Much Not to ‘Like’ – Facebook had its initial public offering (IPO) on Friday. The hype surrounding the offering illustrated the prominence of social networking in our economy and society. Yet, for all the lofty numbers involved, they pale in comparison to the federal budget. The IPO valuation of Facebook at around $100 billion was indeed eye-popping, but consider that the federal budget ran a deficit of nearly $200 billion in the month of March alone. Social networking may have made us more connected to each other than ever before, but we are just learning how the federal budget connects to us. How we address the national debt will affect the economy in the short run and longer term. Budget decisions will also affect key issues like national security, education, taxes and entitlements. Policymakers will have to make some tough decisions. We can’t afford to kick the can down the road any more. If you think getting behind in checking your Facebook updates is bad, think about the deficit hole we continue to dig.
Debt Ceiling Status Update – If the statutory debt limit was on Facebook, its status might read: "In a relationship with Congress and it’s complicated." The last time we ran up against the debt limit, Washington went to the brink of default and Standard and Poor’s and a few minor credit rating agencies downgraded our credit rating for the first time. We are again looking at hitting the $16.4 trillion debt ceiling at the end of this year and the Treasury Department says it can utilize extraordinary measures to put off an increase until early 2013. Lines are already being drawn in the sand indicating that raising the debt limit will not be any easier this time around. At last week’s Peterson Foundation Fiscal Summit, House Speaker John Boehner (R-OH) made clear that he would only support a debt limit increase that is coupled with federal spending cuts of equal or greater value. The prospect of another debt limit fight makes it all the more critical that lawmakers agree on a comprehensive fiscal plan.
Budget Wonks Have a Meetup – Budget experts, economists, journalists, former policymakers and many others gathered in Washington, DC last week for the 2012 Fiscal Summit. The event featured former President Bill Clinton, House Speaker John Boehner, Treasury Secretary Tim Geithner, former Senator and Fiscal Commission Co-Chair Alan Simpson and many others. Most of the speakers brought up the coming fiscal cliff and the need to develop a fiscal plan. And many said that the Simpson-Bowles plan showed the way.
You’ve Got Fail – It’s hard to imagine for Millennials, but AOL, the granddaddy of social networks that made "You’ve got mail" famous, was once an online powerhouse. Now AOL is mostly AWOL from the digital scene. The concurrent resolution on the budget also seems to have gone the way of AOL. Congress has not adopted a budget resolution in three years and won’t produce one for fiscal year 2013, which begins October 1. The Senate voted on five budget resolutions on Wednesday, but all five went down in defeat in what was really just a political show. The lack of a budget is inciting many calls for reform of the budget process. Sen. Joseph Lieberman (ID-CT) proposed a commission to study the problem and suggest changes. The nonpartisan group, No Labels, is building support for its "No Budget, No Pay" proposal, which would withhold the pay for lawmakers if they cannot adopt a budget on time. And we have plenty of budget process reform ideas at http://budgetreform.org.
LinkedIn with the Fiscal Cliff – Talk of the looming “fiscal cliff” grows as it gets nearer. And it is becoming more obvious how the economic recovery could be linked to how we deal with the cliff. Though the estimates of the magnitude of the cliff vary, the consensus is clear that if the across-the-board tax increases and spending cuts occur all at once at the end of the year as the law currently calls for, it will significantly hamper the economy. Speaker Boehner indicated that the House will hold votes on extending the expiring tax cuts before the election to score political points. But the real work will occur after the voting in a lame duck session of Congress. Read more about the fiscal cliff and how to address it here.
Lots of MySpace Between Houses on Appropriations – The House Appropriations Committee last week approved bills funding Homeland Security, Military Construction/Veterans Affairs, Defense, and State/Foreign Operations. Despite this progress, Congress is given little chance of completing all the spending bills before the new fiscal year begins on October 1 because the House and Senate disagree on spending levels. The Senate wants to follow the levels set forth in the Budget Control Act while the House wants to go lower. We can expect stopgap funding measures possibly going into the next calendar year.
Tweet Nothings – Last week the House passed the National Defense Reauthorization Act (H.R. 4310), which provides about $8 billion more in funding for defense that the White House requested, rolling backed the spending cuts the Pentagon proposed. While there may have been lots of Tweets about the bill, the Senate will likely pass a significantly different version. More political posturing forthcoming.
Silly-con Valley – California is the home to Facebook and many other tech startups. But it is also becoming famous for budget dysfunction that rivals Washington, DC. The state faces a budget deficit of around $16 billion … and possibly growing. Under law the budget must be balanced, but there is little agreement on how to do it.
Lots of Pinterest in a Debt Debate – A new Gallup poll shows that the federal budget deficit and debt is at the top of voters' concerns this election year. All the more reason for the presidential candidates to Debate the Debt. Our newest campaign is calling for one of the presidential debates this fall to be devoted to the national debt and the candidates' specific plans to address it. Check out the website to learn more, see who has signed the petition demanding a debt debate, and join the cause.
Key Upcoming Dates (all times ET)
- Presidential contests in Arkansas and Kentucky
- Senate Appropriations Committee mark-up of FY 2013 spending bills for Homeland Security and Military Construction/Veterans Affairs at 10:30 am.
- Senate Appropriations subcommittee mark-up of FY 2013 spending bill for State/Foreign Operations at 2:30 pm.
- Senate Finance Committee hearing on health care delivery at 10 am.
- Presidential primary in Texas
- US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2012 first quarter GDP growth.
- Dept. of Labor's Bureau of Labor Statistics releases May 2012 employment data.
- Presidential contests in California, Montana, New Jersey, New Mexico, and South Dakota
- Dept. of Labor's Bureau of Labor Statistics releases May 2012 Consumer Price Index (CPI) data.
- Presidential primary in Utah
- US Dept. of Commerce's Bureau of Economic Analysis releases its third estimate of 2012 first quarter GDP growth.
- Dept. of Labor's Bureau of Labor Statistics releases June 2012 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases June 2012 Consumer Price Index (CPI) data.
- US Dept. of Commerce's Bureau of Economic Analysis releases its advance estimate of 2012 second quarter GDP growth and revised estimates of 2009 through 2012 first quarter GDP growth.
Yesterday, Medicare trustee Charles Blahous and former chief economist for Vice President Biden Jared Bernstein had a debate about the fiscal consequences of the Affordable Care Act (ACA). The event, hosted by e21 at the National Press Club, discussed Blahous's recent paper on the ACA that claimed the law would increase the deficit, contrary to CBO projections. Their main disagreement essentially boils down to which baseline to use to evaluate the legislation.
Blahous argued that the ACA is expected to increase net federal spending by more than $1.15 trillion, and to add more than $340 billion and as much as $530 billion to federal deficits over the same period, and increasing amounts thereafter. Blahous blamed the failure of ACA on government scorekeeping methods, which compare the effects of legislation to a hypothetical baseline scenario rather than to enacted law. His paper claimed that ACA is not a solution at all since although it appears to reduce federal deficits, it adds to total health care spending and thus "would result in future generations being subjected to tax burdens far higher than previous American generations have ever tolerated."
The ACA, he argued, relies upon substantial savings that would mostly already occur under prior law when Medicare Part A's Hospital Insurance (HI) Trust Fund runs out. To the extent that these reductions would have occurred already within the budget window--Blahous claimed that it is $590 billion of the $850 billion of ACA savings--these do not represent new net savings, but substitutions for spending reductions that would have occurred by law even in the absence of the ACA.
Bernstein responded by saying that the reason Blahous gets a different answer than CBO is that his numbers used a "funky" baseline, which assumes that Medicare and Social Security don’t meet obligations once their trust funds run out---at that point, they cut benefits to meet revenue. Thus, there can only be ACA savings to the extent that they exceed the cuts that would have happened when the HI Trust Fund runs out.
Bernstein said that this conclusion is wrong, and he used a graph (see above) from one of our previous blogs to indicate that the "Blahous baseline" differed significantly from CBO current law and resulted in lower deficits. The Balanced Budget and Emergency Deficit Control Act (Gramm-Rudman-Hollings) states that the budget baseline assumes that all programs will be adequate to meet the obligations required by law. Once one uses a baseline that assumes benefits are automatically cut to evaluate proposals, he said, any budget that cuts Medicare Part A spending--he mentioned the Ryan budget specifically--would be overstating its savings. He then pointed to Brookings Institution fellow Henry Aaron’s testimony last month to the House Ways and Means Health Subcommittee as a better description of what is going on in with health care spending and the Affordable Care Act.
Blahous and Bernstein continue the lively debate that has been ongoing for a few years about the fiscal effects of the Affordable Care Act. In this case, it's about what baseline you use: the baseline that assumes programs are fully funded at their current obligation levels or the baseline that assumes program spending is cut to equal dedicated financing.
Yesterday, Zeke Emanuel advanced an interesting proposal for Social Security and Medicare in a blog at The New York Times: varying the retirement ages for lifetime earnings. This policy is a response to a common criticism of raising the retirement ages that increases in life expectancy over time have been uneven across income groups. Emanuel's idea would work as follows:
People in the bottom half of the lifetime earnings distribution would become eligible for normal retirement benefits at age 65 for Medicare and 66 for Social Security, just as they are today. But people in the next quarter of the lifetime earnings distribution would become eligible for the respective programs at 67 and 68, and those in the top quarter would become eligible at 70 and 71. All eligibility ages would increase over time, as they are scheduled to now.
In all income brackets, those choosing to retire later than the standard age would still receive higher Social Security benefits, called delayed-retirement credits. For those choosing to retire earlier and accept reduced benefits, on the other hand, nothing would change in the lower bracket, while the minimum age would increase in the two higher income brackets. And wealthier older people would have the choice of buying into Medicare at age 65, though they would have to pay for it before the age of 70.
Emanuel also notes that the progressive retirement ages would reflect the difficulty each income group would have in continuing to work at older ages. People in the bottom half of the distribution are more likely to be in physically demanding jobs, while upper-income people would generally not face that difficulty and otherwise be able to support themselves.
We have written before that raising the retirement ages would be good for the budget and the economy by encouraging people to work longer and accumulate greater savings. This sort of modification is a productive and interesting idea to address concerns about the effects of the policy.
When discussing new types of revenue or tax structures for the federal government to consider the other month, we touched on financial sector taxes as one of those options. The idea has caught on in Europe, with many countries and the European Commission proposing taxes of these sorts, although UK Prime Minister David Cameron has opposed it over concerns about its effect on growth. In the U.S., a bank tax has been in the President's budget each year since 2009, while financial transactions taxes have been proposed by some members of Congress (see here for example).
These type of taxes are often justified not just for revenue purposes, but also for discouraging speculation and high frequency trading, for making the financial sector repay governments for the financial support they received in the aftermath of the financial crisis, or as a premium for implicit insurance that large financial institutions have if they are perceived as "too big to fail."
Given the attention that financial taxes have been receiving, Tax Policy Center held an event on Friday entitled "Making Wall Street Pay: The Pros and Cons of Financial Taxes." The panelists were generally supportive of some type of financial tax, but they differed about how to do it. Two different regimes were the most widely discussed: a financial transaction tax (FTT), which taxes the value of transactions on the secondary market and is the more commonly proposed type, and a financial activities tax (FAT), which is levied on at least some portion of the wages and profits of financial institutions--essentially a valued-added tax (VAT) for finance.
One of the speakers, Michael Keen of the IMF, placed more emphasis on the FAT, having co-written a report favoring the FAT over the FTT (although the report did not necessarily endorse adopting a financial sector tax). Keen argued that the FAT would be a more targeted way to address the concerns that financial taxes typically look to fix and that the burden of the tax would be less likely to be passed on to investors. He also argued that a FAT would lessen distortions in countries that have VATs since they usually exempt financial services from tax. Daniel Shaviro of New York University, in both the event and background materials, agreed that a FAT would be superior and did support imposing one. He said that an FTT would be more economically inefficient, discourage economic activity in ways unrelated to the goals of the tax, and perhaps be easy to avoid.
Lee Sheppard of Tax Notes and Damon Silvers of the AFL-CIO, however, sided with the FTT. They both argued that the FTT would be easier to administrate, with Silvers arguing that the tax left less room for "manipulation" than a FAT. Sheppard also felt that the FTT would do a better job of essentially "cleaning up" the financial sector, in addition to being easier to collect. Silvers also argued that raising revenue should be the number one priority of a financial sector tax, and that an FTT could raise a large amount of revenue at a low rate compared to other financial taxes due to its huge tax base.
Whether it's a FAT, an FTT, or a bank tax, financial sector taxes remain in the discourse in the U.S. and especially in Europe. Whether it takes hold as a revenue-raiser remains to be seen.
Via the Washington Post, it seems that the House majority is looking at creating a fast track procedure for passing tax reform in 2013. This will enable a tax reform bill to be passed by an up-or-down vote with no amendments once it is formulated.
House Ways and Means Committee chairman Dave Camp (R-Mich.) said Thursday that he has two goals with respect to the tax code: "One, block massive, job-killing tax increases" at the end of the year, when the George W. Bush-era tax cuts are set to expire. "And two, enact — not just pass — comprehensive tax reform."
There is strong support to use the expiration of the [Bush tax cuts] as leverage to force action in 2013 on comprehensive tax reform,” Camp told the Federal Policy Group’s annual tax seminar. "How? Simple: In addition to extending current low-tax policies originally enacted in 2001 and 2003, we should enact fast-track procedures to compel comprehensive tax reform next year."
Camp said he is mulling what form those procedures might take. He and House Speaker John A. Boehner (R-Ohio), who endorsed the idea this week, made comparisons to the process by which lawmakers adopt trade agreements negotiated with other nations. Under that system, Congress has 90 days to reject or approve a pact in its entirety without amendment.
Although we do not support extending the tax cuts without offsetting the cost of enacting a comprehensive fiscal plan, the discussion of a two-stage process by House Republicans may indeed be helpful. An oft-cited critique of enacting tax reform to replace the fiscal cliff--or more generally in reaction to action-forcing events--is that reform is too complex to be done in such a short timeframe. The House Republicans offer a model for tax reform to instead come in pieces. In a deal at the end of the year, legislation could combine a temporary partial or full extension (fully paid for) with a fast-track process to enact tax reform by a certain time with agreed-upon parameters and especially a revenue target. To ensure that the revenue target is met and to facilitate a deal, the process could be backed up with a credible trigger that enacts across-the-board tax expenditure cuts or other revenue increases -- something proposed as part of the Simpson-Bowles plan.
We have discussed how the a two-stage process could work with regards to the Super Committee in a paper last November. We said:
If the Super Committee only agrees to a small plan or needs more time to work out the technical details of a larger plan, it is likely to require either extending the deadline for the Super Committee or using a two-stage process. A credible process must:
- Go Big: Achieve savings large enough to stabilize and reduce the debt as a share of the economy;
- Include a large and meaningful down payment;
- Include a detailed framework for the second stage;
- Put in place an expedited process to achieve additional savings within the next three to six months, with fast-track status;
- Allow for the consideration of other plans if larger plan is not adopted;
- Establish a credible enforcement mechanism to ensure the required savings are achieved.
We also showed how the process might play out. Move forward the dates by a year, and it would be a relatively accurate timeline of what could happen in a cliff-averting deal.
It is good to see that tax reform is getting some attention and priority on Capitol Hill, although we would like to see tax reform contributing significantly to deficit reduction. The House has shown that the complexity and work required for tax reform should not be an excuse not to include in a cliff-averting deal. A two-step process backed up by a trigger would be a very useful component in a fiscal plan.
Donald Marron, who recently wrote a blog post on how budget limits are treated in Congressional rules, wrote a piece today detailing how Medicare Part A rules could be altered so that savings in Part A could not be used to both reduce the deficit and extend the life of the Hospital Insurance (HI) trust fund. Here's his take:
A better approach would adopt the rules used by Social Security. Those rules show Social Security running deficits far into the future in the budget baseline, but they still take the trust fund seriously when examining new legislation. Any proposed cuts to the program’s spending or increases in its revenues are “off budget”. The Congressional Budget Office reports them, but Congress can’t use them to pay for other spending.
A recent Senate bill provides a telling example. The bill would expand the type of income subject to payroll taxes in order to pay for a one-year extension of low interest rates on student loans. Those low rates would cost $6 billion, but the Senate proposal would raise $9 billion. The bill had to overshoot that much because $3 billion comes from higher Social Security taxes and is thus off limits. Meanwhile, the $6 billion in usable revenues comes from Medicare Part A, which is considered “on budget” despite having a trust fund just like Social Security’s.
That difference highlights the inconsistency in current budgeting. If policymakers believe the Part A trust fund is as sacrosanct as Social Security’s, they should provide the same budgetary protection: Part A savings should be off budget, where they couldn’t be used to pay for health reform, student loans, tax cuts, or anything else outside the hospital insurance program.
If Congress doesn’t believe the trust fund deserves that protection, it should adopt a third approach: make the Part A fund as operationally toothless as the one for Medicare B and D. Those programs spend much more than they receive, so their trust fund has unlimited ability to draw on general revenues. If the same were true for Medicare Part A, program changes could be used to pay for health reform (as they were in 2010) or anything else, just like any other mandatory program. But we wouldn’t have any confusion over whether those changes also extend the program’s ability to operate.
Steep budget cuts are linked to recession and higher unemployment in Europe, argue several commentators (see here for example). Are they right? Certainly, some countries have struggled economically when reducing deficits before their economies have made a recovery. But Germany’s case bears examination as a successful example of combining fiscal sustainability with economic growth.
Since late 2010, Germany has pursued gradual deficit reduction in solid, reassuring plans for medium-term debt reduction. Germany entered the recession with a balanced budget and declining yet high unemployment of 7.6 percent. In late 2008 and 2009, the German government passed stimulus measures which, when combined with increased mandatory spending, lifted total spending from about 44 percent of GDP in 2008 to 48.1 percent in 2009 (including state and local spending). This brought the 2010 deficit to 4.3 percent, while holding unemployment steady for a year before seeing a modest drop to 7.1 percent in 2010. Then in 2010, the government announced a significant deficit-reduction package, which has combined with a wind-down of stimulus spending to result in spending at 45.6 percent of GDP in 2011 and projected at 44.7 percent in 2013, alongside slightly declining tax revenues as a share of GDP.
|German Deficit Reduction (Percent of GDP)|
As a result of Germany’s fiscal reforms, gross debt is predicted to decline from 82 percent of GDP in 2011 to 71 percent in 2017. While German GDP growth will be lower this year than last, so will German unemployment (it also helps that their unemployment is relatively low to begin with). Despite recent state election victories for the opposition Social Democrats, an early May opinion poll shows that Germans support ongoing budget discipline, by 55 percent to 33 percent.
A main reason for Italy’s current decline in deficits is an intentional defensive reaction against the recent sharp increase in interest rates on Italian debt, which exceeds 100 percent of GDP. This dynamic offers a second lesson next to Germany’s model of gradual deficit reduction. Namely, Italy’s pre-recession debt of nearly 90 percent of GDP left it with fewer options today, because Italy now pays a high interest rate premium in order to sell government bonds. And in order to hold interest rates from rising even higher, Italy has little room for counter-cyclical fiscal policy.
|German and Italian Unemployment and Deficits|
|Deficits (Percent of GDP)|
All governments are ultimately limited in their ability to borrow. The sooner they implement specific plans for debt stabilization, the better their options for the short and long term, including the flexibility to reduce deficits gradually. Germany has demonstrated this the past two years, and it offers the United States a useful model for getting our own fiscal house in order. We should pass a plan now while we have the ability to bring our deficits down gradually rather than immediately.
UPDATE: This blog has been updated to include CBO's brief about the fiscal cliff.
About a month ago, we reported our estimates of how much the fiscal cliff would hurt the economy over the next two years using our interpretation of multipliers from CBO and Mark Zandi. That estimate had the 3.6 percent of GDP fiscal impact of the cliff hurting growth by about two percent over the first seven quarters.
Considering the size of the cliff, it is not surprising that others have estimated what impact the cliff will have. Analysts at many different organizations have estimated what the fiscal and economic impact of the change in fiscal stance that will be taking place (see here for an in-depth look at Goldman Sachs' projections). These estimates will vary by what people consider to be part of the fiscal cliff and in what timeframe they are estimating the impact (which will be greatest in the first quarter of 2013). Also, not all the estimates have given both the economic and budgetary effect, instead giving just one or the other.
We have summarized these estimates in the table below, including our estimate for just one year (our original estimate was for two years). The shorthand that we used for the policies included in each estimate is detailed below as well. These policies are:
- The 2001/2003/2010 tax cuts ("tax cuts")
- The patch to the Alternative Minimum Tax ("AMT patch")
- The payroll tax cut and extended unemployment benefits ("jobs measures")
- The $1.2 trillion automatic sequester ("sequester")
- The override of the 30 percent physician payment cut ("doc fix")
- The many temporary tax extenders ("extenders")
- The temporary expensing of certain business investments ("expensing")
- The taxes taking effect in 2013 contained in the Affordable Care Act ("ACA taxes")
- The discretionary spending caps in the Budget Control Act ("BCA caps")
- The scheduled reduction of spending on overseas wars ("war drawdown")
In the table, we also present our original seven quarter estimates of the fiscal cliff (since multipliers are often given in a two year period) alongside our estimate of the effect over three quarters. We will detail the three quarter estimate in a follow-up blog soon.
|Various Estimates of the Fiscal Cliff|
|Budgetary Impact (billions or % of GDP)||Economic Impact (billions or % of GDP)||Policies Included||Timeframe|
|David Greenlaw (Morgan Stanley)||5%||2.5% to 7.5%*||Tax cuts, jobs measures, sequester, BCA caps, war drawdown, ACA taxes||2013|
|Goldman Sachs||4%||4%||At least tax cuts, sequester, jobs measures||2013|
|Bank of America Merrill Lynch||4.6%||N/A||Tax cuts, AMT patch, jobs measures, sequester, doc fix, BCA caps, tax extenders, ACA taxes, expensing, "other" programs||2013|
|IHS Global Insight||4.2%||N/A||Tax cuts, jobs measures, sequester||2013 Q1|
|CBO||3.8%||2.1%||Tax cuts, AMT patch, jobs measures, sequester, doc fix, tax extenders, ACA taxes, expensing||2012 Q4-2013 Q3|
|CRFB (Three Quarters)||4.5%||2.4%||Tax cuts, AMT patch, jobs measures, sequester, doc fix, tax extenders, ACA taxes||2013 Q1-Q3|
|CRFB (Original)||3.6%||2%||Tax cuts, AMT patch, jobs measures, sequester, doc fix, tax extenders, ACA taxes||2013 Q1-2014 Q3|
|CRFB (Using Zandi)||3.6%||2.5%||Tax cuts, AMT patch, jobs measures, sequester, doc fix, tax extenders, ACA taxes||2013 Q1-2014 Q3|
Note: Sources are linked for each estimate where available
*Greenlaw states that the multiplier for the cliff would be in the 0.5 to 1.5 range. The economic impact represents that range.
We have been warning for a few months now about the potential consequences of the fiscal cliff -- and adding to the debt by averting it all together. As it turns out, the short-term economic consequences may already be occurring, according to a recent Washington Post article.
Defense contractors have slowed hiring. Tax advisers are warning firms not to count on favorite breaks. And hospitals are scouring their books for ways to cut costs...
The uncertainty is already prompting some firms to take action. Many more say they will be forced to contemplate layoffs and other cost-cutting measures long before the end of the year unless the Republican House and the Democratic Senate come up with an alternative path to tame deficits. But with control of the White House and both chambers of Congress in play on Nov. 6, aides say it is impossible to begin mapping a strategy for compromise until they know who wins the election, by how much and on which issues.
That seems to be a good argument for getting moving now on a plan to deal with it. We have already estimated that the cliff would hurt the economy by about two percent of GDP in 2013 and 2014, but that does not say what will happen in 2012 in anticipation of everything happening.
The one commonality between the many comments from the business and policy community in the Post article is that the scariest aspect of the cliff is the lack of any plan that would pass Congress at this point. As Bob Greenstein of the Center on Budget and Policy Priorities commented:
On the one hand, you say: "We’re a functioning country. Somehow, we’re going to work this out." But then you ask: "What’s the scenario for a potential solution?" And you can’t come up with anything that you can see actually passing Congress.
That, of course, does not mean that there isn't the ability to come up with a plan, just that there has not been good-faith negotiations yet. Also, just because the cuts would adversely affect certain groups does not mean that we should permanently avert the cliff without deficit reduction. In order to get our debt under control, interest groups need to recognize that everyone will need to contribute to deficit reduction. But indications that businesses and people across the country are dealing with the cliff already should give an impetus for Congress to negotiate a smart and gradual deficit reduction plan very soon.
Former President Bill Clinton joined the Announcement Effect Club at the Peter G. Peterson Foundation's Fiscal Summit yesterday in a Q&A session with Tom Brokaw (you can see the video of it here). Our readers will recall that the announcement effect states that enacting a credible deficit reduction plan now but implementing the actual cuts with some lag will help the economy now by reassuring investors that we will have our debt under control. Here's the quote:
Brokaw: A year ago, you said it would be a mistake to try to fix the deficit when the economy is so broken. Do you still feel that way?
Clinton: Yes, but I also said I think we should pass a very tough deficit reduction plan now and provide for it to trigger when the economy has reached three percent growth for two quarters, because I think it would do an enormous amount to deal with the [weak economy].
He also went on to say that a deficit reduction plan will be very important when the economy recovers considering the debt we have accumulated in recent years. Interest rates will rise significantly at that point, he argued, so a plan to reduce the deficit would help ease that concern.
He also said that enacting a comprehensive deficit reduction plan would increase confidence in our political institutions, both from citizens and people around the world. Considering the showdowns and near-disasters that have defined the past few years, it would certainly be a help.
The Announcement Effect Club is a reminder that the fiscal policy debate isn't a black-and-white debate between focusing on the short term vs. the long term or stimulus vs. austerity. We gladly welcome President Clinton to the Club.
Video of the interview is below.
On Sunday, Fiscal Commission co-chair and former White House Chief of Staff Erskine Bowles delivered a speech at American University's School of Public Affairs Commencement. Apparently, the message hit home for Ben Ritz, Chair of Fiscal Policy and Policy Caucus Director of AU's College Democrats. Ritz wrote a blog post yesterday called "Answering Erskine Bowles' Call to Action." His post makes the case to the rest of the AU Democrats to support a comprehensive fiscal plan.
Ritz says that a main reason why one should care about the debt is interest. He explains:
When we accumulate more debt, we end up increasing both the percentage of it that investors want in interest and the total amount we end up having to pay that interest on. And each year that we run deficits, we end up needing to take on more debt to pay the increasing interest, turning it into a vicious cycle of exponentially increasing costs.
What are the ramifications of having to pay so much interest? Primarily, it’s wasted money. Every dollar spent on interest is a dollar we don’t spend on investments in schools, roads, national security, scientific research, healthcare, or the social safety net.
Considering that the debt is projected to rise rapidly if current policy is continued, we will end up finding our budget consumed by interest. But of course, we would likely have a fiscal crisis before our spending on interest would take up too much of the budget as creditors lose faith in our debt. In that case, we would have to enact immediate tax increases and spending cuts, causing severe damage to the economy.
With all that in mind, what's the solution?
Fortunately, there is hope! Erskine Bowles and former Senator Alan Simpson (R-WY) made a bold, bipartisan proposal to avert the disaster in 2010. Their plan was a balanced package that would reform the tax code, reign in entitlement spending, and halt the growth of the military industrial complex- all while preserving the social safety net and the fragile economic recovery. The plan got 11 out of 18 votes (6 Democrats and 5 Republicans) of the commission; a clear bipartisan majority, but three votes short of the threshold needed to force a vote in Congress on the package.
Finally, Ritz points out that the fiscal cliff will provide a political push for comprehensive reform on the scale of Simpson-Bowles. With a lot of provisions in the budget already "up for negotiation" at the end of the year, there is a very real opportunity for a fiscal plan, and that has inspired him to take action to support serious solutions to our nation's debt conundrum and to urge his fellow College Democrats to do the same. He concludes, "I’m ready to answer Erskine Bowles’ call to action; are you?"
This blog post is another example of citizens wanting to make a difference in our budget discourse. Learn more about what you can to get involved here and sign our petition to have the presidential candidates debate the debt here.
The video of Erskine Bowles' speech is below.
The 2012 Fiscal Summit presented by the Peter G. Peterson Foundation is today. Watch live here now and follow on Twitter with #FiscalSummit.
Speakers include former President Bill Clinton, Speaker of the House John Boehner, House Budget Committee Chair Paul Ryan, House Budget Committee Ranking Member Chris Van Hollen, Treasury Secretary Timothy Geithner, Senator Rob Portman, Travelers Companies, Inc. Chairman and CEO Jay Fishman, and former Senator and Fiscal Commission Co-Chair Alan Simpson.