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.

In order to avoid bumping up against the statutory debt ceiling, the Department of the Treasury has begun undertaking a number of so-called "extraordinary measures".

Keep checking back as we update this table (and click here for last year's Debt Ceiling Watch of 2011).

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.

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.

^{Sources: IMF, La Gazette De Berlin
***Numbers not available for these years}

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.

^{Source: IMF}

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.

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. 

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.

Winter is Coming – HBO’s “Game of Thrones” has a legion of devoted fans. The show deftly combines mystical elements with real-world political intrigue. Of course, the gratuitous sex and violence may also play a role in its popularity. The fictional capital of King’s Landing could be mistaken for Washington, DC except for the (slightly) better sanitation in our capital. King’s Landing is filled with plotting and backstabbing and is currently under siege. DC has more than its share of schemes and, in a way, is also under siege due to the increasing unpopularity of its inhabitants and their inability to address the problems plaguing the nation. The days may be getting longer and the temperatures higher in DC, but there still is a growing sense that, as the Starks constantly warn, “Winter is coming.” This winter could be particularly harsh as the “fiscal cliff” that Federal Reserve chairman Ben Bernanke warns of could wreak havoc on the already fragile economy a the end of the year. The expiration of the 2001/2003/2010 tax cuts, the payroll tax holiday, the Alternative Minimum Tax (AMT) patch and several tax extenders (referred to by some as "Taxmageddon”) along with the across-the-board cuts imposed by the sequester under the Budget Control Act (BCA), will all occur at once, along with the debt ceiling also being reached. The challenge for lawmakers in a post-election lame duck session of Congress will be to replace fiscal cliff with a comprehensive plan that achieves a significant level of deficit reduction, but in a smart, phased-in manner. Learn more about the fiscal cliff here.

You Either Win or You Die – As they set the stage for the election and its aftermath, both parties appear to be following the Cersei Lannister view of politics, “When you play the game of thrones, you win or you die; there is no middle ground.” As Politico reports, Republicans want to soften the defense cuts under the sequester by further cutting social programs while Democrats plan to hold firm. Meanwhile, no progress is being made on entitlement and revenues, which will have to be a significant part of any comprehensive plan to significantly reduce the deficit. Last week the House passed legislation replacing the defense cuts for 2013 under the BCA sequester with $238 billion of cuts over ten years to programs such as Medicaid, food stamps, and the health care reform law. We’re all about being ambitious, but our idea of a "Go Big" approach depends on middle ground. Each side must put everything on the table to reach a comprehensive plan that puts the country on a sustainable fiscal course.

House Passes First Fiscal Year 2013 Spending Bill – The appropriations process is as dysfunctional as the Lannister family. Temporary stopgap measures have now become the norm when it comes to funding the government and this year appears headed in the same direction. Last week the House passed the first spending bill for the fiscal year that begins October 1. The Commerce, Justice, and Science appropriations bill provides $51.1 billion in funding for these agencies. Because this amount is less than the spending level agreed to under the BCA, the President has threatened to veto the bill if it somehow manages to pass the Senate. The White House also objects to policy riders contained in the bill. This week the House Appropriations Committee will mark up the FY 2013 spending bills for Homeland Security, Military Construction/Veterans Affairs, Defense and State/Foreign Operations. The security bills have spending levels above those agreed to in the BCA. All this means we can again expect the fiscal year to begin without most, if any, spending bills in place.

Going on Offense on Defense – Military action is significant to the plot of Game of Thrones. Likewise, defense spending is significant to the federal budget, and a source of great friction. The House this week will consider the National Defense Authorization Act for FY 2013, which rolls back some of the cuts proposed by the Pentagon to comply with the BCA. This comes as the public expresses support for some defense cuts.

Senate Budget Votes Expected – The annual federal budget blueprint has become akin to the Zombie-like White Walkers – not really among the living but nearly impossible to completely kill. While all hope has been lost for the House and Senate agreeing on a FY 2013 budget resolution, the Senate is still expected to vote on several versions this week in what will be no more than political theater. Senators will exercise their right to bring up budget proposals to the Senate floor since no budget has been approved. The Senate is expected to consider the resolution approved by the House, a version of President Obama’s budget proposal, and proposals from Sens. Pat Toomey (R-PA), Rand Paul (R-KY) and Mike Lee (R-UT). None is expected to muster enough votes to pass. Budget process reform is needed to help improve federal budgeting.

Broad Agreement on Debt Fix – The people of Westeros may not be able to agree on who their king is, but Americans appear to be in general agreement that a comprehensive approach will be required to address the national debt. According to a recent poll from the Peter G. Peterson Foundation, 87 percent of respondents say that a solution to the long-term debt solution will require tax increases and spending cuts. That corresponds with the results of our federal budget simulator, where 94 percent of those who voluntarily submitted their results used a combination of spending cuts and revenue increases.

Want to Know Where the Presidential Candidates Stand? – While not as catchy as "King in the North," cries for the presidential candidates to “Debate the Debt” are growing. Visit the website to learn more and sign the petition calling on the candidates to devote one of the three debates scheduled this fall exclusively to the debt and their specific plans to address it.

Key Upcoming Dates (all times ET)

May 15

• 2012 Fiscal Summit in Washington, DC, starting at 8:30 am. Speakers include former President Bill Clinton, House Speaker John Boehner, Treasury Secretary Tim Geithner, Sen. Rob Portman, Rep. Paul Ryan, Rep. Chris Van Hollen, former Sen. Alan Simpson and The Travelers Cos. Chairman and CEO Jay Fishman
• Senate Finance Committee hearing on what tax reform could mean for tribes and territories at 10 am.
• Senate Appropriations subcommittee mark-up of FY 2013 appropriations bill for Military Construction/Veterans Affairs at 11 am.
• Senate Appropriations subcommittee mark-up of FY 2013 appropriations for Homeland Security at 3:30 pm.
• Presidential contests in Nebraska and Oregon
• Dept. of Labor's Bureau of Labor Statistics releases April 2012 Consumer Price Index (CPI) data

May 16

• House Appropriations Committee mark-up of FY 2013 appropriations bills for Homeland Security and Military Construction/Veterans Affairs at 10 am.

May 17

• House Appropriations Committee mark-up of FY 2013 appropriations bills for Defense and State/Foreign Operations at 10 am.

May 22

• Presidential contests in Arkansas and Kentucky

May 29

• Presidential primary in Texas

May 31

• US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2012 first quarter GDP growth.

June 1

• Dept. of Labor's Bureau of Labor Statistics releases May 2012 employment data.

June 5

• Presidential contests in California, Montana, New Jersey, New Mexico, and South Dakota

June 14

• Dept. of Labor's Bureau of Labor Statistics releases May 2012 Consumer Price Index (CPI) data.

June 26

• Presidential primary in Utah

June 28

• US Dept. of Commerce's Bureau of Economic Analysis releases its third estimate of 2012 first quarter GDP growth.

Former Sen. Judd Gregg (R-NH) weighs in on the impact of "taxmaggedon" in The Hill today. While the tax increases would likely lead to more revenue, he said, the sudden rise of the payroll tax, expiration of the 2001/2003 tax cuts, and other tax increases could have a devastating impact on a still weak economy. Gregg explains:

The likely consequences are obvious. Such a massive increase in taxes will lead to a significant slowdown in the economy as investment and disposable income both drop dramatically.

People and businesses will have to retrench in order to deal with these higher taxes. This will result in less economic activity and potentially less revenue for the federal government. The opportunity to partly address deficit problems through economic growth will be lessened, and this will ensure that our deficits and debt situation will continue to grow and become even more of a drag on our prosperity and national culture.

Gregg makes a strong case regarding the negative short- and long-term economic consequences of the tax increases in current law. Importantly, though, extending current tax policy in its entirety would add $5 trillion to the debt relative to that scenario, which would contribute to a slowing of long-term growth or possibly even a fiscal crisis. As with the rest of the fiscal cliff, policymaker should be looking to replace the immediate expiration of all the tax cuts with a gradual plan which brings the debt under control. Indeed, comprehensive tax reform could reduce the deficit while lowering marginal tax rates by going after tax expenditures. 

The expiration of the tax cuts is just one part of the fiscal cliff, which also includes the $1.2 trillion sequester, the expiration of the doc fix, and the expiration of extended unemployment benefits. Taken together, we estimate the fiscal cliff would slow economic growth by about two percentage points over the next two years (the impact split roughly evenly between the tax increases and spending cuts). On the other hand, the debt accrued from continuing these policies will lower GDP by about one percent within ten years and much more beyond that. Any actions must therefore balance these dualing concerns by enacting a gradual and smart plan to stabilize the debt.

At Wonkblog, Suzy Khimm points to a study done by the Stimson Center that polled Americans about how large the defense budget should be. The study asked 665 participants about how much money they would assign to various parts of the defense budget after giving them context and arguments for and against cutting spending. Overall, the participants cut defense by an average of $104 billion (18 percent reduction) from 2012 to 2013 when they went area-by-area through the budget and by $127 billion (23 percent) when they picked an overall defense spending number. Khimm notes that these cuts are larger than even what the sequester calls for (which is a ten percent cut).

Our budget simulator may not be as exhaustive as the options presented in this study, but it does give us a good idea of where our users would be willing to trim costs. Granted, the baseline for defense spending has changed since those results were compiled, as the Budget Control Act has reduced defense through spending caps. Still, the results are informative about areas our users were willing to cut. In terms of defense, a majority of users picked five options from the defense portion of the simulator as well as the option to draw down troops in Afghanistan to 30,000 by 2013. The five options were:

• Cut weapons systems
• Cut foreign aid in half
• Cancel missile defense system
• Reduce ship buildings
• Decrease troop levels and reverse the Grow the Army initiative

These five options represent $330 billion in savings from 2011-2018. Adding in the war drawdown ups that number to close $1.4 trillion; however, the drawdown savings are likely to occur anyways as troops are already scheduled to be drawn down in Afghanistan in a similar manner.

These results are not scientific, but they are informative about what at least the users of our simulator supported cutting. See the full results of the simulator here and play our new simulator with updated defense options here.