for maintaining the savings already written into current law in addition to further cost controls on health care spending (read more about this).

‘Line’ Items: Playoffs Edition

Crunch Time – The playoffs are well underway in the NBA and NHL. A playoff atmosphere is also brewing in Washington even though the home teams are not in the picture. A debt limit deadline and several teams competing for debt reduction glory are creating an air of anticipation and trepidation. Who will go home and who will go all the way?

Caps Are Contenders – The Washington Caps may have had another playoff meltdown, but budget caps are catching fire in Washington. Senate Minority Leader Mitch McConnell (R-KY) is the latest high-profile lawmaker to say that some form of budget cap will likely be a part of a deal that increases the statutory debt limit while reducing the debt in the longer term. New York Times columnist David Brooks cheered on these caps as well. However, as Brooks points out, there is still substantial disagreement over whether the cap should apply to federal spending or more broadly to the national debt. On Friday, several conservative House Republicans introduced legislation to cap federal spending at 18 percent of GDP by 2016. The bill goes even further than Senate legislation seeking a 20.6 percent spending cap. On the other hand, the Peterson-Pew Commission on Budget Reform, which has been studying fiscal targets and triggers for over two years, recommends a debt target as a percentage of GDP enforced by triggers that automatically kick in if lawmakers cannot agree on the policies sufficient to meet the target. The Commission recently offered ideas for how to make a debt target and triggers work.

Medicare and Social Security Face Adversity – While it is too early to say that Medicare and Social Security are on the brink of elimination, the latest Annual Report from the trustees overseeing the two programs makes it clear that they continue to fall behind in their respective battles against insolvency. Medicare’s Hospital Insurance Trust Fund is projected to be depleted by 2024, five years earlier than predicted last year. The Social Security Trust Fund is now forecast to be exhausted in 2036. The trustees also said that, without changes, Social Security will now run cash-flow deficits from here on out. This is the latest in a long line of reports detailing the deteriorating finances of the two critical programs. Though they are down, they are not out; they can still make thrilling comebacks if policymakers take action, and the sooner they do so the better so that changes are phased in and spread out and those affected will have more time to adjust accordingly. Read CRFB’s analysis of the report and see some ideas from CRFB on reforming Social Security and health care, including Medicare.

Debt Limit Going into Overtime. Will it be Sudden Death? – The U.S. is expected to hit the $14.294 trillion statutory debt limit today. The Treasury Department says it can hold off a U.S. default until early August. Today, Third Way will release a paper highlighting the grave consequences of a default to the U.S. economy. Additionally, over 60 business groups last week signed a letter to lawmakers asking them to raise the debt limit in a timely manner, arguing that failure to do so “could have a significant and long-lasting negative impact on the U.S. economy.” The bipartisan, bicameral group of lawmakers being convened by Vice President Biden is looking to negotiate a debt limit deal that could set the stage for more comprehensive action. Read the CRFB paper on responsible approaches to increasing the debt ceiling.

Polls Show Taxes Can’t Be Dismissed – Unlike the L.A. Lakers, the issue of increased revenue as part of a comprehensive fiscal plan cannot be swept away, as two recent polls find. A Reuters survey last week said that 52 percent of respondents think a combination of spending cuts and tax increases is the best route for reducing the national debt. Meanwhile, a Bloomberg News poll of investors indicates that by a large margin they believe that tax increases will be required to substantially reduce deficits.

Key Upcoming Dates

May 16

• Treasury Secretary Tim Geithner says the statutory debt limit will be reached no later than May 16.

• House Budget Committee Chair Paul Ryan (R-WI) addresses the Economic Club of Chicago.

May 17

• Senate Finance Committee hearing on “Financing 21st Century Infrastructure” at 10 am.

May 19

• The Conference Board releases leading economic indicators for April.

August 2

• Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then.

Treasury Begins Extraordinary Measures


Update 5/16: Today, Treasury has reached the legal limit on how much debt it can issue at $14.294 trillion. Beginning today, the Treasury is launching an additional measure to avoid default: suspend reinvestments and issuances of Treasury securities in certain federal pension funds. Furthermore, in a letter to Senator Bennet (D-CO) on Friday, Secretary Geithner says that even a short term default on the debt limit would trigger a "double-dip" recession with "irrevocable damage" on the economy.

Update 5/6: Treasury has begun to implement extraordinary measures, starting with halting the issuance of State and Local Government Series of Treasury Securities.

5/3: Yesterday, Treasury Secretary Timothy Geithner sent a letter to Congress on the debt limit reporting that the Treasury will start this week to implement measures to delay the U.S. from defaulting on its obligations (additionally, Treasury now has a website offering information on the debt limit).

Using these measures, the Treasury is now estimating that it will be able to delay default until August 2, 2011 -- an extension from an earlier estimate of July 8, 2011, mainly stemming from larger than expected revenue. Of course, this new date is still subject to change. The May 16, 2011 estimate for when the U.S. will reach the debt limit without action from Congress remains unchanged.

The measures the Treasury will employ will act to slow the increase of US debt. According to the most recent letter, Treasury will:

  • Suspend issuing State and Local Government Series Treasury Securities
  • Redeem existing securities in the Civil Service Retirement and Disability Fund and stop issuing new ones
  • Suspend daily reinvestment of Treasury securities by the Government Securities Investment Fund of the Federal Employees' Retirement System Thrift Savings Plan
  • When necessary, suspend daily reinvestment of Treasury securities held as investments by the Exchange Stabilization Fund

As Treasury points out, it is imperative that the debt limit be raised -- a default would have significant ramifications on the US and global economy and would do nothing to decrease the national debt. As CRFB said in our paper on Responsible Approaches to Increasing the Debt Limit, the debt limit must be raised, but using it as a mechanism for reaching a larger budget deal would still be beneficial (and as CRFB President Maya MacGuineas said in an Op-Ed last week, tying the debt limit to a real budget trigger could also be a good idea).