The Bottom Line
January 11, 2010
This morning on NPR’s Morning Edition one of our board members, David Walker, discussed his new book, Comeback America: Turning the Country Around and Restoring Fiscal Responsibility. In addition to being on CRFB’s board and serving as a commissioner on the Peterson-Pew Commission on Budget Reform, Walker is president and CEO of the Peter G. Peterson Foundation. Prior that he was head of Congress’s watchdog agency as comptroller general at the Government Accountability Office (GAO).
Listen to the interview below, or go to the Morning Edition site.
One review of the book is available here:
Walker believes that by 2030, absent significant reforms to current government programs and policies, federal taxes could double from current levels, meaning less money and poorer education for kids—which will hurt families along with our nation's economic strength and position in the world. If our foreign creditors—such as China—decide to buy fewer of our Treasury bonds, interest rates will rise and cars and homes will become less affordable.
But it doesn't have to be that way. Comeback America shows how we can return to our founding principles of fiscal responsibility and stewardship for future generations. The book includes bold ideas to control spending, save Social Security, dramatically alter Medicare, and simplify the tax code—all taking into account the Obama Administration's current efforts, which receive never-before-published assessments both complimentary and critical.
Nonpartisan, nonideological, and filled with a love of the country its esteemed author has spent his life serving, Comeback America is a book for anyone interested in America's economic future—in other words, a book everyone should read.
January 11, 2010
On January 8, the FDIC reported that it has taken over an additional bank (Horizon Bank) for a cost to the FDIC of about $540 billion. This brings the total number of failed banks since the beggning of 2008 to 167. Total deposits of all failed banks now equal $1.1 billion for 2010 and $372 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 | |
| Horizon Bank | $1,100,000,000 | $539,100,000 |
January 8, 2010
The government ran record deficits of $390 billion in the first quarter of FY2010, according to the CBO’s Monthly Budget Review. Even last year, with the economic crisis in full force, the deficit was around $56 billion lower.
December itself saw a deficit of $92 billion. Normally, surpluses are recorded in this month, as many corporations make their quarterly income tax payments, and new revenue is collected from end-of-year bonuses and greater seasonal employment. Yet revenues are quite depressed, this year, as a result of lower wages, less employment, and some revenue-side stimulus measures. In fact, receipts this December were down $18 billion compared to last year.
Outlays, meanwhile, were up $22 billion. Some of this increase in outlays was due to timing shifts (as Donald Marron explains), but even controlling for that the deficit was still up 8%.
Notable spending increases include the rise in cash going toward unemployment benefits, which more than doubled in comparison to the first quarter of fiscal year 2009. Those rose by $22 billion, due to the extension in the duration of benefits. Medicaid spending was also up around 25%, with much of that increase being attributable to a provision in the American Recovery and Reinvestment Act (ARRA) which temporarily increased federal aid to states under Medicaid.
Spending associated with the financial rescue has continued to fall. TARP spending fell by $85 billion in the first quarter compared to last year, spending on government-sponsored enterprises (GSEs) fell by $1 billion, and net spending by the FDIC fell $45 billion.
January 8, 2010
UPDATE: CMS released its estimates of the final Senate bill on Friday.
The short answer is that it depends who you ask. Today, the RAND Corporation released their own analysis which found that the coverage provisions of the House bill would cost around $1 trillion over ten years -- and $181 billion in 2019. This includes $445 billion in insurance subsidies and another $559 billion in $559 billion in new Medicaid costs*.
These estimates differ somewhat, though not too substantially, from the estimates we have graphed using CBO data -- as well as other estimates put forth by the Center of Medicare & Medicaid Services and The Lewin Group.
Note: These estimates may not be strictly comparable.
Interestingly, while the House bill costs more than the Senate bill, the Senate bill appears to grow faster. According to both the CMS and Lewin estimates, in fact, the Senate bill will cost more than the House bill by the end of the ten year budget window.
| Ten Year Cost | Cost in 2019 | |||
| House | Senate+ | House | Senate+ | |
| CBO | $1051 | $871 | $207 | $199 |
| CMS | $1053 | $959 |
$190 | $201 |
| Lewin | $1083 | $957 | $198 | $202 |
| RAND | $1004 | n/a | $181 | n/a |
+Lewin and CMS estimates not based on final version of the bill.
Of course, the gross cost of coverage provisions does not tell the whole story. Both bills include other provisions which would add significantly to their costs. They also come with offsetting spending reductions and tax increases meant to pay for the new spending -- and other reform measures designed to slow health care cost growth. But that's a discussion for another day.
*The RAND analysis estimates Medicaid costs imposed on States, as well as the federal government. However, their analysis does not include the costs of the small business tax credits, retiree reinsurance, or high-risk pool funding. Based on a Lewin analysis, we estimate these factors would roughly cancel out.
January 8, 2010
Laura Tyson, a former chair of President Clinton’s Council of Economic Advisers, warned in a Bloomberg op-ed this morning that cutting back on fiscal stimulus too early might undermine the economic recovery, but that deficit reduction will be a necessity when the economy recovers. According to Tyson:
“Under [current economic] conditions, a robust self-sustaining recovery is far from a sure thing and cutting the deficit by curbing spending or boosting taxes too soon might tip the economy back into recession. Policy makers face an enormous and complicated challenge. They must lower future deficits and sustain economic growth with healthy job creation.”
This is something we've explained before, including in our Fiscal Roadmap paper Good Deficit / Bad Deficit. To balance the delicate tradeoff between supporting the recovery and managing the deficit, Tyson made two recommendations:
“First, lawmakers should continue to provide significant fiscal support as long as the economy is operating far below its potential and private spending is constrained. Additional fiscal stimulus to encourage job creation in 2010 is advisable."
“Second, policy makers should develop a credible plan for fiscal tightening now to be implemented automatically once private demand recovers and the economy is operating close to its potential. Passage of such a plan would prevent increases in long-term interest rates triggered by investor concerns about projected future deficits even after the economy has recovered. In addition, such a plan would reduce the likelihood of another financial crisis, caused this time by a loss of confidence in the creditworthiness of the U.S. government and a flight from the dollar.”
CRFB could not agree more about the need for a credible fiscal consolidation plan. This is also exactly what the Peterson-Pew Commission has argued in its first report, Red Ink Rising. Such a commitment to stabilize the national debt would signal to creditors that we are serious about getting our fiscal house in order. The Commission also recommends that any fiscal consolidation plan should wait until 2012 to begin phasing in policy changes to ensure that the economy is on a well-established and robust recovery path.
January 7, 2010
CRFB board member and former CBO and OMB director, Alice Rivlin, argued in Bloomberg, today, that policymakers should put a deficit-reduction plan in place in 2010.
As Rivlin explained:
The recession slashed federal revenue, while efforts to preserve jobs and mitigate economic suffering ballooned spending. The combination pushed deficits to record levels... they won’t disappear, and their legacy is a public debt that drastically reduces our economic flexibility. Suddenly, the nation’s public debt, which was 37 percent of GDP in 2007, has risen to about 67 percent in 2010 and is projected to continue rising if we don’t change course. The built-in deficits caused by aging and medical spending for seniors are no longer looming far ahead of us. They will affect our crisis-damaged budget within the decade. If we don’t want a continuous drain on our standard of living and growing vulnerability to the demands of our creditors, especially the Chinese -- both of which will undermine our influence in the world -- we must stabilize the debt by moving the federal budget back toward balance.
Rivlin argued that "the biggest economic challenge for 2010 is enacting credible future deficit reduction without derailing the fragile recovery." This is something we've addressed through our Fiscal Roadmap Project -- including Good Deficit - Bad Deficit and Time to Develop a Fiscal Recovery Plan. In addition, in Red Ink Rising, the Peterson-Pew Commission on Budget Reform has proposed a debt stabilization path which would put a plan in place now, but not require policy changes until 2012. As Rivlin explains, this isn't as difficult as it might seem:
Tax increases or benefit reductions sufficient to stabilize the debt would [likely] be phased in slowly and wouldn’t affect the near-term economy. Increasing the retirement age for Social Security, means- testing benefits of Medicare or adding a national sales or carbon tax would take several years to implement. Enacting such measures in 2010, however, could show our creditors we mean business and help the recovery by avoiding future interest rates increases.
But, of couse, nearly all measures to stabilize the debt will require some form of pain. Like Rivlin, we hope our political system is up to the challenge. Our economic future depends on it.
January 7, 2010
According to the Associated Press, President Obama has encouraged House leaders to support the Senate's excise tax on high-cost insurance plans. As we have written before, this is preferable to either a surtax on high earners or an increase in the Medicare payroll tax for financing health care reform.
Although far from perfect, the excise tax has two major advantages. First, because it is a tax on health insurance, it will generate a revenue stream which grows as quickly as health care does -- and in fact more quickly than the costs of health insurance expansion. And secondly, this tax can actually help to slow overall health care cost growth, which is perhaps the most important goal of reform.
This graph demonstrates our first point, showing how much faster the excise tax grows than the payroll tax increase. The difference is similar with reference to the surtax on high earners.
We previously offered an analysis which helps to confirm our second point. But alternatively, one need only ask President Obama's chief economic advisor. According to Christina Romer (emphasis added):
"A tax on high-priced insurance plans... will encourage both employers and employees to be more watchful health care consumers... It will discourage insurance companies from offering high-priced plans that would otherwise eat up larger and larger shares of workers' wages... A policy such as this is probably the number one item that health economists across the ideological spectrum believe is likely to stem the explosion of health care costs.
We know that many constituencies oppose taxing health insurance, and that there will be pressure to weaken the tax in negotiations. But we strongly encourage the Senate to hold its ground, and work with the House to strengthen the tax if possible. It is one of the best ways to ensure health care reform will truly be fiscally responsible.
January 6, 2010
Today’s New York Times article on the difficulty President Obama faces in keeping his promise about deficit reduction and tax cuts, Promise to Trim Deficit Is Growing Harder to Keep, is a precursor to all the stories that will be written before the President’s State of the Union address and the release of his FY 2011 budget on the first Monday in February.
The article highlights the fundamental question that faces the administration as it prepares its first full budget. How will the administration balance deficit reduction with a campaign pledge to not raise taxes on Americans making less than $250,000 a year and the pressure to do more to stimulate the economy?
Past presidents have faced the same problem when faced with deficit reduction and promises about taxes and/or economic concerns. In 1990, President Bush gave up his commitment to “no new taxes” when he, along with Congress, made a larger budget deal to combat growing deficits. And in 1993, President Clinton chose to address deficits first, rather than the middle-class economic concerns that denominated his campaign.
The economic lessons of the 1990s should give the Obama administration some hope that they can both pursue deficit reduction and improve the economy. Targeted and thoughtful deficit and debt reduction can give the markets faith in the American economy and can stimulate economic growth.
January 5, 2010
At this week’s American Economic Association meetings in Atlanta, two economists, Kenneth Rogoff and Carmen Reinhart, explore how high levels of government debt can hurt economic growth. Their research found that when debt levels reach above 90 percent as a share of a nation’s economy, median economic growth rates fall by at least one percent and average growth falls even more. Another panel on government deficits worried about its fears about the financial future of the United States if spending and borrowing patterns continue at today’s rate.
We’ve known for some time that high levels of government debt can hurt our economy and that protecting economic growth is an important reason to support fiscal responsibility. Naysayers will rightly point out that the debt of the United States is nowhere near 90 percent in 2010 (even with the almost record high deficit of nearly 10 percent of GDP in 2009). They’ll also say that the United States has nothing to worry about and fiscal hawks shouldn’t worry so much about the debt and deficits.
And they might be right, for now. But under reasonable assumptions about what the Administration and Congress are likely to do over the next two years, U.S. debt will reach 85 percent of GDP by 2018, exceed 100 percent in 2022, and break the 200 percent mark in 2038. And while that might seem years away, it really isn’t. Making changes in spending and revenue policies sooner rather than later can lessen the burden of those changes on taxpayers and beneficiaries.
But as Rogoff and Reinhart hint in their paper, 90 percent is not a magic number. And they suggest that “debt intolerance” is an expectations game. Ultimately, the number matters less than what markets require in interest rates for a government’s borrowing as markets worry about the risk of buying more government debt. The United States should not wait to find out what its “magic number” might be and avoid paying those higher interest rates. While beginning too soon to curb our borrowing habits could stifle the economic recovery, making a plan to reduce our rising debt levels in the next couple of years should happen now.
January 5, 2010
John Podesta and Mike Ettlinger of the Center for American Progress have an op-ed in Financial Times today, calling for a 10 year plan to close the budget deficit. Saying that the worst appears to have passed, they call today's deficits "necessary and appropriate," and note that they "accelerate recovery." They also say though that the anticipation of large, sustained deficits throughout the next decade (and beyond) will pose "risks to financial markets and the economy, and [undermine] US standing."
The op-ed points out the scale of the deficit problem and that the risks involved warrant the creation of a long-term plan of action. The Committee for a Responsible Federal Budget supports the creation of a long-term plan, and further believes that implementing such a plan must begin immediately. Podesta and Ettlinger suggest the goals should include achieving fiscal balance by 2014 and having our budget in balance by 2020. They acknowledge overarching deficit goals are only credible if policymakers set these sorts of targets and implement policies that will help them meet these targets. They suggest that Congress:
- Specify year-by-year steps towards these goals;
- Pass strict pay-as-you-go provisions; and
- Make PAYGO meaningful by ensuring that "tax levels and loopholes, as well as spending, are included in rules that automatically adjust the budget in the event of excess deficit levels."
CRFB, as a part of the Peterson-Pew Commission on Budget Reform, supports the idea of setting hard targets as the first step towards a meaningful effort to get our fiscal house in order. In a report issued by the Commission last month, Red Ink Rising, we call on policy makers to stabilize the national debt through a six-step plan. We recommend that Congress and the President commit to a goal of stabilizing the debt at 60 percent of GDP by 2018, develop a credible package over the next year to attain that goal, begin phasing in the plan in 2012, implement a “debt trigger” mechanism to ensure that the process stays on track, and continue to reduce the debt as a share of the economy after 2018. The report states:
"Without a dramatic shift in course, the debt will grow to unprecedented levels, breaking the 200 percent mark in 2038. Well before the debt approaches such startling heights, fears of inflation and a prospective decline in the value of the dollar would cause investors to demand higher interest rates and shift out of U.S. Treasury securities. The excessive debt would also affect citizens in their everyday lives by harming the American standard of living through slower economic growth and dampening wages, and shrinking the government’s ability to reduce taxes, invest, or provide a safety net."
January 4, 2010
On December 18, the FDIC reported that it has taken over an additional seven banks (First Federal Bank of California, Imperial Capital Bank, Independent Bankers' Bank, New South Federal Savings Bank, Citizens State Bank, Peoples First Community Bank, RockBridge Commercial Bank) for a cost to the FDIC of about $1.8 billion. This brings the total number of failed banks in 2009 to 140. Total deposits of all failed banks now equal $137 billion for 2009 and $371 billion since the beginning of 2008, all at an estimated cost to the FDIC of about $58 billion. Visit Stimulus.org for more details and a full list of FDIC bank closings.
| Total Deposits | Cost to the FDIC | |
| First Federal Bank of California | $4,500,000,000 | $146,300,000 |
| Imperial Capital Bank | $2,800,000,000 | $619,200,000 |
| Independent Bankers' Bank | $511,500,000 | $68,400,000 |
| New South Federal Savings Banks | $1,200,000,000 | $212,300,000 |
| Citizens State Bank | $157,100,000 | $76,600,000 |
| Peoples First Community Bank | $1,700,000,000 | $556,700,000 |
| RockBridge Commercial Bank | $291,700,000 | $124,200,000 |
| Total | $11,160,300,000 | $1,803,700,000 |
January 4, 2010
Last month, the International Monetary Fund released a report identifying successful measures that countries should keep in mind as they cope with government deficits and debt in the wake of the global recession, but continue to strive for responsible fiscal policies. Many countries have various “fiscal rules” intended to force a country’s lawmakers to consider the fiscal impacts of their actions, with a goal of long-term fiscal sustainability. The European Union, for example, requires member countries to maintain certain levels of debt and deficits. But, as the paper highlights, the recent global economic crisis has brought new scrutiny to the use and effectiveness of such rules. Among the report’s findings on successful measures:
- Fiscal rules must be credible and enforceable;
- Fiscal rules need to be flexible in order to deal with economic shocks;
- Implementation of new fiscal rules should begin immediately, but take effect gradually as economies continue to recover;
- In the wake of the recession the focus should be on the medium term and avoid a rapid return to any existing rules.
A December report released by the Peterson-Pew Commission on Budget Reform includes recommendations that parallel the IMF’s recommendations for ensuring a country’s success in maintaining a sound fiscal plan, while balancing those efforts with the continuing effects of the global recession on governments’ budgets. For example, the Commission report recommends Congress and the President enact debt reduction legislation now that would begin slowly in 2012 so as not to jeopardize the recovery, and that would also include flexibility to deal with poor economic times that may resurface. The IMF also recommends acting quickly to implement a fiscal consolidation plan, suggesting that, “…it may be helpful to design and announce early-on a credible rule-based framework, and a timetable for its implementation.” The Commission report recommends a similar goal for the United States: a medium-term goal of stabilizing the level of U.S. debt held by the public to 60 percent of GDP by 2018.
January 4, 2010
We hope all of our readers had very happy holidays. Now that we are back from our vacation, there is a lot to report on regarding congressional actions right before the holidays, as well as expected actions once they return.
Debt Limit
On December 28 President Obama signed into law an increase to the debt ceiling, bringing the number up from $12.1 trillion to $12.39 trillion. This new limit passed the Senate just four days earlier by a vote of 60-39, with many Senators supporting the increase only after they were promised a debate in late January over the possibility of creating an independent and bipartisan commission to make recommendations on spending, taxes, and deficit reduction. The increase to the debt limit bought the Treasury two months of funding government operations, before the limit will need to be revisited again. Congress is expected to take up the issue shortly after reconvening on January 19. The Senate will consider a longer term debt bill – HJ Res 45, which has been passed by the House – along with several other amendments. These amendments will likely include consideration of pay-as-you-go budgeting rules, a proposal to bar the spending of extra TARP funds, and a possible proposal for the regulation of greenhouse gases. As for the debt ceiling itself, while the House version includes an increase to $13.029 trillion, it is unknown at this point how large of an increase Harry Reid will propose at this time.
Health Care
Senate Democrats also passed their health care overhaul bill December 24. Negotiations with the House on a final bill are still to come (the House returns on January 12, the Senate on January 19). One of the biggest areas of contention is how the House and Senate will each go about funding their bills; with the Senate including a tax on high-end insurance plans and the House supporting a new surtax on millionaires.
CRFB has updated our comparison chart outlining the ten-year costs of the major provisions in both the House and the Senate bills. We have also created a number of sharable graphs that can be seen in this blog post. The one below shows the change in federal budgetary commitment to health care.
(We encourage you to share this graph, but please link to us.)
Defense Bill
The Defense spending bill for FY 2010 provides $636 billion in discretionary spending for regular activities and war operations. It is $11 billion greater than last year’s total. The bill included some short-term extensions of federal unemployment benefits, as well as other non-military programs. Included in the Defense package was an extension, through February 2010, of existing unemployment and COBRA provisions.
The defense bill included a number of temporary measures that Congress was not able to fully address. These include:
- COBRA:
- Small Business Loans: The bill allows the SBA to continue two temporary enhancements to its loan guarantee program through February 28. It is fully offset.
- Patriot Act: Extends authorizations of the act through February 2010.
- Flood Insurance: Extends through February 2010.
- Medicare Physician Payments Extension: Delays through February 2010 a 21.2% cut to payments. The delay is fully offset.
- Surface Transportation Authorization Extension: Extends the authorization for the highway, transit, highway safety and motor carrier safety programs through February 2010.
- Unemployment Insurance: Extends expanded benefits through February 2010.
- Satellite Television Extension and Localism: This bill fully offsets the extension of a copyright license used by satellite television producers, through February 2010.
- Nutrition Assistance: The Supplemental Nutrition Assistance Program (SNAP) increased participation by 18% in the last year. This bill includes language ensuring it will have sufficient funding to meet the growing demand for nutrition assistance from modest-income families.
- Assistance Eligibility: Maintains HHS administered poverty guidelines at current levels through February 28, 2010.
Jobs Bill
Before leaving town for the holidays, the House passed a $150 billion jobs bill which the Senate did not have time to consider. About half of the bill -- $75 billion -- would be financed with leftover funds from TARP. It would $39.3 billion toward highways, transit, and HUD, $40 billion toward assistance for unemployed workers, and $2.8 billion for clean-water infrastructure. The jobs bill also extends unemployment benefits and health care subsidies for laid-off workers under COBRA for six months.
The bill still has to be considered in the Senate. CBO's cost estimate of the Jobs for Main Street Act can be seen here.
Non-Defense Appropriations Bills
On December 16 President Obama signed into law a $447 billion omnibus measure that provided spending on a number of appropriations bills through FY 2010. The bill provided spending for he Departments of Commerce, Defense, Education, HHS, HUD, Justice, Labor, State, Transportation, the Treasury, Veterans Affairs and other agencies. CRFB released a paper on controlling discretionary spending, pointing out:
"When added to the five already-passed bills, this minibus will put total non-stimulus, non-defense FY2010 appropriations at $583 billion. This represents an 8.2 percent increase over last year’s $539 billion."
December 21, 2009
As a heads up to all of The Bottom Line's loyal readers, we wanted to let you know that we will be taking a break from blogging over the holidays. But don't fret! - we will promptly resume on Monday, January 4th.
The Bottom Line launched just four short months ago, and since then we have written over 230 blog posts on all areas of budget, fiscal, and economic policy. We thought you might enjoy this "Wordle" graphic of our most commonly used words:
We wish all of you and your families a great holiday season. See you 2010!
December 19, 2009
UPDATE: CBO mistakenly overestimated the deficit-reducing effect of the Medicare Commission in their score. As a result, they now estimate deficit reduction of between 0.25 and 0.5 percent of GDP, as opposed to 0.5 percent in the second decade.
ALSO: Click here for charts and interactive graphs comparing the House and Senate bills.
Today, Senator Reid released his Manager's Amendment of the Patient Protection and Affordable Care, which will likely be passed by the Senate before Christmas. The CBO also released its corrected score of the bill which showed that it would reduce $132 billion over the next decade ($60 billion excluding the CLASS Act). More importantly, the CBO estimates the bill could reduce the deficit in the second ten years by somewhere in the broad range of 0.25 percent and 0.5 percent of GDP. This is somewhat more significant than the previous most recent bills from both the House and Senate, and is largely the result of new rules enhancing the power of the Independent Medicare Advisory Board (The "Medicare Commission").
We will provide more information soon, but for now here is our newest chart comparing the new bill to previous versions:
| Provisions | Finance Committee | Senate Leadership |
Manager's Amendment |
| Individual Penalties | $4 | $8 | $15 |
| Employer Payments | $23 | $28 | $28 |
| Mandate Provisions | $27 | $36 | $43 |
| Exchange Subsidies | ($461) | ($447) | ($436) |
| Medicaid Expansion | ($345) | ($374) | ($395) |
| Small Business Credits | ($23) | ($27) | ($40) |
| Coverage Expansion | ($829) | ($848) | ($871) |
| Physician Payment Updates | ($11) | ($11) | $0 |
| Medicare Prescription Drug Coverage | ($21) | ($23) | ($23) |
| Measures to Slow Health Care Cost Growth | ($14) | ($17) | ($12) |
| Other Spending Changes | ($26) | ($42) | ($57) |
| Other Spending | ($72) | ($93) | ($92) |
| Prescription Drug Cost Reductions | $28 | $51 | $51 |
| Medicare Advantage Cuts | $114 | $119 | $119 |
| Reductions in Provider Payment Updates | $163 | $160 | $157* |
| Medicare Premium Increase | $33 | $36 | $36 |
| Medicare Payment Commission | $22 | $23 | $28 |
| Measures to Slow Overall Health Care Cost Growth | $29 | $26 | $19 |
| Measures to Reduce Federal Health Care Spending | $135 | $129 | $126 |
| Spending Offsets | $524 | $544 | $536 |
| Excise Tax on High Cost Insurance | $201 | $149 | $149 |
| Tax Gap and Loopholes Closing | $17 | $17 | $17 |
| Limits to Health Care Tax Benefits | $42 | $43 | $41 |
| Fees on Health Care Companies and Taxes on Certain Heath Procedures | $121 |
$108 | $103 |
| Medicare Payroll Tax Increase for High Earners | n/a | $54 | $87 |
| Tax Increases | $382 | $370 | $398 |
| Interactions and Other Spending and Taxes |
$49 | $48 | $46 |
| Budgetary Impact Subtotal | $81 | $57 | $60 |
| CLASS Act+ | n/a | $72 | $72 |
| Total Budgetary Impact | $81 | $130 | $132 |
| Tenth Year Budgetary Impact |
$12 | $8 | $16 |
| Deficit Reduction in Second Decade | 0.25% to 0.5% of GDP | 0.25% of GDP | 0.25% to 0.5% of GDP |
| Reduction in Uninsured | 29 million |
31 million | 31 million |
Numbers in billions, with positive numbers representing a reduction in the deficit
Sources: Congressional Budget Office, Joint Committee on Taxation, and Authors' Calculations
*Assumes $10 billion in home health cuts are the result of market-based payment updates
+The CLASS Act makes available government-sponsored long-term care insurance. Because this insurance would have a "vesting period," the provision appears to raise considerable amounts of revenue over the next decade. However, these revenues must ultimately be used to cover the program's costs, and therefore do not belong in the bill as an offset.
December 18, 2009
In a blog post earlier this week, Stan Collender presented a laundry list of suggestions about how deficit hawks can be more effective. As a proud member of that group, we welcome Stan’s advice. Having reviewed the list, we were pleased to find that we already are doing everything that Stan wanted. We’re not sure who Stan is writing about, but it’s obviously not us.
Here’s Stan’s checklist and how the Committee for a Responsible Federal Budget measures up:
- “Advocate aggressively and forcefully for reducing the deficit. Pay-as-you-go rules for new proposals are important, but existing programs already in the baseline shouldn’t get a free pass.”
Check – Sure, we were for PAYGO before favoring PAYGO was sexy, (see here, here, here, and here), but we also regularly call for entitlement reform, tax reform, and discretionary spending control.
- “But understand that there are times, like when the economy is in the tank, that reducing the deficit or running a surplus is the wrong fiscal policy.”
Check - We have written extensively on how there are times where deficits are good (see here) and that Deficit reduction should phase in slowly once the economy has recovered so as not to destabilize an economic recovery (see here and here).
- “Be the one that helps define when a deficit is appropriate. One of the most important contributions hawks can make will be to communicate this so that it becomes the common wisdom…”
Check - Devoted an entire paper to it (see Good Deficit/Bad Deficit from our Fiscal Roadmap Project).
- “Don’t allow the deficit to be a partisan issue. Both political parties frequently use the deficit as an excuse whenever they oppose something but don’t want to state the real reason for the opposition.”
Check - We certainly don't do that, and our bipartisan credentials are solid. CRFB's board is about as bipartisan as it gets. It represents views from both sides of the aisle, bringing together budget experts with different political beliefs but who all share a common interest in getting deficits and the debt to sustainable levels.
We agree some budget experts do seem to use different standards for the two different parties.
- “Advocate as forcefully for debt reduction as deficit reduction when it makes sense economically.”
You guessed it, CHECK - The newly released Red Ink Rising from the Peterson-Pew Commission on Budget Reform discusses the importance of focusing on debt and not just deficits, as the debt level could negatively affect the credit ratings on U.S. debt instruments, interest rates throughout the economy, and threatens budget flexibility to respond to emergencies.
So, thank you Stan for pointing out everything that “real, substantively based” deficit hawks should be doing.
December 18, 2009
Yesterday, on the heels of President Obama signing a $1.1 trillion "minibus" CRFB released a paper on the importance of controlling discretionary spending growth. The paper showed that, while fiscal conservatives tend to worry about mandatory spending, discretionary spending has actually been growing faster over the last decade. It also devotes a small box to discussing President Obama's proposed spending cuts -- which this blog will discuss in more detail. As we explain:
In his 2010 budget request, President Obama proposed terminating or cutting about 75 discretionary spending programs to achieve $11.5 billion in savings. Proposals ranged from as large as $3 billion for the F-22 Fighter Aircraft – which most experts deem no longer necessary - to as small as $1 million for the Christopher Columbus Fellowship Foundation – which the Administration found spent 80% of its funds on overhead.
We first discussed and analyzed these proposed cuts in our Analysis of the President's FY 2010 Budget back in May. There, we pointed out that administrations have historically faced opposition in Congress in trying to enact cuts and eliminations. As we wrote:
Despite proposing more cuts than the Obama Administration, President Bush saw limited success in eliminating or cutting government programs. For its FY2006 Budget, coming off a large electoral victory with a unified Congress and few spending pledges, the Bush Administration succeeded in achieving around 40% of its proposed cuts and saving roughly $6.5 billion. In the next two years, Congress enacted less than 15% of the Administration’s proposed cuts, for savings of less than $2 billion a year.
We haven't yet reviewed all of President's requested cuts (we plan to in the next month or so), but we did try to look at the President's top ten proposed cuts to see if they were included in the appropriations bills he has signed. We excluded defense spending because it has not been passed yet. We also excluded two proposed "corps of engineers" cuts, since they came out of difficult-to-trace earmark spending.
Of the top ten programs remaining, we found that only two were enacted as requested. Another three were partially enacted. Yet five of the proposed cuts were ignored altogether -- including four which received funding increases.
Out of the $1.78 billion in proposed savings from these ten items, in fact, Congress only enacted $560 million -- less than one third. And that doesn't even include the $200 million in increased spending for areas the President recommended cutting. That would put the net cut at closer to $360 million.
Here is a chart of the spending cuts (numbers in millions). We intend to expand it to include all the President's proposed cuts the coming months:
| Program |
Agency | FY2009 Levels | FY2010 Proposed Level | Actual FY2010 Funding Level |
| Health Care Facilities and Construction | HHS | $310 | $0 | $338 |
| Surface Transportation Priorities | Transportation | $161 | $0 | $293 |
| Water Infrastructure Earmarks | HHS | $145 | $0 | $162 |
| Agricultural Research Service Buildings and Facilities | Agriculture | $47 | -$50 | $71 |
| SCAAP | Justice | $400 | $0 | $330 |
| Nuclear Power 2010 | Energy | $178 | $20 | $105 |
| Election Assistance Commission Grants | Financial Services | $106 | $52 | $75 |
| Safe and Drug Free Schools | Education | $295 | $0 | $0 |
| Yucca Mountain | Energy | $288 | $197 | $197 |
| Even Start | Education | $66 | $0 | $66 |
If Congress cannot even enact these small cuts, we worry about its ability to control discretionary spending on the whole. We thus urge Congress to enact some type of enforcement mechanism, such as caps, to keep Congress from bowing to the temptation to overspend. As we explain:
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...caps would prevent the situation from further deteriorating, something which would almost certainly occur under the current process...controlling discretionary spending alone cannot be enough to avert the coming debt crisis...But discretionary controls can make a far bigger difference than most policymakers realize, and more importantly, they can send a signal that we are serious about getting our burgeoning debt under control.
December 18, 2009
Congress will leave town for the holidays without completing some serious fiscal business, but with a full agenda for next year. The House and Senate will have to raise the debt limit again early next year. Many members are clamoring for the establishment of a fiscal commission. And Democratic leaders from House Speaker Nancy Pelosi to President Obama have promised a new focus on deficit reduction. Republicans have promised to force the Democrats’ hands on the issue or make it a major issue in the fall election.
The question remains whether policymakers will have the political will to tackle these and even more serious long-term fiscal issues in an election year. For the past year, along with our colleagues on the Peterson-Pew Commission on Budget Reform, we have wrestled with a critical issue — a federal debt that is out of control. The Commission members share a common concern: the fiscal future we leave to succeeding generations will lower their standards of living. It is our strong belief that we must take action now to prevent that from happening.
On December 14, the bipartisan Commission presented a report containing recommendations for how lawmakers and the administration can tackle the debt – “Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt.” Commission members from both sides of the aisle agreed that spending cuts and tax increases will have to be part of the solution. That won’t be easy for anyone to swallow. But it’s essential to avoid saddling future generations with a crippling debt. We hope that the holiday break will give lawmakers the opportunity to rest and return to the Capitol re-energized to face the nation’s fiscal future.
December 17, 2009
The chance that some type of bipartisan commission will be created to address the nation’s long-term fiscal challenges increased significantly this week as the idea has gained support and key leaders appear to be responding to mounting pressure to adopt the proposal.
CNN reported on Tuesday that President Obama is seriously contemplating an executive order to establish a commission, with White House advisors debating on how broad a mandate the panel should have. House Speaker Nancy Pelosi, who previously had been cold to such the idea, was quoted by Politico today as saying that “we’ll come to terms on a commission” early next year.
A group of key centrists in the Senate have demanded a vote on legislation to create a commission that will make recommendations to reduce the mounting federal debt in order to gain their support for a long-term debt limit increase.
At a hearing convened by the Senate Committee on Homeland Security and Governmental Affairs today former Federal Reserve chairman Alan Greenspan offered his approval of a bipartisan commission, saying it is “an excellent idea.” At the hearing, Senate Budget Committee chairman Kent Conrad (D-ND) stated that the proposal he introduced last week with Sen. Judd Gregg (R-NH) now has 34 sponsors. Conrad testified that a commission is needed because the “regular order will not take on burgeoning debt.”
There are still several issues that must be resolved among competing proposals for a budget panel. One is whether it should be formed though legislation or presidential directive. A directive would be easier to execute, but the commission would not have the full force of law and could not mandate that Congress vote up or down on its recommendations, like the Conrad/Gregg bill proposes. Other issues include how broad a mandate the entity should have and the make-up of the panel – whether it should be composed entirely of Members of Congress or include others.
CRFB supports a bipartisan special process for tackling the debt in the hope that it will focus much-needed attention on fiscal responsibility and establishing a shared fiscal goal. According to a recent statement from CRFB president Maya MacGuineas. “It is less important to us the specifics of any commission or task force than the reflection that Congress and the White House are finally willing to turn their attention to this pressing problem.”
December 17, 2009
With U.S. debt held by the public on track to exceed 100% of the economy in a little over a decade, policymakers must come together now and implement a plan for getting our fiscal house in order. Otherwise, our economic future, as well as that of the rest of the world, is at risk. The Peterson-Pew Commission on Budget Reform recently released a report that examines the consequences of the large government debt and suggested a plan for lowering that debt to 60 percent of GDP (an international standard). The report received widespread attention, including from The Economist, Wall Street Journal, and Capital Gains and Games.
Our debt has implications far beyond our borders. But we are not the first to deal with overwhelming debt and the United States can learn some lessons from other countries.
The bad news first:
A large and growing portion of our debt is held by foreign investors (see page 12 of the report). Without the reassurance that comes from having a plan to bring U.S. debt down to a sustainable level, those investors may begin demanding higher returns on their investments (thus, pushing interest rates up), or reduce lending to us altogether. This would hurt our ability to react to economic crises in the future, and to continue to pursue economic growth.
We are already starting to see some nervousness among our international creditors. China, our largest foreign creditor, has recently voiced concern over whether our debt, and its expected growth, is sustainable. And while U.S. Treasury debt instruments continue to be a safe haven for many investors, there is no telling when a fiscal crisis might trigger a change in that scenario. Some fear the United States may not continue to be the world’s reserve currency. The IMF and the UN have already begun to investigate a worldwide reserve currency as a potential alternative to the dollar.
Now the good news:
The United States is not the first country to face an unsustainable debt burden, and other countries have been successful in lowering their debt and improving their economic prospects (see pages 16 and 17 of the report and this paper on other fiscal success stories). While not perfect comparisons, those examples show that bringing a country’s debt to a sustainable level is possible. After a series of missteps, Canada successfully brought its debt level down and enjoyed a decade of budget surpluses.
However, we would be wise to learn from the mistakes of most other countries who undertook debt reduction: don’t wait too long. In many, if not most, cases, debt reduction came only with difficult and rapid policy changes after an economic crisis struck, precipitated by high debt and persistent deficits. Economies and people suffer greatly when their government fails to act until it is too late. Without concrete action soon, we might face an economic crisis sooner than we think, and our nation might lose its global clout.
