The Bottom Line
Today, the Blue Dog coalition released its blueprint for fiscal reform. The group, comprised of moderate and conservative Democrats, has long been known for its commitment to fiscal responsibility. But the plan takes another step by calling for a specific fiscal goal. It also recommends a variety of budget process tools such as reinstating PAYGO rules, performance-based budgeting, and more attention to the long-term fiscal outlook in the budget resolution. The plan also supports the establishment of a bipartisan fiscal commission.
The plan calls for a sustainable debt goal of 60 percent of GDP (the fiscal goal that the Peterson-Pew Commission on Budget Reform recommended in its Red Ink Rising report and that was echoed by the National Academy of Public Administration’s study earlier this month). The Peterson-Pew Commission acknowledged that there is no one single “right” goal but committing to a credible fiscal goal that is sufficient to reassure global credit markets is the important thing. It’s nice to see that members of Congress recognize the importance of setting a fiscal goal and we commend this and other proposals to address our nation’s fiscal crisis.
President Obama will propose freezing "non-security" discretionary spending for the next three years (FY2011-13) when he unveils his new budget next week. It's a start. A small one, but a start. The president is using his bully pulpit to push for restrained spending. According to numerous leaks, the Obama plan will cap that spending at its current level of $447 billion, saving $15 billion next year and $250 billion over ten years. It's difficult to interpret how meaningful those numbers are until we can actually see the budget. Administration officials simply say that the freeze does not include military, veterans’ affairs, homeland security and some international programs.
There will be lots of arguments that discretionary spending is not the part of the budget that is growing the fastest--that entitlement spending far outpaces the size of the discretionary budget. But as we show in this report, between 1999 and 2008, discretionary spending grew an average of 7.5 percent annually. As the budget process unfolds, there will a huge amount of pressure to simply disregard the president's plan and increase domestic spending. That is why any plan would be much better paired with statutory spending caps, such as what a bipartisan group of senators, led by Sen. Jeff Sessions (R-Ala.) is introducing as part of the debt limit debate and by a promise by the President to veto any spending bill that exceeds his limits. The risk here is that this and other deficit reduction measures will just be used as political talking points but that the President won't push Congress to follow through in a tough election year. Obama and Congress need to put teeth in any deficit reduction plan.
Policymakers will have to adopt much broader plans, savings much more money to bring the debt to a reasonable level. We estimate that working off of a current policy baseline, policy savings of somewhere $4.5 and $5 trillion over the next decade would be needed to bring the debt to a reasonable level. But at least the President is moving in the right direction.
A proposal to form a bipartisan commission to address the nation’s mounting long-term debt just fell short of the 60 votes needed for approval in the Senate. The vote on the Conrad-Gregg amendment to the debt limit increase was 53 in favor to 46 opposed. The vote tally detailing how Senators voted is available here.
Just before the vote, the co-sponsor of the proposal, Senate Budget Committee Chairman Kent Conrad (D-ND), called the vote “A defining moment for this Congress.” President Obama gave his backing to the legislation over the weekend.
A bipartisan group of Senators supported the measure as the best means of confronting the country’s growing fiscal imbalance. CRFB supports a statutory commission.
A group of Senate moderate Democrats led by Sen. Conrad have signaled they will not vote to increase the nation’s debt limit without a fiscal commission. They have been working with the White House on a fall back plan if the legislation failed in which the President would appoint a commission. The moderates are seeking firm assurances that Congress will vote on the recommendations of a presidential commission. Congress would have been required to vote on a fast-track basis on the commission’s proposals under the Conrad-Gregg legislation.
Debate will continue this week and perhaps next week on raising the debt ceiling. The Senate is seeking to raise the limit to nearly $14.3 trillion. See CRFB's recent paper, "Raising the Debt Ceiling."
The federal deficit in FY10 is expected to be $1.35 trillion--a slight drop from the $1.41 trillion in FY09--but still the second largest in our nation's history, CBO says in its "Budget and Economic Outlook: Fiscal Years 2010-2020," released this morning. But CBO warns that if, as expected, Congress enacts legislation that will increase spending or reduce revenue, the deficit in 2020 will remain the large share of GDP that it is now and that debt held by the public would equal close to 100 percent of GDP. The $1.3 trillion deficit represents 9.2 percent of GDP, slightly smaller than the 9.9 percent last year. CBO also forecasts that that next year's deficit could drop to $980 billion, but only if all tax cuts passed during the administration of George W. Bush were allowed to expire--an unlikely scenario. This year's deficit is expected to remain close to last year's because spending on stimulus legislation and income support programs will climb, while assistance to the financial sector will drop. In August, CBO predicted that the FY09 deficit would reach $1.59 trillion and that the deficit in FY10 would be $1.38 trillion.
The large deficits will result in federal debt continuing to climb. At the end of 2009, debt held by the public was $5.8 trillion or 53 percent of GDP. By the end of 2020, that debt is expected to climb to $1.5 trillion, or 67 percent of GDP. As the debt increases and interest rates climb, interest payments on the debt will soar. CBO projects that spending on net interest will more than triple between 2010 and 2020 in nominal terms, going from $207 billion to $723 billion and will more than double as a share of GDP.
And CBO warns that its projections understate likely political scenarios, including extension of the tax cuts, changes to the alternative minimum tax and larger-than-inflation increases in appropriations. For instance, baseline projections show ;revenues rising to 20.2 percent of GDP by 2020, with almost half of that increase attributed to an assumption that tax cuts will be allowed to expire. The Committee for a Responsible Federal Budget will release its analysis of the CBO report later today.
Budgeteers have long argued that baselines matter. You have to know where you are going before you decide where you should be. We use baselines as benchmarks to assess the costs (or savings) of various changes in the law, and we use them to enforce certain budget rules (such as PAYGO) designed to ensure new mandatory spending and tax cuts are fully offset. Usually, though, what the baseline should look like is a budget geek discussion.
“On January 26th the Congressional Budget Office (CBO) will update its “baseline” estimate of federal program costs, including those for student loan programs and Pell grants…The student aid bill, however, hinges on a favorable estimate from CBO. The March 2009 baseline showed some $87 billion in savings would be achieved over 10 years by eliminating FFEL and making all federal student loans through the Direct Loan program -- savings that can be redirected in a budget neutral manner to other education programs, including Pell Grants….The alternative estimate done with CBO’s January baseline will certainly be less favorable to the bill’s supporters and, unfortunately, hand a legitimate argument to the legislation’s opponents. Specifically, the new spending programs will cost more and proposed savings will be less.”
The Senate will vote this week on key fiscal measures as it attempts to increase the nation’s debt ceiling. The debt limit is expected to be reached next month absent action by legislators to increase it.
On Tuesday Senators will vote on an amendment by Senate Budget Committee Chairman Kent Conrad (D-ND) and Ranking Member Judd Gregg (R-NH) to create a Bipartisan Task Force for Responsible Fiscal Action that would offer recommendations to improve the long-term fiscal condition of the country. The panel would be empowered to propose tax increases and cuts in entitlement spending. Its proposals would be subject to an up-or-down vote in Congress after the mid-term elections.
Although the Conrad-Gregg commission plan has bipartisan support, it also faces opposition from special interests on both sides of the political spectrum. Groups like AARP oppose it because they are against reducing Social Security and Medicare benefits while organizations like Americans for Tax Reform fear tax increases.
Underscoring the sway of such interests in Congress, just before the vote on the Conrad-Gregg commission amendment, the Senate will vote on an amendment from Senate Finance Committee Chairman Max Baucus (D-MT) to exempt any changes to Social Security recommended by such a commission from being considered under a fast-track process. And Senate Minority Leader Mitch McConnell (R-KY) is expected to offer an alternative proposal with a commission that only considers spending cuts, not tax increases. The politics surrounding the upcoming fiscal commission vote serves to highlight the need for a special process that confronts the nation’s fiscal challenges.
On Saturday President Obama officially endorsed the Conrad-Gregg proposal. Moderate Democrats in the Senate had been pressuring him to publicly support the idea. The presidential support may not improve prospects for the vote on Tuesday, but may make it easier for the moderate Democrats to support Obama’s preferred approach, a commission created by the White House, if the Conrad-Gregg amendment fails to garner the 60 votes needed for approval.
After Tuesday’s votes, several more amendments await Senate consideration. On Friday Senate Majority Leader Harry Reid (D-NV) offered an amendment to reinstate statutory pay-as-you-go (paygo) rules. Senators Jeff Sessions (R-AL) and Claire McCaskill (D-MO) have an amendment instituting discretionary spending caps and Senator Tom Coburn (R-OK) is sponsoring an amendment rescinding at least $120 billion in federal spending. Last week an amendment from Senator John Thune (R-SD) that would have ended the TARP program and mandated unused TARP funds go towards reducing the debt fell short of the 60 vote threshold, garnering 53 votes.
The debt limit debate has become politically charged as voters signal their frustration with mounting federal budget deficits and national debt. The Democratic leadership in Congress is trying to raise the limit enough to avoid further action until after the midterm elections while Republican leaders would like to force a series of debt limit votes throughout the year and use each vote as an opportunity to paint Democrats as fiscally reckless. The White House would like to point to some concrete steps on the debt ahead of the president’s State of the Union address Wednesday night and the release of its budget proposal on February 1. The Senate will consider raising the limit a record $1.9 trillion to $14.3 trillion.
CRFB supports a budget commission that places all options for stabilizing the debt on the table, as well as paygo rules without exemptions (except for emergency spending) and discretionary spending caps. Now is the time for developing a credible fiscal plan, not for political posturing and finger-pointing.
On Friday evening, the FDIC reported that it has taken over an additional five banks (Columbia River Bank, Evergreen Bank, Charter Bank, Bank of Leeton, Premier American Bank) for a cost to the FDIC of about $530 million. This brings the total number of failed banks since the beggning of 2008 to 175. Total deposits of all failed banks now equal $4.6 billion for 2010 and $375 billion since the beginning of 2008, all at an estimated cost to the FDIC of about $60 billion. Visit Stimulus.org for more details and a full list of FDIC bank closings.
|Total Deposits||Cost to the FDIC|
|Columbia River Bank||$1,000,000,000||$172,500,0000|
|Bank of Leeton||$20,400,000||$8,100,000|
|Premier American Bank||$326,300,000||$85,000,000|
We recently invited folks to take the spending challenge and show how they would close the budget gap without raising taxes (or alternatively, take the tax challenge and show the inverse). Our first contestant suggested cutting bureaucracy -- a good idea but one that doesn't get us too far.
Bob Williams, Rosanne Altshuler, Katie Lim of the Tax Policy Center took this challenge without even knowing it recently, in a paper measuring what we would need to do on personal income tax rates in order to stabilize the debt.
So can we fix our budget problems with income tax increases? The short answer is no.
This is especially true if we only tax the rich. The authors looked at how high the top two rates would need to be to bring the deficit down to 2 or 3 percent of GDP if we kept other rates at their current levels -- as per the pledge that taxes not be raised for those making under $250,000 a year. In that case the top tax rate would need to increase to as high as 90 percent.
Chart Created With Data From The Altshuler, Lim, and Williams, "Desperately Seeking Revenue."
And in reality, such high rates would almost certainly influence behavior and negatively imapct the economy; as a result, they would raise much less revenue than the authors' static analysis reflects.
So what about moving passed the $250,000 tax pledge? Well, if we raised each rate proportionally they would each have to go up by 40 to 50 percent -- so the bottom rate would have to increase from 10% to as much as 15%, and the top rate from 35% to around 50%. And again, these assume no behavior responses.
And still, these taxes only get you to 2019. As the population ages and health care costs grow, the costs of Social Security, Medicare, and Medicaid are expected to rise considerably in the following decades. So tax rates would have to keep rising.
Income tax rates can surely be part of the solution, but they fall short of being able to fix the budget problem on their own. An excelent place to look for new revenue would be the income tax base, which could be broadened by reducing the multitude of tax credits, deductions, exemptions, and exclusions.
Even then, depending on how much policy makers are willing to cut on the spending side, there may very well have to be a new source of revenue: likely contenders are an energy tax, transactions tax, or consumption tax.
If these taxes are considered, one of the most heated debates is likely to be over whether they should be introduced in place of the income tax, on top of it, or some combination. We'll surely write more on this in the future.
|Raise All Ordinary Rates by 1%||$196||$455|
|(Include AMT and Capital Gains Rates)||$267||$626|
|Raise Top 4 Ordinary Rates by 1%||$81||$200|
|Raise Top 3 Ordinary Rates by 1%||$47||$119|
|Raise Top 2 Ordinary Rates by 1%||$39||$99|
|Raise Top Ordinary Rate by 1%||$29||$74|
|Raise Rate by 1% for Income Above $1 million||$17||$45|
Chart Created With Data From The Congressional Budget Office
Here is the statement:
The serious fiscal situation that our country faces reflects not only the severe economic downturn we inherited, but also years of failing to pay for new policies—including a new entitlement program and large tax cuts that most benefited the well-off and well-connected. The result was that the surpluses projected at the beginning of the last administration were transformed into trillions of dollars in deficits that threaten future job creation and economic growth.
These deficits did not happen overnight, and they won’t be solved overnight. We not only need to change how we pay for policies, but we also need to change how Washington works. The only way to solve our long-term fiscal challenge is to solve it together – Democrats and Republicans.
That’s why I strongly support legislation currently under consideration to create a bipartisan, fiscal commission to come up with a set of solutions to tackle our nation’s fiscal challenges – and call on Senators from both parties to vote for the creation of a statutory, bipartisan fiscal commission.
With tough choices made together, a commitment to pay for what we spend, and responsible stewardship of our economy, we will be able to lay the foundation for sustainable job creation and economic growth while restoring fiscal sustainability to our nation.
For the fiscal hawks among us, he warns: "Our economic growth has been based … on borrowing from the future: we have been living beyond our means."
But, he has other worries for the immediate future:
- He’s still more worried about deflation than inflation, given the continuing weakness of the economy.
- He argues that it is very important now for additional stimulus resources to go to state and local governments to help offset state tightening to satisfy their balanced budget requirements. State and local fiscal tightening had made the Great Depression worse, he noted.
- He proposes a Chapter 11 bankruptcy framework for households, particularly since otherwise record high home foreclosures will perpetuate the vicious cycle keeping job creation down.
But much of his talk and his book were/are devoted to fixing the financial sector - provocative and important reading in the wake of this week's Volcker Rule announcement by President Obama. His proposed financial sector fixes seem along the lines of the Volcker Rule proposals.
For us, however, there are important fiscal issues to be raised. Going forward, the taxpayer costs of not getting the fix right for the financial sector could be high. And we've already spent massive amounts of money to stop the economy’s freefall caused by the financial sector crisis. Taxpayer anger has been increasingly visible - and understandable.
But, with all due respect to one of the foremost thinkers of our time, does it make sense to make changes so that the financial sector will consist of, on the one hand, low return, plain vanilla banking, but, on the other hand, high risk, high return, essentially unregulated activity? Didn't the banks get into trouble in the first place because of their desire/need to compete with the high flyers? And, isn’t it significant that the major firms precipitating the collapse (AIG, Lehman Brothers, Bear Sterns) and costing us the most taxpayer dollar (most notably AIG) were not commercial banks and were not within the fold of the formal safety net?
Just think about it a bit more: as the economic situation improves, will you give your money to a taxpayer-insured low yield bank or would you search for a better return - especially if you need additional income?
And aren't we still begging the critical question of how to manage risk at a time of global capital liberalization and technological change (not to mention structural shifts in industry and global markets)? Can we stuff only one hand of the genie back into the bottle? Although done in the name of the taxpayer, won't this ultimately diminish the viability of the financial sector that would be covered by the deposit insurance safety net, and therefore potentially cost the taxpayer in the end - however well intentioned? Why is no one talking about "smart regulation" any more?
For more on the Volcker position, see the report he headed last year from the Group of Thirty ("Financial Reform: A Framework for Financial Stability"); and for more on concerns about this approach, see the most recent piece by Douglas Elliott of Brookings ("More Nuance Needed in Bank Regulations").
Picking a “fiscal goal” would be a great way to get the discussion started about what policies to enact to close the budget gap. It allows policymakers to engage in an apples-to-apples comparison of how best to fix the budget situation.
The Peterson Pew Commission recommends stabilizing the debt at 60% of GDP by 2018. (Though we also say that there is no one single “right” goal but that instead that the important thing is to credibly commit to a fiscal goal that is sufficient to reassure global credit markets.)
At yesterday’s House Budget Committee hearing on Perspectives on Long-Term Deficits, Bob Greenstein worried that the goal was too aggressive and could dissuade politicians from even trying. He instead suggests simply getting to deficits down to 3 percent of GDP.
An hour later, at NASI’s Annual Conference in the DeLong-MacGuineas debate on how to think about the debt, Brad DeLong argued that the goal wasn’t aggressive enough and that we need to go further than stabilizing debt in order to bring it back to much lower levels.
We’d be thrilled for Congress to pick any goal and start improving the fiscal situation, but in terms of specifics, it sounds to us like the Peterson-Pew 60% might be just about right.
Update: The debate between Maya MacGuineas and Brad Delong is about to begin. See the live tweets here: http://twitter.com/BudgetHawks
Maya MacGuineas, President of the Committee for a Responsible Federal Budget, joined three other budget experts testifying today before the House Budget Committee. MacGuineas was discussing the Peterson-Pew Commission's recent report Red Ink Rising. We will post more on that hearing later today.
Also, at 12:30 this afternoon, MacGuineas will participate in a debate sponsored by the National Academy of Social Insurance at the National Press Club. The topic is How Should We Think About the Public Debt? Should be a lively debate with Brad DeLong, an economist at the University of California, Berkeley. Follow our live Tweet of the debate this afternoon.
The nation's soaring federal debt can no longer be ignored and Congress and the president must develop comprehensive plans to avoid a looming fiscal crisis, budget experts, including CRFB President Maya MacGuineas, told the House Budget Committee Thursday. "What was once a long-term fiscal problem has become an immediate one," MacGuineas said during the panel's hearing on long-term deficits. "We no longer have time on our side." And she warned that "the economic risk of doing nothing is tremendous."
MacGuineas and other noted experts outlined fiscal goals and plans they believe would help wrestle the debt and the federal deficit under control. "There is no single right goal, MacGuineas said, in describing the Peterson-Pew Commission on Budget Reform's plan, "Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt." The commission recommended last month that policymakers take immediate action to develop a specific package of ways to stabilize the debt at 60 percent of GDP by 2018. In 2012, policy changes would begin to be phased in. The plan must include triggers and enforcement mechanisms to ensure goals are met, MacGuineas said. In dealing with specific policies, MacGuineas said, "everything has to be on the table."
John Podesta, president and CEO of the Center for American Progress, agreed that a fiscal crisis could be on the horizon and policymakers must take action to return the nation to "fiscal sustainability." He said the Center believes the federal government should return to a balanced budget by 2020 and to ensure that total revenue equals total spending with the exception of debt service payments by 2014. He also agreed that enforcement mechanisms such as PAYGO are needed. Robert Greenstein, executive director of the Center on Budget and Policy Priorities, said Congress and the president should set a goal of bringing the deficit down to 3 percent of GDP. However, he warned that setting goals that are too ambitious would doom any deficit reduction plans. James C. Capretta, a fellow at the Ethics and Public Policy Center, warned that health care bills currently being considered by Congress costs too much. He advised policymakers to abandon the health bill and concentrate on a long-term budget plan.
As the Senate continues its consideration of the debt ceiling today, it will consider at least three important budgetary amendments - a deficit commission supported by Senators Conrad and Gregg, statutory pay-as-you-go rules to be introduced by Senator Reid, and discretionary budget caps supported by Senators Sessions and McCaskill. We've voiced our support for the deficit commission, and comprehensive PAYGO (without exemptions) before; but just as important is the implementation of discretionary spending caps.
Along with PAYGO, these types of caps are a valuable and co-necessary tool to stop the debt situation from getting any worse.
For all our talk about entitlements and mandatory spending, it is important to remember that discretionary spending makes up nearly 40 percent of the budget. And historically -- over the past decade, especially -- this area of the budget has grown tremendously, at a faster pace than entitlement spending, in fact.
If regular (non-war, non-stimulus) discretionary spending were to simply grow with the economy over the next decade (a slower pace than its historical average, by the way), we calculate it would cost an extra $1.7 trillion plus interest, relative to the CBO baseline. As we wrote recently in a paper on discretionary spending:
"Over the past decade, discretionary spending has grown faster than mandatory. Between 1999 and 2008, mandatory spending grew by an annual average of 6.4 percent, from about $900 billion to almost $1.6 trillion. Discretionary spending grew annually, on average, by 7.5 percent – from less than $570 billion to over $1.1 trillion... Although the CBO baseline makes it appear as if discretionary spending will grow only modestly, more realistic assumptions tell a different story"
"Just holding discretionary spending growth to inflation – with strong enforceable spending caps – would be a positive step. In the 1990s, it was these types of caps, along with pay-as-you-go rules, strong economic growth, slower-than-usual health care cost growth, and a commitment to deficit reduction that led to budget surpluses."
That is why the amendment proposed by Senator Sessions and Senator McCaskill is so important.
Generally speaking, they would cap defense and non-defense discretionary spending at the levels in the President's Budget for the next five years. There would be some exceptions for war spending, program integrity adjustments (spending designed to save money by cutting waste, fraud, and abuse), and emergency spending, but the caps would be relatively rigid. Absent a new law, waiving the caps would require a two thirds majority.
These caps, of course, will not be nearly enough to stabilize our debt. We need to reform Social Security, Medicare, Medicaid, and the tax code (all things which we hope the commission will consider). But discretionary spending caps -- especially if accompanied by statutory PAYGO -- can slow the bleeding. And they would signal, for the first time in a long time, that the United States is committed to getting its fiscal house in order.
Senior congressional Democrats late Tuesday met with the White House to attempt to hammer out a deal that would create a fiscal commission and a strong statutory PAYGO plan.
The commission would be a key part of the FY 2011 budget and the PAYGO plan appears to be stronger than that passed by the House. The meeting Tuesday included VP Joe Biden, OMB Director Peter Orszag, Speaker Nancy Pelosi, House Majority Leader Steny Hoyer, House Budget Committee Chairman John Spratt, Senate Majority Leader Harry Reid, and Senate Budget Committee Chairman Kent Conrad.
The fiscal commission is likely going to be a central part of the Administration's FY 2011 budget. The agreement -- which is tentative until Pelosi and Conrad approve it -- calls for President Obama to create a fiscal commission via executive order. It would serve as a replacement for the Conrad-Gregg commission, which which now appears to lack the votes to pass. But Conrad and others worry that a commission created by executive order would lack the authority to force action by Congress, although the White House is insisting that an Obama commission would have teeth. Only a commission created by statute would have the power to force Congress to act on the proposed recommendations.
Conrad and Senator Judd Gregg are still likely to offer their proposal for a Congressionally-created fiscal commission as an amendment to debt ceiling legislation. Senator Gregg, in response to the idea of a presidentially-appointed commission, called it "a fraud," and questioned whether it would lead to any real action.
This 18-member commission would be charged with putting together a package of fiscal reform proposals by the end of 2010.The goal would be to find a way to bring this year's projected deficit, around 10% of GDP, down to 3% of GDP by 2015. The commission would have the authority to propose changes in the tax code, as well as changes to federal entitlement programs such as Medicare, Medicaid and Social Security. Twelve members would be appointed by Congressional leaders (six from each party), and six from the Administration, with no more than four from the Administration allowed to be Democrats. On his blog, Keith Hennessey has a good post comparing a possible Administration's commission with a Conrad-Gregg commission.
CRFB continues to support the Conrad-Gregg commission as we stated in this December press release, even as other groups, such as the AARP, have voiced concerns against it. If an executive commission is chosen over the Conrad-Gregg commission, we are hopeful that it could work to come up with strong recommendations to improve the long-term fiscal balance. We recognize that any successful commission must have both executive and congressional support, as well as a realistic way to keep Congress from being able to simply ignore any proposed recommendations.
AIn addition to the commission, the deal also calls for the Senate to pass a PAYGO bill similar to one passed in the House last July, except in one area - the new bill would scale back the exemptions.
CRFB appreciates the acknowledgement by the Administration and Democratic leaders that high projected deficits for years to come are an economic threat to the country that needs to be dealt with. As the President prepares for his State of the Union address next week and the release of the budget in early February, it is essential that deficit reduction is a priority. CRFB would urge the administration and Congress to hammer out a deal creating PAYGO rules without exemptions (except emergency spending), as well as a strong commission with the power to make recommended changes to the tax code and entitlement programs that Congress will actually adopt.
This agreement between the Administration and congressional leaders paves the way for Congress to work on increasing the debt ceiling, which they will be discussing today. The Senate began debate yesterday and will continue with discussion this morning.
Roll out the red carpet and velvet rope, CRFB’s new list of prominent economists, organizations, and opinion leaders that have joined us in suggesting we create a viable fiscal plan now to be implemented as the economy recovers is quickly becoming the hot club to be seen in.
Soon after we unveiled the “Announcement Effect Club” last week, Donald Marron applied for membership, offering this post from October as his creds. He cites the example of Sweden in recovering from fiscal crisis and identifies one of the key lessons of that experience is to “[s]et clear, easily communicated budget goals (e.g., specific deficit targets that get the government debt under control).” He goes on to say that “clear, credible commitments will be rewarded by world capital markets through lower interest rates, which can help offset some of the contractionary effects of tightening the budget.” We are happy to welcome him into the club and apologize for not including him in the original list.
Len Burman of Syracuse University has also earned admission to the club, along with his co-authors, Jeffrey Rohaly, Joseph Rosenberg, and Katherine Lim of a recent paper presented at a conference last week on the looming fiscal crisis. In a footnote they contend, “if corrective policies were adopted early enough that either the size of outstanding debt was “modest” or most of the adjustment could take the form of credible commitments to reduce future government deficits, the macroeconomic effects could be manageable.”
Underscoring the international flavor of this group, Nick Clegg, leader of Liberal Democrats in the UK, joined the group with a Financial Times piece describing the need for his country to set forth a credible fiscal plan in order to reassure jittery markets. He writes,
“The consequences of failure to bring the deficit under control could be very damaging for Britain… Significant cuts are necessary. But the hawks must accept that cuts should come only once tests confirm the resilience of the recovery: jobs, growth, credit availability, international conditions and the cost of government borrowing. The timing of fiscal contraction should be governed by economics, not political dogma… To maintain confidence, it is vital that steps are taken now, before the election, to demonstrate clear commitment.”
Who will be next to join this trendy club? View the complete list here.
Yesterday, we challenged those of you opposed to tax hikes to take the spending challenge, and show us how the debt can be stabilized with spending cuts alone.
Soon after, our first contestant stepped up. This commentor suggested that cutting government bureaucracy was the answer:
[The] US should cut 10-15% of all the bureaucracies in its government. Those genius bureaucrats should have no problem finding a job in the private sector. With similar personal income tax Canada provides health care to all the people and US provides benefits to a monstrous bureaucracy called HHS.
So how do the numbers add up?
Of course, it depends on how you define bureaucracy -- but lets take a broad approach and assume we are talking about all government employees. According to an OMB estimate, the government spent around $420 billion on wages and benefits in 2009. That includes not only agency employees, but also military personnel, postal workers, and those employed by the judicial branch (judges, clerks, etc).
Cutting 15% of that would save just over $60 billion - or 0.4% of GDP. Assume we laid off (or allowed to retire, without replacing) 15 percent of workers effective in 2011 (and took away their benefits); and assume the savings grew with the economy, accruing interest along the way.
In that scenario, the deficit in 2018 would be 6.2 percent of GDP instead of 6.8 percent of GDP. And debt held by the public would be 82 percent of GDP instead of 85 percent (remember that our target is 60 percent).
It's a start, but it still leaves a tremendous amount of that hole to be filled in. So now what?
(We welcome more contestants and more recommendations).
Even though they're sending a self-proclaimed deficit hawk to the Senate, Massachusetts voters don't see the budget as a major problem, if two recent public opinion polls are to be believed. Republican Sen.-elect Scott Brown railed against government spending in his campaign. But it appears that his upset win can be attributed to voter unrest on other issues , such as health reform rather than government spending.
Only 9 percent of the 554 likely voters surveyed by the University of New Hampshire Survey Center between Jan. 2 and Jan 6 identified taxes and the budget as the most important issue or problem facing the state's new senator. Health care, jobs and the economy and "other" finished ahead of taxes and the budget. And ironically, more of those polled said they would trust Democratic candidate Martha Coakley to handle spending issues than the budget hawk Brown. Coakley beat Brown 42 percent to 37 percent when voters were questioned who they would trust the most to handle their checkbooks.
Another poll also showed the budget wasn't on voters' minds. Only 3 percent of the 500 likely voters polled by Suffolk University on Jan. 11-13 identified the budget and spending as the most important job facing the state's next senator. They rated health care and overall economic issues as the top problems. But voters also may be unsure of the impact of government spending. A poll of 1,000 likely voters by Rasmussen Reports on Jan. 11 found that 54 percent of the likely voters believed that increased government spending hurt or had no impact on the economy, while 38 percent said it helped.
The Independent Payment Advisory Board (AKA the Medicare Commission) is one of the most important pieces of healthcare reform. This commission should not only remain in the bill, but should be given as broad a mandate a possible.
Under the Senate version of the bill, the commission would be required to make recommendations to reduce Medicare spending, which would be automatically enacted if not modified by Congress, whenever it grew by more than 1 percent beyond GDP after 2019 (a more complicated measure would be used from 2015 through 2019).
The bill would require the commission to recommend a certain amount of savings each year, but limit its preview primarily to reducing provider payment rates and private insurer subsidies from the Medicare system. The commission could also make recommendations for reforming the private health care system - but these would be completely advisory in a nature.
To really make a difference, though, we recommend a broader mandate. The commission should be able to reform Medicare benefits and contribution levels, where it makes sense, and also make changes to Medicaid, SCHIP, the exchanges being created in the bill, and even the excise tax on high costs plans.
Focusing on Medicare provider payment rates, alone, may prove politically and economically unsustainable. Medicare payment rates cannot grow significantly slower than private insurance rates forever without causing providers to begin dropping Medicare payments altogether. If this occurred, policymakers might begin overruling the commission's recommendations just as they have with scheduled cuts in Medicare physician payments. By sharing the pain more broadly, though, cuts will be much easier to maintain.
Moreover, a broader mandate maximizes the chance of being able to control health care costs. There is no question that provider payment schemes in Medicare can help lead the way to system-wide reform. But expanding these schemes to other federally-run or federally-subsidized insurance programs would increase the chance for success. And other types of changes such as increased patient cost-sharing and a smarter health insurance excise tax can also help to push down prices.
The bottom line is, if reform passes this time, it might be a while before we have another chance. Yet the measures in this legislation, alone, are unlikely to control costs to the extent we need them to. Empowering a Medicare health care commission to make these changes for us - especially as we better learn what works and what doesn't - may be the best hope for bringing public and private health care cost growth under control. And if we don't do that, we have little hope of avoiding the coming debt crisis.