The Bottom Line

September 14, 2010

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.

September 13, 2010

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.

September 13, 2010

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.

September 10, 2010

The “Orszag Plan” laid out by former OMB director Peter Orszag in his inaugural New York Times column argues that we should extend the tax cuts for two years--all of them--but let them expire after that (click here for our response to it).

While the focus has been on his departure from his former employer's position that we should only extend the middle class tax cuts (though really – since when is $250,000, or about the top 3 percent of earners considered the threshold for middle class?) the more important break from the Administration is his suggestion that we should let the tax cuts expire after that.

Though extending the tax cuts for only two years, given the nature of politics, the risk is that people will jump onto the first half of the idea while ignoring the second half. Indeed, many in the permanent-tax-cut camp have jumped on the Orszag bandwagon, hoping that politics will turn a two-year extension into a permanent extension.

As you can see below, even though the Orszag Plan would add to the deficit relative to current law if not offset, it is still significantly better from a fiscal perspective than the Obama Plan and the permanent extension of all tax cuts.

The Cost of Tax Cost Extensions Including AMT Patches (billions)
Option Two-Year Cost Ten-Year Cost
Below $250,000 $400 $3,000
All $500 $4,000

 

There is also some concern about how the Orszag Plan might play out in terms of process. The cost of extending the tax cuts for the highest earners is not covered by the PAYGO legislation while the cost of the middle class ones is covered. However, on that PAYGO scorecard sits roughly $40 billion in savings from health reform. There may be a temptation to "grab" that savings to offset the high-earners extension (which would cost $37 billion in the first year) for at least one year. 

Don’t do it. Just don’t.

The savings from health should have been designed so they couldn’t be used to offset other deficit spending, and that was clearly the intention. The savings are frankly pretty puny and spending them rather than walling them off for deficit reduction would add insult to the injury of the health care reform bill that didn't go far enough in controlling costs. Letting the tax cuts expire after two years would go a long way towards bringing the deficit back to manageable levels. Or, Congress could, as we have suggested use their expiration as a hammer for real tax and budget reform, agreeing not to extend them again unless they were fully paid for and part of a more comprehensive budget deal to get the debt under control.

September 10, 2010

US markets this week continue to reflect a modest growth play despite uninspiring data. Safe haven concerns from abroad and deflation worries have diminished, although unexpected news could quickly reverse trends – as we have so vividly seen over the past few years. The yield on the benchmark 10 year bond headed up again from its nearly two year low at the end of August and start of September (although it remains very low), as capital shifted into stocks at the margin.  

Data has been thin and sentiment modestly positive in this shorter post-Labor Day week. Still reeling from last week’s weak unemployment data for August, US financial markets have been chewing on possibly more positive news on the labor market front (unemployment claims may be showing some trend improvement). Still, weak data and surrounding discussion from the past few weeks led forecasters to revise downward their 2010 and 2011 outlooks (eg, the new Blue Chip.) While a double dip recession is not expected, growth and labor market improvements are expected to be weak. Deflationary worries have receded slightly, but the deflation ghost hovers in the background of market activities and policymaker risk concerns. (The US slowdown and a few other factors have just led the OECD, the advanced industrial economies’ policy think tank, to call for additional stimulus in countries that have fiscal room for maneuver, aka “fiscal space”.)
 
Awaiting any economic policy surprises today from the President in his scheduled news conference, markets have not reacted much to the President’s announcement earlier this week of additional proposals to modernize the economy’s infrastructure through basic capital spending projects – perhaps because they think it won’t get through Congress. (His proposals are not stimulus of the same variety we have seen over the past few years to jump-start the economy. Rather, they are growth friendly investment proposals to fix some of the aging infrastructure – highways, bridges – for the longer term. The ARRA – last year’s stimulus package – included infrastructure spending, but it was for the most part shovel-ready so that resources could be moved into the economy relatively quickly.)  
 
Safe haven pressures on the US market have so far been relatively limited this week, with financial pressures coming from Ireland (a tighter fiscal policy has increased pressures on its financial sector, still overextended from its construction boom) and some so far quiet concerns about European bank capital. It remains to be seen how the new Japanese stimulus measures will affect US markets.
 
China has also been on top of the agenda. The financial press has covered the visit to China of two of the President’s top economic advisers (including Larry Summers), presumably to discuss market valuation of the Yuan among other concerns with the leadership. At the end of the visit, Treasury Secretary Geithner criticized the lack of market orientation of the currency. Next week, Congress is expected to put the spotlight on the Chinese currency and its undervaluation (creating problems for the US manufacturing sector), which could be particularly sensitive as the mid-term elections approach. China is the largest foreign holder of our sovereign debt.   

 

September 9, 2010
Comparing the Upper-Income Tax Cuts to the Social Security Shortfall

A small controversy has been brewing in the blogosphere over the relative value of the higher-income 2001/2003 tax cuts and the Social Security shortfall. A couple of weeks ago, the Center on Budget and Policy Priorities displayed this graph, showing the present value of the two being roughly equal:

Some bloggers (but not CBPP) have held this up to essentially argue that we can let the top cuts expire to pay for Social Security. Others, meanwhile, have disputed CBPP’s findings or its relevance. Megan McArdle over at The Atlantic, for example, has argued that Social Security’s shortfalls would exceed the value of the trust funds in the out-years – a point which is obscured by using “present value” calculations. CBPP responded that while the Social Security shortfalls grows over time, so too do the value of the tax cuts (they further responded to McArdle’s concerns here). Over at his blog, Ezra Klein said he was “calling this one for CBPP, at least for the moment.” We aren’t so sure it’s that simple.

Present value calculations are an important way to measure our fiscal obligations. But cash flow matters too. Here is a graph comparing CBPP’s projections of the upper-income tax cuts to Social Security’s shortfalls as measured by the Trustees:

 

 

 

As you can see, the Social Security shortfall begins to exceed the value of the upper-income tax cuts at the very beginning of next decade, and is projected to be significantly larger over the course of the following quarter century.

So why do the cash-flow numbers make Social Security’s shortfall look so much larger? Well, there are two major reasons. First, by their very natures, present value estimates favor the near-term over the far term. This is logical, since a dollar today is worth more to us than a dollar tomorrow. But it also means that the first decade of relatively modest deficits (and brief surpluses) in Social Security weigh heavily on the calculation.

Secondly, these calculations include the value of the $2.6 trillion Social Security trust fund – and weight those heavily since we are holding that money today. If we were looking at the present value of Social Security’s future shortfalls, as opposed to accounting for its past surpluses (which have accumulated in the trust fund), the program’s unfunded costs would be closer to 0.9 or 1 percent of a GDP, rather than 0.7 percent. (That 0.7 percent isn’t irrelevant, since most reform plans would rely on the trust fund, at least for a while. But looking out to the end of the 75-year window, the gap will reach 1.4 percent of GDP.)

Aside from these cash-flow issues, we also have some concerns about CBPP’s methodology for projecting forward the value of the tax cuts – which appears to be highly sensitive to a few uncertain assumptions.

Essentially, CBPP assumes that the growth rates in revenue loss from 2017 through 2020 will continue forever. Over time, the compounding effects of these growth rates are significant -- increasing the value of the cuts to about 1.1 percent of GDP by 2080. Yet tiny changes in some of the numbers they use can drastically alter this number.

For example, they estimate that the tax cuts will cost $99 billion in 2017 and $120 billion in 2020 based off of a combination of Treasury and TPC estimates. We used some TPC tables to estimates these numbers at $102 billion in 2017 and the same $120 billion in 2020. When we tried to roughly apply their methodology using our $102 billion instead of their $99 billion (in other words, a nominal growth rate of about 5.6% instead of 6%) we found that the shortfall only reaches about 0.65 percent of GDP rather than 1.1 percent.

This is not to say that our $102 billion is right and their $99 billion is wrong – both are plausible and surely both will be wrong. The point is that tiny changes in these numbers cause wild swings in the ultimate cash flow results. (Though the magnitude of the present value cost wouldn’t swing nearly as much – under the scenario we presented, the present value of the upper-income cuts would be between 0.5 and 0.6 percent of GDP rather than 0.7 percent).

We also tried projecting forward two other ways: assuming that the upper income tax cuts remained a fixed proportion of total revenue under CBO’s extended baseline scenario and assuming bracket creep for the upper-income cuts in line with the total bracket creep we estimate in our CRFB baseline.

Here are the results:

 

Note: CBPP estimate (blue line) is the same line from the above graph. 

We have one more point – a point which CBPP has rightly made many times: reforming Social Security and letting the upper-income tax cuts expire is not an either or question. Based on CBPP’s estimates, doing both would generate present value savings of 1.4 percent of GDP or so. Based on CBO’s 2009 alternative baseline, the fiscal gap is more like 8 percent over the next 75 years.* That means we will need to do the fiscal equivalent of letting the top income tax cuts expire AND reform Social Security AND a whole lot more. This is what CBPP's graph from above would look like if we compared the costs of upper-income tax cuts and Social Security shortfalls to the fiscal gap:


Those who think that reforming Social Security is a fiscal imperative but there is no need to pay for the expiring tax cuts simply aren’t being honest with themselves. As CBPP argues, it’s “time for hard choices – not hypocrisy”.

 

 

*Note that we used the 2009 Alternative Fiscal Scenario because it assumes that the upper-income tax cuts are renewed. The 2010 Alternative Fiscal Scenario assumes that only the tax cuts for those below $250,000 a year are renewed, and that after 2020 revenue is fixed as a percent of GDP. Also note that numbers are not strictly comparable.

September 9, 2010

The Tax Policy Center recently unveiled their new “Tax Calculator,” which examines how the decisions regarding the 2001/2003 tax cuts will affect people’s tax payments. The Tax Calculator allows you to calculate the impact of three distinct scenarios on your bottom line: current policy where all of the 2001/2003 tax cuts are in place; current law where they all expire; and having the tax cuts continued except for individuals making over $200,000 or couples making over $250,000 (the plan outlined in President Obama’s 2011 budget).

Their calculator has six sample taxpayer options: married and under age 65 with no children, married with one child in college, married with two children under 13, single, head of household with two children under age 13 and married and over 65. The calculator spits out a host of tax metrics on your different assumptions about income and other houshold variables. It's really cool. Year, we said it - a tax calculator is really cool.

Using the Tax Calculator and their pre-determined “Middle Income” bracket, the following results were produced:

  Married, Under 65, No Children Married, 1 Child in College Married, 2 Children Under Age 13 Single Head of Household, 2 Children Under Age 13 Married, 65 and Over
Current Tax Law (with all 2001/2003 Tax Cuts) No Change No Change No Change No Change No Change No Change
All 2001/2003 Tax Cuts Expire $1,944 Higher $2,138 Higher $2,638 Higher $819 Higher $2,400 Higher $852 Higher
President Obama's Plan $160 Lower No Change $645 Lower No Change No Change No Change

However, it should be noted that this calculator does not take into account the resulting fiscal costs that President Obama’s plan or a full extension would entail. The following table details the budgetary impact of these options (as we detailed in a previous blog):

Action
2011-2020 Budgetary Impact
Fully Extend Tax Cuts (without AMT) $2.7 Trillion
Fully Extend Tax Cuts (with AMT) $3.9 Trillion
Extend the Tax Cuts for All but Top Earners (without AMT) $1.7 Trillion
Extend the Tax Cuts for All but Top Earners (with AMT) $3.0 Trillion



Click here for our Budget Simulator to see how these tax cuts, and a wide variety of other budget alternatives, can be used to help bring our long-term fiscal house in order.

September 9, 2010

Secretary of State Hillary Clinton spoke yesterday about the importance of taking action soon to ensure future fiscal sustainability, calling the mounting federal deficit a threat to our national security in two ways:

“It undermines our capacity to act in our own interest, and it does constrain us where constraint may be undesirable. And it also sends a message of weakness internationally. It is very troubling to me that we are losing the ability not only to chart our own destiny, but to have the leverage that comes from having this enormously effective economic engine that has powered American values and interests over so many years. So I don’t think we have a choice – it is a question of how we decide to deal with this debt and deficit…. There is no free lunch, and we cannot pretend that there is without doing grave harm to our country and our future generations.”

Secretary Clinton's statement reflects the growing number of our nation's leaders (listed here are the members of the Announcement Effect Club) who recognize that our current unsustainable fiscal path will have ripple effects beyond just our federal budget. Our skyrocketing national debt will impact not only America at home but also our global economic and political relationships -- making it more important than ever to enact a plan now that will outline how we will bring down future deficits, before it's too late.

September 8, 2010

The knives are out, and they’re pointing at Social Security reform.

There is no one “right” way to fix the fiscal problems facing the country, but if there is one thing experts from all ideological perspectives tend to agree on, it is that with Americans living longer, we should raise the retirement age. Just ask House Majority Leader Steny Hoyer or House Minority Leader John Boehner. Or ask any member of the American Academy of Actuaries, for that matter.

So why then the slew of recent attacks on raising the retirement age? Sure, some are depressingly predictable made by groups determined to prevent any changes to Social Security benefits – actuaries’ warnings be damned. But others show that the pushback against raising the retirement age is gaining momentum even by those who previously supported it. If fixing the budget is a one-step-forward three-steps-back kind of process, markets are going to lose patience sooner than we were expecting.

Working longer is probably the single best thing people can do for their retirement security. The stock market’s plunge left savings pummeled and companies have pulled back from providing defined benefit plans. Staying in the workforce allows workers to save more money before retiring and go without wages for a shorter period of time. Importantly, it also improves the overall fiscal picture through higher income tax revenues and improved labor market incentives, helping to grow the economy, which benefits everyone.

When Social Security began, the retirement age was 65. Today, 75 years later, it is 66, moving up to 67. The good news is that life expectancy has improved greatly since then – by 17 years for men and 20 for women. In his recent piece in the Washington Post, Ezra Klein points out that these numbers are influenced in part by improvements in infant mortality. Yet even life expectancy at age 20 has increased by 9 years for men and 10 years for women.

  At Birth
At Age 20 At Age 65
   Men
Women  Men
Women  Men
Women
1940 61 66 67 71 77 78
2006 75 80 76 81 82 85
2050 (projected) 80 84 n/a n/a 85 87

 

In light of continued increasing longevity, it only makes sense that individuals would work longer. Raising the normal retirement age would serve as an important signal to encourage them to do so, and raising the early retirement age would go even further to promote longer working lives.

So why all the pushback on turning to the retirement age as part of the problem?

There are concerns that it would be regressive and unfair. Not so.

Even reform-opponent Dean Baker admits that “an increase in the NRA reduces benefits by the same percent for all workers” – and that analysis doesn’t account for disability benefits, which are completely protected from changes to the retirement age. When looking at the entire Social Security system, the Urban Institute finds that raising the NRA is in fact a progressive option and “benefit reductions from an increase in the [NRA] would increase with lifetime earnings.”

Benefit Reductions by Quintile in 2050 (percent relative to scheduled benefits)


Then there is the concern that some individuals may be physically unable to continue working past the current early retirement age of 62. This is a legitimate concern for about a fifth of young retirees today, but we shouldn't design the entire retirement piece of program around them since they can largely be assisted through the disability program, SSI, or other means. We need to be targeting benefits toward the old-old who have outlived their savings and really can’t work. Maintaining unaffordable benefits for 100 percent of people in order to protect 20 percent of people is like putting out a match with a fire extinguisher.

Back in 1950, the average retirement age was over 67, and more than 70 percent of 65 year olds worked. Today, the average retirement age is 62 and only 30 percent of 65 year olds work (this was true before the recession as well). Are we really going to argue that jobs are more physically intensive and people less able to work than back in 1950?

 

The barrage of arguments against Social Security reform aren't limited to the retirement age.

In his article, Ezra also argues that the Social Security gap isn’t that large -- and that we are better off letting the Bush tax cuts expire on high income earners than we are going after Social Security.

Yet Social Security and the higher-income tax cuts don’t actually have the same impact on the debt at all though there have been repeated attempts to equate them. From about 2021 on, the Social Security cash shortfall will grow larger than the value of those cuts – much larger as time goes on. (We’ll discuss this more in a future blog). Realistically, we should be talking about letting the tax cuts for the well off expire AND reforming Social Security. We’re going to have to do both, and much, much, more, if we really want to stabilize the debt.

Finally, Ezra makes the argument against Social Security changes in general because of the high level of efficiency, which he argues would make changes a zero-sum game. Ezra uses the low administrative costs of the system to make his case. But saying Social Security is efficient because SSA can cut checks on the cheap is like saying dropping money from a helicopter is efficient as long as we get a good price on the helicopter.

The real measure of efficiency should be how effectively Social Security meets its goal of improving retirement security, and at what cost to society. It’s an open question as to whether a program which gives some seniors more than $30,000 a year and leaves others in poverty is efficient, especially if it encourages under-savings and premature retirement in the process.

Done right, Social Security reform need not be zero-sum at all. If we can encourage people to work longer and save more, we can improve their personal retirement security, increase income tax revenue, and (by increasing labor and capital supply) improve overall economic growth, all while preserving Social Security for future generations.

This approach to shooting down all possible changes to strengthen Social Security presents a serious danger to our nation’s fiscal sustainability. Instead, it would be helpful for those who don’t want to touch Social Security benefits to show how they would fix the program on the tax side, and for those who don’t want to address it at all to show how they would fix the budget without changes to Social Security. There are ways to do both (though probably not ones most people would like when presented with the facts), but this effort at shooting arrows at all ideas is not the way to succeed in putting the program back on sound footing.

September 8, 2010

An interesting exchange was recently published on progressive ways to think about deficit reduction, especially when it comes to the “big three entitlement programs”. Isabel Sawhill and Greg Anrig debated on how to go about medium- and long-term debt reduction in a manner that would be amenable to many progressives.

Anrig emphasized deficit reduction not taking place until after the economic recovery. Beyond that, he went through a plan that would hit a large swath of government programs and revenue sources, but would leave much of the big three untouched. He proposed a public option for the health insurance exchange as the "next round" of health care reforms (which he claims are crucial to the nation's fiscal future), and suggested looking deeply at the defense budget. On the tax side, he suggested a broad overhaul of the tax system, along the lines of the 1986 Tax Reform Act. He -- like many others -- also wants to go after tax expenditures, specifically mentioning the preferential rates for capital gains.

Sawhill argued that savings must be found within the big three; otherwise, the government would risk losing the people’s trust as deficits and debt exploded. On health care, she suggested setting a per-capita spending limit on Medicare while reforming provider payments to reward quality and not quantity. With regard to Social Security, she proposed slowing the growth of benefits for the more affluent -- presumably along the lines of progressive price indexing -- and raising the retirement age. She agreed with Anrig on the need for tax reform, citing tax expenditures like the mortgage interest deduction and the exclusion of fringe benefits from taxable income as items that should be addressed.

CRFB is always glad to hear about people presenting specific ways to bring down future deficits and debt. Check out the full debate here, and as always feel free to submit your own ideas for reducing the debt using either our Contact page or by submitting your choices on our Stabilize the Debt budget simulator.

September 7, 2010

Today, former OMB Director Peter Orszag debuted his new column in the New York Times and he sure made a splash. He tries to thread the needle of propping up the economy in the immediate-term and helping right the budget imbalances in the medium-term by suggesting that the tax cuts should be temporarily extended for all income brackets until 2013 and then allowed to expire. While this is not his ideal plan--he states that extending the tax cuts for only middle-income earners would be--he notes that “getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.”

Orszag's opinion has spurred a great deal of discussion. The White House felt it necassary to state that it disagrees with its former budget chief's view. CRFB’s president Maya MacGuineas wrote a response today in Politico to Orszag as part of a lively debate on Politico.com. MacGuineas called Orszag's solution to extend the cuts to 2013 and subsequently let them all expire “clever”. While agreeing with the idea of a temporary extension, she further suggests that the tax cuts be used as a “budget hammer” in order to get broader budget reform through and only made permanent if they are fully offset. MacGuineas also notes that the then impending tax cut expiration should spur serious tax reform that could include replacing the income tax with an energy tax and broadening the tax base through tax expenditure reform.

September 7, 2010

Yesterday, the President announced two new plans for economic growth. Responding to pressure to deliver more job creation in a critical election year, Obama announced a plan to spend $50 billion next year on transportation and infrastructure—from roads to railways to airports. The proposal also includes plans for the creation of a national ‘infrastructure bank’ to attract private funding for further infrastructure improvement projects. If approved, this $50 billion in spending would be the first part in a six-year series of infrastructure spending bills, supposedly to be paid for by an increased tax on oil and gas companies.

Additionally, Obama will announce tomorrow his proposal for two new tax write-offs for businesses—a permanent extension of the research tax credit and a tax break that would allow companies to write off 100 percent of any new investments this and next year. It’s expected that these combined tax proposals would cost about $130 billion over the next ten years. This bill would be the tenth stimulus bill since the beginning of 2008, and would not be extremely large on the scale of the original Economic Stimulus Act passed in February of that year (see our recent blog on Stimulus Calculus for a rundown of the bills and their costs).

In the wake of Obama’s new ‘stimulus’ proposals, it’s imperative to remember the need to pay, over the longer-term, for any tax cuts or new spending we implement now. As we face an increasingly grim fiscal future, the need for economic growth in the short-run must be balanced with budgetary sustainability in the long-run.

As CRFB President Maya MacGuineas stated in Politico's Arena today:

"While more stimulus may well be in order in the short run, a budget plan to bring down future deficits and debt also needs to be put in place as quickly as possible, and phased in gradually as the economy recovers, in order to reassure global credit markets and keep interest rates low. Focusing on the relatively easy part of what taxes to cut and spending to increase--which makes up stimulus--may be politically desirable, but it will not get the job done."

Follow Stimulus.org for a complete look at how policymakers have addressed the economic downturn.

September 7, 2010

A Lot of Work Ahead – The end of the long Labor Day weekend heralds the effective end of summer: the pools are closed, the kids are back at school, and summer vacations are over. Congress goes back to work in Washington next week. Members of Congress may be hard at work back home campaigning now, but tough tasks wait for them in DC as well.

Spurring the Economy Still a Work in Progress – With little improvement in the jobs picture, the White House is rolling out new proposals to stimulate the economy. On Monday the president announced a plan to improve the nation’s infrastructure, including a swift $50 billion dollar federal infusion to fund improvements to roads, rail lines and airport runways and a new infrastructure bank to finance longer term projects. Reportedly, higher taxes on the oil and gas industry will pay the costs of the plan. Tomorrow he is expected to call for a permanent extension of the corporate research and development tax credit, which will reportedly cost $100 billion and be paid for by closing other corporate tax loopholes. He will also propose allowing businesses to deduct the full cost of equipment purchases through 2011. Plans for paying for such policies over the longer term need to be fleshed out more. A White House statement on the infrastructure plan states that “As with other long-run policies, the Administration is committed to working with Congress to fully pay for the plan.” That is a hopeful sign that long-term offsets will be found to pay for the short term stimulus, as CRFB recommends.

Small Business Bill Awaits Big Break – The Senate plans to resume work next week on legislation (HR 5297) to aid small business that already has cleared the House. The package creates a $30 billion lending fund for small businesses and includes numerous tax breaks. It is ostensibly paid for, but one of the offsets involves allowing people to roll over their individual retirement accounts into Roth IRAs. Although the change will increase revenues in the next ten years, it will cost more afterwards. This is no more than a timing gimmick that increases long-term debt.

Much Laboring to Do Over Tax Cuts – One of the biggest policy debates is over what to do with the 2001/2003 tax cuts that will expire at the end of the year. The debate will become more intense as the Senate is expected to take up the issue this month. President Obama wants to permanently extend the tax cuts for the middle class while Republicans in Congress argue for extending all the cuts, even those for the wealthy. Many economists argue that a permanent extension is not feasible in light of the nation’s long-term debt issue. Some propose a compromise to extend the tax cuts temporarily, as in a year or two. CRFB wants any extension to be paid for in the longer term.

Orszag at Work in New Job – Former OMB director Peter Orszag published his first piece as a columnist with the New York Times yesterday. He writes that a permanent extension of the tax cuts is not fiscally feasible while letting them expire now could harm the economy. He offers a two-year extension as a compromise. He also argues that we cannot expect the bond market to ignore our mounting debt indefinitely and that market sentiment could change swiftly, and painfully, for the U.S. The problem will become more prevalent as the economy recovers.

September 3, 2010

We are heading into the Labor Day weekend with persistent labor market weakness and great uncertainty over the direction of the economy. This is a tough situation for policymakers and taxpayers.

All eyes this week were on today’s unemployment report, the first solid glimpse of the economy in August and labor market trends going forward. Because the report was stronger than expected, markets shifted from a deflation to a growth play (which meant – as usual – that markets shifted from bonds to stocks in the US market). In the lead-up to today’s report, growing concerns about deflation (fanned by recent commentary, including some of the Fed’s Jackson Hole-related statements, and preliminary employment reports), strong demand for the benchmark 10 year bond had put interest rates at the lowest points since the crisis kicked into high gear at the end of 2008/beginning of 2009.
 
Still, today’s adjustment to employment news was quick and one-off: while today’s employment report was stronger than expected (a small gain in private sector jobs, including the leading indicator “temporary help supply employment” and construction, one of the contributing sectors to our recession), the overall trend going forward remains unclear and of concern. Employment creation remains sub-par, the unemployment rate uncomfortably high – to say the least (particularly if long-term unemployment is included), and employment hours (also considered a forward indicator) remain low.
 
Market sentiment – at least as of this am – is that indicators will not be considered sufficiently weak for the Fed to be tipped in the direction of quantitative easing, which had been considered more likely in the event of weak data coming out today.
 
 
    

 

September 2, 2010

An IMF paper released today details the long-run fiscal outlook for the G7 nations. Authors Carlo Cottarelli and Andrea Schaechter wrote about the need for fiscal adjustment in order to ensure long-term sustainability and prevent any defaults on national debt. Yet they tempered this call for reform with the acknowledgement that it “cannot be too abrupt”—as we emerge from the recent global financial crisis, our economic recovery is too precarious for excessively sudden or dramatic change. Cottarelli and Schaechter argue for a “downsizing of government, but without preventing it from playing a key role in the provision of basic services.”

Now is the time, they argue, to tackle the public debt problem that has been growing around the world for decades—and even though it will be difficult to do, if we don’t, we run the risk of a far worse financial crisis than what we’ve recently witnessed. G7 economies will face the challenge of “reducing debt ratios at a time when aging-related spending will put additional pressure on public finances.” In order to put the focus on long-term fiscal sustainability, Cottarelli and Schaechter advocate “growth-friendly structural reforms, a fiscal strategy involving gradual but steady fiscal adjustment, stronger fiscal institutions, expenditure and revenue reforms, and an appropriate degree of burden sharing across all stakeholders.”

Furthermore, Cottarelli and Schaechter argue that right now is a good time to implement these reforms because of the “current environment of low interest rates,” which has kept debt service payments relatively low despite ballooning debt principal levels. The time for action is now, they say, because interest rates may not stay low much longer, and the additional fiscal burden placed on G7 economies by steadily increasing debt service payments might be too much to bear, increasing the risk of default.

September 2, 2010

CRFB board member Laura Tyson makes the argument for additional economic stimulus in a recent New York Times op-ed. At the same time she mirrors CRFB in also proposing that policymakers “should enact a credible multiyear plan now to stabilize the ratio of federal debt to gross domestic product gradually as the economy recovers.” Additionally, she renews her membership in CRFB’s “Announcement Effect Club” by arguing that announcing a credible plan now would ease capital market concerns.

But Andrew Samwick at Capital Gains and Games disputes her counting of stimuli. What she argues would be a second stimulus Samwick labels as a third, also counting the $150 billion package in early 2008 while George W. Bush was president. Actually, there have been multiple attempts to stimulate the economy since the beginning of the current economic slowdown.

Fortunately, CRFB has a great tool in Stimulus.org for keeping track of economic stimuli. It is a comprehensive database of government reactions to the economic and fiscal crisis. It is a good resource for staying on top of the complex stimulus calculus. According to Stimulus.org, there have been 9 stimulus bills (or extensions of provisions in previous stimulus bills) enacted into law since the beginning of 2008.

Date Name Gross Cost (billions) Deficit Impact
Feb. 2008 Economic Stimulus Act of 2008 $147 $114
Feb. 2009 American Recovery and Reinvestment Act $814 $814
Nov. 2009 Worker, Homeownership, and Business Assistance Act $24 $0
Dec. 2009 Provisions in Defense Appropriations Bill $17 $17
Mar. 2010 Temporary Extensions Act $8  $8
Mar. 2010 Hiring Incentives to Restore Employment Act  $13  -$1
Apr. 2010 Continuing Extension Act of 2010 $18 $18
Aug. 2010 Unemployment Compensation Extension Act $34 $34
Aug. 2010 State Aid Bill $26 -$1

 

September 1, 2010

Many are sounding alarms over news that the White House fiscal commission is considering changes to Social Security as a part of a possible debt reduction proposal. Progressive members of Congress are demanding that Social Security be taken off the table. At the same time the commission is being similarly pressured from the right to take tax increases off the table. All this goes directly against the president’s charge that nothing be left off the table in considering how to improve the long-term fiscal outlook.

The sirens have been especially loud regarding raising the retirement age. The Economic Policy Institute has put forth the top ten reasons not to raise the retirement age. CRFB board member Gene Steuerle rebutted many of these arguments in a recent commentary. We would like to add to the excellent points Gene made.

The argument that raising the retirement age will be a benefit cut is misleading. As Gene points out, even if the retirement age is increased to 70, projected benefits will still increase substantially for beneficiaries.

The fact is that people are living longer and Social Security must adjust to that reality. While it is true some people can't work longer, many retire way earlier now than they did in the 1950s and 60s—despite a significant decrease in the number of physically demanding jobs. A 2008 study by the Rand Corporation for the AARP Public Policy Institute suggests that less than 20% of 62 year olds are truly believed to be unable to work. That number will likely continue to go down further over time. That said, increases to the retirement age should (as pretty much everyone acknowledges) go hand-in-hand with protections for those who cannot work longer.

As it is with dealing with the larger budget picture, spending cuts and revenue increases must both be considered in shoring up Social Security’s long-term finances. The revenue-only options that EPI proposes to raise the taxable earnings cap and the cap on employer’s taxes would not be adequate. If phased-in completely by 2019, the proposal would close only about 85% of the actuarial shortfall; and about 40% of the gap in the 75th year. The problem grows so large, there are no easy fixes.

Furthermore, there are only so many tax increases the budget can sustain. So the question must be asked: what is the best use of new tax dollars—supporting larger Social Security benefits than what are paid today, other investments that could do more to fuel economic growth, or keeping taxes closer to historical levels? Whatever one’s answer—and there is no “right” answer—it should not be a given that Social Security trumps all other budgetary priorities without considering the nation’s full host of needs.

As with the overall budget picture, some tough choices will have to be made to strengthen Social Security so that future generations can be secure in retirement with adequate annual benefits. We need a constructive dialogue on what can be done to improve the important program’s long-term finances. We agree with Congressman Paul Ryan’s call for a real conversation without partisan attacks. Impractical demands to ignore potential solutions will not get us there.

September 1, 2010

The FDIC has just released its Quarterly Banking Profile (QBP) for the second quarter of 2010, showing improvement in bank balance sheets since last quarter and at the same point last year. 

After the collapse of the subprime mortgage market, many banks were hemorrhaging money as many of those loans and the mortgage-backed securities attached to them went south. The financial collapse in September 2008 greatly worsened the problem and sent the number of bank failures in the following year skyrocketing. In 2009, 140 banks failed at a cost to the FDIC of $36 billion. 

But in 2010, with an economic recovery seeming to take hold, banks have gotten out of a two year tailspin. The QBP reported that among FDIC-insured institutions, profits were about $22 billion in the second quarter of this year, compared to a $4 billion loss in the same period last year and an $18 billion profit in the first quarter of this year. The 2010 Q2 profit total represents the highest mark in three years.

With banks doing better in the aggregate, the cost of bank failures this year has gone down as well. As of August 27, bank failures have cost the FDIC about $20 billion in 2010; if this pace keeps up, the total cost for the year should come in much lower than the cost in 2009. However, the total still completely dwarfs the total cost of bank failures from 2000-2007, a reminder of how deep the financial crisis and recession were.

Year Number of Bank Failures Cost to FDIC (billions)
2000-2007 24 $1*
2008 25 $22
2009 140 $36
2010 121 $19
Total 286 $78

 *The FDIC did not provide cost estimates for nine of the 24 closings during this period. Still, the total should not come close to approaching the costs of bank closings froom 2008 through 2010 since most of these banks were smaller.

In somewhat contrasting news, though, on August 20, Chicago's ShoreBank failed, at a cost to the FDIC of almost $400 million. This represents the largest cost by a single bank failure in four months.

Remember, you can check the FDIC cost of bank failures, along with any other government actions to help the economy at Stimulus.org.

August 30, 2010

While a great deal of attention has been given to Federal Reserve Chairman Ben Bernanke’s address in Jackson Hole, Wyoming on Friday, the remarks provided that day by his trans-Atlantic counterpart, European Central Bank President Jean-Claude Trichet, deserve equal, if not more, attention. Trichet highlighted the need for “ambitious” fiscal consolidation in promoting the global economic recovery.

Trichet said that the debt overhang among families, the public and private sectors is primarily responsible for the slowing down of the economic recovery. He argued against using inflation to solve the debt overhang, saying that such a policy “has been disastrous everywhere.” He also dismissed “living with the debt” in order to pursue economic stimulus in the short term. He pointed out Japan’s “lost decade” in the 1990s as an example of the failure of ignoring imbalances. Trichet contended that addressing the debt will promote growth and that strong growth will, in turn, make it easier to reduce the debt.

He acknowledged that reaching the target of a 60 percent debt-to-GDP ratio (as the Peterson-Pew Commission on Budget Reform also recommended in the report, Red Ink Rising) will require sizable decreases in debt, but said that such reductions “are not uncommon and quite feasible.” He provided post-war United Kingdom, Belgium in the late 1990s and 2000’s, Ireland, Spain, the Netherlands and Finland in the mid 1990s as examples. He also made it clear that he was “skeptical” of arguments that fiscal consolidation could severely harm the fragile economy. Rather, Trichet maintained that timely fiscal consolidation would strengthen the economy, while delay would be costly.

He reaffirmed the ECB’s membership in CRFB’s “Announcement Effect Club” by reasoning that announcing a credible fiscal plan now would aid the economy by removing uncertainty that debt will be addressed.

Timeliness does not necessarily mean that all measures are implemented immediately. Rather, it implies that a credible long-term plan is announced in time. Although fiscal adjustment itself may be gradual, it is important to announce a credible road-map for fiscal consolidation as soon as possible. With a credible road-map, and a consistent step-by-step implementation of the consolidation measures that it involves, the uncertainty diminishes or perhaps even vanishes completely. As a consequence, fiscal consolidation pushes the economy towards a durable recovery.

We completely agree.

August 30, 2010

From Red Carpet to Red Ink – The Emmy Awards last night celebrated the best in TV. In Washington, the plotlines are still being written for this fall, but fiscal issues are sure to get star treatment.

No “Glee” from S&P – A senior executive with rating agency Standard & Poor’s last week warned the U.S. that its AAA credit rating was at risk down the road if action is not taken to address mounting national debt. The official specifically mentioned that they would closely follow the recommendations of the White House fiscal commission later this year and how Congress reacts.

“Mad Men” (and Women) of CRFB Release Realistic Baselines – Last week CRFB released its Medium- and Long-Term Baselines, which forecast a bleak budget outlook based on realistic assumptions about future policy. CRFB calculates that, absent significant policy action to change course, debt will reach 75 percent of GDP in 2015, 89 percent in 2020, and 127 percent in 2030.

A “Modern Family” Get-Together in Jackson Hole – Economists and central bankers descended upon Jackson Hole, Wyoming for an annual economic symposium where monetary and fiscal policy were hot topics. In his address, Federal Reserve Chairman Ben Bernanke admitted that the U.S. economy was sluggish and that the Fed stood ready to make sure the recovery continued. European Central Bank President Jean-Claude Trichet told the gathering that now that the worst of the financial crisis is over, governments must aggressively reduce their debt. CRFB President Maya MacGuineas was there and talked to CNBC about fiscal policy and the need for a credible debt reduction plan.

Presidential Panel Seeks “Big Bang Theory” for Tax Reform – On Friday the President’s Economic Recovery Advisory Board submitted a report on tax reform options. The report offers several ideas for improving the tax code, along with pros and cons of each. Hopefully, the report will initiate a much-needed discussion on fundamental tax reform that modernizes the inefficient tax code and broadens the tax base.

Boehner Seeks to be “The Closer” – House Republican Leader John Boehner (R-OH) gave a much-publicized speech on the economy last week that is seen as a part of his effort to provide the closing campaign argument for control of the House of Representatives. He devoted significant time to fiscal policy in his remarks. Of particular importance were his statements on the need for tax reform. His acknowledgement that some tax breaks need to be reexamined and the tax code simplified are welcomed and could open the door for bipartisan reform.

Are Unemployment Numbers Still “Breaking Bad”? – Observers are eagerly awaiting the August unemployment report due Friday as an indicator of the strength of the recovery.

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