June 2011

CRFB Unveils Fiscal Plan Comparison Website!

Check out CRFB's Fiscal Plan Comparison Tool!

The Comparison Tool is an interactive website that allows users to compare up to 3 fiscal plans side-by-side. A countless number of budgets or fiscal plans have been released in the past year and a half, and our new website is an easy way to compare and keep track of them.

Appropriations Update: More of the Same

In this next installment of our FY 2012 appropriations update, we will detail the actions that the House has taken since our last update on May 24. Despite the recess last week, the House has managed to stay active with the appropriations process.

There are a lot of moving parts in the House's action on the 2012 budget. So far, two appropriations bills have passed the full House: the Military Construction-VA bill and the Homeland Security bill. The former bill was relatively non-controversial, but the Homeland Security bill came under attack by Democrats for cuts to first responder grants.

Other bills are waiting for action by the full House. The controversial Agriculture bill was approved by the Appropriations Committee before the recess. This bill has been a lightning rod for Democrats, who believe the bill provides inadequate funding for a number of food programs, especially the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). Also, just yesterday, the full Committee approved the Defense bill, including an additional $119 billion for war spending, and the Energy and Water bill just passed today.

Additional action will come tomorrow when the Financial Services bill is marked up in its subcommittee.

The table below sums up all the moving parts of the House process, along with the amount of cuts contained in each bill.

Summary of House Appropriations Actions
Bill Recent Action Funding Level (billions) Change from FY2011 (billions)
Homeland Security Passed by House $40.6 -$1.1
Military Construction-VA Passed by House $72.5 -$0.6
Agriculture Passed by Committee $17.3 -$2.7
Defense Passed by Committee $648.7* -$22.1*
Energy and Water Passed by Committee $30.6 -$1.2
Financial Services Just Released $19.9 -$2.1

Note: All numbers in the table only represent discretionary spending

*These numbers account for both DOD base budget and war spending. The 2012 DOD base budget is $17 billion higher than 2011, while war spending is $39 billion lower.

As for the Senate, well, we're still waiting for that budget resolution.

 

Other Happenings at the Debt Conference

CRFB's debt conference yesterday, titled "The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go from Here?," featured an all-star cast of 40 of the biggest names in economic and fiscal policy, producing a fascinating discussion on the debt ceiling and our country's long-term outlook. Here's a brief summary of some of the things that were said.

According to an impromptu poll by moderator Steve Liesman of CNBC, about two-thirds of the participants expect the debt ceiling to be raised by the August 2nd deadline given by the Treasury Department. Although Ben Bernanke disapproved of using the debt limit to force action on the deficit, a number of experts felt that the debt ceiling in general and this debt ceiling vote specifically would be an appropriate way to force an agreement on a down-payment of deficit reduction.

However, most attendees were gloomy on the long-term outlook. They felt that any agreement that came out of the debt ceiling increase would likely be too small or not sufficiently focused on the long-term drivers of the debt. In addition, former NEC director Larry Lindsey noted a number of ways in which the status quo may actually understate projected deficits, including an understatement of interest rates and an overstatement of economic growth (although the latter example comes from the President's budget).

Most of the experts also felt that coming to an agreement of the magnitude necessary to set our country on a sound fiscal path would be very difficult to do, considering the political environment. Specifically, former OMB director Franklin Raines and Rep. Peter Welch (D-VT) lamented the polarization of Congress that makes agreements like we had in the 1990s much harder to pull off. And there was the usual criticism about Republican intransigence on taxes and Democratic intransigence on entitlements.

Most notable is what elected officials said during the conference. Rep. Paul Ryan (R-WI), unsurprisingly, plugged the House Republican plan, while Sen. Michael Bennet (D-CO) promoted the work of the Fiscal Commission for the 2-to-1 spending cut to tax increase ratio in its plan (3-to-1 if you include interest savings). When moderator Steve Liesman asked what the other side could offer up to bring them to the table, Ryan wanted Democrats to suggest health care entitlement cuts while Bennet wanted some give on taxes (once again supporting the Fiscal Commission's proportions).

Mark Warner (D-VA) and Mike Crapo (R-ID), members of the Gang of Six, unsurprisingly endorsed a bipartisan approach that touched all areas of the budget, including tax expenditures. Sen. Crapo said he believes the agreement that comes out of the Gang of Six negotiations will be one that has a decent shot at achieving 60 votes in the Senate -- the threshold no other plan as of yet has been capable of reaching.

With so many big names taking part in the debate, the conference produced some very interesting discussion. For an archived video of the entire conference, click here

 

Highlights from Chairman Bernanke's Speech

We were lucky enough to have Federal Reserve Chairman Ben Bernanke open our annual conference this week. His remarks were an important statement on the need for action and also offered some helpful guidance on how to move forward. Full text of his remarks is here and video of the event can be viewed here.

Bernanke on our current situation:

Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option. Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. These adjustments could take place through a careful and deliberative process that weighs priorities and gives individuals and firms adequate time to adjust to changes in government programs and tax policies. Or the needed fiscal adjustments could come as a rapid and much more painful response to a looming or actual fiscal crisis in an environment of rising interest rates, collapsing confidence and asset values, and a slowing economy.

The Peterson-Pew Commission on Budget Reform, a CRFB project, made this point in 2009 in the report, Red Ink Rising.

Bernanke on what we can do to fix it and the timing:

Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk. At the same time, acting now to put in place a credible plan for reducing future deficits would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

Chairman Bernanke is a charter member of CRFB's Announcement Effect Club, which promotes the idea that devising a credible fiscal plan now that would be phased in over time would aid the economy in the shorter term. You can compare the various fiscal plans here.

Bernanke on what a fiscal plan would look like:

Clear metrics are important, together with triggers or other mechanisms to establish the credibility of the plan. For example, policymakers could commit to enacting in the near term a clear and specific plan for stabilizing the ratio of debt to GDP within the next few years and then subsequently setting that ratio on a downward path. Indeed, such a trajectory for the ratio of debt to GDP is comparable to the one proposed by the National Commission on Fiscal Responsibility and Reform. To make the framework more explicit, the President and congressional leadership could agree on a definite timetable for reaching decisions about both shorter-term budget adjustments and longer-term changes. Fiscal policymakers could look now to find substantial savings in the 10-year budget window, enforced by well-designed budget rules, while simultaneously undertaking additional reforms to address the long-term sustainability of entitlement programs.

The Peterson-Pew Commission recommended a medium-term goal of stabilizing the debt at 60 percent of GDP and lowering it further in the longer-term. You can try reaching the goal yourself using CRFB's Stabilize the Debt budget simulator. The Commission also laid out budget process reforms to help enforce debt reduction goals in Getting Back in the Black; recommendations included debt targets and triggers. The Commission recently offered ideas for making President Obama's proposed "debt failsafe" trigger work and also created a Fiscal Toolbox summarizing and comparing triggers and other budget mechanisms. And CRFB has offered ideas for reforming Social Security and health care programs to strengthen their long-term sustainability.

Some great quotes by Chairman Bernanke! We were lucky and grateful to have him keynote our conference. We hope policymakers will listen closely.

Tune into CRFB's Debt Conference Today!

We hope you tune in today to the live webcast below and Twitter feed (@budgethawks and #debtconference) of CRFB's 2011 Annual Conference The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here? The conference will run from 2:30 - 5:30pm.

We have all-star line-up of speakers throughtout the afternoon to help us dive deeper into these fiscal issues, including Chairman of the Federal Reserve Ben Bernanke, Senator Bennet, Senator Crapo, Senator Warner, Congressman Ryan, and Director of the National Economic Council Gene Sperling, among many other distinguished guests. For a full list of conference speakers and more conference info, click here.

The live webcast will begin at 2:30pm (if you're tuning in before 2:30pm you may catch the end of a New America Foundation event).

Streaming live video by Ustream

 

Actually, Raising the Medicare Age is Also a Good Idea

Update: As it turns out, increasing the Medicare age actually improves benefits for low-income seniors, thus helping to most disadvantaged.

Since Senator Lieberman proposed a package of Medicare reforms last week, he has come under attack, particularly for his proposal to increase the Medicare retirement age from 65 to 67 by 2025. Matt Yglesias said that this idea "really fails to put the Medicare issue in the proper context," Kevin Drum calls it "an egregiously punitive policy," and Paul Krugman says it is "an idea that’s so bad, so wrongheaded, that you’re almost grateful."

These critics are incredibly off base. In the past, we have argued that raising the Social Security retirement age is a good idea. As it turns out, when one looks at all the facts, so too is raising the Medicare age.

Critics of this policy have essentially made three arguments:

  1. The focus of any Medicare changes should be on slowing health care cost growth, not changing eligibility
  2. Raising the Medicare Age will not actually save money -- or not much money
  3. Raising the Medicare Age will throw many seniors into the ranks of the uninsured

Critics are wrong on all three accounts, which we will address in order.

1. We have a health care cost AND aging problem

One criticism of raising the Medicare age is that it does not focus on actually slowing per-person health care cost growth -- with cost-growth being the primary driver of growing Medicare costs. As Kevin Drum writes, "Lieberman's plan reduces the level of Medicare spending, but it does nothing to address growth rates. That's backwards. If healthcare costs keep growing at the same rate they're growing now, it swamps everything else."

Of course, controlling health care cost growth is incredibly important, and we strongly support policies which can "bend the cost curve". Senator Lieberman's plan includes a couple of these policies -- reforming cost-sharing rules and restricting Medigap plans -- but he could and should go further (for example, by supporting tort reform or changes to pay providers based on performance). But it is worth remembering that Medicare grows for two reasons -- health care growth and population aging. More than a third of the projected growth in Medicare and Medicaid is due to population aging, rather than health care cost growth.

Drivers of Increased Medicare and Medicaid Spending
2035 2080
Aging Health Care Cost Growth Aging Health Care Cost Growth
44% 56% 30% 70%

 

According to CBO, even if per capital health care cost growth were limited to GDP -- a highly unlikely outcome -- federal health spending would still increase from 5.5 percent of GDP in 2010 to 8.7 percent by 2030. To be sure, this would be a major improvement over the 10.9 percent of GDP currently projected, but it would represent substantial growth none-the-less. 

Given that this 3 percent of GDP increase is driven by population aging, it is quite sensible to address at least a portion of it by increasing the Medicare eligibility age.

(As for Drum's concern that raising the age only reduces the "level" of spending, we'd strongly support building on Senator Lieberman's proposal by permanently indexing the Medicare age to longevity once it hits 67).

2. Raising the Medicare age will save the government $125 billion through 2021 alone

Another criticism of raising the Medicare age is that it either won't save the federal government (much) money or it won't reduce (and in fact will increase) overall health spending. On the first count, Yglesias says that "actual savings here are kind of surprisingly low" and Drum says that the policy "might raise Medicare costs."

We don't have time to fully address the methodological flaws in the studies these two are citing, but it should be sufficient to show that the Congressional Budget Office believes Lieberman's proposal would substantially reduce the deficit. Over the next decade, in fact, CBO projects the not-fully-phased-in age increase would save $125 billion. By 2035, they project Medicare spending would be about 0.3 percent of GDP lower as a result of the two-year increase in the eligibility age.

Paul Krugman has a more nuanced criticism: that while raising the Medicare age might save the government money, it will actually increase the total cost of health care. "While it’s true that Medicare has done an inadequate job of controlling costs," he writes, "the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare."

Krugman could be right on this front. What happens to overall health care costs if the Medicare age is raised will depend on how well the new health care law works in implementing low-cost exchanges and keeping Medicaid costs down (Krugman makes it clear that he has little faith in this law, despite his support of it). Importantly, though, the purpose of raising the Medicare age isn't to reduce overall health care costs; it is to allocate limited federal dollars efficiently. We'll discuss this more later in the post.

3. Raising the Medicare age will have only a small effect on the number of uninsured people

The final criticism of raising the Medicare age is that it would leave those age 65-67 uninsured. Krugman argues that "not every 65- or 66-year-old denied Medicare would be able to get private coverage — in fact, many would find themselves uninsured." Drum is more emphatic, claiming that "it's flatly impossible for anyone that age to get private insurance, so they either keep working or they go without health insurance."

These claims show not only a failure to look at the statistics, but more importantly a failure to remember the health care reform legislation which both critics support and which will provide near-universal coverage beginning in 2014.

Statistically, as it turns out, older Americans are among the least likely to be uninsured. In 2009, 22.5 percent of adults under 65 were uninsured -- but only 14 percent of those age 55 to 64 were. And those in their early 60s are less likely to be uninsured than those in their late 50s. So even currently, claims that it is impossible to find insurance at older ages are at best exaggerated.

 

 

But all this forgets about the health care reform legislation (PPACA), which provides Medicaid coverage for those making less than 138 percent of the poverty line and progressive subsidies for those making up to 400 percent of the poverty line. Even individuals making over 400 percent of the poverty line -- where the uninsured rate for those aged 55-64 is a whopping 4 percent -- still have the ability to purchase insurance on exchanges which have "guarantee issue" (purchasers cannot be denied coverage) and limited age rating (premiums for older purchasers cannot be more than three times as big as younger purchasers).

In other words, increasing the Medicare age won't cause most people to be uninsured; instead, it will push them into the insurance exchanges.

The Benefits of Increasing the Medicare Age

Criticisms of raising the Medicare age are not only off base, but they obscure the two major benefits of such a policy. First, as suggested above, raising the age will lead to much better targeting of limited government resources. 

Currently, pretty much everyone over age 65* receives the same effective insurance subsidy from the government -- regardless of age or income. But Medicare's costs are rising to unaffordable levels, and will have to be cut. Rather than reducing benefits across-the-board, raising the Medicare age does so in a very targeted way. For one, all reductions are targeted at the youngest of the Medicare population -- those who tend to be in the best health and are most able to work. And as we explain above, it is not as if they would be thrown to the dogs. The lowest income individuals would continue to receive free heath care through Medicaid. Those of more moderate income would receive subsidized health care in the health exchanges, with subsidies linked directly to income. And even those of higher incomes would still benefit from many of the coverage provisions under health reform.

In addition to better targeting Medicare, increasing the age would have positive labor market effects. Many people make their retirement decisions based upon the Medicare eligibility age, and increasing it would likely encourage longer working lives. As we've explained in the past, longer working lives would accelerate economic growth, increase revenue collection, and improve overall retirement security.

It's time to consider raising the Medicare age.

 

*Lower-income individuals receive additional Medicaid subsidies and much-higher income individuals pay higher Medicare premiums.

President Obama Joins the Announcement Effect Club

Yesterday while making comments about the Jobs and Competitiveness Council, President Obama made some remarks that qualified him to be the newest member of CRFB's Announcement Effect Club. Here's what caught our attention (from Politico):

Obama also sought Monday to link the deficit-cutting talks and the issue identified in polls by most Americas as their top concern: job creation.

"The thing I want to emphasize is that we need to solve our medium- and long-term debt and deficit issues not for abstract reasons, but because they are a concrete impediment to growth and jobs," Obama said.

"So the American people need to know that over the next month, as we focus on making sure that we have a balanced, thoughtful resolution to this problem, this isn't to the exclusion of worrying about jobs, but is actually in service of making sure businesses have enough confidence about the investment environment so that they can start getting off the sidelines and putting more money to work and hiring more people."

As we have reiterated many times, making a firm commitment to reducing our medium and long-term debt and deficits would inspire confidence today in businesses, investors, and individuals, and would have positive effects on the U.S. economy right away. Welcome to the club President Obama, we are very glad to have you!

 

The New Biden Group

As the bipartisan group of lawmakers being led by Vice President Biden continue to discuss the budget and ways to raise the debt ceiling, it seems the Vice President has gotten himself another fiscal policy-related task: the Campaign to Cut Waste.

In a blog on the White House's website, Vice President Biden announced his leadership role in the new group, whose responsibility would be to--you guessed it--cut wasteful spending. The Obama Administration has taken a number of steps over the past year (most recently here) to try to cut down on wasteful spending, but this seems to be a broader effort than the individual initiatives they've announced previously.

Here is Vice President Biden's take on the new group:

Most of these cuts we’re going to make are small. They won’t close our deficit or solve all of our fiscal problems. However, no amount of waste is acceptable, and these cuts will add up over time. This year alone we’ve found $33 billion in savings, but we know there’s a lot more work to be done.

Any efforts to reduce wasteful or inefficient spending that can lead to savings are worthwhile. There is no reason to continue low-priority or wasteful spending at a time of record deficits, and these types of cuts are even lower than the low-hanging fruit we recently identified.

Defending IPAB

Today, CNN Money featured a piece from the Concord Coalition's Josh Gordon, who argued against repealing the Independent Payment Advisory Board (IPAB) established in the health reform legislation. As Gordon explains:

In a country struggling mightily with unaffordable health care costs now, and destined to struggle even more in the future, IPAB is one of the institutions that gives some hope that if we figure out how to control costs, we just might be able to put that knowledge to use.

CRFB has supported IPAB since before it was enacted into law and continues to believe in its cost saving potential. At the same time, IPAB does have some serious flaws and limitations and could be improved in a number of ways to make it more effective. We'll be writing more on just how this could be done soon. In the meanwhile, see the video below for a strong defense of IPAB: 

 

New Members of The Announcement Effect Club

Over the past few weeks, a number of new members have been added to The Announcement Effect Club. Recently, Washington Post blogger Ezra Klein, Senator Joseph Lieberman (I-CT), and Rep. Steny Hoyer (D-MD) all joined the club. All pointed out that enacting a fiscal plan now to reduce our long-term fiscal problems would restore confidence in the market and thus bring about short-term economic benefits in addition to the long-term benefits often associated with deficit reduction.

Ezra Klein, in a Bloomberg op-ed on 6/8/11, said:

"...agreeing to deficit reduction later would also help make a stimulus more effective now. It would calm fears about federal spending, demonstrate that the government can overcome political paralysis and encourage businesses to take advantage of short-term tax incentives by confirming that Washington won’t be handing out more goodies once recovery takes hold."

Following that, Sen. Lieberman, in a Washington Post Op-Ed on 6/9/11 about reforming Medicare and reducing deficits, noted that:

"Doing so would send a powerful and necessary signal to financial markets that we are addressing our long-term fiscal challenges. It would prove to our constituents that we can still come together to fix a program that they want and need. In fact, showing that we can work across party lines to solve one of our toughest fiscal problems is probably the best thing we can do to stimulate confidence in our economy, and that will lead to more capital investment and more jobs."

Finally, Rep. Steny Hoyer, in an interview with CBS alongside Rep. Paul Ryan on 6/12/11, when talking about the national deficit and fiscal plans such as the House passed FY 2012 budget, noted that:

"If we can work together, I think that’s going to raise the confidence level here and around the world, and I think that in itself will have a very positive effect."

These three new members of the club all agree that a fiscal plan, or at least major deficit reduction, is both necessary and a way to help stimulate the economy.

Welcome to the club, and let us hope that lawmakers enact a fiscal plan sooner rather than later.

‘Line’ Items: The Heat is on Edition

Except in Miami – The Miami Heat weren’t hot enough, but Washington saw record temperatures last week. Capitol Hill may warm things up this week as well as both chambers are in session together for the first time this month and the Biden group looks to pick up the pace of its debt limit/deficit reduction negotiations. CRFB will also add some sizzle with a big conference this week.

Biden Group Catches Fire – After only meeting once in the last two weeks, the bicameral, bipartisan group of lawmakers led by Vice President Biden plans to meet three times this week – Tuesday, Wednesday and Thursday afternoons – to make progress towards reaching a deal to raise the debt limit and reduce the deficit well ahead of a projected U.S. default in early August. Discretionary spending, entitlements, budget caps and other spending restraints are all on the agenda this week. CRFB has ideas for all these topics. We previously identified over $1 trillion in common-ground savings and offered ideas for reforming health care and Social Security. Additionally, the Peterson-Pew Commission on Budget Reform has provided recommendations for making a debt trigger work and last week unveiled a Fiscal Toolbox comparing budget process ideas like spending caps, balanced budget amendments and triggers. The group talked revenues last week (see our tax expenditure reform ideas here). In addition to picking up the pace, negotiators on both sides are also toning down the rhetoric, raising hopes that agreement can be reached relatively soon.

Gang of Six Returns to the Front Burner – Last week the bipartisan Gang of Six senators, now a group of five with Sen. Tom Coburn (R-OK) on sabbatical, returned to relevance as it shared its work with fellow senators at a meeting of about 18 colleagues split evenly by party. The group has found about $4.7 trillion in deficit reduction in its quest to devise a comprehensive, multi-year fiscal plan.

CRFB Conference Looks to Keep the Fiscal Responsibility Flame Alive – Speaking of the Gang of Six, two of its members, Sens. Mark Warner (D-VA) and Mike Crapo (R-ID), will appear at CRFB’s 2011 Annual Conference on Tuesday. The star-studded lineup also includes Federal Reserve Chair Ben Bernanke, White House National Economic Council Director Gene Sperling, House Budget Committee Chair Paul Ryan (R-OH), Fiscal Commission Co-Chair Alan Simpson, and many more. CNBC's Steve Liesman will moderate. More information can be found here. A live video stream of the event will be available on the Bottom Line Blog starting at 2:30 pm on Tuesday. You can also follow the conference on Twitter using the hashtag #debtconference. CRFB (@budgethawks) will be live-tweeting the event.

House Burning Up the Appropriations Track, Senate Not So Much – The House resumes its relatively torrid pace on FY 2012 spending bills this week, with the Military Construction-Veterans Affairs bill on the House floor today. The Agriculture bill is also expected to be considered and voted on the floor this week, with the Defense and Energy-Water bills coming before the House Appropriations Committee this week to be teed up for floor action next week. The Defense bill is the only one where spending is expected to increase. Meanwhile, there remains little action on the other side of the Capitol. Although Senate Budget Committee Chair Kent Conrad (D-ND) says he has made some progress in drafting a budget resolution that could pass his committee, no timetable for action has been set.

Will Ethanol Subsidies Get Torched? – Sen. Coburn has forced a vote on an amendment to cut the 45 cent blender tax credit for ethanol, which costs about $6 billion in lost revenues. The proposal is causing a rift among conservative groups. Americans for Tax Reform opposes repeal of the credit because the group calls it a tax increase, while the Club for Growth supports repeal. The Senate vote will occur Tuesday.

Key Upcoming Dates

June 14

  • CRFB Annual Conference, with Federal Reserve Chair Ben Bernanke and many others at 2:30 pm. Information here and a live webcast will be available on our blog.
  • House Oversight & Government Reform Committee hearing on "Achieving Transparency and Accountability in Federal Spending" at 9:30 am.
  • Producer Price Index for May released by Labor Department.

June 15

  • Senate Appropriations Committee hearing on the FY 2012 appropriations request of the Department of Defense with Defense Secretary Robert Gates and Joint Chiefs of Staff Chair Adm. Mike Mullen at 10:30 am.
  • Consumer Price Index for May released by Labor Department.

June 17

  • Consumer sentiment for June released by University of Michigan/ThomsonReuters.
  • Leading economic indicators for May released by The Conference Board.

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.

CRFB President Maya MacGuineas Recongized As One of the 100 Most Influential Leaders in Finance

We are honored that Treasury & Risk has included CRFB's president, Maya MacGuineas, on their list of The 100 Most Influential Leaders in Finance for 2011. Names on the list range from government officials to policymakers to CEOs, including Ben Bernanke, Steve Jobs, and President Obama.

Hopefully, in next year's edition we'll see a list of the people who helped push for and enact a comprehensive fiscal plan!