September 2011

IMF Highlights Need For a Fiscal Plan

Earlier this week, the IMF released its latest World Economic Outlook (WEO), with a section devoted to the fiscal situation of the U.S. The IMF aptly reminds us that putting in place measures to gradually stabilize and reduce debt needs to be the "first priority" for U.S. lawmakers.


As the IMF said:

"The first priority for the U.S. authorities is to commit to a credible fiscal policy agenda that places public debt on a sustainable track over the mediumterm, while supporting the near-term recovery. For this, the fiscal consolidation plan should be based on realistic macroeconomic assumptions and should comprise entitlement reform and revenue-raising measures (for example, gradual removal of loopholes and deductions in the tax system and enhanced indirect taxes). This would allow the near-term fiscal policy stance to be more attuned to the cycle...

More fundamentally, delays in accomplishing an adequate medium term debt-reduction plan could suddenly induce an increase in the U.S. risk premium, with major global ramifications. As recently observed, shocks to the U.S. bond and stock markets tend to reverberate through major economies, and U.S. interest rate shocks have a strong bearing on emerging market spreads."

While it may seem like a broken record at this point, the IMF, like many other organizations and individuals note that the longer we wait on passing a long-term debt solution, the more investor, business, and consumer confidence can be drained. In addition, failure by the Super Committee to meet its mandate would trigger $1.2 trillion in budget cuts, which would not inspire any confidence in the political system and would represent a more front-loaded approach to deficit reduction than what many other fiscal plans have called for (who phased in cuts slowly to avoid harming the economy too much).

Overall, the IMF's report once again emphasizes the need for a fiscal plan, and the Super Committee presents a perfect opportunity for getting there.

Event Re-Cap: Urging the Super Committee to "Go Big"

On Wednesday CRFB hosted a three-panel discussion made up of lawmakers and budget luminaries urging the Super Committee to “Go Big” and develop a large-scale debt reduction package sufficient to stabilize the debt as a share of the economy. All panelists supported the notion that the minimum amount of savings tasked to the super committee, between $1.2 and $1.5 trillion, is an insufficient target for putting the budget on a sustainable path. A video of the event will soon be available, so check back on our homepage.

Participants included former Federal Reserve Chairman Alan Greenspan, Co-chair of the National Commission on Fiscal Responsibility and Reform Erskine Bowles, Senators Mark Warner and Mike Crapo, former CBO and OMB Director Alice Rivlin, former Senator Pete Domenici, Business Roundtable President John Engler, and former SEIU President Andy Stern. The full list of panelists can be found here.  Additionally, a number of prominent policymakers added their voices to the go big movement in recorded remarks that can be found here.  Check back soon with The Bottom Line for a video of the full event.

CRFB President Maya MacGuineas, Steve Bell of the Bipartisan policy Center, and Concord Coalition Executive Director Bob Bixby made opening remarks on behalf of their organizations as co-hosts, setting the tone for the “Go Big”, “Go Long”, and “Go Smart” messages.

Overall there were a number of areas of universal agreement across the three panels:

  • Failure is not an option. Congress and the President have really backed themselves up against a wall, and kicking the can further down the road to delay making difficult choices is no longer an option.
  • $1.5 trillion is an inadequate savings target; most agreed the minimum goal should be at least $4 trillion, while others argued for a higher minimum of $5-6 trillion (Chairman Greenspan), to even beyond that (David Stockman).
  • Everything must be on the table – spending cuts, tax reform (including tax expenditures), and entitlement reform.
  • There are a lot of good plans out there with multiple ideas to achieve a $4 trillion goal – the Simpson-Bowles and Domenici-Rivlin plans were frequently cited.

Among the many observations and recommendations from participants, Andy Stern’s surprising admission that he regretted not voting for the Bowles-Simpson Fiscal Commission plan may have been one of the most notable moments.

Another common theme was that lawmakers need to acknowledge that the public in many ways is more supportive of a go big approach than many lawmakers right now, and we need to compare the kinds of changes necessary to put debt on a downward path to what might happen if we experience some kind of bond crisis and loss of confidence. The math is pretty simple – without changes now there’s a pretty steep cliff on the horizon. The Super Committee must implement policies that begin to get deficits and debt under control, while at the same time not harming the fragile economic recovery that is a key to restoring increased prosperity and growth.

Panelists agreed that putting in place a strong, ambitious plan now that is phased in will actually lead to increased growth as the drag on the economy diminishes and markets, foreign governments and domestic consumers regain confidence in the U.S. economy and its prospects. Chairman Greenspan, Pete Domenici, Dave Cote, Erskine Bowles, and many other panelists highlighted this confidence element as one of the most serious threats afflicting the economy today and one of the strongest upsides to putting in a place a credible, ambitious debt reduction plan. However, speakers did recognize that debt reduction will be tough politically and economically this decade, but that the long-term benefits were undeniable.  Former Congresswoman Jan Harman underscored this point by quoting a recent Thomas Friedman article,  "We can either have a hard decade or a bad century."

There was universal agreement on the need to “go big”, and that there is no time for delay. Panelists argued that circumstances and external forces will eventually force lawmakers’ hand, and the better route is to make some tough choices now that begin a longer-term path to sustainable levels of debt and a return to more manageable annual deficits, and perhaps even eventually a balanced budget.

Updated Sep 28, 2011 to correct a mis-attributed quote.

Time is Running Out On the FY 2012 Budget

Update: The House has passed a CR Friday morning by a 219-203 vote. The new CR garnered more Republican votes by including $100 million more in offsets. The Senate will most likely reject this version.

Although it had been expected to pass the House, the FY 2012 CR that would have funded the government at the level of the Budget Control Act cap of $1.043 trillion through November 18 was defeated by a coalition of Democrats and conservative Republicans 195-230. Almost all Democrats voted against the bill and 48 Republicans joined in defeating the CR.

The sticking point for Democrats concerned disaster relief. The bill provided $3.65 billion for disaster relief, which was partially paid for by cutting $1 billion from the Advanced Technology Vehicles Manufacturing Loan Program, a Department of Energy loan program to automakers for developing (you guessed it) advanced technology vehicles, especially with regards to energy efficiency. Democrats decried the specific offset, but there are also general differences over the need to offset the disaster aid in general and the amount of aid that was included (the Senate passed a $6.9 billion bill that was not offset). You know our position on paying for disaster relief.

However, there is no word yet on how the House will proceed next. This vote showed that Republicans will need at least some significant Democratic support for a CR to offset the conservative members they are losing. Obviously, either they will have to find a more agreeable offset or drop the offsets altogether.

There is only a week left for the Congress to pass some sort of funding agreement before there will be a government shutdown, and there will need to be a bill that gets past both chambers. It should not be difficult to work out the differences, given that lawmakers already agreed to this topline discretionary level for FY 2012 in the BCA, but let's hope it happens quickly.

In April, the government almost shut down over a difference of a couple of tens of billions, and that seemed silly at the time given the magnitude of our fiscal challenges and the need for trillions in savings. It would be even less understandable over a difference of a few billion. Let's hope lawmakers reach an agreement very soon on next year's spending levels so that we can start the real work of working on reforming entitlement programs and the tax code.

The Federal Reserve Does 'The Twist'

The Federal Reserve's much anticipated statement came yesterday after two days of FOMC meetings, the Fed's policymaking group. As expected, they decided to take new steps to try to boost the recovery, citing weakness in the housing sector and labor market, as well as the downside risks related to some instabilities in global financial markets. (To see the steps they have previously taken, see

The Fed's plan of action includes a couple of different policies. The centerpiece is that they will be lengthening the average maturity of the Treasury securities that they currently hold by buying $400 billion of 6 to 30-year bonds and selling an equal amount of short-term Treasuries (which is what they traditionally hold to conduct open market operations). This is a reprise of a move the Fed did in the early 1960s, which was referred to as "Operation Twist." The intent, like previous bond-buying, is to lower long-term interest rates enough to try to push people out of the bond market and into long-term investments, including business investments and mortgages for consumers.

Second, they will be re-investing the proceeds of maturing agency debt and mortgage-backed securities back into mortgage-backed securities. Previous, the Fed had allowed their holdings of MBSs to decline, since they were re-investing these proceeds into long-term Treasuries. Now, they will aim to keep their holdings of MBSs relatively constant (while continuing to re-invest the proceeds from long-term Treasuries back into Treasuries).



In addition, the Fed continued to promise to keep interest rates at their current low levels through at least mid-2013.

Unlike the previous QEs, this move would not actually increase the size of the balance sheet, but rather change its allocation to focus more on the parts of the economy they feel need it. It is almost the monetary equivalent of "more bang for the buck." The Fed's holdings of mortgage-backed securities have declined by about $250 billion since their peak in June of last year, but housing prices have remained very low, so they have decided to instead keep their holdings constant. Also, yields on ten-year bonds are at record-low levels (a full percentage point below where they were at the start of QE2), so the Fed wants to reverse the flight-to-quality that has been occurring lately.


We will continue to track the shifting nature of the Fed's balance sheet at



Event 9/21: Urging the Super Committee to Go Big

In the past few weeks, CRFB and many others -- including 36 Senators from both sides of the aisle, the Blue Dogs, and more than 60 business leaders, former government officials, and other budget experts -- have been calling for the Super Committee to ‘Go Big’ and exceed their mandate of finding $1.5 trillion in deficit reduction measures over the next ten years. This sentiment has clearly been gaining traction and has been echoed constantly in the media since then.

The Committee for a Responsible Federal Budget is hosting a forum that will bring together leaders from across the political spectrum to discuss the path ahead for the Super Committee and the reasons it should ‘Go Big.’ Among those speaking will be Erskine Bowles, Alan Greenspan, Senators Mike Crapo and Mark Warner, as well as CRFB board members Jim Nussle, Alice Rivlin, John Spratt, among other experts. Seating is limited, so we ask that you please RSVP to Kingsley Trotter at

Be sure to tune back to The Bottom Line as we will be embedding a live webcast of the event.

When and Where:

Wednesday, September 21, 2011
2:00-5:30 pm
Dirksen Senate Office Building, Room #608

Live broadcast by Ustream

Senate Appropriators Attempt to Avoid BCA Cap

Update: Over at "Off the Charts," CBPP argues that the President's proposed war spending cap -- regardless of how it is counted toward deficit reduction -- would be helpful in preventing the type of cheating we describe below.

War spending is once again being used to avoid hard choices in budgeting. While the President is using a gimmick to try to count a current policy war drawdown as new deficit reduction, Senate Appropriators are using the Overseas Contingency Operations (OCO) accounts -- the war spending accounts -- to avoid enacting mandated defense cuts.

According to the National Journal, the Senate Appropriations Committee is moving $10 billion of base discretionary spending into the OCO budget. This change will allow them to avoid a portion of the $26 billion in defense spending cuts called for because of the discretionary caps from the Budget Control Act. Because war spending is not subject to those caps, this effectively allows lawmakers to cheat the caps by falsely classifying spending, which is particularly worrying given calls from a few lawmakers to remove defense from a potential automatic sequester.

Russell Rumbaugh of the Stimson Center remarked that:

“The Senate appropriators have shown how tempting it will be to move base budget costs into war funding to avoid the Budget Control Act’s rules.  Although this time they found offsets within the war costs, the $10 billion move sets the precedent for doing so in the future, which could undermine the whole purpose of the Budget Control Act’s caps.”

Circumventing the budget caps in this manner is unacceptable, and it undermines the effectiveness of any caps regime. They also highlight the need for further reforms to the discretionary caps to make these kinds of budget games more difficult. One option would be to put OCO spending into its own cap as President Obama recommended recently (though it is a gimmick to count savings already in place, it is nonetheless useful to lock those savings in through procedural mechanisms). This could be accompanied by a stricter definition of OCO spending, as the Fiscal Commission recommended. And in order to avoid letting budget rules dictate military tactics, provisions could be put in place to allow for offsetting tax increases or spending cuts if these caps were exceeded.

Regardless of any procedural changes, though, lawmakers need to stop playing games with the deficit. The deficit and our long-term fiscal imbalance is real. Playing games, using gimmicks, using accounting tricks, or attempting to circumvent the caps only adds to the perception that Washington is not serious about the issue and further underlies the point that they are not ready to make the real choices that need to be made.

Glenn Hubbard Joins the Announcement Effect Club

In a Bloomberg Op-Ed today, Glenn Hubbard, a former Chair of the Council of Economic Advisors under former President George W. Bush, joined the Announcement Effect Club. In his Op-Ed, Hubbard says that in order for the economy to begin growing, a long-term plan addressing our major structural reforms has to be implemented. Hubbard notes that the tax code is a mess, that short-term policies create business uncertainty, and the general uncertainty that looming deficit reduction create is hurting the economy.

As he notes, "The key, then, to any effort to boost the economy is to craft a short-term “stimulus” in the context of a longer-term structural reform plan that clarifies the deficit and debt path for the U.S" He also argues that there is no conflict between near-term stimulus and long-term deficit reduction.

As he writes:

Bear in mind that these structural reforms do not imply that all near-term stimulus must be off the table, only that any stimulus proposal be linked to longer-term fixes. For example, suppose that policy makers announced a credible reduction in future deficits caused by Social Security through a combination of gradual increases in the retirement age and slowing the growth in benefits for higher-income households. The enormous fiscal improvement from such a change would give leeway to strengthen Social Security benefits now for the least well-off and provide substantial incremental resources for training and re-employment of the long-term jobless.

Likewise, credible, gradual broadening of the base in the tax system by reducing tax expenditures on, say, housing and health insurance would give leeway to support business investment now with investment incentives and a much lower corporate tax rate. Or, as Obama has proposed, an infrastructure spending program could be made a high priority, but coupled with longer-term reductions in social spending.

Much of the debate over the stimulus paints economists and officials like myself, those concerned about the long term, as favoring inaction for (and perhaps indifference to) pressing short-run problems. This is a false choice: Enhancing a recovery in productivity and employment is a pressing policy need. Yet turning around the economy now also depends on grasping our structural problems and defining a policy for long-term reform and growth.

‘Line’ Items: Game On Edition

Game Time – NASCAR has begun its chase for the championship, baseball’s pennant race is under way, the deficit super committee is deliberating and we now have a budget plan from the White House. Its “Game on!” Will it be like the playoffs and some will go big while others go home?

White House Releases Deficit Game Plan – President Obama released his long-awaited deficit reduction blueprint Monday. The president rhetorically supported a “Go Big” approach to deficit reduction, as CRFB lauded in a statement, by proposing a plan the White House claims will reduce the deficit by over $4 trillion, which exceeds the congressional super committee’s mandate of recommending $1.5 trillion in deficit savings over the next decade. However, in reality the amount of savings is less than $2 trillion. CRFB pointed out in a blog post that “Go Medium” is a more apt description of the proposal. The plan has many good ideas that the super committee can draw from, but CRFB believes we must go farther. More analysis from CRFB will be forthcoming.

Super Committee Gets the Ball Rolling – The Joint Select Committee on Deficit Reduction (known as the “super committee”) held its first public hearing last week with CBO Director Douglas Elmendorf providing testimony on the history and drivers of the national debt. Several committee members, including Rep. Chris Van Hollen (D-MD) and Sen. John Kerry (D-MA), called on the committee to “go big” in reducing the deficit. The group had a private meeting over breakfast last Thursday and has another public hearing scheduled for this coming Thursday on revenue options and tax reform.

Leaders Join the Go Big Team – Last week over 60 economists, former policymakers and budget experts signed a letter to the super committee asking it to go big and go beyond its $1.5 trillion deficit reduction mandate. The letter was released at a press conference featuring White House Fiscal Commission co-chairs Erskine Bowles and Alan Simpson. A bipartisan group of 38 senators followed suit with a statement of principles also calling for the super committee to go big.

Lots of Tax Reform Plays Being Called – The Subcommittee on Fiscal Responsibility and Economic Growth of the Senate Finance Committee held a hearing last week on tax reform featuring heavy hitters such as former Federal Reserve Chair Alan Greenspan, former Michigan Governor John Engler and prominent economists John Taylor and Martin Feldstein. Reforming tax expenditures figured prominently in the discussion. See more on the subject here, here and here.

Key Upcoming Dates

September 20

  • Senate Budget Committee hearing on promoting job creation at 9:30 am.
  • Senate Finance Committee hearing on tax reform options to promote innovation at 10 am.
  • Joint Economic Committee hearing on "What is the Real Debt Limit" at 10 am.

September 21

  • House Budget Committee hearing on "The Broken Budget Process: Perspectives from Former CBO Directors" at 10 am.
  • IMF releases report on global financial stability.

September 22

  • Joint Select Committee on Deficit Reduction (Super Committee) hearing on revenue options and tax reform at 10 am.
  • House Budget Committee hearing on "The Broken Budget Process: Perspectives from Former Members of Congress" at 10 am.
  • Second GOP presidential debate in Florida.

October 1

  • New fiscal year begins. Legislation fully funding the federal government, or a stopgap measure with temporary financing of government operations, must be enacted by this date.

October 11

  • GOP presidential debate in New Hampshire.

October 14

  • Congressional committees must submit any recommendations to the Super Committee by this date.

October 18

  • GOP presidential debate in Nevada.

November 23

  • The Super Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.

December 2

  • The Super Committee report and legislative language must be transmitted to the president and congressional leaders by this date.

December 9

  • 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.

December 23

  • Congress must vote on the bill recommended by the Super Committee by this date. No amendments are allowed.


How Does President Obama's Plan Stack Up?

With President Obama's deficit reduction plan now officially out, it's worth comparing the debt path under this plan to other debt paths. For the comparison graph below, we have thrown in CBO's August baseline (excluding the trigger included in the Budget Control Act), the Fiscal Commission, and CRFB's Realistic baseline. Also, note that the numbers for the Obama plan are using CBO savings numbers (presented in Table S-3 of the report).

As we suggested in our release earlier today, the President seems to accept the idea of going big and of pushing the Super Committee to exceed its mandate, but, as you can see in the graph below, his plan certainly does not go big enough.



Obviously, the plan is an improvement over the CRFB Realistic baseline, and it comes close to stabilizing the debt in the medium term. But it still leaves debt at a high level and would fail to stabilize it in the long-term -- meaning it essentially attempts to do the absolute minimum necessary to 'stabilize' the debt, and doesn't do nearly enough to set it on a declining path as a share of the economy. 

The President has shown what "going medium" would look like; going big would be better.

MY VIEW: Paul Volcker

In today's New York Times, CRFB board member and former chairman of the Federal Reserve Paul Volcker has an op-ed on the dangers of inflation.

He writes that while "just a little inflation" can seem like an attractive option for invigorating the economy -- especially now given the "sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates" -- it is a slippery slope.

He continues:

My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.

Mr. Volcker also voices support for a comprehensive deficit reduction plan, saying:

President Obama has now set out new proposals to support economic growth. I hope he will be able to work with a responsible Congress to find the common ground that is urgently needed to deal with the economic challenges before us, restoring a healthy economy “in a context of price stability.” I also hope they will reach agreement early next year on a strong program to deal responsibly with our huge budget deficit over the years ahead.


Click here to read the full op-ed.


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

CRFB on President Obama's Deficit Reduction Plan

With the release of President Obama's deficit reduction plan this morning, CRFB has put out a press release commenting on the proposal.

We note that while the plan, excluding war savings, would exceed the Super Committee's mandate of $1.5 trillion, it would not be big enough to bring down the debt to sustainable levels. Also, the plan does not make the kind of changes to entitlement programs that are needed to stabilize the debt over the long-term, and completely avoids offering solutions for Social Security reform.

The Administration claims that the plan would save about $4.4 trillion in total (including interest savings, war savings, and the costs of the jobs proposals). However, as we noted in the release, counting the war savings is counting a policy that is already in place and is thus a gimmick to be avoided. Taking out the war savings and savings from the discretionary cuts in the Budget Control Act leads to total savings of less than $2 trillion. Granted, it's more than the Super Committee's mandate, but "Go Medium" seems to be a more accurate description.

Savings by Category of President Obama's Plan
Category 2012-2021 Savings (billions)
Budget Control Act $1,200
Obama Recommendations  
Revenue $1,573
Federal Health Programs $320
Other Mandatory $257
American Jobs Act -$447
War Drawdown $1,100
Interest $430
Total $4,400

Note: Many numbers are rounded

As CRFB president Maya MacGuineas said in our release:

There is a growing chorus of lawmakers, business leaders, former government officials, and experts urging the Super Committee to ‘go big’ and exceed its mandate. If we want to fully address our debt problems, the Super Committee will have to exceed its mandate and go well-beyond the proposals the President has called for.

Obama Leaves Social Security Out

With President Obama's deficit reduction plan set to be released on Monday, we already have some idea of what will be in it: reductions in tax expenditures for wealthy individuals and corporations, changes to health programs, and other mandatory savings. We also now know what won't be included in the plan: Social Security reform.

Following a pattern that we have seen this year with the House Republican budget and the President's Framework, Social Security will be excluded from an otherwise comprehensive budget plan. The White House had previously seemed open to at least switching to the chained CPI, which would reduce Social Security cost-of-living adjustments (COLAs). Now, even that step appears to be off the table.

This is a mistake. Even if Social Security reform does not yield significant savings in the first ten years (if the policies are backloaded), it would still significantly improve the long-term outlook (which is part of the Super Committee's mandate, as we noted here) and it would avoid a sudden 23 percent benefit cut in 2036. Social Security's finances need to be remedied and the sooner, the better, because the longer we wait to address the program, the larger the changes will need to be. Just over the next ten years, the program will run cash flow deficits of about $500 billion.



We hope that the Super Committee does not follow this example and keeps all options on the table. Fencing off parts of the budget is not the way to go.