The Bottom Line
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.
On Friday evening, the FDIC reported that it has taken over an additional three banks (Barnes Banking Company, St. Stephen State Bank, Town Community Bank and Trust) for a cost to the FDIC of about $300 million. This brings the total number of failed banks since the beggning of 2008 to 170. Total deposits of all failed banks now equal $2 billion for 2010 and $373 billion since the beginning of 2008, all at an estimated cost to the FDIC of about $59 billion. Visit Stimulus.org for more details and a full list of FDIC bank closings.
|Total Deposits||Cost to the FDIC|
|Barnes Banking Company||$786,500,000||$271,300,000|
|St. Stephens State Bank||$23,400,000||$7,200,000|
|Town Community Bank and Trust||$67,400,000||$17,800,000|
Obviously the fiscal situation facing the country is bad. Deficits are massive; the debt is headed towards unprecedented territory; and the weak economic recovery could be derailed at any moment if credit markets get spooked about the U.S.’s fiscal prospects.
Yet still there are many politicians who don’t want to raise taxes at all (or in the softer version of the ‘no new taxes pledge’, don’t want to raise taxes on families making less than the poverty line…no wait…less than TWO HUNDRED AND FIFTY THOUSAND DOLLARS.)
Ok. Fine. Here is our spending challenge to all of you then. Assuming you acknowledge there is a problem—and how could you not—pick your fiscal goal. We recommend stabilizing the debt at 60% of GDP by 2018 here —still at levels well above historical averages, by the way. Or you could try to balance the budget by 2020. Or cut it in half in a few years. Take your pick – just believe it will be aggressive enough to stave off a fiscal crisis. Then show us how you’d get there without raising taxes.
There is nothing wrong with wanting to fix the problem by cutting spending; spending is the cause of the longer-term fiscal problems after all. But in our own attempts, we just can’t get to a reasonable debt level on the spending side of the budget alone. But please, show us how.
But the second part of the challenge is to agree that what you can’t get done through spending cuts will have to be fixed through revenues. It just doesn’t make sense to promise no new taxes, but not be willing to provide the spending cuts to avoid them.
There is a secondary argument that without dynamic scoring, projections don’t show the economic benefits of lower deficits and lower spending. So in the challenge, we’d even be willing to allow reasonable assumptions of positive economic effects…but the plan should include a trigger where automatic tax increases fill in the hole if the dynamic assumptions don’t materialize as promised, as a way to avoid exaggerated economic claims.
So it’s a pretty simple challenge. All you no new taxers (and no new taxers on families making less than $250k,) we’d love to see how we are going to cut enough spending to get the job done.
P.S. By the way, for those on the other side of the debate, we encourage you to take the tax challenge -- look at CBO's long-term budget projections, and show us how you can stabilize the debt without reducing entitlement spending.
The AARP, of course, is concerned the commission will recommend spending reductions for Social Security and Medicare. The conservative groups are concerned it will raise taxes.
The unfortunate truth is that we are going to have to do some of both; either now on our own terms, or later when a fiscal crisis hits.
Ideally, of course, Congress and the President would be able to make rational decisions about what taxes to raise, what spending to cut, when, and how. But the political system is fundamentally broken – in part because of pressure groups that make already-difficult decisions seem impossible.
A special process, such as the Conrad-Gregg commission, may very well be the best mechanism to help avoid economic and fiscal catastrophe – and in turn the best way to save Social Security, Medicare, and the comparatively low tax rates we enjoy in the United States.
If AARP, Americans for Tax Reform, and others think we can avert a debt crisis through the normal political process, we welcome their help in doing so. Solid and actionable recommendations for bringing our entitlements into balance and reforming our tax code to make it more efficient are always welcome – and these groups certainly have the expertise to provide such recommendations.
So what productive ideas are they offering??? (That's the sound of crickets chirping you hear.)
Yesterday -- citing CRFB's work -- The Stephen Dinan of Washington Times wrote that President Obama, in his first year, was more successful than President Bush in getting his spending cuts enacted. Several administration officials, including President Obama himself, have repeated this fact. According to the article:
President Obama... [won] 60 percent of his proposed cuts... at least $6.9 billion of the $11.3 billion in discretionary spending cuts Mr. Obama proposed for the current fiscal year... By comparison, the Committee for a Responsible Federal Budget says Mr. Bush won 40 percent of his spending cuts in fiscal 2006 and won less than 15 percent of his proposed cuts for 2007 and 2008.
Soon after the article came out, OMB Director Orszag cited it in his blog, explaining that he was "proud of what we were able to accomplish in conjunction with the Congress, but it’s just a start." Senior Obama advisor David Axelrod also cited the article in a Washington Post piece. And yesterday evening, President Obama again cited this success in his address to the House Democratic Caucus retreat:
We reformed our defense spending to cut out waste and save taxpayers billions of dollars while keeping us safe. I don't know if you saw today, The Washington Times, not known for a big promoter of the Obama agenda, pointed out that we had succeeded where previous administrations had failed because of the work that was done here in this Congress to finally get serious on some of these spending cuts that had been talked about for years.
We are pleased that President Obama has been so successful in cutting wasteful spending. Although we are still crunching the numbers on our own analysis of President Obama's spending cuts, the 60 percent figure cited by the Times is consistent with our findings so far. In looking at some of the larger proposals outside of Defense, we found that (in dollar terms) roughly one third of proposed cuts were accepted:
But this statistic doesn't taken into account the defense bill -- which was passed after our last analysis and included some very large cuts. Eliminating the F-22 Raptor, alone, saved almost $3 billion (out of the $6.9 billion in total estimated savings).
Marc Goldwein, policy director at the Committee for a Responsible Budget, said President George H.W. Bush in 1992 proposed eliminating 246 small programs, but succeeded in getting only eight of them chopped. One of those successes was to end funds for the Constitutional Bicentennial Commission - an event that was completed five years earlier... Mr. Goldwein said the nature of the appropriations process means every program that gets federal money has a powerful backer somewhere.
So 60 percent is a good start. And we expect to see many of the unsuccessful cuts -- along with a whole host of new ones -- proposed again in the upcoming budget. Unfortunately, even as Congress accepted some of the President's cuts, it increased spending on other programs slated for elimination.
And despite the cuts, discretionary spending grew dramatically, last year, by 7.3% (when war costs are excluded). That type of growth rate is not sustainable. And while $6.9 billion in cuts is a good start, it is going to take a whole lot more than that to bring our federal debt under control.
Since CRFB called for a Fiscal Recovery Plan in July, a growing number of prominent economists, organizations, and opinion leaders have joined us in suggesting we create a viable fiscal plan now to be implemented as the economy recovers. To this end, we are compiling a handy-dandy list of members of the newly formed "Announcement Effect Club."
As we explained in July, the U.S. could aid the economic recovery without exacerbating a debt crisis by “continu[ing] with stimulus policies as necessary, but… announc[ing] a plan to reduce the deficit and close the long-term fiscal gap.” The Peterson-Pew Commission of Budget Reform reiterated this point in Red Ink Rising, discussing that “the ‘announcement effect’ of such a commitment, if credible, can have positive economic effects by signaling that the United States is serious about reducing its debt.”
In other words, while aggressive debt reduction in the short term might imperil the fragile recovery, the announcement of future deficit reduction can actually strengthen it.
Without further ado, here are the inductees into the Announcement Effect Club in chronological order. If you have a nominee for the club, let us know:
- Members of the Committee for a Responsible Federal Budget* (Time to Develop a Fiscal Recovery Plan 7/9/09)
- Ben Bernanke, Chairman, Federal Reserve Board (Congressional Testimony 7/21/09)
- Washington Post Editorial Board (Washington Post 8/26/09)
- Financial Times Editorial Board (Financial Times 9/28/09)
- Marvin Phaup, Director, The Pew Charitable Trust’s Federal Budget Reform Initiative (Albany Times-Union 9/30/09)
- Angel Gurria, Secretary-General, Organization for Economic Co-operation and Development (Statement before the International Monetary and Financial Committee 10/4/09)
- Donald Marron, former acting CBO director (Blog 10/12/09)
- C. Fred Bergsten, Director, Peter G. Peterson Institute for International Economics (Foreign Affairs Nov/Dec 2009)
- Peterson-Pew Commission on Budget Reform (Red Ink Rising 12/14/09)
- International Monetary Fund (Report 12/16/09)
- John Podesta, Center for American Progress (Financial Times 1/4/10)
- Michael Ettlinger, Center for American Progress (Financial Times 1/4/10)
- Laura Tyson, Haas School of Business at UC Berkeley, former chair of the President’s Council of Economic Advisors (Bloomberg News, 1/8/10)
- Bruce Bartlett, former Deputy Assistant Secretary for economic policy, U.S. Dept. of Treasury (Forbes.com 1/8/10)
- Diane Lim Rogers, Concord Coalition, former House Budget Committee chief economist (EconomistMom.com 1/10/10)
- Leonard Burman, Syracuse University (Paper 1/11/10)
- Jeffrey Rohaly, Urban Institute (Paper 1/11/10)
- Joseph Rosenberg, Urban Institute (Paper 1/11/10)
- Katherine Lim (Paper 1/11/10)
- James R. Horney, Center on Budget and Policy Priorities (CBPP Report 1/12/10)
- Kathy Ruffing, Center on Budget and Policy Priorities (CBPP Report 1/12/10)
- Kris Cox, Center on Budget and Policy Priorities (CBPP Report 1/12/10)
- National Research Council and National Academy of Public Administration (Choosing the Nation's Fiscal Future 1/13/10)
- Nick Clegg, Leader, UK Liberal Democrats (Financial Times 1/14/10)
- Timothy Geithner, Secretary, Department of the Treasury (Congressional Testimony 2/3/2010)
- André Meier, International Monetary Fund (After the Stimulus, the Big Retrenchement 2/5/2010)
- Giancarlo Corsetti, European University Institute (After the Stimulus, the Big Retrenchement 2/5/2010)
- Gernot Müller, University of Bonn (After the Stimulus, the Big Retrenchement 2/5/2010)
- Carmen Reinhart, University of Maryland (Senate Budget Committee testimony 2/9/10)
- Thomas Hoenig, President, Federal Reserve Bank of Kansas City (Knocking on the Central Bank's Door 2/16/2010)
- Richard Berner, Co-Head of Global Economics and Chief U.S. Economist, Morgan Stanley (Peterson-Pew Event 2/16/2010)
- Clive Crook, Senior Editor, The Atlantic Monthly (Peterson-Pew Event 2/16/2010)
- Tim Besley, Professor of Economics and Political Science, London School of Economics (Blog 2/25/2010)
- Andrew Scott, Professor and Joint Subject Area Chair of Economics, London Business School (Blog 2/25/2010)
- Stephen Cecchetti, Bank for International Settlements (Report 3/2010)
- M.S. Mohanty, Bank for International Settlements (Report 3/2010)
- Fabrizio Zampolli, Bank for International Settlements (Report 3/2010)
- Kent Conrad, U.S. Senator and Chairman of Senate Budget Committee (Chairman's Mark of FY 2011 Senate Budget Resolution 4/21/2010)
- Paul Ryan, U.S. Congressman (Peterson Foundation Fiscal Summit 4/28/2010)
- Alan Blinder, Professor of Economics and Public Affairs at Princeton University and former Vice Chairman of the Federal Reserve (Op-Ed 5/20/2010)
- Carlo Cottarelli, Director of Fiscal Affairs, IMF (Second Executive Fiscal Commission Meeting 5/26/2010)
- Larry Summers, Director, National Economic Council (Washington Post 6/14/2010 and Speech 5/24/2010)
- Edmund Andrews, Former New York Times Correspondent (Blog 6/20/2010)
- European Central Bank (Monthly Bulletin 6/22/2010)
- Erskine Bowles, Co-chairman, National Commission on Fiscal Responsibility and Reform (Commission Meeting 6/30/2010)
- Robert Rubin, Former Treasury Secretary (CNN.com 8/8/2010)
- David Chavern, Chief Operating Officer, Chamber of Commerce (ChamberPost 10/14/2010)
- Christina Romer, Former Chair, Council of Economic Advisors (New York Times 10/24/2010)
- The Economist (Article 11/18/2010)
- Pete Davis, Capital Gains and Games (Blog 11/27/2010)
- National Commission on Fiscal Responsibility and Reform (Fiscal Commission) (Final Proposal 12/1/2010)
- Steven Pearlstein, Washington Post columnist (Op-Ed 12/3/2010)
- Tom Coburn, Senator (R-OK) (Fox News Interview 12/26/10)
- Ezra Klein, Washington Post Contributor (Bloomberg Op-Ed 6/8/11)
- Joseph Lieberman, Senator (I-CT) (Washington Post Op-Ed 6/9/11)
- Steny Hoyer, U.S Congressmen (D-MD) (CBS Interview 6/12/11)
- President Barack Obama (Speech 6/13/11)
- Glenn Hubbard, former Chair of the Council on Economic Advisors (Bloomberg Op-Ed 9/19/11)
- Douglas Elmendorf, director of the Congressional Budget Office (Hearing, 10/26/2011)
- Michael Bloomberg, Mayor of New York City (I-NY) (Speech, 11/8/2011)
- Mark Zandi, Moody's Analytics (Op-Ed 11/15/2011)
- Former President Bill Clinton (Fiscal Summit Interview 5/15/12)
- Bill Bradley, Former Senator (D-NJ) (Interview 6/3/12)
- Alan Simpson, former Senator (R-WY), Fiscal Commission Co-Chair (Interview 7/31/12)
* Members of the CRFB Board are: Bill Frenzel, Tim Penny, Charlie Stenholm, Maya MacGuineas, Barry Anderson, Roy Ash, Charles Bowsher, Steve Coll, Dan Crippen, Vic Fazio, Bill Gradison, Jr., William Gray, III, William Hoagland, Douglas Holtz-Eakin, James Jones, Lou Kerr, Jim Kolbe, James Lynn, James McIntyre, Jr., David Minge, Jim Nussle, June O'Neill, Marne Obernauer, Jr., Rudolph Penner, Peter G. Peterson, Robert Reischauer, Alice Rivlin, Martin Sabo, Eugene Steuerle, David Stockman, Paul Volcker, Carol Cox Wait, David Walker, and Joseph Wright, Jr.
Individual statements of CRFB members include:
- Alice Rivlin, Brookings Institution and former CBO director (Bloomberg News 1/7/10)
- Charlie Stenholm, former Member of Congress (Fort Worth Star-Telegram 12/28/09)
- James R. Jones, former Member of Congress (Tulsa World 12/27/09)
- Jim Kolbe, former Member of Congress (The Hill 12/18/09)
- Tim Penny, former Member of Congress (St. Paul Pioneer-Press 12/14/09)
- Bill Frenzel, former Member of Congress (Sphere.com 12/13/09)
- Robert Reischauer, President of the Urban Institute and former CBO director (Urban.org 9/10/09)
- Eugene Steuerle, Urban Institute Fellow (Urban.org 7/15/10)
At the start of the new decade, one in every ten Americans is unemployed. By broader measures of unemployment (including discouraged workers who may have stopped looking), nearly one out of every six people is unemployed or underemployed.
As bad as things are now, they might well have been worse, according to the latest stimulus jobs report by the President’s Council of Economic Advisers. Some 1.5 – 2 million more people would be out of work now if the stimulus legislation (the American Recovery and Reinvestment Act or the ARRA) had not been passed and other steps taken for economic and financial stabilization and recovery, according to the CEA (whose estimates are in line with respected mainstream economists).
Do we need more fiscal measures - or is recovery coming anyway (but slower than we might like)? What targeted growth and employment measures would offer the greatest bang for the taxpayer buck? Would their cost be worth the fiscal price down the road – or can we do something now but offset it later (keeping in mind, we already have a lot to offset)?
These questions aren’t academic. Congress may soon return to these issues, picking up where the House left off in December when it passed H.R. 2847, "The Jobs for Main Street Act, 2010".
The Congressional Budget Office (CBO) has just put out a new report with useful discussion for weighing these key issues. (Table 1 is quite useful.) The Director’s blog also has a dandy graph which features some possible measures and their bang for the buck in the creation of employment:
President Obama has just proposed a fee on financial firms, stating his commitment “to recover every single dime the American people are owed.” The measure, called the Financial Crisis Responsibility Fee, will only apply to the largest firms with over $50 billion in assets. The White House expects it to raise $117 billion over 12 years and $90 billion over the next ten.
CRFB commends the Administration for announcing a specific proposal to close TARP’s budget gap, and hopes that this move will further encourage lawmakers to make the tough decisions in coming months for deficit reducing measures.
In August, the Administration estimated that TARP would cost the government $341 billion, but more recent and conservative estimates put the total cost at $117 billion. The Emergency Economic Stabilization Act, the act that authorized the Treasury to create TARP, requires the President to submit a plan by 2013 “that recoups from the financial industry an amount equal to the shortfall in order to ensure that the [TARP] does not add to the deficit or national debt.” Today’s proposal shows an early commitment to recoup the losses.
The proposed measure would go into effect on June 30, 2010 and would institute a 0.15% fee on all covered liabilities (see the White House fact sheet here).
In other news, the Fed announced yesterday in the latest Beige Book that 10 of 12 Fed district banks reported improved economic conditions in their region since the beginning of December. The exceptions were the Philadelphia and Richmond Fed districts, who reported “mixed conditions.”
The House voted Wednesday to sustain President Obama's veto of a Continuing Resolution to keep the government funded. Huh? Confused? Why wasn't this front-page news Thursday morning? Because what looked important was simply a bit of budget cooperation between the Legislative and Executive branches of government. Congress was following a long-standing tradition in sending the CR down to the other end of Pennsylvania Avenue. The backstory is more complicated, however and involves a dispute between the branches.
When the House passed the Defense appropriations bill on Dec. 16, it also passed a five-day Continuing Resolution in case Obama didn't sign the Pentagon bill quickly. The Senate followed suit on Dec. 19. But Obama signed the Defense bill the same day the Senate passed it, so the CR was not needed. In similar cases in the past, Presidents simply have signed the CR. But Obama vetoed it and possibly reignited a constitutional battle between the branches dating back decades by implying that he pocket vetoed it, which can only happen after Congress has adjourned. House leaders decided to sustain the veto, since they believed Obama couldn't pocket veto it.
We'll let the constitutional lawyers continute to fight that battle. But from a budget point of view, it was much ado about nothing.
In the past two days, at least two new voices have joined a growing chorus of organizations warning that our federal debt is growing at an unsustainable rate -- and calling for a plan to put it on a sustainable path.
Today, a committee established by the National Research Council and the National Academy of Public Administration released Choosing the Nation’s Fiscal Future, which delves into the ramifications of the federal budget where the gap between spending and revenues is growing increasingly wider, causing debt to explode to untenable levels. This comes on the heels of a Center on Budget and Policy Priorities report, The Right Target: Stabilize the Federal Debt, which has more of a focus on federal deficits.
As with the Peterson-Pew Commission, Choosing the Nation’s Fiscal Future recommends that federal debt be stabilized at around 60 percent of GDP -- although its budget horizon for doing so is slightly longer. CBPP recommends a path which would stabilize the debt at a little above 70 percent of GDP -- suggesting the goal should be to bring deficits down to below 3% of GDP (the levels associated with stabilizing the debt as a proportion of the economy) by 2019.
In general everyone seems to agree on a few principles:
- The debt-to-GDP ratio must ultimately be stabilized to prevent an economic and fiscal crisis.
- We shouldn't start too quickly or else we might undermine the economy's recovery -- but we should begin to put a plan in place now that can begin in the next couple of years.
- The short and medium term problems need to be addressed now, but the longer-term problem must also be part of the follow-on steps.
- Health care cost growth and population aging are forcing up the costs of the big three -- Social Security, Medicare and Medicaid -- and those costs must be contained.
- It will be impossible to close the fiscal gap without addressing the entire budget, and difficult, to say the least, to close the gap without revenue increases (although the Fiscal Future report does include four scenarios, one which includes very little revenue growth).
- Tough tax and spending choices are unavoidable, and are absolutely necessary.
We may not agree on all the specifics, but our message is the same. Our nation is in serious trouble, and we are running out of time to get our fiscal house in order.
The Financial Crisis Inquiry Commission, which was established to examine the causes of the economic and financial crisis, kicked off the first day of its first hearing today. The witnesses on the main panel today were the chairmen and CEOs of Goldman Sachs, JP Morgan & Chase, Morgan Stanley, and Bank of America. Commissioner statements and testimony can be seen here. The Commission is chaired by Phil Angeledes, former Treasurer of California, and also includes on its panel a CRFB board member, Doulas Holtz-Eakin. The group has so far generated one report, "Select Financial Market and Economic Data."
The deadline for the Commission to submit their final report to Congress, the President, and the public is December 15, 2010. A National Public Radio interview with the Chairman and Vice Chairman can be found here.
Earlier this week the Joint Committee on Taxation (JCT), the congressional group that provides cost estimates and tax expertise to Congress, issued its annual report on tax expenditures. Tax expenditures are defined under the Budget Act and are changes in tax liability that result from special tax provisions or tax rules that provide tax benefits to a particular group of taxpayers.
|Deduction of mortgage interest on owner-occupied homes||$573|
|Exclusion of employer contributions for health care, health insurance premiums||$568|
|Exclusion of pension contribution and earnings||$533|
|Reduced rates of tax on dividends and long-term capital gains||$419|
|Exclusion of Medicare benefits||$317|
|Earned income credit||$261|
|Deduction of state and local taxes||$250|
|Deduction for charitable contributions||$184|
|Child tax credit||$160|
|Exclusion of capital gains at death||$159|
Tax expenditure provisions have become increasingly popular to lawmakers. They are designed to encourage or reward economic behavior or provide benefits to citizens, rather than funding spending programs through the annual appropriations process. For example, according to JCT, the February 2009 stimulus bills created 15 new tax expenditures designed to stimulate homeownership, subsidize health insurance coverage for the unemployed, and the “Making Work Pay” tax credit.
Critics argue that tax expenditures lack transparency and bypass the normal review channels. And their true costs are largely hidden in the federal budget, as they count as credit against individual or corporate income tax, meaning they do not show up as a cost to the federal treasury, but have the effect of lowering tax receipts. Using a tax expenditure provision instead of a spending program allows Congress to claim it is cutting taxes, while simultaneously providing a benefit to some group or taxpayers.
JCT and the Department of the Treasury (which publishes its estimates of the cost of these provisions in the Analytical Perspectives volume of the president’s budget) list and categorize the provisions differently. They are seldom reviewed by the congressional committee that oversees a particular policy area; for example, the mortgage interest deduction provision is reviewed by House Ways and Means and Senate Finance Committees (which oversee tax policy), rather than the authorizing committees that oversee housing policy. They are not part of the annual budget or appropriations process and are seldom re-examined as part of a comprehensive review.
The Federal Reserve announced, this morning, that it will transfer $46.1 billion in FY2009 profits over to the Treasury, higher than the $31.7 billion in 2008 profits (Thanks to Donald Marron for pointing this out). The Fed reported that the increase in profits was due largely to earnings on additional securities holdings.
Total gross earnings for the Fed reached $58.6 billion for 2009. Including the costs for operating the 12 Reserve Banks, interest and dividends paid to member banks, and Board expenditures, profits came to $46.1 billion.
Profits accrued from security purchases ranging from U.S. Treasury securities, GSE debt securities, federal agency mortgage-backed securities, earnings from limited liability corporations (AIG collateralized debt, Bear Sterns funding, AIG MBS’s), and loans to primary dealers, all of which are tracked by CRFB at Stimulus.org.
Although the actions of the Fed are not directly recorded in the federal budget, Federal Reserve Board policy requires all Reserve Banks to transfer profits over to the Treasury. This remittance is generally in the range of $20 to $30 billion each year. But given the extraordinary and unprecedented action taken by the Fed in more than doubling the size of its balance sheet to help shore up financial markets and the economy (see CRFB’s paper The Extraordinary Actions Taken by the Fed), the Fed has accrued larger than normal profits.
Yet, the Fed has added large amounts of risk to its portfolio of securities. A year ago, in fact, the CBO has estimated that the Fed’s earnings will be lower by approximately $90 billion over the next ten years as losses on some of the more risky assets materialize. So while taxpayers are certainly benefiting from high profits today, there is no guarantee they will last.
In related news, the Treasury reported yesterday that in FY 2009 the net cost of TARP was $68.5 billion, down from original estimates of $178 billion. The Capital Purchase Program generated a $15 billion profit for the Treasury, while support for AIG and the auto industry cost the government $30.4 billion each.
Check back regularly to Stimulus.org, where CRFB will continue to track all TARP and Fed balance sheet developments.