The Bottom Line
Today, the House passed HR 5297, the small business bill that had been stalled in Congress for weeks. It is expected that President Obama will sign it into law right away. Meant to provide capital for banks to loan to small businesses, the bill will establish a $30 billion lending fund that will buy equity in community banks and have them pay varying dividends based on how much they increase lending (CBO actually expects this provision to raise $1 billion over ten years). Also, the bill will increase the allowable size of Small Business Administration loans from $2 million to $5 million, fund a State Small Business Credit Initiative, and allow the exclusion of 100 percent of the sale of small business stock from capital gains taxation.
The bill is ostensibly deficit-neutral, with the costs coming upfront, as you'd expect from a stimulus bill. CBO’s most recent cost scoring of the bill, which came a month and a half ago, indicates that the bill will increase deficits in 2011 by about $85 billion. After that, the bill will reduce the deficit in each year, eventually making it deficit-neutral--in fact reducing the deficit by $500 million--by the end of the ten-year outlook.
The bill is paid for with a few tax measures. They include greater reporting requirements (i.e. reducing the tax gap), and a tightening of the cellulosic biofuels credit.
The "paid for" is just on paper though. Since the House simply passed the Senate's version of the measure, it also passed the timing gimmick included in the Senate bill: allowing for more rollovers into Roth IRAs. Since the rollovers are taxable, they would raise revenue over the ten-year outlook. But since withdrawals from Roth IRAs are tax-free and withdrawals from traditional IRAs are not, it would decrease revenues in the future. It's unclear how much this specific provision would cost in the long-run, but it would surely be a net decreaser of revenue. Also, if this provision were excluded from the ten-year cost estimate, the measure would not be deficit-neutral.
We would have preferred the bill to be passed gimmick-free, as the House's original bill was. This is the type of shortsightedness that has plagued fiscal policy for far too long.
The September growth play picked up speed at the end of the week, as markets liked stronger than expected US business investment data from August (taking out the volatile transportation sector, durable goods orders were solid, suggesting a good third quarter) and news coming out of Germany (growth appears to have kept up, based on a reliable business sentiment indicator).
But, going forward, things are in fact complicated. Uncertainty and concern over the outlook for the U.S. economy persists, although fears of crisis have subsided for the time being. With weaker economic news earlier in the week and the Fed taking a large step in the easing direction based on worries about weak growth and below target inflation, demand for Treasuries picked up earlier in the week and the yield on the benchmark 10-year declined. With today’s good economic news, the 10-year bond reversed course a little and traders went to equity markets here and in Europe. Demand for gold – considered a safe haven investment by some – remains buoyant. Many cross-currents are also shaping the European outlook. Currency movements are also being driven by policy steps involving the Bank of Japan (which had intervened to dampen the yen’s rise) and the US and China (Congress is expected to raise its currency manipulation concerns next week, in some form).
For the economy in the 4th quarter and early next year, uncertainty over tax policy is becoming a problem. Households and businesses, trying to plan, do not know whether what their tax bill will be, starting January 1st. This uncertainty appears to be starting to dampen economic activity now. With the recovery struggling, the last thing we need is avoidable policy uncertainty.
It's that time of year again, when people start asking whether Social Security recipients will receive a Cost of Living Adjustment (COLA). And it appears that the answer is, once again, "no." As Donald Marron said on his blog recently:
It looks like 2011 will be another year without a cost-of-living adjustment (COLA) for Social Security recipients. Why? Because consumer prices haven’t yet returned to the peak they reached in the third quarter of 2008, when the 2009 COLA was set.
Provided there is no major increase in the CPI-W in September, Marron is absolutely right. One reason why prices haven't rebounded to their 2008 level is that the 2008 level itself was so high. COLAs are measured by their third-quarter-to-third quarter increase, and, as you might remember, the third quarter in 2008 was when oil prices hit $150 per barrel and gas prices were north of $4 per gallon. The result of this timing was a CPI level that was unusually high, leading to a large 5.8 percent cost-of-living increase for 2009. Prices, especially oil prices, dropped precipitously after the summer of 2008 and they haven't increased to that level since.
Social Security recipients are in better shape now than they could have been. As Marron says, if Social Security benefits simply followed the CPI-W (going up and down in line with overall prices in the economy), they would actually be below 2009 benefit levels right now. But since benefits never are cut, they have stayed flat, meaning that real benefits have actually increased. Normally, COLAs keep real benefits flat. Ironically, deflation leads to a better outcome for seniors' COLAs than inflation does.
The chart below shows how a hypothetical $1,000 benefit in 2005 would increase or decrease based on different COLA rules: the current one that has a zero bound and an alternative one that allows for negative COLAs.
When the no-COLA announcement was made in October 2009 for benefits in 2010, there were many calls for an ad-hoc COLA or a one-time payment to seniors, as the Obama Administration advocated. Luckily, advocates were rebuffed (well, not really--see below). This year seems to be no different; in fact, Rep. Earl Pomeroy (D-ND) beat everyone to the punch by introducing a bill in July that would make a $250 one-time payment in the event of a no-COLA year. In the words of Charles Barkley, "that's a terrible idea."
(It seems that lawmakers were actually able to sneak-in a one-time payment to seniors this year--just under a different guise. Under the health care reform act, Medicare Part D beneficiaries will be receiving a $250 check to help them deal with the "donut hole", or the coverage gap between a beneficiary's maximum deductible under their drug plan and the threshold where catastrophic coverage would kick in. Measures in the health care reform package will gradually close this coverage gap, but to "hold beneficiaries over", the federal government will be sending them $250. "Coincidentally", the Medicare Part D and Social Security cover nearly all of the same people . Even under the guise of health reform, lawmakers just couldn't resist the urge to pander to seniors.)
Politico mentioned the possibility in passing the other day that some lawmakers may support using the credit on the PAYGO scorecard to pay for any sort of COLA measure, though nothing specific has been brought up yet. The $43 billion in "credits" on the PAYGO scorecard are the savings that have been accumulated by bills passed this year; most of the savings come from health care reform. Under the PAYGO law, Congress would technically be able to pass a bill such as the one-time payments using these savings as offsets. (Note that Congress could instead decide to use the PAYGO credit to pay for extending tax cuts for upper-income earners.) Again, these are all terrible ideas that would reflect poor policymaking and poor fiscal decision making.
But some of these ideas are even worse than others:
- The worst outcome would be an ad-hoc COLA, since such an action would institute a permanent change in the Social Security system by making benefits higher (indefinitely) than they would have been.
- Also very bad would be a one-time payment to seniors that was designated as "emergency spending"--thus waiving the requirement that it be paid for. This would at least be only tempory, but it would add to the debt and set a bad precedent.
- Nearly as bad would be a one-time payment that used credits on the PAYGO scorecard -- that would at least eliminate the ability of lawmakers to use those hard-earned credits for something else.
- Though a one-time payment to beneficiaries that was fully offset would do the least fiscal damange, it is poor policy nonetheless. Such a payment is unjustified given that real benefits will aleady be higher than in 2009. And it will take away a policy change which could have been potentially used for deficit reduction.
Getting the message? Any way you frame it, it's just a bad idea. If prices do not drastically increase this month, any type of COLA or one-time payment to seniors in 2011 would be plain old political pandering.
Many of the credits on the PAYGO scorecard (in fact, over $44 billion) were put there by health reform's savings from Medicare Advantage and cuts to Medicare providers over the coming decade. (Note: these numbers should not be confused with the $143 billion in deficit reduction over ten years.) Those deficit savings were hard-earned, and the public was promised that health reform would reduce the deficit. Policymakers must not use those credits to pay for other initiatives.
Not making the deficit any worse is the first step--but we need to start lowering them. Lawmakers must resist the temptation to enact an ad-hoc COLA.
Today the Republican caucus of the House of Representatives released an agenda-setting document as a part of its strategy to take control of the House in November. The “Pledge to America” covers five broad topics: jobs and the economy; reducing federal spending and the size of government; repealing and replacing the health care reform law; congressional reform; and homeland and national security.
The prominence of fiscal policy in the document is a testament to how potent the issue of rising deficits and debt has become to voters. Pledges pertaining to fiscal matters are:
• Renew all the tax cuts that expire at the end of the year
• Allow small business owners to deduct 20 percent of their business income from taxes
• Require a vote in Congress of any new federal regulation that is determined to have an annual economic cost of $100 million or more
• Repeal the 1099 requirement in the health care reform law
• Cancel unused stimulus funds
• Reduce federal spending to “pre-stimulus, pre-bailout levels”
• Institute discretionary spending caps
• Reduce Congress’ budget
• Vote weekly on spending cuts
• Allow any legislator to offer amendments to cut spending in appropriations bills
• Cancel TARP
• Reform Fannie Mae and Freddie Mac
• Impose a net hiring freeze on non-security federal employees
• Adopt “sunset” provisions for federal programs
• Reform entitlements
• Repeal the health care reform law
• Enact medical liability reform
While there are not enough numbers to determine the overall fiscal effect, we are betting that on net, this would be a move in the wrong direction. Still, there are plenty of good ideas here that should be part of the discussion.
The document correctly points out that “[t]he lack of a credible plan to pay this debt back causes anxiety among consumers and uncertainty for investors and employers.” While there are several ideas in the document that should be pursued, it falls short of being the detailed, credible fiscal plan that the country needs to reduce the mounting debt. Although there is an unambiguous focus on cutting federal spending and a vague aim to “put government on a path to a balanced budget and pay down the debt,” no clear benchmarks are enunciated that will help chart a sustainable fiscal course.
In the pledge Republicans promise a national dialogue that will be vital to closing the fiscal gap.
We will have a responsible, fact-based conversation with the American people about the scale of the fiscal challenges we face, and the urgent action that is required to deal with them. We will curb Washington’s spending habits and promote job creation, bring down the deficit, and build long-term fiscal stability.
Not surprisingly, the pledge focuses on spending cuts. Ok, but those who support ideas like extending the 2001/2003 tax cuts and the small business income deduction proposed in the pledge will have to articulate how they will pay for them and how they fit within the fiscal targets that must be established to reduce the debt. Spending cuts to close the budget gap and more spending cuts to offset the cost of tax cuts is an awful lot of spending cuts – and though the policies laid out here are pretty vague, we are betting they don’t make it.
The call for discretionary spending caps is critical, and one that CRFB has repeatedly advocated [see here, here and here]. While the document notes that spending caps helped bring about budget surpluses in the 1990s, it fails to mention that those caps were coupled with strong “pay as you go” requirements. As we have noted previously, spending caps are most effective when paired with genuine PAYGO rules (not the current PAYGO law that contains massive exceptions).
The pledge also promises that:
Instead of pushing off our long-term fiscal challenges, we will reform the budget process to ensure that Congress begins making the decisions that are necessary to protect our entitlement programs for today’s seniors and future generations.
Budget process reform will indeed be essential to overcoming the long-term fiscal challenges. And entitlement reforms will definitely have to be a very large part of the equation. However, entitlement reform will require a lot more than reforms to the budget process (we say as a group running a commission on reforming the process). The pledge’s largest shortcoming is the massive punt on how to reform entitlements. In fact the 45 page document only mentions the word “entitlement” twice.
Additionally, there is much more to reforming the budget process than simply entitlements. Comprehensive reform of the budget process is required that will establish and enforce fiscal targets consistent with national priorities and make the process more efficient, transparent and accountable. The Peterson-Pew Commission on Budget Reform will issue a report next month that lays out a blueprint for improving the budget process.
The document does not mention tax expenditures, even though House Republican Leader John Boehner (R-OH) hinted recently that these tax breaks that often benefit relatively few taxpayers and are rarely reviewed should be addressed. Reforming tax expenditures could offer an opportunity for bipartisan cooperation.
The pledge is also silent on fundamental reform of the tax code. This is a vital issue that must be addressed. The complex and archaic tax system must be vastly improved to make it simpler while also broadening the tax base. Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) have proposed a thoughtful reform plan that can help inform and move this debate.
It is time to get very specific about how we will address the growing fiscal gap. We need to develop a credible fiscal plan now with annual targets and triggers to meet those goals that can be implemented as the economy recovers. We need detailed policy proposals now and CRFB is committed to creating an environment conducive to advancing and discussing specific ideas. Senators Wyden and Gregg, and Representatives Paul Ryan (R-WI) and James Himes (D-CT) will participate in a September 30 “Getting Specific: How to Fix the Budget” policy forum sponsored by CRFB. CRFB will also kick-off a “Lets Get Specific” series of papers.
Ok, so it’s a political document. No surprise there. And we suppose we will have to wait until after the election for a real, specific, discussion of what to do to improve the debt situation.
Until then, you can work on coming up with your own plan – or pledge – using CRFB’s Stabilize the Debt online budget simulator.
The Center for American Progress released a paper yesterday titled "A Thousand Cuts." The paper aims to show how deep policymakers would have to cut spending to reduce the deficit to primary balance in 2015--the equivalent of finding about $255 billion in savings in the year 2015.
As we said yesterday, the paper presents five budget scenarios for achieving primary balance: 33 percent spending cuts, 50 percent spending cuts, 67 percent spending cuts, 100 percent spending cuts (without tax expenditures), and 100 percent spending cuts (with tax expenditures). The spending reductions are specified while the gap is filled in with unspecified revenue increase.
The following summary table shows the amount (in billions) that their specific proposals would cut in 2015 alone.
100% (without Tax Expenditures)
Scenario 1 focuses on tax expenditure reduction and defense cuts. It saves $10 billion by eliminating the deduction for business meals and entertainment, $12 billion in troop reduction in Europe and Asia and $25 billion in defense overhead that would otherwise be used to offset additional spending. Scenario 2, closing 50 percent of the gap through spending reductions would build on that by including a $6 billion cut in military compensation and a full ($13 billion) repeal of the exception from passive loss rules for $25,000 of rental loss. The 3rd also includes $9 billion more in cuts from the exclusion of interest on private purpose bonds and $7 billion in additional Federal Highway Administration cuts, and layers on new cuts in non-defense discretionary, including reductions in environmental and conservation related programs.
The 4th scenario has large cuts for many spending areas such as a 75 percent cut in agricultural subsidies and $12 billion from Social Security (by indexing COLA to an improved measure of inflation). There are cuts to 15 different tax expenditures, $96 billion in defense cuts and a full 2.5 percent decrease in non-defense discretionary spending. Of note, however, is the lack of Medicare and Medicaid reductions which CAP states is due to the cuts already in place in the recent health care reform act.
The last scenario drops the $53 billion in savings from tax expenditures. This scenario eliminates the Build America Bonds program ($12 billion) and state grants for rehabilitation services and disability research ($3 billion), reduces defense spending by an additional $14 billion, $2 billion from housing assistance, $600 million from children and families service, completely eliminates the Universal Service Fund ($5 billion more), $13 billion more from the Federal Highway Administration and another $1 billion from the Federal Aviation Administration.
Keep in mind that in the first three scenarios, the goal is not reached through spending cuts alone. Thus, in order to fully reach the overall budget goal under these scenarios, revenues would have to be increased by about $170 billion in the first scenario, $127 billion in the second, and $85 in the third. Moreover, since this is done from the President's budget, this assumes that the 2001/2003 tax cuts for upper-income earners would expire, meaning that the additional needed revenue would have to come from another source. One must also recognize that these revenue numbers and the spending cuts examined by CAP are only for 2015, meaning additional cuts/revenue enhancers would be needed for each additional year.
Lastly, the fifth scenario is indicative of what many policymakers say when they want to reduce the deficit, but not touch revenue.
Regarding the magnitude of the spending cuts in the 3rd, 4th, and 5th scenarios, John Podesta, founder of CAP, stated that:
"We believe that cuts this severe would eviscerate the foundation for future growth and do lasting harm on the health of the American middle class."
We also believe that a more balanced approach--one that includes both spending reductions and revenue increases--represents the most viable solution to controlling our rising debt.
This is an incredibly useful exercise and we applaud CAP for putting forth such a detailed analysis of different approaches to cutting spending. Click here to try to cut the debt yourself.
The remarkable level of austerity proposed in Britain’s new emergency budget made news around the world (see our earlier blog for details) as, in the wake of the Grecian debt crisis, the British coalition government declared deficit reduction their number one priority. If enacted, the emergency budget would reduce the nation’s budget deficit from 11 percent of GDP last fiscal year to 1.1 percent by 2015—a very dramatic reduction.
What would it look like if the U.S. adopted a similar budget policy in the coming years? In a recent paper, taxanalysts showed that over 10 years, the UK budget austerity package would translate to a $10.4 trillion U.S. deficit reduction package, with just over $2.5 trillion of that coming from tax increases and almost $8 trillion in non-health spending. Such a package would bring the U.S. debt-to-GDP ratio down to roughly 45 percent by 2020 (using CRFB's Realistic Baseline), which is only slightly above historical averages.
While the Administration is aiming to reduce the deficit by 2015 in a manner that would stabilize the debt-to-GDP ratio, Britain’s austerity budget would have their debt-to-GDP ratio steadily declining by that year. (Note: The Peterson-Pew Commission has called for stabilizing the debt-to-GDP ratio at 60 percent by 2018, and to decline thereafter.) Major spending cuts would include adjustments to the indexing of government payments for inflation and the freezing of all government salaries.
Considering that we are currently debating the extension of the Bush tax cuts—which would cost about $3.3 trillion under the President's proposal and about $4 trillion if all the tax cuts are extended (see our blog from Monday for more discussion)—it is clear that a package like Britain’s is about 10 steps ahead of the discussion here in the U.S. (and it’s highly controversial there as well). However, the time has come for us to enact our own fiscal plan that will slowly phase in changes as the economy recovers. Such a plan could actually strengthen the recovery now while eliminating the threat of a fiscal crisis down the road.
Today, the Fed widened the door further toward easing monetary policy (presumably in the form of additional quantitative easing). The Fed's shift rests on a weaker outlook for growth (investment appears to have started to slow again, too), limited prospects for a pick-up in employment, combined with inflationary pressures below its target. It does not however make it at all clear what would prompt it to "take the plunge" and actively ease. The key passage in today's Federal Open Market Committee (FOMC) statement is as follows: "The Committee ... is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." The lone dissenter continued to be Kansas City Fed President Thomas M. Hoenig, who did not support additional easing because he judges that the economy is recovering at a moderate pace anyway.
Attemping to show how deep policymakers would have to cut spending to reduce the deficit to primary balance in 2015, the Center for American Progress today released a paper titled “A Thousand Cuts”.
The paper begins by looking at the projected 2015 deficit in the President's FY 2011 Budget, and then presents five different budget scenarios looking at how a set proportion of spending cuts could be used to reduce the deficit to primary balance in 2015 (a balanced budget except for interest payments). The five scenarios offer an illustrative picture for the types of spending changes that would be necessary to meet this goal. The Center did not include large revenue increases in its research in an effort to show the huge impact of using only spending cuts to reach balance.
Stay tuned, as we will have more analysis of these five scenarios shortly.
Can Budget Offices Help Us Address Demographic Pressures?
As pressures mount on the nation's long-term budget, the Congressional Budget Office now views the aging of the population as the main stressor and health care costs as a close second. Yet, CBO and the Office of Management and Budget (OMB) have traditionally offered only limited analysis and estimates on addressing these demographic concerns, often leaving them to the Social Security Administration, which focuses only on the Social Security piece of the budget puzzle.
Accordingly, when groups like the president's budget commission meet, they get too few options on how government might adjust to the two distinct forces mistakenly put under a single "aging" banner: (1) longer lives and (2) fewer children (new workers) than previous generations. For better and often worse, reform groups frequently stack up reforms by their budget impact. But where there's no estimate, there's no political traction and, alas, no action.
If we want real budget reform, we need to get over this hurdle.
To start, we have to understand what puts it there in the first place. Put simply, we may soon see a fairly dramatic drop in the proportion of workers in the population and the taxes they pay, along with a commensurate increase in the number of people who depend on government for support. As baby boomers retire, this triple whammy on output, revenues, and spending intensifies.
The hit on government is most often discussed as a Social Security problem. That's misleading. The real, far bigger problem is fewer people producing less output and generating far less income for themselves. In turn, these individuals start saving less, spending down their savings sooner. When it comes to government, they start paying less income tax and start relying more on programs like Supplemental Security Income (SSI) and Medicaid—close to half of the latter's budget pays for long-term care. All these repercussions are in addition to any effect on Social Security taxes and benefits.
If policymakers could relieve some of this demographic pressure—particularly by avoiding some of the projected drop in employment rates among those in late middle age and older—then revenues rise without tax rate hikes, and those higher revenues support additional benefits at any tax rate. Such a win/win scenario should be easy for both Republicans and Democrats to embrace.
So what's stopping them? For one, the ingrained habit of raising this issue strictly as a Social Security problem even though the Social Security Trust Fund balance doesn't tell the whole story.
But there's another, more complicated reason. Budget offices seldom project changes in national output and income from reforms. Politicians assert that their every proposal promotes growth by helping people, improving incentives, or reducing deficits. As Congress drafts and redrafts bills, estimators don't have the ability—or the time—to rank every proposal by its impact on growth. Also, evaluating all legislation affecting the budget by very uncertain impacts on national income gives estimators too much power over issues that require a broader legislative debate.
In practice, there are exceptions. The Social Security actuaries do project some changes in long-term behavior when it affects Social Security. And unified budget projections (as opposed to cost projections of congressional bills) do incorporate some estimate of where the economy is headed.
Still, more generally, the budget impacts of a populace that works more and longer aren't going to emerge from traditional budget and Social Security analyses. A recent CBO report on Social Security reform options that affect Trust Fund balances, for instance, didn't touch on proposals to bump up the early retirement age or to backload benefits more to older ages. These proposals trade off fewer benefits in early retirement for more benefits in later retirement, but they generally don't help the Social Security Trust Fund balances unless they increase work effort. Thus, once CBO excluded estimating behavioral shifts, as well as impacts on income tax revenues, it effectively excluded the proposals from the report. Such proposals, by the way, have another non-Trust Fund objective: improving protections for the frail by reorienting payments to when people are truly old.
As another example, a few years ago the CBO staff wisely decided to check out statements that budget problems were driven almost solely by health care cost growth. But even when the analysts provided credible measures of the relative budgetary effects of health cost growth, demographic shifts, and their interaction, they didn't venture to estimate the impact on general revenues of any projected drop in share of the population employed.
Of course, estimating these impacts is no piece of cake. Budget offices lean toward conservative estimation on grounds that large behavioral shifts, however frequent or powerful, are hard to predict. That's one reason budget offices have underestimated the cost of, say, Medicare as implemented or guarantees for Fannie Mae and Freddie Mac. But budget analysts often underestimate upside potentials of legislative actions as well.
My work with Brendan Cushing-Daniels, for instance, suggests that the signal government sets by fixing Social Security retirement ages significantly affects the decision of when to retire—independently of whether there are any real economic gains from retiring at those ages or later (see http://www.urban.org/publications/412201.html). But think about trying to estimate the ultimate effect of changing those signals amid demographic shifts unlike any the developed world has ever seen. (I'm emboldened a bit here because one of my past predictions is proving correct: Social Security underestimated the work efforts of older workers once earlier retirement was not so easily supported by baby boomers and women entering the workforce in droves.)
Since budgeteers have to live with some uncertainty, one key to successful reform is not to depend so much on estimates being right, but to set in place triggers that keep a system in balance as behavioral patterns shift. If reform increases work, for instance, then fewer other benefit cuts or tax increases would go into effect.
Such reform options won't even be considered as long as the budget offices can't improve ways to analyze and estimate proposals addressing these demographic shifts. But with looming deficits threatening to hamstring growth, opportunity, and the safety net itself, there's no longer much time to wait.
Gene Steuerle is a member of the board of directors of the Committee for a Responsible Federal Budget. He also is a senior fellow at The Urban Institute, co-director of the Urban- Brookings Tax Policy Center, and a columnist for Tax Notes Magazine.
"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.
Note: This article was originally published as a Government We Deserve column at the Urban Institute.
With Congress back in session, the mid-term election right around the corner, and a looming expiration, the debate of the 2001-2003 tax cuts is getting hotter and hotter. Up until now, the debate over the tax cuts, which are set to expire at the end of the year, has mainly centered on whether or not to extend all of them or let them expire for the highest income earners. We believe that this type of debate is missing a key component: each plan’s specific and relative deficit impact.
Some observers have decried the costs of extending the tax cuts for all earners based on the additional $700 billion in costs. Such a relative deficit view ignores the immense costs of extending the tax cuts for middle- and lower-income earners. Let’s take a deeper look at their specific and relative costs.
As can be seen by the graph below, each of the two tax cut extensions have vastly higher 10-year deficit impact than the other selected spending options enacted since the recession began. Extending all of the tax cuts will have a 10-year impact of nearly $4 trillion (when combined with annual AMT “patches”). The still incredibly expensive--yet less expensive-- partial extension would still cost over $3 trillion. In comparison, the 2008 stimulus will have a more "modest" cost of $114 billion. Even more enlightening is the fact that the partial extension is over 4 times more than the 2009 Stimulus (ARRA is now projected to cost $814 billion over 10-years) and about 50 times larger than TARP ($66 billion 10-year cost). A full extension is nearly 5 times larger than the costs of ARRA and nearly 60 times larger than TARP.
Note: All Others include FDIC Bank Takeovers, Housing, Unemployment, Pension and other Relief, Extended Provisions from ARRA and New Stimulus, and Credit Union Rescues--taken from Stimulus.org.
You could also compare the cost of the tax cuts with other baseline projections of government spending. The graph below compares these plans to Social Security, Medicare, Medicaid, the defense discretionary budget, and the non-defense discretionary budget. This spending is, for the most part, more expensive than these tax cuts--except for Medicaid, which is roughly the same cost as the full extension--but it shows just how much money policymakers are talking about. Using these programs, which account for about 77 percent of all projected government spending over the next 10 years (about $10 trillion is not included in the figure), to fully offset these tax cuts, we could do the following highly unrealistic and fairly ridiculous program changes: cut about 2/3 of Medicare or the non-defense discretionary budget, about ½ of the defense budget, 40 percent of the Social Security budget, or eliminate Medicaid entirely. We don’t support doing anything this drastic to any one program, as every area of the budget must contribute to deficit reduction. We simply wish to demonstrate the size of these tax cuts to policymakers and the public.
But what about the argument that the tax cuts would increase economic growth? Well, yes, lower rates can encourage faster growth -- if they are accompanied by lower spending and/or a broader tax base. If deficit finainced, though, the negative effects of borrwing would likely overhwhelm any positive affects from reduced taxation on capital and labor. Note that when CBO looked at its Alternative Fiscal Scenario which assumes the continuation of the tax cuts (combined with a few additional practices that will further increase deficits over the coming decade), it found that:
"Over time, [as] the negative consequences of very high federal borrowing build up [under CBO's Alternative Fiscal Scenario]....real GDP would fall below the level in CBO’s baseline projections later in the coming decade because the larger budget deficits would reduce or 'crowd out' investment in productive capital and result in a smaller capital stock."
(Note that the opposite is true in the short-run, when higher deficits are expected to have a stimulative effect on the economy).
It must be noted that CBO's Alternative Fiscal Scenario includes more than a mere extension of the 2001/2003 tax cuts. It also includes faster discretionary spending growth and fixes to the Medicare remibursement formulas. As CRFB has argued for here and here, policymakers could use the upcoming expiration of the tax cuts as a “hammer” to work out broader tax reform and/or a medium-term deficit reduction plan.
Today, the National Bureau of Economic Research announced in a statement that the recession that began in December of 2007 had ended in June of 2009. After waiting for the release of the updated Gross National Income and Product Accounts (released in August of this year), it became clear that the recession had bottomed out in June of 2009.
Although this seems to be good news for the American economy, it was accompanied by a few important cautionary notes. The official end of the recession does not mean that the economy has since “returned to operating at normal capacity,” the NBER said. Furthermore, this official decision that the recession has ended means that any future recessionary economic activity must be considered a new, or double-dip, recession—which would indicate that the economy has indeed not returned to “business as usual."
Falling Into Pieces – Fall officially begins this week. A short congressional calendar and the quickly-approaching elections mean that the legislative agenda will largely fall by the wayside. Only a few bills will get passed this month, with a post-election lame duck session set to rake up with the rest.
Leaving Tough Tax Cut Decisions Until Later – The tax cut debate is turning about as much as the leaves soon will. Last week Senate Minority Leader Mitch McConnell (R-KY) introduce a proposal, the Tax Hike Prevention Act of 2010, to permanently extend all the 2001/2003 tax cuts for all tax brackets. It will also permanently extend Alternative Minimum Tax relief to middle class families and permanently set the estate tax at a 35% rate with a $5 million exemption for individuals. Meanwhile, Senate Finance Committee Chairman Max Baucus (D-MT) is drafting a proposal that will permanently extend the tax cuts for families making less than $250,000 (as the White House proposed) and also permanently extend the estate tax, possibly at the 2009 rate of 45% with a $3.5 million exclusion. Neither of the tax plans are paid for; CRFB has been adamant that any tax extension be paid for over the longer term. House Democrats were briefed last week by a pollster who told them that deficit reduction should be a key part of their tax message. Although Senate Majority Leader Harry Reid (D-NV) has promised a debate on renewing the tax cuts this month, it is doubtful there will be votes ahead of the election on the politically-charged issue. Some Senators, like, George Voinovich (R-OH) and Ron Wyden (D-OR), who has co-sponsored a tax reform plan of his own, are calling for a larger debate on fundamental tax reform. Such a debate certainly is needed.
Small Biz Aid Falls to the House – The Senate passed H.R. 5297, the Small Business Jobs Act, last week. The House is expected to accept the Senate version this week in order to speed its way to the White House for enactment ahead of the election.
Tax Extenders Fallout – The never-ending “tax extenders” debate may once again sprout up as Senator Baucus last week introduced legislation that extends many of the tax breaks, such as the research and development tax credit, that have so far been unable to clear Congress.
Will CR Bring a Harvest of Add-ons? – Action on FY 2011 appropriations bills has come to a stop, meaning that a continuing resolution (CR) will be required by October 1, the beginning of the fiscal year, in order to keep government functioning. Must-pass legislation such as this often attracts other bills along for the ride. This could set up a showdown over the unrelated add-ons with threats of a government shutdown.
Yesterday, the Senate Budget Committee held a hearing on Jacob Lew’s nomination as the new head of the Office of Management and Budget, where he received bipartisan support. Mr. Lew is currently the Deputy Secretary of State for Management and Resources and previously served as the head of OMB under former President Clinton.
Lew left OMB in 2001 amid a budget surplus and projected surpluses for many years to come. That track record and Lew’s experience crafting bipartisan agreement on fiscal matters were major selling points during his testimony. Lew did, however, acknowledge that the fiscal situation he is being thrust into today is far different than the one he confronted during his years in the Clinton Administration.
During the hearing, Lew argued that “there is no doubt that we are in an unsustainable fiscal situation right now.” Continuing in his opening statement, Lew stated that:
“In the late 1990’s, our challenge was how to maintain a prudent fiscal policy while transitioning into a world of budget surpluses and robust economic growth...Today, a series of policy choices and the worst economic downturn since the Great Depression present us with a very different set of challenges...I don’t think we’ve faced a more significant fiscal challenge in my lifetime, and we will be judged based on our ability to respond.”
When referring to the need for balancing economic recovery with the need for fiscal discipline to address the looming crisis, Mr. Lew argued:
“At the same time, we must put our nation back on a sustainable fiscal course in the medium-term while making investments critical to long-term economic growth; and how to shore up our fiscal position for decades to come. Indeed, the coming months may be the most critical time in fiscal policy in recent memory.”
Of particular note, Lew, when referring to our unsustainable budget path, said:
“We can’t put off for years worrying about the deficit...[the country must] take actions that will send a signal of real confidence that right over the horizon we’re putting in place the policies that will put us back on a path towards fiscal discipline.”
That statement got Lew close to joining CRFB's Announcement Effect Club, but not quite. A statement on how enacting a medium-term consolidation plan can actually improve the economy both now and in the long-term--by putting further downward pressure on interest rates and restoring confidence--would have been welcomed, but we'll keep listening for it.
As for the President's fiscal commission, Lew was hopeful, stating that:
“We’re looking very, very hopefully towards the results [of the commission] being in a place where the beginning of a bipartisan consensus can begin to develop.”
We're certainly hopeful too. But as we've argued here, the administration must have a Plan B in case the commission does not succeed, and there's no reason why the White House has to wait until December to begin seriously focusing on medium-term deficit reduction.
Lew also recognized that all options must be on the table for closing the fiscal gap and that there is no magic bullet:
“The challenge we have is to leave things on the table because the answer will not be one [policy] or the other.”
We at CRFB wish Jack Lew the best of luck and look forward to working with him to achieve fiscal sustainability. Click here to view the entire hearing and here to see how you would bring our fiscal house in order.
Today, the White House announced its intent to appoint CFRB Board Member Jim Kolbe and CFRB Co-Chair Bill Frenzel to the Advisory Committee for Trade Policy and Negotiations. The Advisory Committee for Trade Policy and Negotiations is part of the Office of the United States Trade Representative. Members on the Advisory Committee “broadly represent key economic sectors affected by trade” and the Committee “provides policy advice on trade matters”.
Bill Frenzel served 20 years as a member of the U.S. House of Representatives from Minnesota and also served as the Ranking member of the House Budget Committee and was a member of the House Ways and Means Committee. He has served as a special advisor to President Clinton and was on the President’s Social Security Commission in 2001. Mr. Frenzel is a Co-Chair of the Committee for a Responsible Federal Budget.
Jim Kolbe served 22 years as a U.S. Representative from Arizona and was a member of the House Appropriations Committee serving as chair of the Subcommittee on Foreign Operations. He now serves as a senior transatlantic fellow at the German Marshall Fund and is an adjunct professor in the College of Business at the University of Arizona. Mr. Kolbe is on the Board of the Committee for a Responsible Federal Budget.
CRFB would like to congratulate Jim and Bill for being nominated.
Nobody's breaking out the champagne for this anniversary.
On this day two years ago, the collapse of Lehman Brothers turned an already bad-looking recession into an all-out financial panic. The collapse sent the stock market on a wild ride for the next month and rapidly accelerated the pace of job losses, turning 6 percent unemployment into 9.5 percent unemployment in just six months.
The Bush Administration allowed Lehman Brothers to fail then, but the shockwaves it sent through the economy forced them to make an about-face pretty quickly. Less than a month later, Congress passed the $700 billion Troubled Asset Relief Program (TARP) , which was originally created just to buy toxic assets in financial institutions (known as the Capital Purchase Program). Under the Obama Administration, it has been expanded to include a variety of initiatives. The latest CBO estimate of the program puts the net cost of the program at about $70 billion.
At the same time, the Federal Reserve sprang into action and in the fall of 2008, cut interest rates from 2 percent down to near zero. It also took several unconventional actions, drastically expanding its balance sheet by lending directly to institutions, opening a variety of new lending facilities, and purchasing mortgage-backed securities.
Also, with the financial crisis came a wave of failed banks, which racked up costs for the FDIC. In fact, in the two weeks around the collapse, September 12th to September 26th 2008, the FDIC incurred $9 billion in costs, more than they had incurred in the previous 8 1/2 months of the year. Since September 2008, roughly 280 banks have failed at a total cost to the FDIC of about $70 billion, many times more than they cost the FDIC from 2000-2007.
Obviously, the failure of Lehman Brothers and its effects have cost the Federal government greatly, even when all of the fiscal policy moves are excluded.
You can track all of the moves--financial, fiscal, or otherwise--the government has made since the start of the recession at Stimulus.org. And with the small business aid bill coming closer to final passage, it looks like we'll have more to add to Stimulus.org in the near future...
The Washington Post reported Tuesday that the number of workers seeking disability benefits from Social Security’s Disability Insurance Program has risen. From 2008 to 2009, according to the Social Security Administration, the number of applicants increased 21.4 percent.
As of the end of the second quarter of this year, there were more than 8 million people on the Social Security Disability program’s rolls. Since the end of 2007, there has been an increase of 12.6 percent in the Disability Insurance Trust Fund Program applications (end of 2007 to the end of the second quarter, 2010).
The Post cites economic conditions as the major factor in the increase in program applications. That may be the case, but if this trend continues, the already precarious state of the Disability Trust Fund will become even questionable. The Disability Trust Fund began running deficits in 2005 (excluding interest) and will run out of money in 2018 according to the Social Security Administration’s most recent report. Given the overall state of Social Security (shown in the graph below) if the increase in applications to the Disability Program continues, the Disability Trust fund may run out sooner than expected (as would the combined OASDI Trust Fund).
As can be seen by the graph above, the Trust Fund will run out in 2018 after a steady drop in value (a ratio of 100 means that assets at least equal projected costs). The rise beginning in the late 1990's as a result of lawmakers in 1994 responding to an earlier SSA report saying that the DI trust fund would run out in 1995. The Social Security Domestic Employment Reform Act of 1994 changed the rate from the total OASDI trust fun going to the DI Trust fund. The law made the following changes; in 1994 to 1996, the rate increased from 0.60 percent to 0.94 percent, in 1997 to 1999 the rate increased from 0.60 percent to 0.85 percent and in 2000 the rate increased from 0.71 percent increased to 0.90 percent. Beginning with the year 2000, the DI Trust Fund allocation was increased from 0.71 percent to 0.90 percent . As CBO states in its recent review of the Disability Program, doing so again would solve the sustainability problem, but would only speed up the eventual depletion of the combined OASDI trust funds.
The recent rise in applications for disability insurance highlights the need for broader Social Security reform now. As we've argued, implementing changes sooner rather than later will give policymakers more options for reform while also giving workers more time to adjust to any changes. The increase in DI applications will speed up the depletion of the program's trust fund after which it will put an additional burden on the OASI Trust Fund.
UPDATE: The Senate passed the small business package on Thursday 9/16, and the House is expected to pass the legislation early next week.
The Senate today successfully invoked cloture by a 61-37 vote on HR 5297, a bill to provide relief to small businesses. The legislation provides $12 billion in tax breaks, a $30 billion lending fund and other aid. A vote on final passage is expected by Thursday and the House will likely accept the Senate version in order to move it to the president for his signature. It may be the last stimulus spending bill that the deeply-divided Congress adopts this year.
Before invoking cloture on the Senate substitute amendment, two amendments involving an offset to the health care reform bill passed earlier this year were rejected. An amendment from Senator Mike Johanns (R-NE) to repeal the 1099 reporting requirement for business purchases from corporate vendors of $600 or more failed. The $17 billion cost would have been offset by limiting a preventive care fund and the individual mandate to purchase health insurance. Another amendment that would have exempted more businesses from the requirement also failed. Its $10 billion cost would have been paid for by repealing the manufacturing tax deduction for the five biggest oil and gas firms.
The Senate had to modify the bill because one of the original offsets was used by legislation to provide extra funding to states. The loss of eliminating the Advanced EITC was offset by jettisoning nearly $1.5 billion in agriculture disaster relief.
While the cost of the package is supposedly offset, CRFB takes issue with one of the pay-fors. Allowing people to rollover their individual retirement accounts to Roth IRAs will technically raise just over $5 billion over the ten year period since the rollovers will be taxed. But it will cost an estimated $15 billion over the longer run because withdrawals from Roth IRAs are not taxable.
CRFB supports finding long-term offsets for short-term stimulus. But using short-term offsets that actually increase the debt over the longer term not only goes against the principle of offsets, but is fiscally irresponsible.
Kick-off Time – Football season got underway this weekend, and the final legislative drive before the mid-term elections also commences this week. The elections will loom over the work of lawmakers as they return to work for a short period before adjourning in October, making major breakthroughs unlikely. But stranger things have happened (like the Redskins winning).
Small Biz Bill in the Red Zone – The Senate is expected tomorrow to resume work on a bill (HR 5297) to aid small businesses that includes a lending fund and tax breaks. With Senator George Voinovich (R-OH) saying he no longer will support a filibuster, it looks like the legislation will have the 60 votes needed to move forward. While the package is technically paid for, CRFB previously took issue with one of the offsets. We hope Congress will include gimmick-free offsets that do not add to the long-term debt.
Waiting for the Play on Tax Cuts – Senate Majority Leader Harry Reid (D-NV) has promised a Senate debate on extending the 2001/2003 tax cuts this month, yet is unlikely that Congress will complete work until after the election. In the meantime, players are lining up on both sides of this political football. Some Democrats are reportedly sending a letter to House leaders asking them to call a new play on the tax cuts, rejecting the White House proposal to extend the cuts only for families making less than $250,000 and instead extending them for all taxpayers. Calls for a temporary extension have grown louder since former OMB Director Peter Orszag recommended such an idea last week. But CRFB warned in a blog Friday that the second part of Orszag’s suggestion was to let all the cuts lapse after the two-year extension expires.
Lew Hearings Set for This Week – The man tapped to be the administration’s new budget quarterback will have his confirmation hearings this week. The Senate Budget and Homeland Security and Government Affairs committees will hold hearings on Thursday on the nomination of Jacob Lew to be the new director of the Office of Management and Budget. The hearings will no doubt provide a lot of posturing and finger-pointing over the budget outlook.
No Rush on Appropriations – Neither chamber is expected to make much movement on the FY 2011 spending bills. Instead, a continuing resolution is expected before the new fiscal year begins on October 1.
We reported a lot in June about small efforts the White House and OMB were taking to cut costs in the government. Now, the Obama Administration is taking a whack at travel allowances for federal employees. Citing lower costs due to the recession, they have reduced the daily allowance for hotel rooms in most major cities. The cuts average to about a 4 percent reduction.
Naturally, the hotel industry is opposed to this change, but it seems like a common sense measure, considering the lower cost of hotel rooms compared to last year. We encourage the White House to continue to find ways to make government operate more efficiently and save taxpayer money.