January 2013

Economists in Favor of Smart Deficit Reduction

A recent op-ed from Joe Scarborough in Politico has brought back attention to the stimulus vs. deficit reduction debate.

Some commentators like Paul Krugman have suggested that we do not need to be worrying about debt and deficits right now. Furthermore, he suggested that attempting to put the deficit on a sustainable path in the medium-term would require short-term austerity and run contrary to the goal of reducing unemployment. Wonkblog's Neil Irwin and Business Insider's Joe Weisenthal have joined the conversation, commenting on a divide between perceived divide economists and those in favor of deficit reduction.

This conversation doesn't focus on the real debate. Many of the economists referenced in the Irwin and Weisenthal pieces warn of implementing spending cuts or tax increases now but still would like to see a plan to reduce the deficit over the medium and long term passed now, with the deficit-reducing policies phased in slowly over time. We have said before that not only should lawmakers seek to "Go Big" with a comprehensive plan, but also to "Go Smart" and use a plan that would slowly phase in many provisions, like in Simpson-Bowles and Domenici-Rivlin. Not only would that allow ample time for business and households to prepare for these changes, but it would also ensure that most savings take place when the economy has recovered. There is reason to believe that just announcing a plan that would get our fiscal house back in order could boost confidence among businesses and households and contribute to economic growth in the meantime without the negative effects of upfront fiscal retrenchment.

To some extent, the debate on our need to create more jobs and ensure fiscal sustainability is a matter of emphasis, rather than of direction. Lawmakers can easily do both. Federal Reserve Chairman Ben Bernanke advocated a dual approach in a December press conference, both avoiding creating economic headwinds and agreeing upon a framework that would demonstrate that lawmakers are serious about our unsustainable longer-term debt problem. It wasn't so long ago either that ten former chairs of the Council of Economic Advisors under both Republican and Democratic administrations authored an op-ed on the need to deal with the unsustainable deficit. They wrote:

There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.

Chairman Bernanke is not the only economist who has suggested the benefits of phased-in debt reduction. In an op-ed by Christina Romer, a former chair of the Council of Economic Advisors under President Obama,  she writes:

What about the United States, which faces a terrible long-run budget problem, but no immediate threats from the bond market? The best policy here is to combine the backloaded consolidation I’m recommending for troubled countries with the short-run stimulus I’m advocating for countries like Germany. We could enact something like the Bowles-Simpson plan to reduce the deficit sharply over 10 years, and include in it more near-term investment in infrastructure, education and scientific research.

Kenneth Rogoff of Harvard University agrees that it is important to be mindful of the business cycle, but also cautions those who say we can afford to forget about deficits right now:

They see lingering post-financial-crisis unemployment as a compelling justification for much more aggressive fiscal expansion, even in countries already running massive deficits, such as the US and the United Kingdom. People who disagree with them are said to favor “austerity” at a time when hyper-low interest rates mean that governments can borrow for almost nothing.

But who is being naïve? It is quite right to argue that governments should aim only to balance their budgets over the business cycle, running surpluses during booms and deficits when economic activity is weak. But it is wrong to think that massive accumulation of debt is a free lunch.

We aren't arguing that there needs to be immediate austerity to balance the budget now. The focus of deficit reduction should be putting debt on a downward path at the end of the decade, and to do this will require certain structural changes that should be phased in over time -- giving the economy time to recover. As we show in our paper, Our Debt Problems Are Far From Solved, an ideal plan would not make dramatic changes right away, but rather phase in specified changes over time that are agreed to now.

Source: CRFB calculations

There is a legitimate debate on how deficit reduction should proceed -- the pace, the composition, and the enactment of a final plan. But this, as Michael Kinsley noted in a recent Bloomberg column, is a more nuanced conversation, and there are many areas where deficit hawks and doves agree. Tomorrow, we will further explain why the "how and when" of deficit reduction can be just as important as "how much."

Update (2/1/2013): A previous version of this post may have mischaracterized Irwin's article. This has since been clarified.

150 Ways to Reform Medicare

At nearly $500 billion a year, Medicare is the costliest piece of the federal health care budget. As we’ve discussed before, Medicare spending and enrollment is projected to rise rapidly as more baby boomers retire over the next few decades. Meanwhile, Part A of Medicare has been running cash-flow deficits over the last several years and is projected to be insolvent by 2024. As a result, many groups -- such as The Commonwealth Fund, the National Coalition on Health Care, the Center for American Progress, and the American Enterprise Institute -- have come out over the last few months with reports outlining options that lawmakers could adopt in a budget deal to help reign in Medicare spending and make Part A solvent.

In perhaps the most comprehensive and detailed report to date, the Kaiser Family Foundation (KFF) has released a compendium of 150 different policy ideas that have the potential to produce Medicare savings (and a few which would raise revenue outside of the program). Many of these policies overlap with those included in our Health Care and Revenue Savings Options report. This report further discusses the implications each policy option has for beneficiaries, providers, and plans. Savings estimates vary where scorable and many do not have official estimates available but would certainly produce savings.  Options fall into the following areas:

  • Medicare eligibility age (savings up to $113B)
  • Beneficiary cost sharing (roughly $130B in scorable savings) and premiums (roughly $270B in scorable savings)
  • Program financing (up to $1.1T in scorable savings)
  • Medicare payments to providers and plans ($350B)
  • Medical malpractice (roughly $40-57B in savings)
  • Delivery system reforms (No estimates available)
  • Reforms to improve care for high-need beneficiaries and patient engagement (No estimates available)
  • Medicare benefit redesign (roughly $125B in scorable savings)
  • Premium support (Dial-able)
  • Spending caps (Dial-able)
  • Medicare program administration and program integrity (Minimal savings where available)

Together, these policies show three different pathways toward reforming the Medicare program which can be dialed in any number of ways to achieve significant savings. One approach would be to keep the current program as is, but make modifications to certain payments or cost sharing requirements. Another approach would use Medicare to drive policy that encourages value over volume in the delivery of care system wide. A third approach would change the fundamental structure of the program through reforms that impact the government’s financial contribution.

At a briefing for the release of the report, Dr. Gail Wilensky, Senior Fellow at Project HOPE and former Administrator of the Health Care Financing Administration (HCFA, the predecessor to the Center on Medicare and Medicaid Services), said, "Most people who look beyond 2020 acknowledge Medicare poses a real problem in terms of growth relative to GDP." Dr. Bruce Vladack, Senior Advisor to Nexera Inc. and also a former HCFA administrator, acknowledged that "an aging population means less of a workforce which poses serious long term fiscal challenges, people will need to stay in the workforce longer.”

Panelists also discussed the issue of cost sharing reforms and other ways to give beneficiaries some "skin in the game." Mark McClellan, Director, Engelberg Center for Health Care Reform at the Brookings Institution, pointed to Medicare Part D’s history which showed that when given a choice, beneficiaries chose non-traditional benefit designs. He argued that Medicare could do more to encourage beneficiaries to lower unnecessary utilization which increases spending.

Overall, this report is helpful towards better informing the discussion on reforming Medicare spending. If anything else, it reminds us that given the opportunities ahead, policymakers do not lack ideas on how to restrain health spending.

Click here for the full report.

How Far We Have to Go on Deficit Reduction

In the past few weeks, we have made the case for putting debt on a downward path as a percent of GDP as a goal for the next round of deficit reduction. This is in contrast to those who have advocated stabilizing the debt over ten years with $1.4 or $1.5 trillion of additional savings and, much more worryingly, those who believe that serious deficit reduction can wait for another ten years. In CRFB's latest policy paper, we re-iterate our arguments for going further than debt stabilization, make the case for acting sooner rather than later, and elaborate on minimum targets for deficit reduction.

Readers of our blog will be familiar with the reasons why we think stabilizing the debt over the medium-term would not be an aggressive enough target. Doing just that would leave no margin for error in projections, would most likely not stabilize the debt over the long term, and would leave much less fiscal flexibility that would otherwise be the case. Also, leaving debt at such a high level would crowd out private investment more when the economy is at full capacity.

So far, lawmakers have enacted, by our count, $2.35 trillion of savings relative to the August 2010 CBO baseline, a notable achievement. But more is needed to put the debt on a gradual downward path as a share of the economy. Under current projections, debt would exceed the size of the economy by the 2030s and double the size of the economy by the 2050s. While $1.4 trillion of savings would stabilize the debt through 2022, it would not do enough to do so beyond that year. 

So what is the appropriate target for deficit reduction? In the paper, we construct a "minimum necessary savings" path, which has debt on a downward path and at 70 percent by 2022. In this path, debt further declines to 60 percent by 2040 and 40 percent by 2080. Achieving the 2022 target would require $2.2 trillion in additional deficit reduction from 2013-2022 from the CRFB Realistic baseline. This path comes with a few caveats. First, there is nothing special about these exact numerical targets; rather, the focus should be on the trajectory of debt rather than the level itself. Second, we do not think this path is necessarily ideal, since it brings down the debt very gradually, especially over the long term. It simply represents a minimum savings path to have debt on a downward path over the medium and long term -- and ideally, lawmakers would choose more aggressive debt targets.


It is clear that to reach the targets we need for the long term, we will need to enact significant reforms to entitlement programs, especially for health care. We will also need to combine those reforms with an overhaul of the tax code that raises revenue. If we do those things, the fiscal future will look much brighter. If we delay action, the problem only gets larger and the solutions only get tougher.

Click here to read the paper.

Bowles: National Debt Threatens U.S. Innovation

In an interview with Forbes contributor Henry Doss, former Fiscal Commission co-chair Erskine Bowles explains just how our unsustainable debt trajectory threatens the future of U.S. innovation and may be preventing some businesses from investing due to the uncertainty.

First, Bowles says that debt and deficits really do deserve the center stage:

Of course there’s a danger in talking about our debt in overblown terms, because sooner or later folks will just tune you out.  At the same time it’s hard not to be aggressive about how we frame this conversation.  But let me be clear:  Our debt levels and the economic uncertainty they cause affect every single aspect of our business environment.  I think this is the defining issue of our times.

He explains that the reason why it may be difficult to get a deal is that people have a hard time connecting very high debt levels with tangible consequences, though there clearly would be. Debt would crowd out government investments and hurt U.S. competitiveness abroad. Bowles:

When I think about the consequences of debt, I think about things slowing down and grinding to a halt.  Debt is a drag on everything.  I think about companies considering investments in R & D, employee training, expansion, product investment...you name it.  All of those components of innovation are going to be dramatically reduced when – as is almost inevitable – payback time comes for our debt.  I just don’t see how we will be able to invest – time, capital, creative energy – in innovation if we are focused on survival.

America is now and has been the world leader for innovation, for growth, and for financial security.  US debt is still seen as a safe haven.  But the debt threatens to turn all that on its head.  Sooner or later, I believe that the market will look at our financial position and just make a decision that enough is enough.  And when that happens, we will lose access to capital, access to talent and access to customers.  As we discussed earlier, it’s a mistake to talk in apocalyptic terms; but it’s difficult for me to see anything other than a really, really bad outcome for American innovation and competitiveness if we don’t get our financial house in order.

On a more positive note, Bowles presents the potential gains to be had if lawmakers do reach across the aisle and come to an agreement:

There aren’t magic or quick solutions to the debt.  It’s been a long time coming and it will be a long time going.  Any solution is going to be months and years in development and implementation.  So, we shouldn’t expect something that will be sudden or dramatic.  Good or bad. But I strongly believe that if we have the appropriate compromises in Washington; if tax reform and spending cuts are addressed responsibly, with shared pain as it must be; and if it becomes clear that our political leadership is on an honest path to addressing this issue; I think we will see what we would hope to be the case: less uncertainty and more market optimism; more investment, leading to growth; and much more opportunity for entrepreneurial risk and innovation.

Click here for the transcript of the interview.

Peterson Foundation Analyzes the Fiscal Cliff Deal

The Peter G. Peterson Foundation has released a new report on the American Taxpayer Relief Act (ATRA) and its effect on the long-term outlook, similiar to our previous analysis of the medium-term and long-term debt paths after the deal.

With the focus of the report on the budget outlook beyond the ten-year window, the Peterson Foundation finds that ATRA improved the long-term outlook only slightly. That same conclusion also holds when the savings from previous packages, including the Budget Control Act and various continuing resolutions, are counted. The report projects that the federal government would accumulate a public debt level of 200 percent of GDP 26 years from now under current policy. After the fiscal cliff deal, the federal government is projected to reach the 200 percent level in 27 years.

Source: Peter G. Peterson Foundation

Even if the cuts under the sequester were allowed to take place, the long-term budget outlook would still be unsustainable. While the cuts to discretionary spending would lead to smaller deficits in the short term, its long-term impact would be small given that health care and aging are the true drivers of long-term debt and the sequester would both not address them or be large enough to make up for them. Rather, policymakers will have to turn their attention to rising entitlement spending, especially on health care, and an inefficient and complex tax code to control the debt.

The report contrasts the current policy outlook to some of the proposals put forward in Peterson's Solutions Initiative II from think tanks across the political spectrum. While the think tanks differed in their appraoches, all were able to put the budget on a sustainable fiscal path, with debt continuing to be stablized in the long run. 

Source: Peter G. Peterson Foundation

The analysis from the Peterson Foundation throw cold water on claims from some commentators that lawmakers have already enacted a sufficent amount of deficit reduction. Getting debt on a downward path could help ensure the federal budget is sustainable in the long-term. As the report says, we may be "past the cliff, but not out of the woods" yet.

Click here to read the full analysis from the Peter G. Peterson Foundation.

New Proposal to Reform Federal Student Aid

In a report released today, the New America Foundation’s Education Policy Program offers a proposal to overhaul the federal financial aid system with over 30 specific policy options. The authors argue that the current poorly targeted and complicated system, combined with rising tuition costs, is no longer meeting today’s demand. These recommendations aim to more efficiently spend federal dollars and better align incentives for students and institutions of higher education. These include:

  • Reform Pell Grants: The report recommends permanent elimination of the Pell Grant funding cliff and shifting future Pell funding to the mandatory side of the budget (making it into an entitlement program). It proposes increasing the maximum Pell Grant and providing Pell bonuses to public and private non-profit colleges that serve a larger share of low-income students. Additionally, it recommends requiring schools that enroll a small share of low-income students but charge them high net prices to match a portion of the Pell Grant funds they receive.
    • Make the Pell Grant Program Mandatory and Fully Fund ($68 billion cost)
    • Increase the Maximum Pell Grant Level ($94 billion cost)
    • Enact Further Pell Grant Reforms ($94 billion net cost)
  • Simplify Student Loans: The report recommends eliminating the in-school interest subsidy for subsidized Stafford student loans, which ensures that interest doesn't accrue while the borrower is in school.  It would also allow borrowers to repay their loans based on a percentage of their earnings after graduation, thereby reducing the dangers of default. Other options which would reduce spending include the creation of a new fixed formula for setting student loan interest rates that adjusts annually according to market conditions (specifically, ten-year Treasury bond rates plus three percent) along with incentives for borrowers with older loans to switch to the direct loan program.
    • Eliminate in-school interest subsidies ($41 billion savings)
    • Set student loan interest rates based on market rates ($25 billion savings)
    • Enact other student loan reforms ($9 billion net savings)
  • Eliminate Certain Education Tax Expenditures: The report recommends eliminating higher education tax benefits (i.e. the American Opportunity Tax Credit) and tax advantaged savings plans (i.e. 529 plans). They argue that the benefits are poorly targeted, poorly timed (since benefits are often received long after tuition is paid), and complex to navigate. (savings $182 billion)
  • Improve Accountability, Transparency, and Reform: Other recommendations in their report would create new incentives to use existing federal aid more effectively with greater accountability and data collection measures. (<$1 billion net cost)

Click image to enlarge.

While together these recommendations are budget neutral through 2022 according to their estimates, individually some policies (such as increasing the Pell grant program) would be deficit increasing whereas others (such as eliminating interest-free subsidized Stafford loans) would be savers. Importantly, the report reminds us that there are opportunities in all areas of the budget to reduce, reform, and more efficiently use federal spending to achieve policy goals.

Line Items: Hockey Edition

Dropping the Puck – The NHL season is finally underway, and it only took the Washington Capitals five games to get a win. Things are similarly getting off to a slow start with the new session of Congress. Negotiations over filibuster reform officially kept the Senate in its first day until the matter was resolved last week. Policymakers have a full schedule: in addition to immigration reform, climate change and gun control, there are a series of fiscal deadlines that they will have to contend with. But if the NHL can resolve the lockout, perhaps anything is possible.

Debt Ceiling Going to the Penalty Box – Last week, the House passed legislation that would suspend the debt limit until May 18, putting off a contentious fight that could rattle markets. The Senate is expected to take up the measure Wednesday and it is expected to pass. The President is also expected to sign it when it reaches his desk. The bill also includes a “No Budget, No Pay” provision stipulating that lawmakers will have their pay withheld after April 15 until their chamber passes a budget or the 113th Congress ends. The debt limit drama may be delayed past mid-May, because the Treasury Department could again use “extraordinary measures” to ward off default.

Sequester Coming in on the Next Line Change – While Congress will likely put off the next debt limit fight for a while, the next fiscal battle will still come soon as the across-the-board spending cuts of the sequester will kick-in on March 1. While the fiscal cliff deal slightly reduced the cuts under sequestration, they would still be significant.

Americans Say: No More Passing the Fiscal Puck – A poll last week from the Pew Research Center for the People & the Press shows that reducing the budget deficit has risen on the public’s agenda. The issue now is only behind strengthening the economy and improving the jobs situation as the top issue for voters. It has climbed higher than any other issue in the past four years. The sentiment is echoed in a Gallup survey from earlier this month in which voters say the federal budget deficit is just behind the economy as the most important issue facing America today.

The Puck Stops with Her? – New Senate Budget Committee Chair Patty Murray (D-WA) is not wasting time in getting to work. Not only has she promised that the committee will produce a budget for the first time in years, but she is taking steps to involve the public in the process like never before. On Monday Sen. Murray announced “MyBudget”, a platform for Americans to share their stories about how the federal budget impacts them, express their budget priorities and provide ideas for tackling our budget challenges. The Fix the Debt Campaign also allows the public to share their stories about why the national debt matters to them and our online budget simulator allows people to create their own budget plan.

Still Trying to Ice IPAB – Legislation has again been introduced in the House to repeal the Independent Payment Advisory Board (IPAB), which was created by the Affordable Care Act. The panel of 15 healthcare experts will provide recommendations to reduce Medicare costs. Under the law, Congress has to vote on the panel’s recommendations, if Congress rejects a proposal, it must either do so with a three-fifths supermajority or find Medicare savings at least equal to the rejected ideas. IPAB is one of the central cost-cutting mechanisms in the health care reform law. As such, it should not be repealed unless it is replaced with another cost-containment process or a package of reforms.

Kerry Wants to Mind the Fiscal Policy Net – During his Senate confirmation hearing last week to be the next Secretary of State, Sen. John Kerry (D-MA) went into unexpected territory when he talked about the global importance of the U.S. addressing its fiscal challenges. He said, "The first priority of business which will affect my credibility as a diplomat and our credibility as a nation, as we work to help other countries create order, the first priority will be that America at last puts its own fiscal house on order." Sen. Kerry previously served on the Joint Select Committee on Deficit Reduction, more commonly known as the Super Committee.

Tax Reform Offsides or On Goal? – While some question if fundamental tax reform will occur this year with everything else on the agenda, House Ways and Means Committee Chair Dave Camp (R-MI) is moving forward. Last week, he released a discussion draft with ideas for changing how financial products are taxed. Hopefully more steps towards comprehensive tax reform will soon be made.

Sandy Relief Finds the Back of the Net – On Monday, the Senate approved of $50.5 billion in aid to victims of Hurricane Sandy. The House already passed the bill. Debate over the size of the package and whether it should be offset delayed enactment late last year. In the end, none of the measure was paid for.

Entitlement Reform Power Play Coming Up?Politico reports on some reforms to Medicare and Social Security that have some support among progressives. One of the ideas in switching to the chained CPI, which is a more accurate measure of inflation, for adjusting benefits. Read more about the chained CPI here. Senate Finance Committee Ranking Member Orrin Hatch (R-UT) also recently laid out some ideas that have received bipartisan support.

What Should be the Game Plan?The New York Times columnist and Nobel Laureate Paul Krugman has recently argued that that the long-term debt should be addressed later and need not be addressed now. CRFB has taken issue with his views here and here.


Key Upcoming Dates (all times are ET)


January 30

  • Bureau of Economic Analysis releases advance estimate of 2012 4th quarter and annual GDP.


February 1

  • Dept. of Labor's Bureau of Labor Statistics releases January 2013 employment data.


February 4

  • By law, the President's budget must be submitted by the first Monday in February, occurring February 4 this year. The deadline will likely be missed this year because of the fiscal cliff.


February 5

  • The Congressional Budget Office (CBO) will release its 2013 Budget and Economic Outlook at 1 PM.


February 6

  • House Budget Committee holds a hearing on CBO's Budget and Economic Outlook with CBO Director Douglas Elmendorf.


February 12

  • President Obama delivers the State of the Union address to a joint session of Congress.


February 21

  • Dept. of Labor's Bureau of Labor Statistics releases January 2013 Consumer Price Index data.


February 28

  • Bureau of Economic Analysis releases second estimate of 2012 4th quarter and annual GDP.


March 1

  • Across-the-board cuts to defense and non-defense discretionary spending prescribed in the Budget Control Act, known as "sequestration," will take effect.


March 8

  • Dept. of Labor's Bureau of Labor Statistics releases February 2013 employment data.


March 15

  • Dept. of Labor's Bureau of Labor Statistics releases February 2013 Consumer Price Index data.


March 27

  • Current continuing resolution (CR) funding the federal government expires.


March 28

  • Bureau of Economic Analysis releases third estimate of 2012 4th quarter and annual GDP.


April 5

  • Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.


April 16

  • Dept. of Labor's Bureau of Labor Statistics releases March 2013 Consumer Price Index data.


April 26

  • Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP. 

MY VIEW: Maya MacGuineas & Thomas Rippon

Today in an op-ed in The Patriot News, CRFB president Maya MacGuineas and Pennsylvania Fix the Debt Co-chair Thomas Rippon call for bipartisan compromise from our national leaders in putting our debt on a sustainable path. They argue that though the nation successfully averted the fiscal cliff through the passage of the American Taxpayer Relief Act, nothing significant was achieved in terms of a fiscal plan that puts our debt on a downward trajectory.

Of particular concern to MacGuineas and Rippon is the failure of the agreement in tackling the issues of rising entitlement costs and inadequate revenues. Unless major reforms are undertaken, there will remain a "yawning gap" between revenues and outlays. They write:

Nothing much was achieved by the “successful” juke to avoid the fiscal cliff.

Poor leadership is taking a toll on the businesses and individuals who participate in our economy. Inaction is not an option. And the recent legislation averting the fiscal cliff, while not inaction, was wholly inadequate to address the immediate challenge and associated tasks we face. We long for the bipartisan days of House Speaker Tip O’Neil and President Reagan.

For months leading up to the Jan. 1 deadline, the private sector, particularly small businesses, voiced concerns over economic and political uncertainty; they sidelined investment and delayed plans to hire. Gridlock in Washington prevented any real progress. And the ultimate last-minute deal punted on the tough decisions to rein in the federal debt.

Though Congress and the Obama administration managed to eke out a deal to avert the fiscal cliff, the agreement does little to boost confidence in the short-term. And it does nothing to seriously slow down the unsustainable trajectory of our national debt.

Simply put, the future cost of our entitlement programs far outstrips our tax code’s ability to fund them. And we’ll need major reforms on both sides of the ledger in order to close the yawning gap between revenues and outlays.

But all hope is not lost. MacGuineas and Rippon believe that there is still a chance for our elected officials to do away with political games and come to a compromise on entitlement and tax reforms. In their words:

If Congressional Democrats and Republicans really want to help economic growth and job generation, they need to stop focusing on outmaneuvering each other and start focusing on bipartisan solutions to our long-term fiscal problems.

Businesses rely on policy and economic certainty, and a comprehensive plan to that bends down the trajectory of our long-term debt and ends the status quo of lurching from one crisis-induced mini-deal to another would help immeasurably.

Such a plan must address the problem from all sides. This includes smarter spending as well as entitlement and tax reform. Additionally, these changes need to be implemented gradually to avoid creating shocks in the economy.

The parties need to return to the negotiating table now and show the courage to work together on a deal that does not simply represent the lowest common denominator, but is big enough to stabilize the debt and put it on a downward path.

They have a chance to demonstrate Washington can still compromise to help restore confidence. Most importantly, it would reassure the country’s businesses, large and small, and help stimulate growth and investment.

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.

Washington Post on the Proper Target for Debt Reduction

A recent editorial from the Washington Post takes on the "new school of thought on deficits" that believes that we do not have to go too much further with deficit reduction, with champions like the Center for Budget and Policy Priorities and Paul Krugman.

Specifically, the Editorial Board comments on the recent study from the CBPP, which argues that lawmakers need only to stabilize the debt as a share of the economy. This would require around $1.4 billion in additional deficit reduction relative to a current policy baseline (a baseline that does not include the sequester), at which point lawmakers could turn their attention elsewhere. The Editorial Board disagrees:

If only. A debt-to-GDP ratio “stabilized” at 73 percent would be a paltry achievement — a level of indebtedness 32 percentage points larger than the post-1950 average. A five-year plateau at that ratio would depart markedly from historical patterns, according to which U.S. debt surges during wars and/or recessions, then recedes in equal or near-equal measure amid renewed growth and fiscal consolidation.

The CBPP analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth. “Those who argue against a further focus on prospective deficits” based on rosy scenarios “counsel irresponsibly,” President Obama’s former Treasury secretary, Lawrence H. Summers, wrote in The Post on Inauguration Day — and we agree.

Anyway, it’s not like Congress and the White House are close to agreeing on an alternative to the sequester. Many deficit doves would also decry the sequester’s cuts to domestic programs; few, however, have said exactly what tax hikes and spending cuts they would prefer. A memo circulated by the Senate Budget Committee’s Democratic majority alludes to closing tax loopholes but specifies nothing bigger or politically riskier than breaks for corporate jets and oil companies.

The big money is in entitlements, the source of our structural debt problem, which Democrats seem increasingly to treat as untouchable. The CBPP paper concedes that stabilizing debt at 73 percent of GDP by 2018 “would not be enough to address the longer-term budget problem.” Never mind, deficit doves coo, the problem is health spending generally — not a sustainable redesign of Medicare and Medicaid. And health spending is already easing, albeit for unknown reasons.

Given the economy’s fragility, we should not slam on the fiscal brakes, but even the short-term goal should be a downward trajectory for debt-to-GDP — not a high plateau. Regarding structural debt, our leaders can hardly be accused of rushing into things. They should be more ambitious, not less. The longer they wait, the more painful the process will be.

This is in line with what we said in our blog Putting the Debt on a Downward Path. We pointed out that while $1.4 trillion would technically be projected to keep the debt stable through 2022, that target was quite problematic. For one, just barely stabilizing the debt would leave no margin for error in case economic assumptions turned out to be off or politicians enacted new policies on a deficit-financed basis. In addition, leaving debt at such a high level would allow for little flexibility to respond to possible national disasters, economic downturns, or national security crisis that may demand additional resources.

And finally, we pointed out that $1.4 trillion through 2022 is highly unlikely to be enough to keep the debt stable in future decades. In fact, we modeled an illustrative version of CBPP's $1.4 trillion and found that debt would still grow dramatically beginning in 2023.

Source: CRFB calculations

Note that CBPP president Bob Greenstein has already responded to the Washington Post editorial. He focused much of the response on discussion of the forecasts being based on "rosy scenarios," pointing out that their numbers are based off CBO estimates. We agree with Greenstein that there is a good chance that their estimates may prove to be too pessimistic as well as optimistic. Still, it is better to be prudent and prepare for the latter situation, since it is much more difficult to reverse a worse budget outlook than it is to deal with an improved outlook.

Nevertheless, the Washington Post editorial board gets the main argument right. These projections can quickly change for the worst, as the decade of the 2000s showed us. Lawmakers should focus on the long-term and should be conservative with deficit spending and putting debt on a downward path will provide needed wiggle room if anything goes wrong.

Senator Murray Brings Citizens Into Budget Process

Today, Senate Budget Committee Chair Patty Murray (D-WA) unveiled a new feature on her Committee's website called MyBudget, which allows constituents to fill out a form sharing their priorities for the federal budget, personal stories on how the budget affects them, and ideas on how to best move forward.

Sen. Murray captures the importance of engaging Americans outside of the beltway in the budget debate, saying:

I feel very strongly that politicians and bureaucrats shouldn’t be making our budget decisions in a vacuum, but that the ideas, stories, values, and priorities of families across the country have a loud voice at the table and a platform to be heard.

We completely agree. The budget is the best reflection of our government's objectives, and the decisions policymakers make should be part of a national conversation on the direction the country should take in the future.

In the months ahead, Senator Murray also promises to provide additional tools and resources to seek feedback as her Committee works to draft a budget resolution. This year's budget process presents another opportunity for lawmakers to work together and broker a compromise on a deficit reduction plan that would go big, go long, and go smart.

We applaud Sen. Murray for taking these steps to include the American people as she begins her new role at the helm of the Committee. Policymakers will face difficult choices in the coming weeks, making it all the more important to understand what Americans value the most. The more ideas put forward and stories heard, the better chance we have to end up with a budget that will achieve the goals of the entire country.

Click here to see the Senate Budget Committee's MyBudget page.

We Still Need Postal Reform

Today, The Wall Street Journal (subscription required) reported that the U.S. Postal Service will again raise the price on first-class postage stamps from 45 cents to 46 cents, consistent with its announcement in November. USPS will introduce a new first class global Forever stamp, which will cost $1.10 and allow mail to anywhere in the world, still valid with future rate increases.

USPS is self-financed, raising much of its revenue from postage. The Postal Service is prohibited from raising postage rate beyond adjustments for inflation, but with only a year since USPS last raised postage rates to adjust for inflation, it is a reminder of the tremendous financial challenges faced by the organization.

Postal reform is needed soon in this next Congress. The Postal Service has stated that it is currently losing $25 million per day and was not able to contribute $11.1 billion to the Treasury for employee retirement in this past year, overall recording a $15.9 billion loss. In the last Congress, the House passed a postal reform bill (H.R. 2309) as did the Senate (S. 1789), but the two chambers were unable to agree on a final bill.

2013-2022 Savings/Costs (-) in Postal Reform Bills (billions)
  House Bill Senate Bill
Authorize Five-Day Delivery Week $21 $9
Transfer of Retirement Contributions $0 $0
USPS Changes in Spending from Changes in Retirement Contributions -$5 -$6
Changes in Payments to Retiree Health Benefits Fund $0 $0
USPS Changes in Spending from Changes to Health Payments N/A -$11
Increased Credits to People Who Retire N/A ***
Elimination of Annual Appropriations $1 N/A
Payment from Alaska $1 N/A
Change in Mail Service Rates *** N/A
Changes to Workers' Compensation N/A ***
Total Savings $20 -$6

Source: CBO
***Less than $500 million

Postal service reform could give USPS more flexibility to raise revenues and control costs, operating more like its competitors. This may include allowing the Postal Service to further increase its postage rates to cover costs, ending Saturday delivery, run advertisements and making changes to its retirement program. The USPS has already undertaken many measures to reduce costs, including reducing hours, closing processing centers, and reducing the number of employees by 24 percent since 2006.

The Postal Service is in desperate need of reform, and lawmakers should work to revive the work they started in the last Congress. With USPS due to run out of money by October of this year according to some estimates, Congress cannot wait any longer to act.

Camp Offers New Ideas on Financial Products Tax Reform

Yesterday, House Ways and Means Committee Chairman Dave Camp (R-MI) released a Discussion Draft on reforming the tax treatment of financial products. This is the latest in the Committee’s efforts to seek input and feedback on elements of comprehensive tax reform legislation which they have been working on over the last few years. In 2011, they released a Discussion Draft on international tax reform.

This draft exemplifies the kind of serious discussion tax reform will involve. Figuring out how to reform or replace these elements of the tax code is complicated, and Camp’s draft shows his Committee is committed to thinking through these issues and seeking feedback. The process for a comprehensive reform of our tax code will involve tough choices and tradeoffs, and every provision must be reviewed and discussed on its merits. We are pleased to see this process moving forward.

In this draft, Camp outlines six proposals that seek to provide greater simplicity and uniformity in the tax treatment of financial products:

  • Uniform tax treatment of financial derivatives: Currently, the tax treatment of derivatives varies depending on type, profile of the taxpayer, and other factors. This proposal would require all derivatives to be marked to market (current/fair value) at the end of each tax year, and any gain or loss would be treated as ordinary income or loss. There are carve outs for real estate transactions and hedges on price, currency, and interest rate changes. It would also repeal the current “60/40 rule” that allows some investors to treat 60 percent of their earnings as long-term capital gains (this provision is also in the President's budget).
  • Simplify business hedging tax rules: Currently, taxpayers have to identify a transaction as a hedge for tax purposes on the day they enter that transaction, but often they fail to do so even if they treat it as a hedge for accounting purposes. This proposal would allow transactions that are properly treated as hedges for financial accounting purposes to be treated as hedges for tax purposes.
  • Eliminate phantom tax resulting from debt restructuring: This proposal would reform the tax rules that apply to debt restructurings that do not involve a forgiveness of principal. It sets a floor for the modified issue price of the debt instrument by requiring that it can’t be less than the issue price before modification. Since cancelation of indebtedness is a taxable event, this policy would reduce the “phantom” income tax owed when debt is restructured, common during economic downturns. This attempts to address the differing treatment of debt and equity that is part of the current tax code.
  • Harmonize tax treatment of bonds traded at a discount or premium on the secondary market: For bonds sold on the secondary market at a discount (less than the amount to be repaid), this would require the holder of the bond to recognize taxable income on the discount over the remaining life of the bond, which currently applies only to bonds acquired at a discount directly from the borrower. It would also limit the taxable secondary market discount to the amount that reflects an increase in interest rates that has occurred since the bond was originally issued (rather than a change in the borrower's creditworthiness) and allow taxpayers to claim above-the-line deductions for bonds acquired at a premium on a secondary market.
  • Increase the accuracy of determining gains and losses on sales and securities: Currently, taxpayers can identify which shares have been sold based on their cost basis (original price) even if they are identical, which helps them manipulate taxable gains and losses. This proposal would require the cost basis of the security to be based on the average cost basis of all other shares or units of the identical security held by the taxpayer.
  • Prevent harvesting of tax losses on securities: This proposal would apply the “wash sale” rule -- which prevents taxpayers from harvesting tax losses by selling securities at a loss and then immediately reacquiring the same securities -- to transactions involving closely related parties, such as relatives and controlled entities.

At this time, there are no revenue estimates for these proposals. On face, it appears that the net effect of the proposals would be to raise revenue -- though Chairman Camp would presumably use this revenue to lower rates as part of comprehensive revenue-neutral tax reform. Whether and how much revenue would be generated depends on interactions with the broader tax reform as well as with trends in the broader economy (for example interest rate changes).

The Discussion Draft reminds us that tax reform is about far more than just what to do with tax rates and which deductions or credits to reduce. Tax reform takes a careful evaluation of how to better have the tax code define income, promote growth, improve fairness, and prevent potential abuses. These type of reforms are also apparent in reforming the corporate tax code, as you can see in our calculator. We are excited to see the tax reform process move forward.