November 2012

MY VIEW: Laura Tyson

Former Council of Economic Advisers Chair and CRFB Board Member Laura Tyson writes in The New York Times about the dual challenges of "Go Fast" to repeal the fiscal cliff and "Go Big" on a comprehensive plan to reduce the debt over the long term. She writes:

Washington faces two urgent fiscal challenges in the next few months. Before the end of the year, the lame duck Congress, the most polarized in recent history, must negotiate an agreement with President Obama to protect the still fragile economic recovery from the so-called fiscal cliff — the $600 billion in spending cuts and tax increases scheduled to begin to take effect on Jan. 1. Then, early next year, a newly elected but still divided Congress must approve an increase in the federal debt limit. Failure to do so in a timely way would damage confidence, posing yet another threat to the economy’s continued healing.

These two challenges are manifestations of the long-running fiscal challenge confronting the country: the fact that the federal debt is rising at an unsustainable rate. That’s why a political deal to address the fiscal cliff and the debt limit in the near term should be linked to a credible framework to put fiscal policy on a sustainable path in the long term.

By the end of this year, policy makers need to “go fast” to address the fiscal cliff and debt limit and to “go big” to establish the broad outlines of a significant multiyear deficit-reduction plan.

On the solution, Tyson writes that any comprehensive plan must focus on growth. This of course means tax reform, but also directing spending toward infrastructure, education and training, and research and developments. Only a sufficiently big plan, though, will have the breathing room and the scope to do it.

A more progressive tax code, achieved through some combination of higher tax rates and capping deductions for high-income taxpayers, would be a powerful tool both to counteract these trends and to achieve long-term fiscal sustainability.

The goal of a “go big” plan for deficit reduction should be to ensure the economy’s long-term growth and competitiveness. Yet the debate over spending in Washington is fixated on cutting entitlement spending. Very little is heard about the need to increase federal spending in education and training, research and development and infrastructure, three areas with proven track records in rate of return, job creation, opportunity and growth.

Spending in these areas accounts for less than 10 percent of the federal budget; this share has been declining for several decades and is slated to fall to dangerous new lows as a result of the caps on nonmilitary discretionary spending already in place.

A pro-growth framework for deficit reduction must reverse these trends. More government investment in the foundations of economic growth should be recognized as a core principle of deficit reduction.

The full piece can be found here.

"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.

Drawing Lessons from the 1990 Federal Budget Deal

Back in the late 1980s and early 1990s, lawmakers faced a serious challenge with large budget deficits.  Throughout the 1980s, many measures were put in place to combat deficits. Chief among them was the Gramm-Rudman-Hollings Balanced Budget Act of 1985 that laid out a path for balancing the budget by 1990. If the enacted criterion was not met, a large spending sequester loomed.

As it turned out, the budget was actually further away from balance in 1990 than it was when the Act was passed. As a result, President George H.W. Bush and leaders in the House and Senate (both controlled by Democrats at the time) met at Andrews Air Force Base to hammer out a budget plan. While there were some initial setbacks, a deal came to fruition that included both revenue increases and spending cuts. The package reduced deficits by nearly $500 billion over 5 years, with 64 percent of the savings coming from spending cuts and 36 percent from raising revenue. Savings came from instituting discretionary spending caps, creating a new top tax rate of 31 percent (up from 28 percent), increasing the gas tax, increasing the Medicare payroll tax cap, reducing Medicare provider payments, and reducing farm price support payments, among other things.

The 1990 Omnibus Budget Reconciliation Act
Changes 1991-1995 Savings
Revenue $158 billion
Mandatory Spending $80 billion
Discretionary Spending $197 billion
Debt Service Savings $60 billion
Total $496 billion

Source: Congressional Budget Office

Drawing on the 1990 budget deal's lessons, George Mason University in conjunction with the Bipartisan Policy Center and Deloitte held a panel discussion yesterday to discuss how they could be applied in the current political discourse. The program was divided into two discussions with the first panel comprised of former members of the H.W. Bush administration, former Senate and House Leaders, and other budget experts. Panelists included former Senate Budget Committee Chairman Sen. Pete Domenici (R-NM), former Speaker of the House Tom Foley (D-WA), former White House Chief of Staff and Governor John Sununu (R-NH), Rep. David Obey (D-WI), and CRFB co-chair and former Rep. Bill Frenzel (R-MN).

One point a few panelists made was that the cliff in the 1990s was worse than the sequester we face today; the Gramm-Rudman-Hollings sequester would have cut non-exempt spending by about one-third, compared to the roughly 9 percent sequester this time. On the other hand, our budget problems this time around are more difficult since projected deficits and debt are larger, and we also face a demographic shift that will put additional pressure on the budget in the coming decades. Additionally, many panelists thought the political hurdles are higher today because partisanship may be a bigger issue now than it was two decades ago.

Sununu attributed the success of the 1990 budget deal to a President who was willing to sacrifice political capital to make a deal. Others on the panel called on President Obama to do same, which could be easier now after his re-election. CRFB co-chair Bill Frenzel advised lawmakers not to turn down a responsible deal since they would often get a worse one later. He also said that one should not make the perfect the enemy of the good since ultimately no deal will be perfect.

The second panel was composed of distinguished journalists and budget experts--including Jackie Calmes of The New York Times, Ron Elving of NPR, Michael Graetz of Columbia University, and Joe Minarik of the Committee for Economic Development--and focused on lessons for the current negotiations. The panelists generally were in agreement in calling on national leaders to set aside partisan divides to get a deal. Calmes said that national leaders must be able to stand up to their caucuses and put the nation first. She also said that both parties should want a deal and not just look to score cheap political points or make the other party look bad. Minarik advised leaders to make fundamental changes to put our debt on a sustainable path and not just constantly be in crisis avoidance mode.

The 1990's featured other budget compromises that eventually led to a balanced budget by the end of the decade. Hopefully lawmakers will take a lesson from the history books and put fiscal responsibility above partisan goals. The full event is worth watching for its perspective on both the politics and technical aspects of the 1990 budget agreement.

Click here for a full video of the event.

CBO: Federal Government Will Hit Debt Limit in February or March

With all the attention on the fiscal cliff looming only weeks away, the fact that the federal government will hit the debt ceiling in the next few months appears to be on the back burner. At the same time, it's hovering over current negotiations, which is why some lawmakers, including Senate Majority Leader Harry Reid (D-NV), would like to see the issue resolved at the same time as a cliff deal.

Given the uncertainty about the timing of the debt ceiling, CBO has released a timely report estimating when we might reach the debt ceiling. They cite Treasury's estimate that it will happen in late December, but also note that Treasury should be able to hold off until mid-February to early March using extraordinary measures described in the report. These measures would give lawmakers three months at most to negotiate raising the debt ceiling by drawing from:

  • The Thrift Savings Plan G Fund ($154 billion)
  • The Exchange Stabilization Fund ($23 billion)
  • The Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund ($17 billion)
  • The suspension of issuances of State and Local Government Series securities ($3 to $12 billion)
  • The issuance of debt not subject to the limit ($8 billion)

A detailed explanation of these maneuvers can also be found in a CRFB paper from July of last year.

CBO's report also shows the issues that would be involved the closer we get to the limit. They lay out the frequency and size of bond issuances, the time of the month when major federal payments are made, and the dates when major cash inflows and outflows happen. These issues may seem technical, but can be very important if we get as close to the deadline as we did in August 2011.

We discussed in an in-depth analysis the history of the debt ceiling and the issues around raising it (or not). That analysis stated that hitting the debt ceiling would be extremely harmful to our economy and would be unprecedented in the 95-year existence of the limit. It would likely permanently raise borrowing costs for the federal government and require an immediate decrease in spending. CBO notes that failing to raise the debt limit would ultimately force the government to restrict or delay its payments or possibly default on the debt. With a number of large Social Security and Medicare payments scheduled to go out in early March, that may be very disruptive for millions of people. Obviously, exceeding the debt limit for even a short period would be very harmful.

Myth Buster: The Fiscal Cliff Spares the Poor

Some commentators have advocated for a position of going over the fiscal cliff to leverage a better compromise. Paul Krugman called for the recently reelected President Obama to "not make a deal." Matt Yglesias and others have also played down the harm from the cliff, arguing that it mostly affects the rich, sparing the poor.

But this is far from the truth. The poor would see a large tax increase, another recession and rising unemployment made worse by the expiration of extended unemployment benefits as a part of the cliff, and cuts to many income security and education programs as a part of sequestration. Lets look at each of these in turn.

The Tax Hike

On the tax side, while the overall tax increase as a result of the cliff would be progressive, the poor still get hit pretty hard. In fact, according to the Tax Policy Center, the bottom quintile would see their taxes rise by $412 on average, leading to a 3.7 percent reduction in their after-tax income.

This is a significant amount of money for those struggling to make ends meet. The payroll tax cut expiration, the expiration of the 10 percent tax bracket, and especially the expiration of the refundable credit expansions in 2001 and 2009 very much hit low income earners. Those expansions increased the earned income credit for married couples and families with three or more children, doubled the child tax credit and made it much more refundable, and created the American Opportunity Tax Credit for college students. The overall tax effect of the cliff might be progressive, but it clearly does not spare the poor.

Source: Tax Policy Center

A Double Dip Recession

The fiscal cliff will also likely trigger a double-dip recession, with the economy due to contract 0.5 percent in 2013 (from the fourth quarter of 2012 to the fourth quarter of 2013) with the unemployment rate to rise to 9.1 percent by the fourth quarter of 2013. The economy is already slowing from uncertainty in Europe and weak growth in China, so the fiscal cliff would be devastating.

In the recent economic downturn, the number of people experiencing extended periods of unemployment has increased, and extended unemployment has led to much higher poverty rates. With 4.8 million people, as of 2011, between 100 and 125 percent of federal poverty levels, the tax and spending policies of the fiscal cliff, a double dip recession, and higher unemployment would likely increase poverty in a notable way.

Cuts to Programs that Benefit the Poor in Sequestration

While low-income mandatory programs are largely exempt from the sequester, it does hit discretionary programs that serve low-income people. As the table below shows, education and income security programs are a significant part of discretionary spending and across the board cuts would hinder the effectiveness of many of these programs. The OMB report on the sequester showed that many housing support programs, heating assistance, nutrition programs, and federal education programs are sequestrable and included in the nearly 8 percent across the board cuts to non-defense spending. The cuts to spending under the sequester may exclude low-income mandatory spending, but are otherwise untargeted and do not hold the poor harmless.

For these three reasons, it is clear the fiscal cliff certainly does not spare lower-income households. Some critics charge that proposed replacement plans would be just as bad if not worse for the poor as the fiscal cliff. But if bipartisan plans such as Simpson-Bowles or Domenici-Rivlin are any indication, a comprehensive plan could easily be more progressive than the fiscal cliff and protect low earners. We will show you how in the next blog of our mythbuster series.

TPC Releases Fiscal Cliff Tax Calculator

Yesterday, we discussed the myth that the poor would be spared by the fiscal cliff, with one of the reasons being the large tax increase at the end of the year. According to the Tax Policy Center, the poorest 20 percent of people would face a tax hike of $412, or a 3.7 percent reduction in their after tax income.

Now, the Tax Policy Center has released a new tax calculator for different taxpayers by income group, filing status, and how they would fare under the cliff or competing plans. The calculator then allows you to compare your tax burden under current law (the fiscal cliff), a complete extension of current policy, and the Senate Democratic and Republican plans.

Below is a sample of what the calculator shows.

Of course, the Senate Democratic and Republican plans are not the only alternatives to the fiscal cliff. A better approach would involve comprehensive tax reform that could be equally or more progressive than the current code with lower rates and more revenue. Under the bipartisan proposals of Domenici-Rivlin and Simpson-Bowles, a far greater burden falls on the wealthy even with a lower top marginal rate. Tax reform can make the code simpler, fairer, and more conducive to growth. But lawmakers need to be willing to make the tough choices.

The tax calculator can be found here.

State Leaders Come to Washington to Urge Congress to Fix the Debt

Today, the Fix the Debt Campaign is having a major event at the Capitol with its many citizen leaders, urging Congress to replace the fiscal cliff with a smart, comprehensive plan to fix our unsustainable fiscal path.

Over 300,000 people have signed the Citizen's Petition to Fix the Debt, so it is clear that many people across the country want lawmakers to work toward a compromise. The event is scheduled to start at 1:45 PM E.T. You can watch the live stream below or go to Fix the Debt's website for more information.



MY VIEW: Laura Tyson

Former Council of Economic Advisers Chair and CRFB Board Member Laura Tyson says that it has become clear that increased revenues are needed along with spending cuts in a comprehensive plan. But there is still some disagreement about how to get that revenue.

Tyson argues that tax reform needs to be considered, but pursuit of reform should not stall attempts to repeal the fiscal cliff given the likelihood of falling into another recession. The solution in the interim might be a temporary limit on deductions for high income earners, similar to what we discussed in a recent paper. Tyson writes:

Republicans have proposed tax reforms in lieu of rate hikes on high-income taxpayers to raise revenues for deficit reduction. Obama has signaled that he is willing to consider this approach, provided it increases tax revenues from the top 2-3% by at least the same amount as higher rates while protecting other taxpayers.

The federal tax system is certainly in need of reform. Tax expenditures – which include all deductions, credits, and loopholes – account for about 8% of GDP. Indeed, the US tax code is riddled with special preferences and contains large differences in effective tax rates across individuals and economic activities. These differences distort decisions about investment allocation and financing. Reforms that made the tax system simpler, fairer, and less distortionary would have a beneficial effect on economic growth, although economists concede that the size of this effect is uncertain and impossible to quantify.

Because tax expenditures are so large, limiting them could raise a significant amount of additional revenue that could be used both for deficit reduction and to finance across-the-board cuts in income-tax rates. Analysis of the Simpson-Bowles and Domenici-Rivlin deficit-reduction plans by the nonpartisan Tax Policy Center confirms that this approach is arithmetically feasible. Reducing large regressive tax expenditures like preferential tax rates for capital gains and dividends and deductions for state and local taxes, and replacing deductions with progressive tax credits, could generate enough revenue to finance rate cuts for all taxpayers, increase the tax code’s overall progressivity, and contribute meaningfully to deficit reduction.

But the odds of such an outcome are very low: what is arithmetically feasible is unlikely to be politically possible. Efforts to cap popular tax expenditures will encounter strong opposition from Republicans and Democrats alike. Nonetheless, some tax reforms are likely to be a key component of a bipartisan deficit-reduction deal, because they provide Republicans who oppose increases in tax rates for high-income taxpayers with an ideologically preferable way to increase revenue from them.

Unfortunately, it will take time to negotiate tax reforms – more time than remains until the end of the year, when the 2001 and 2003 tax cuts are scheduled to expire for all taxpayers. But there is still time to negotiate an agreement that extends these cuts for the bottom 98%, and that contains temporary measures to cap deductions and credits for high-income taxpayers in 2013. Such an agreement could help to break the political impasse over whether and how much these taxpayers’ rates should rise next year, thereby preventing the US from falling over the fiscal cliff and back into recession.

The full piece can be found here.

"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.

Line Items: Leftovers Edition

Putting the Turkeys Behind Us – We hope everyone had a good holiday weekend! As we all recover from the annual turkey-induced coma, we are especially thankful for our growing network of supporters who are demanding fiscal responsibility of their leaders. That message is especially important as lawmakers return this week to address unfinished business such as the fiscal cliff and possibly an appropriations package for the rest of the fiscal year. The fiscal cliff is a result of the failure a year ago of the Super Committee to agree on a plan to reduce the deficit and the larger inability of policymakers to work together to address major issues and make policies permanent when they are intended to be. The coming weeks will be a key test as to whether we can clean up the leftovers and put behind the failures of the past in order to strengthen our future.

Fiscal Cliff a Makes Full Plate – Though the talks on avoiding the fiscal cliff have gotten off to a slow start, many lawmakers remain optimistic that a deal can be reached that replaces it with a smart deficit-reduction plan, perhaps through a two-step process that produces a comprehensive plan next year. Sen. Jon Kyl (R-AZ), the number 2 Republican in the Senate told CNN, “There will be a solution–not a final solution–that gets us into next year with a plan to get us through these issues over the next Congress.” In case the talks break down, Sens. Michael Bennet (D-CO) and Lamar Alexander (R-TN) have developed a three-part back-up plan that involves a down payment on reducing the deficit this year, creates a process for finishing the job next year and implements a default deficit reduction plan if one is not enacted. On the other hand, Sen. Bob Corker (R-TN) argues for getting a comprehensive deal done now in a Washington Post op-ed. House leadership will meet with business leaders this week while small business owners and middle class Americans visit the White House. Concerned citizens from across the country will also make the rounds on Capitol Hill.

Talking Turkey on Taxes – Although the consensus in Washington seems to have crystallized around raising revenue as part of a fiscal cliff deal, there is still no agreement on how exactly to do it. More and more Republicans are signaling that they are willing to break from pledges to raise taxes by supporting raising revenues through eliminating or limiting tax deductions on the wealthy while many Democrats insist on raising tax rates on top earners. According to a poll by Republican pollster David Winston, 61 percent of respondents support raising revenue by “reforming the tax code to lower tax rates, and close loopholes” compared to 28 percent who support “raising tax rates on those making over $250,000 a year.” Josh Barro defends such base broadening and a recent paper from CRFB shows how it can raise the same amount of revenue as raising rates on high-earners. The New York Times' Jonathan Weisman reports that negotiators are exploring a potential compromise that would raise effective rates for the wealthy without raising the nominal rate. Campaign to Fix the Debt steering committee member Steven Rattner reminds us that capital gains and dividends rates need to be part of the equation as well and Warren Buffett calls for a minimum tax on the wealthy.

Getting Stuffed on the Cliff – Voters are paying attention to the fiscal cliff drama and not liking what they are seeing. A Pew Research Center poll says more Americans are following the fiscal cliff than the drama surrounding the resignation of former CIA chief David Petraeus. A new CNN poll shows that 67 percent of voters believe that elected officials in Washington will act like "spoiled children" as opposed to "responsible adults" in dealing with the cliff. The same poll finds that 68 percent believe a crisis or major problems will ensue if the fiscal cliff takes place while 77 percent say that their personal finances will be affected if we go over the cliff. A new White House report backs up the sentiment, finding that tax cuts on the middle class next year would significantly impact retailers and other businesses. The Wall Street Journal also reports that nearly all American households would be affected next year if the fiscal cliff occurs and that low-income families could be hit particularly hard. In addition, Federal Reserve Chairman Ben Bernanke last week reiterated his call for policymakers to act on the fiscal cliff, saying that "a fiscal shock of that size would send the economy toppling back into recession." Meanwhile, a study by the Pew Center on the States looks at how the fiscal cliff would affect state finances.

The Gravy on Top – With the fiscal cliff the main priority, lawmakers are still trying to finalize a federal spending package by the end of December that will finance government operations until the end of the fiscal year in September 2013. The government is currently funded by a stopgap measure through late March of next year. Appropriators are trying to create an omnibus bill that would wrap all the spending bills together. While it would be a pleasant surprise to enact a spending bill now, it won’t make up for the inability of Washington in recent years to devise a budget blueprint or complete its appropriations bills on time.

 

Key Upcoming Dates (all times are ET)

November 27

  • Conference Board releases consumer confidence data for November.

 

November 29

  • Second estimate of third quarter GDP figures released

 

December 6

  • Joint Economic Committee hearing on "“Fiscal Cliff: How to Protect the Middle Class, Sustain Long-Term Economic Growth, and Reduce the Federal Deficit" at 9:30 am.

 

December 7

  • Unemployment statistics for the month of November released

 

December 14

  • Consumer Price Index data for November released

 

December 20

  • Third estimate of third quarter GDP figures released

 

January 1, 2013

  • The "fiscal cliff" occurs, including the expiration of the 2001/2003/2010 tax cuts and across the board spending cuts the following day

 

January 3

  • 113th Congress will convene

 

January 4

  • Unemployment statistics for the month of December released

 

January 16

  • Consumer Price Index data for December released

 

January 21

  • President Obama publicly sworn in for his second term (a private swearing in will occur on Sunday the 20th, the technical inauguration date)

 

January 30

  • Advance estimate of fourth quarter GDP figures released 

Myth Buster: Those Who Advocate for Deficit Reduction Should Love the Fiscal Cliff

In the first of our "Myth Buster" series this week, we take on the myth that those who advocate for deficit reduction should love the fiscal cliff. We have talked a lot about the cliff since our full-length paper on it earlier this year, arguing that the correct approach would be to take a smart path between going off the cliff and simply waiving it without offsets. That path would involve making more targeted changes to both spending and taxes while backloading the deficit reduction so that the economy has time to recover before substantial changes kick in.

But a few bloggers and commentators have asked why deficit hawks would want to repeal the fiscal cliff. Matt Yglesias of Slate asks this question, arguing that since debt is projected to fall under current law, they should be for the cliff. Likewise, in a recent blog post, Paul Krugman of The New York Times writes:

Now, there’s a straightforward argument for why the fiscal cliff is bad but long-term deficit reduction is good — namely, that you really don’t want to cut deficits when the economy is depressed and you're in a liquidity trap, so that monetary expansion can’t offset fiscal contraction. As Keynes said, the boom, not the slump, is the time for austerity. But the deficit hawks can’t make that argument, because they have in fact been arguing for austerity now now now.

Contrary to what is suggested above, we have long argued that deficit reduction should not take place during a slump and that deficits in the short term since the start of the Great Recession are necessary. In fact, we supported deficit-financed stimulus in the depths of the recession and further jobs measures that are deficit-neutral over a reasonable period, but have called for such measures to be temporary, targeted, and linked to broader measures to control long-term deficits.

In terms of the timing for deficit reduction, we have frequently made a distinction between the enactment of a plan and the actual implementation of the deficit reduction. Ideally, the former would come well before the latter. This is a central point of our Announcement Effect Club, which states "while aggressive debt reduction in the short term might imperil the fragile recovery, the announcement of future deficit reduction can actually strengthen it." Earlier this year, we contrasted our position with the plan put into place by the UK coalition government, saying "this announcement effect is not contingent on substantial deficit reduction occurring early while the economy is still weak, but rather on the plan being enacted at that time. In addition, people should not expect the increased confidence to be large enough to fully offset the contractionary effect of whatever short-term deficit reduction does occur."

Projections from the CBO show that the economy would contract by 0.5 percent in 2013 should we go over the fiscal cliff. The economy is still weak and too much fiscal consolidation today would push us into another recession. Comprehensive plans like Simpson-Bowles and Domenici-Rivlin put off much of the deficit reduction until the economy has had time to recover. As the graph below shows, an illustrative comprehensive plan--intended to look similar to the deficit path under these plans--would reduce deficits more gradually and be more targeted than the cliff.

Our position on the fiscal cliff is consistent with what our positions were previously and in line with what many economists across the ideological sprectrum believe to be necessary. Immediate and untargeted austerity is not preferred over deficit reduction that is backloaded to protect the recovery and targeted to spread the burden of adjustment. Bipartisan approaches to deficit reduction have called for targeted spending changes that also protect the most vulnerable and tax reforms that raise revenues and address tax loopholes.

The fiscal cliff is the second worst option we could choose at this point, representing a combination of delayed decisions and failure to compromise. Triggers like the sequestration were supposed to force lawmakers to come to the table and provide a stopgap if negotiations should fail, but they are far from ideal. While it is better than the alternative of failing to do anything about our unsustainable debt, there is so much more that can be gained from a comprehensive plan. The budget and the economy would be better off in that case.

Washington Post Endorses Chained CPI

The Washington Post has joined the many supporters of using a more accurate measure of inflation, the chained CPI. We've written a paper before about the chained CPI as a potential piece of a deficit reduction plan. Not only is it a more accurate measure of inflation, it also raises revenue and reduces spending in a gradual way. The editorial board writes:

President Obama and Congress have hard choices to make as they try to fashion a long-term budget compromise. But not all of the options are excruciating. One measure would generate large savings over the next decade, split between entitlement spending and revenue increases. The pain it inflicts on beneficiaries and taxpayers would be minimal, widely shared and phased in gradually. And all it would require is a quick administrative tweak.

We refer, as we have before, to the long-standing need for more accurate cost-of-living adjustments to federal benefits and income taxes. Current law indexes Social Security and other federal retirement payments to one estimate of consumer prices; it indexes tax brackets, personal exemptions and the like to another. Both slightly overstate inflation, because they do not allow for the fact that consumers offset price increases in certain goods by switching to cheaper alternatives.

Economists have developed a more realistic measure of inflation, known for obscure reasons as the “chained CPI” (consumer price index), which has averaged a little under 0.3 percentage points less per year than existing measures. That difference doesn’t sound like much, but cost-of-living adjustments work like compound interest: This year’s increase in benefits pyramids on top of all the others that have gone before; ditto for tax adjustments.

This proposal has its critics, with the AARP leading the way. But as we've said in the past, many of the criticisms of the chained CPI do not have much supporting evidence. Some want to use an alternative measure of inflation CPI-E, an experimental CPI for the elderly. But given the many methological flaws of moving to the CPI-E--discussed by the CBO previously--it would make more sense to use the chained CPI unless a more robust and chained version of the CPI-E were made. Changes could be made elsewhere in the budget or within the affected programs if lawmakers felt the chained CPI had an adverse distributional impact--a clear advantage of a comprehensive fiscal plan. The Post itself mentions a few tweaks that could be made.

The chained CPI has clear benefits and bipartisan support, appearing in proposals from policy experts across the political spectrum. Price indices are supposed to reflect the cost of living, and chained CPI does so better than the current standard. We're excited to see the Washington Post come out in favor of a technical, but highly supported, proposal to help reduce future deficits.

The full editorial can be found here and our report on chained CPI can be found here.

Senator Corker Lays Out His Plan

In an op-ed in the Washington Post, Sen. Bob Corker (R-TN) outlined a plan for replacing parts of the fiscal cliff with what he estimates to be a $4.5 trillion deficit reduction plan. This is one of the first plans to be put out by a member of Congress since Election Day. Although he has not publicly released the entire bill yet, the op-ed provides a number of specifics about the plan. Encouragingly, Sen. Corker's plan looks for savings from both spending and revenues to address rising debt.

On taxes, Sen. Corker advocates for "pro-growth tax reform," which would raise revenue by capping deductions at $50,000 rather than raising tax rates. According to Tax Policy Center, this policy would raise about $750 billion (or about $500 billion if the charitable deduction were excluded) and would almost exclusively hit high earners (91 percent of the tax increase would come from people making more than $200,000). The plan also calls for switching to the chained CPI for inflation-indexed elements of the tax code, as well as for spending programs.

On the spending side, Corker endorses reforms to federal employee compensation to "bring its compensation in line with private-sector benefits." He supports a version of premium support for Medicare, though it would differ from some recent iterations by leaving the growth of subsidies uncapped. He also would raise the retirement ages for Medicare and Social Security, means-test both programs, and raise Medicare premiums for higher-earners. In addition, he would the end Medicaid tax gimmick, in which states increase both Medicaid spending and provider taxes in order to increase matching payments from the federal government.

We applaud Sen. Corker for putting his ideas on the table as discussions continue to take place. As he points out, lawmakers are not lacking for ideas, just in knowing which ones to use and having the political will to stand by a plan. We appreciate both the way in which he addresses both sides of the federal budget and the manner in which he advocates being aggressive in trying to get something done this year as opposed to next. One would hope other lawmakers follow his example and put their ideas on the table for a bipartisan compromise to move the discussion forward. 

Tackling the Fiscal Cliff Myths

Over the past few weeks we've heard some misleading things about the fiscal cliff and the possible bipartisan plans that could replace the cliff. CRFB President Maya MacGuineas referenced many of these myths in her recent Washington Post piece, but a few of these, and additional misconceptions, are worth addressing in detail. Next week we will dive more in depth into each of the three misconceptions listed below. For now, here is a quick preview.

Claim 1: Those Who Advocate for Debt Reduction Should Love the Cliff

Both Paul Krugman at the New York Times and Matt Yglesias at Slate have made the claim that those who advocate for debt reduction should love the cliff. After all, it does significantly reduce the debt, sending it below 60 percent of GDP by 2022.

We've challenged this myth in the past, the sudden and blunt nature of deficit reduction in the fiscal cliff would have a devastating impact on the economy. It also ignores tax and entitlement reform that could minimize harm and address the future drivers of debt. For these reasons, the fiscal cliff is the second worst option, only behind kicking the can further down the road and not addressing our rising debt.

Claim 2: The Fiscal Cliff Spares the Poor

Yglesias also claims that going over the fiscal cliff would not hurt lower-income earners very much - rather it is only the high earners that take the hit. This myth may stem from the initial design of the sequester, which exempted many mandatory programs that provide benefits for lower-income households, including Medicaid and food stamps. However, the sequester hits discretionary spending very hard, a significant amount of which goes to programs designed to help low income people, such as low-income rental housing assistance, heating assistance, and Title 1 education funding to name a few.

On the tax side, while the expiration of the upper-income tax brackets has received much of the attention, it's also important to remember that the 10 percent bracket, payroll tax holiday, and expansions of the EITC and the CTC will all expire. In total, taxes will rise on the lowest income quintile by 3.7 percent, with an average tax increase of $412.

Finally, extended unemployment benefits would go away as part of the cliff - a big hit to lower income households given how high unemployment is today. The resulting recession from the cliff would hurt lower income people more than the greater population, further compounded by the expiration of extended unemployment benefits. Clearly the fiscal cliff has serious implications for the most vulnerable in society.

Claim 3: Other Plans to Avoid the Cliff are Much Worse

While neither CRFB or the Campaign to Fix the Debt advocate for any particular plan, some critics argue that plans adhering to its principles would be much worse than the fiscal cliff. But if bipartisan plans like Simpson-Bowles and Domenici-Rivlin are any indication, there are models out there that would be much more targeted and better for the economy than going over the fiscal cliff.

These plans proceed in a smarter way with deficit reduction, backloading much of the fiscal consolidation until the economy has had time to recover. They also take special effort to protect the most vulnerable in tax and entitlement reform. Even with lower tax rates under both Simpson-Bowles and Dominici-Rivlin, the rich pay much more in taxes through the elimination of deductions -- in fact, the tax systems under those plans would be far more progressive than only allowing the top two rates in 2001/2003/2010 tax cuts to expire. Overall, these proposals would be better in reducing the debt, encouraging growth, and protecting the most vulnerable than going over the fiscal cliff.

Next week, CRFB will be providing more analysis on each of these points. Stay tuned!