The destruction and devastation caused by Hurricane Irene is of serious concern, and addressing it will come at a real cost. Yet even while both parties agree that more federal money will be necessary to help pay for relief and recovery, some have argued that these additional costs must be offset through other spending cuts.
We agree with this premise. Federal funds will be a crucial element in helping some communities recover from flooding, wind, beach erosion, and other types of damages, but the money isn't free. Budgeting is about priorities, and if disaster relief is worth the cost (as we believe it is), it's also worth paying for.
But there's a larger challenge here than finding ways to pay for the federal response to Hurricane Irene. We need a better way to budget in advance for all types of national disasters and emergencies. True, we don't know when the next hurricane, tornado, wildfire, earthquake, or other natural disaster might strike, but in a country as large as the U.S. there are sure to be a constant supply of such occurrences.
Disaster spending can at times be grossly underfunded, and emergency funding is allocated on top of the funds lawmakers have already accounted for in each year's budget. This is no way to prepare for emergencies.
In the recent debt ceiling deal, emergency spending was defined and affected. First, in the deal, disaster spending, that is non-war, cannot exceed the previous ten year average, excluding the highest and the lowest. Additionally, the bill codified what emergency spending is. The law says that "emergency" is when new budget authority or outlays for the prevention or mitigation response to a loss of life or property, a threat to national security and is unanticipated, which means that it is sudden, urgent, unforeseen and temporary.
One way to proactively budget for emergencies comes from the recommendations of the Peterson-Pew Commission on Budget Reform in their report Getting Back In the Black.
In the report, they recommend lawmakers:
Change the process of budgeting for emergencies, annually outlaying to an emergency reserve amounts sufficient to pay the expected average annual cost of emergencies, with strict rules governing the use of the emergency reserve.
Now is the time for real fiscal reform, and improving the misguided way we budget for emergencies is just one of the concrete ways we can.
It's no secret that taxes will be a central element in national politics over the next fourteen months leading up to the Presidential election. With that in mind, Republican Presidential candidate Jon Huntsman is prepared to offer up a comprehensive tax reform plan.
His reform would lower individual income tax rates and eliminate the AMT while axing all tax expenditures. Sounds like the Fiscal Commission tax plan, right? For the most part, it is. The difference is that instead of devoting the remaining revenue raised to deficit reduction, Huntsman would use it to eliminate capital gains and dividends taxes. This is actually the opposite of what the Commission did in this regard--taxing capital gains and dividends as ordinary income.
It's good to see that the idea of pro-growth tax reform is making its way on the campaign trail as well as in Washington. Huntsman's plan would certianly make the tax code simpler while fostering more growth and investment. In a time of such serious fiscal imbalances, however, we should also be looking to raise more revenue to finance our spending priorities while also keeping deficits and debt under control. Our tax code should be simplified, but it should also accomplish the goal of providing the government with sufficient revenue for its operations.
We look forward to learning more details of Hunstman's tax reform plan as well as how he would address other areas of the budget.
In a joint press release this morning, Super Committee co-chairs Sen. Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX) announced that Mark Prater will serve as staff director for the Joint Committee on Deficit Reduction (click here for full list of members). Mr. Prater has worked for the Senate Finance Committee for over two decades, currently serving as deputy staff director and chief tax counsel for the Republican staff.
Co-chairs Murray and Hensarling spoke highly of Mr. Prater, saying:
The know-how and experience Mark brings to this difficult task is exactly what we agreed must be the top priority for the staff serving all the members of this Committee. Mark has a well-earned reputation for being a workhorse who members of both parties have relied on. We look forward to working with him and are confident that his approach and expertise will be valuable as we weigh the difficult but necessary choices ahead.
We congratulate Mr. Prater on his newest appointment, and wish him luck going forward!
Quakes and ‘Canes – Washington and much of the East Coast were rattled by natural phenomena last week, with a 5.9-magnitude earthquake on Tuesday and Hurricane Irene storming up the coast over the weekend. Attention is now turning back to what will happen once lawmakers flood back into DC after Labor Day.
CBO Issues Fiscal Storm Warning – In its update of the Budget and Economic Outlook, the Congressional Budget Office (CBO) said that, while the recent debt ceiling deal had improved fiscal prospects for the next decade, the U.S. still faces “profound budgetary and economic challenges.” Beyond the ten-year window, CBO warned that an aging population and soaring healthcare costs could cause federal debt to skyrocket without changes. In addition, CBO’s near-term projections were likely too rosy as their economic predictions were formulated before the recent downturn in leading economic indicators and their fiscal projections assumed that the 2001/2003/2010 tax cuts would not be extended, the AMT would not be patched as it always is, and there would be no more doc fixes. CRFB updated its own baseline with realistic assumptions projecting that public debt will reach 80 percent of GDP in 2020.
Jackson Hole Shakes Things Up – Jackson Hole, Wyoming was the epicenter of a different kind of earth-moving event as economic and financial leaders met at the resort for the annual conference hosted by the Federal Reserve Bank of Kansas City. Fiscal matters were front and center at the proceedings. Federal Reserve Chair Ben Bernanke gave a speech where he stressed the importance of putting the U.S. on a sustainable fiscal path to economic and financial stability. He said that the country needs a “credible plan” now that will reduce deficits over the longer term while recognizing the short-term needs of the economic recovery. The speech echoed some of Bernanke’s remarks at CRFB’s Annual Conference in June (watch the video here). In later remarks at Jackson Hole, International Monetary Fund (IMF) head Christine Lagarde also emphasized the need for fiscal policy changes, stating that “policymakers must strike the right balance between reducing public debt and sustaining the recovery.” In addition, Bernanke also suggested budget process reform be a part of the solution. The Peterson-Pew Commission on Budget Reform offered a blueprint for budget process enhancements that can help put the country on the right fiscal course in Getting Back in the Black.
Supercommittee In the Eye of the Hurricane – The Joint Select Committee on Deficit Reduction is already facing scrutiny. Gang of Six member Sen. Mark Warner (D-VA) and many fiscal experts want the Committee to “go big, go bold” and go beyond its mandate of $1.5 trillion in deficit reduction. Many watchdogs are also calling for members to come back from recess early to start their deliberations. In response, Committee members are sending the message that work has already begun. Committee member Rep. Fred Upton (R-MI) said that the group has had “lengthy conference calls already.” Co-chairs Sen. Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX) released a joint statement on Wednesday saying that they are “engaging in serious discussions” to set rules and a schedule for the group, as well as hire staff. They also noted that members are reviewing recent deficit reduction efforts from other entities. It just so happens that CRFB has a handy comparison grid of all the deficit reduction plans. There is also word that the Committee will soon put up a website that will allow the public to offer ideas. Committee member Sen. Rob Portman (R-OH) has already created a section on his website for input from his constituents. Concerned citizens can complete CRFB’s popular “Stabilize the Debt” online budget simulator to test their deficit reduction ideas or discover new ones.
Candidates Talk Economy – The whirlwind that will be the 2012 presidential campaign is beginning to take shape as candidates start to flesh out their policy positions in key areas, such as economic and fiscal issues. Former Utah Governor Jon Huntsman will unveil his economic plan this Wednesday, former Massachusetts Governor Mitt Romney will follow suit on September 6, and President Obama will also announce a detailed plan for boosting the economy and reducing the deficit shortly after Labor Day. CRFB will assess the fiscal impact of economic plans of the candidates. Several high-profile GOP debates are also planned for next month (see below), which will provide plenty of opportunity for the candidates to explain their fiscal priorities. CRFB will strive to make sure the right questions are asked of the candidates so that voters can make informed choices.
Krueger Named CEA Chair – Princeton University economist Alan Krueger has been tapped to be the new White House Council of Economic Advisers chair. Krueger will be a key player in dealing with the nightmare on main street as the economic recovery struggles to maintain steam.
Key Upcoming Dates
- GOP presidential candidate Jon Huntsman unveils economic plan.
- Senate back in session.
- GOP presidential candidate Mitt Romney unveils economic plan.
- House of Representatives back in session.
- Debate at the Ronald Reagan Presidential Library in California for 2012 Republican presidential candidates.
- GOP presidential debate in Florida.
- The Joint Select Committee on Deficit Reduction (Super Committee) must hold its first meeting by this date.
- Second GOP presidential debate in Florida.
- New fiscal year begins. Legislation fully funding the federal government, or a stopgap measure with temporary financing of government operations, must be enacted by then.
- GOP presidential debate in New Hampshire.
- Congressional committees must submit any recommendations to the Super Committee by this time.
- GOP presidential debate in Nevada.
- The Super Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.
- The Super Committee report and legislative language must be transmitted to the president and congressional leaders by this date.
- Any congressional committee that gets a referral of the Super Committee bill must report the bill out with any recommendation, but no amendments, by this date.
- Congress must vote on the bill recommended by the Super Committee by this date. No amendments are allowed.
With so much going on in United States’ fiscal policy, it can be difficult to focus on much more than what is happening in Washington -- at least we feel that way. But if you haven’t noticed, the fiscal and economic outlook overseas has taken a hit in recent weeks as well, leading to a number of downgrades, talks of mandatory balanced budgets in the Eurozone, and a good deal of volatility in markets around the world.
Wednesday, Moody’s – one of the ‘big three’ ratings agencies – issued a downgrade of Japan’s sovereign debt, bringing them from Aa2 to Aa3 (with a stable outlook). This brings the Moody's rating on par with Japan's ratings from Standard and Poor’s (S&P) and Fitch, both at AA- (though S&P and Fitch have Japan on a negative outlook).
In France, many have argued that the U.S. downgrade by S&P portends a French downgrade as well. To better their fiscal picture, French President Nicolas Sarkozy recently announced a series of spending cuts and revenue increases for the remainder of 2011 and 2012 aimed at hitting the country’s deficit reduction targets. However, some have argued the underlying economic assumptions (specifically 1.75 percent growth each year) are overly optimistic, suggesting further cuts may yet be necessary.
France isn’t the only one rumored to be near a potential downgrade. As an example of just how high tensions are and how volatile the markets have been lately, rumors of a coming downgrade of German debt and of the country being set to ban the short-selling of stocks caused European markets to tumble dramatically Thursday, only to find out later the rumors were seemingly unsubstantiated.
And we haven’t even mentioned the downgrade to Ireland’s debt by smaller rating agency DBRS. Ireland saw its rating brought down from A to A (low) last week, while the Canadian rating agency also put Spain on a negative outlook (though reaffirming its AA rating).
In Europe, things have gotten so bad that it has been reported Merkel and Sarkozy are pushing mandatory balanced budgets for every country in the Eurozone. Also under consideration are joint “Eurobonds” to help fund sovereign deficits -- bonds which would be backed by every Eurozone country. This idea of balanced budgets is not unlike the ones that are floating around Congress (on which a vote is guaranteed due to the recent debt deal). Though every European country is different, the growing debt crisis across the pond should show American policy makers that it is better to avoid the storm than weather it.
In a Bloomberg article, Sen. Mark Warner (D-VA) called for the Joint Committee set up by the recent debt deal to exceed its $1.5 trillion target for deficit reduction this decade. Specifically, he wants a $4 trillion plan over ten years.
The article quoted Warner as saying:
"Even if the super committee knocks another $1.5 trillion off our debt, that’s still not going to be enough,” Warner said on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “Unless we can also take on the issue of entitlement reform and tax reform to generate revenue, I don’t think we’re going to get there,” he said.
These comments should not be of any surprise coming from a member of the Gang of Six, who spent this year working on a comprehensive, bipartisan fiscal plan. Also, he said that coming up with this kind of plan "should not be the kind of ultimate heavy lift," and having done this kind of work already, Warner is in a good position to speak on that.
Of course, as we have mentioned before, even if the Committee achieves its mandate of $1.5 trillion in savings over ten years, debt would still be on an upward path, assuming that lawmakers continue to extend various policies.
Sen. Warner's endorsement of a comprehensive fiscal plan is no surprise, but we hope other members will follow suit to pressure the Joint Committee to go beyond its target.
Earlier today, the chairmen of the Federal Reserve, Ben Bernanke gave a speech at Jackson Hole, Wyoming where he commented on the current state of our economy and commented on our fiscal situation, including our budget process. Dr. Bernanke noted that the economic recovery has slowed (with factors affecting it such as the global economic situation and the housing slump), although our economy's foundations are still quite strong which will likely prevent the United States from becoming too stagnant or into a prolonged recession.
When talking about fiscal policy, Dr. Bernanke noted, as he has in the past, that our fiscal policy is headed in the wrong direction and if not corrected, might risk "severe economic and financial damage". He also noted that the current high level of unemployment is a burden on our fiscal situation and that increased employment can help our fiscal situation, but that we cannot grow our way out of our fiscal mess.
Of particular note, Dr. Bernanke said, with regard to budget process reform:
Finally, and perhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals. Of course, formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country's fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial.
As the Peterson-Pew Commission on Budget Reform has recommended (see their December 2010 report, "Getting in the Black"), enacting a credible goal for fiscal policy – such as stabilizing the debt at a specified level within the decade and lowering it to a safer level thereafter – would provide a clear standard for leaders and the public to judge the results of budget decisions and a basis for enforcing greater discipline. While setting clear, enforceable goals is only part of building a smarter budget process, doing so would help keep pressure on leaders to make hard choices going forward.
For the full text of Dr. Bernanke's speech, click here.
An interesting article in today's Washington Post caught the eye of some of us here at the CRFB office this morning. GOP presidential candidate Mitt Romney evidently has a "new sidekick": an enormous green debt clock. Mr. Romney debuted the clock, whose enormous numbers show the total of the continually-growing U.S. national debt, in a New Hampshire town hall meeting yesterday (his fourth in two days--no wonder he wanted to change it up a little!).
Mr. Romney made many references to the clock throughout the meeting, saying "It’s a frightening thing here as we watch these tens of thousands of dollars going by second by second, hundreds of thousands of dollars going by by the minute. I don’t know who told politicians that there was a number that was called a trillion, but they learned it, and now they’ve borrowed it."
The article also had an answer for the burning questions on all of our minds: where on earth did they get an enormous debt clock? Can you order them online? (If so just tell us where!) Turns out, the clock is homemade; two of Mr. Romney's aides made it by renting two huge flat-screen TVs, hooking them up to computers to connect them to one of the internet's many live debt clocks, and putting it all together with a self-designed green styrofoam cut-out. Very creative.
We at CRFB hope that fiscal issues will continue to be a central focus of the 2012 presidential campaign, and applaud Mr. Romney's efforts to draw attention to our growing national debt. What better way to do that than take an enormous, impossible-to-miss debt clock with you everywhere you go?
In CBO's latest Budget and Economic Outlook, CBO includes revised projections of various economic indicators as part of its update. Since there is such a major relationship between economic conditions and fiscal policy, these numbers are of significant importance. CBO's latest economic projections do contain worse real GDP growth for the first few years, but much faster growth mid-decade. However, CBO notes in its update, that "[t]incorporating that recent news and economic data would have led CBO to temper its near-term forecast for economic growth". CBO notes that these projections were done in early July and did not have time to re-do them to incorporate some of the significant economic news which points to even slower growth than originally projected.
For example, today's Bureau of Economic Analysis release of dismal revised second quarter real GDP numbers with the annual growth rate for the second quarter equal to 1.0 percent. With economic projections such as that, coming after early July, it is likely, as CBO explains, that their own economic outlook, at least in the short term, would likely have been changed due to recent events, which of course would also change their fiscal outlook.
Some other reasons for pessimism from CBO include:
- 15 percent drop between early July and mid-August in the S&P 500 stock index
- BEA revision of GDP from 1.9 to 0.8 for the first half of the year
- Downward revision of the recession from -4.1% to -5.1% from fourth quarter 2007 to second quarter 2009
In addition to changes in growth estimates, CBO is now estimating interest rates will be far lower in both the near- and long-term. In the short-run, the lower rates are based largely on observation -- and are likely a result of a weaker economy as well as decisions by the Federal Reserve to maintain a low federal funds rate. Over the long-term, the lower interest rates come mainly as a result of the marked improvement in the fiscal picture (though this improvement is based largely on an unrealistic baseline and on the assumption the Super Committee identifies $1.2 trillion in yet-unspecified savings). With debt declining as a share of GDP, CBO estimates interest rates will remain lower than they otherwise would be.
As a result of these factors, CBO projections more than $630 billion less in net interest spending than they did in March. This savings might not materialize, if the United States fails to get its fiscal house in order.
Although CBO shows debt improving significantly over the coming decade, reaching 61 percent of GDP in 2021, debt will not follow this downward path without lawmakers putting in place specific debt reduction measures. As we have showed in our CRFB Realistic Baseline, debt is much more likely to grow to 82 percent of GDP by 2021 given that they are likely to continue extending the tax cuts and other policies. As we stated yesterday in our analysis of CBO's report, we think it's more appropriate to include the $1.2 trillion savings from the Super Committee "once specific policies have been identified and agreed to."
But even if the special Joint Committee succeeds in achieving its goal of $1.5 trillion in savings, debt would still most likely be on an upward path, reaching 76 percent in 2021 according to our projections.
In order to put the debt on a downward path, we estimate that the Super Committee will need to double or even triple its savings. Doubling it, assuming a reasonable set of phase ins, would likely get debt down to 69 percent of GDP by 2021 and just barely put it on a downward path. Tripling it would do more to actually bring our debt under control in a fashion similar to what was proposed by the Fiscal Commission.
We should note, however, that these projections rely on CBO's economic assumptions which were updated in early July and do not include more recent data showing slower than anticipated growth along with other financial and economic developments. In short, they are likely optimisitic.
If debt continues to rise as we project under CRFB Realistic Baseline, we risk jeopardizing strong economic growth down the road as public debt and borrowing "crowds out" private investment. We also risk having to pay higher and higher interest payments on our debt, reducing the available resources to pay for other spending and tax priorities. By failing to address our debt challenges, we ultimately risk a fiscal crisis.
But let's not focus on the negatives of inaction. If lawmakers "Go Big" and solve our fiscal problems, we can lay the foundation for strong economic growth while giving future generations the budget flexibility to structure spending and tax policies as they see fit. Wouldn't that be great. We're confident that lawmakers will rise to the challenge - afterall, we can either reduce debt on our own terms or be forced to make more abrupt changes by our creditors.
With CBO having released their newest Budget and Economic Outlook, CRFB has updated its Realistic Baseline for the second time in a month to reflect these new numbers and estimates. Incorporating all of the recent legislation, economic and technical changes from the CBO update, and compiling what we believe is the most likely scenario going forward, our updated Realistic Baseline projections show a much gloomier outlook than do the CBO current law projections.
To refresh your memory, our baseline contains a number of policy adjustments to the CBO estimate of current law that are more likely to occur, in our estimation. Using the same economic assumptions as CBO, we then assume that the 2001/2003/2010 income tax and estate tax provisions will be extended past 2012, the AMT is patched continuously, Medicare physician payments are frozen instead of cut by 30 percent (the "doc fix"), the wars are gradually drawn down, and the $1.2 trillion in savings from the Super Committee are not assumed. Compared to CBO's current law projections, these policies add $4.9 trillion to the deficit.
With our baseline earlier this month, we estimated that the ten-year deficits could total $10.3 trillion, instead of the CBO baseline's figure of $6.7 trillion. This time around, we estimate $8.4 trillion in deficits over the next ten years, compared to $3.5 trillion under CBO's current law baseline.
|Bridge from Current Law to CRFB Realistic Baseline|
|CBO August Baseline Deficits||$3,487|
|Tax Cuts Extended and AMT Patched||$3,949|
|Doc Fix Passed||$298|
|Super Committee Fails and no Trigger||$1,003|
|August CRFB Realistic Baseline||$8,361|
Using this more realistic baseline, debt as a percentage of GDP would be 81.5 percent in 2021, compared to 61.0 percent under current law.
|New CRFB Realistic Baseline Deficits and Debt|
|Spending (Percent of GDP)||23.0%||22.6%||22.3%||21.8%||22.0%||22.1%||22.1%||22.5%||22.8%||23.0%|
|Revenue (Percent of GDP)||16.8%||17.5%||18.3%||18.3%||18.1%||18.4%||18.3%||18.4%||18.5%||18.5%|
|Deficits (Percent of GDP)||-6.2%||-5.1%||-3.9%||-3.5%||-3.9%||-3.8%||-3.8%||-4.1%||-4.3%||-4.5%|
|Debt (Percent of GDP)||71.2%||74.8%||75.8%||75.1%||75.7%||76.5%||77.3%||78.5%||79.9%||81.5%|
Yesterday, CBO released an update on the effects of the American Recovery and Reinvestment Act of 2009 (ARRA) on employment and economic output in the second quarter of 2011. (They also released their updated Budget and Economic Outlook, click here to read CRFB’s analysis.) Enacted in 2009 as an effort to stimulate the economy, ARRA's legislation requires CBO to regularly report on its effects. The table below shows CBO's latest estimates of ARRA's effects (given in ranges) for the second quarter of 2011, as compared to what CBO estimates would have occurred if ARRA had not been enacted.
CBO Estimates of ARRA's Economic Impact from April 2011 - June 2011
|Real GDP Increase||0.8% to 2.5%|
|Unemployment Rate Decrease||0.5% to 1.6%|
|Employment Number Increase||1.0 to 2.9 million|
|Increase in Full-Time-Equivalent Jobs||1.4 to 4.0 million|
|Budget Deficit Increase (2009-2019)||$825 billion|
Yesterday's analysis slightly lowered CBO's estimate of the legislation's impact on budget deficits, as CBO's May update estimated that ARRA would increase budget deficits by $830 billion. The report also stated that ARRA's effects on employment began weakening at the end of 2010 and continued to weaken throughout 2011. CBO's projections, however, have ARRA raising real GDP in 2012 by 0.3 to 0.8 percent and increasing employment numbers by 0.4 million to 1.1 million.
In a related post over on Ezra Klein's blog, Dylan Matthews looks at nine different studies conducted to determine ARRA's effects on employment and economic output. He found that six studies reported that the stimulus "had a significant, positive effect on employment and growth," while three claimed that "the effect was either quite small or impossible to detect." Matthews looks at the methodologies behind the studies, including yesterday's CBO report.
CBO's estimates are calculated using different "multipliers" for each category of ARRA's provisions, which are meant to represent the direct and indirect effects on the nation's output of every dollar spent implementing a certain policy. So, CBO applies the provision's multiplier to the total amount spent on that provision to estimate its overall impact. CBO's report acknowledges potential problems with their method, such as disagreement among economists about the economic models used to calculate multipliers. Another approach could estimate a policy's indirect effects on output differently, thus changing the conclusions of the study.