The Bottom Line
CBO recently put out its quarterly estimate of the macroeconomic effects of the American Recovery and Reinvestment Act of 2009 (ARRA). They found that ARRA created about 680,000 full-time equivalent jobs in the first quarter. Since its passage in February 2009, ARRA has raised employment by anywhere from 1.2 million to 2.8 million, raised real GDP by anywhere from 1.7% to 4.2%, and lowered the unemployment rate by anywhere from 0.7% to 1.5%.
However, it should be noted that the report only measured jobs that were directly created by ARRA funding. Thus, it excludes many parts of the stimulus, like the Making Work Pay tax credit and the one-time transfer payments to seniors. The amount that CBO actually measured only accounts for about 1/6 of the total stimulus spending in the first quarter. The indirect effects of the increase in aggregate demand resulting from the tax cuts, transfer payments, and wages spent by ARRA-funded workers could have also greatly increased the number of jobs. On the flip side, some of the direct spending that CBO measured may have funded jobs that would have been created even without the stimulus in place. CBO does not say which effect is greater.
Finally, in the report, CBO shows the trends in ARRA's effect over the next year. Job creation and GDP growth will continue to increase as a result of ARRA, with its effects peaking in the third quarter of this year. By the fourth quarter, the effects of the stimulus will start winding down through 2011 until they are practically gone by 2012. The major weight to be pulled by the stimulus will come in the next few quarters; we'll see how it does.
Remember you can track all the government's recession spending at Stimulus.org. So far, ARRA has spent about $395 billion, with about $232 billion in spending and $163 billion in tax cuts. Also, be sure to check out our paper on the effects of ARRA.
A close vote is expected today to end debate in the senate on a $59 billion supplemental that includes funding for operations in Iraq and Afghanistan and some disaster aid. The spending is labeled as “emergency” in order to avoid the need for offsets, although the wars are not new developments.
Before the cloture vote, the senate will vote on two amendments sponsored by Senator Tom Coburn (R-OK) to fully pay for the bill's costs by rescinding spending in other areas. The rescissions proposed by Senator Coburn include cutting budgets of members of Congress, selling unused government property and equipment, reducing printing and publishing costs of federal documents, and eliminating bonuses for poor performance by government contractors.
CRFB has called for war costs to be paid for and has decried the use of the “emergency” designation to evade pay-as-you-go requirements. The supplemental and even-larger “tax extenders” bill being considered would add significantly to the federal debt at a time that other countries are paying the price for mounting red ink. Just because a bill is critical doesn’t mean it shouldn’t be paid for. Lawmakers should be prioritizing their projects and finding responsible ways to budget for them.
The extenders bill the House is considering would cost $190 billion between 2010-2020. Only $56 billion of that would be offset.
Emergency designations and PAYGO loopholes aside, we think more (like all) of the bill should be paid for, a belief that seems hard to argue against when staring at a mountain of $8.5 trillion in debt. (If you want to visualize that mountain, picture $100 bills stacked 5,695 miles high.)
So far the offsets in the House bill include:
- Taxation of carried interest ($30 billion)
- Oil spill liability tax ($11 billion)
- Other revenue increases ($15 billion)
But all the proposed offsets are tax increases. May we suggest that spending cuts make excellent offsets as well.
The CBO offers a good list of potential candidates. Or take a run at our Stabilize the Debt! simulator. We at the Committee for a Responsible Federal Budget will soon be offering more potential offsets on our blog – stay tuned, or send us ideas of your own.
The President's Fiscal Commission is holding its second public meeting, which is being webcast live on the White House's website. We've embedded the webcast below for your convenience.
The meeting will provide updates on the workings of the commission's sub-groups, including the Discretionary, Mandatory, and Tax Reform working groups.
Yesterday CBO issued a very interesting report on the budgetary impact of the Federal Reserve's actions to address the economic and financial crisis. Besides giving a very useful background on the Fed's extraordinary actions (which we've talked about here) and its more traditional policy controls, CBO estimates that remittances from the Fed to the Treasury will grow from about $34 billion in 2009 to over $70 billion in 2010 and 2011.
Each year the Fed is required to remit any excess income (income minus expenses, dividends to banks, and additions to it surplus account) to the general fund of the Treasury, where it appears as a type of revenue under "miscellaneous receipts." Between 2000 and 2009 remittances ranged from $19 billion to $34 billion.
Due to the Fed's actions to stabilize the economy and financial sector (including expanded lending to banks, new liquidity programs, open-market purchases of securities, and support for systemically important institutions -- see a full list and descriptions at Stimulus.org), remittances are expected to more than double over the next few years as the Fed's asset portfolio remains large (according to Stimulus.org, the Fed's balance sheet is currently nearly $2.4 trillion) and returns on these assets remain higher than interest rates the Fed pays on reserves.
But the Fed's asset portfolio is now much riskier than before. Before the crisis, U.S. Treasury securities made up almost all of the Fed's assets. Now, Agency debt and MBSs constitute the majority of assets held.
But there's another part of the story here. The projected increased remittances to the Treasury fail to fully account for the costs to the taxpayer of the Fed's actions. Since the Fed purchased some of these assets at prices higher than what private investors would have, taxpayers receive less of a return for their money. As CBO explains:
If the Federal Reserve purchases the security at a fair market price, equivalent to what private investors would have paid, then the purchase creates no economic gain or loss for taxpayers; the price compensates the central bank for the risk it has assumed. By contrast, if the Federal Reserve purchases a risky security for more than the amount that private investors would have paid, it gives a subsidy to the seller of the security, creating an economic loss, or cost, for taxpayers.
Using "fair value" subsidies conferred by the Fed, CBO estimates that the Fed's actions totaled about $21 billion. CBO does note, however, that these fair value estimates focus on the costs and not the benefits of the Fed's actions, arguing that the benefits likely "exceeded the relatively small costs reported here for fair-value subsidies."
So, it's clear that the actions of the Fed clearly affect the federal budget, but these remittances do not capture the full extent of the risks and subsidies that the Fed is taking on and dispersing, respectively. It is also unclear whether the Fed's remittances should be shown in the budget as a receipt -- to reduce the deficit -- or as a means of financing -- to reduce the Treasury's borrowing needs.
See CRFB's paper The Extraordinary Actions Taken by the Federal Reserve.
A few months back, we discussed a comprehensive proposal by Senators Ron Wyden (D-OR) and Judd Gregg (R-NH), the Bipartisan Tax Fairness and Simplification Act of 2010. Wyden-Gregg would, as its name indicates, simplify the tax system in many ways. It would reduce the number of income tax brackets from six to three, with rates of 15, 25, and 35 percent. As a side note, the brackets would be adjusted for inflation based on a different measure, the chained CPI, which is one of the options included in our budget simulator.
The proposal would also eliminate a number of tax expenditures, and replace the preferential rates for capital gains and dividends with a tax exclusion on 35% of them. It would also nearly triple of the standard deduction, which would discourage taxpayers from itemizing and thus ease the burden some on the largest tax expenditures. However, it leaves those big ticket items, like the exclusion for employer sponsored health insurance and the mortgage interest deduction, untouched. And the Earned Income Tax Credit, dependent care credit, and child tax credit expansions that have been enacted since 2001 would be extended.
The Wyden-Gregg proposal also drastically simplifies the corporate income tax. There would be a flat 24 percent rate, down from a top marginal rate of 35 percent, and many of the preferences built into the tax would be eliminated.
Yesterday, Tax Policy Center came out with revenue estimates of the proposal. Just as described earlier, Wyden-Gregg would be just about deficit-neutral relative to a current policy baseline, raising $22 billion over the next ten years and $31 billion in 2020 alone. Additional proposed (but unspecified) cuts in corporate welfare would roughly align the deficit-impact with that of the President's tax plan.
Still, the bill drastically increases deficits relative to a current law baseline -- by $4 trillion over the next decade. This is a cause for serious concern. It essentially means the costs of continuing the 2001/2003 tax cuts and AMT patches will be deficit-financed.
Compared to a current policy baseline, the rate changes alone would have the effect of raising $600 billion. Yet compared to a current law baseline, they would cost nearly $1.3 trillion.
Here is a breakdown of the bill:
|Provision||2011-2020 Deficit Impact (in billions)|
|Current Policy Baseline||Current Law Baseline|
|Simply to Three Rates of 15%, 25%, and 35%||+$599||-$1,284|
|Increase Standard Deduction||-$1,577||-$736|
|Replace Capital Gains/Dividends Rates with 35% Exclusion||+$447||-$175|
|Repeal Alternative Minimum Tax||-$298||-$2,123|
|Extend Certain Provisions from the 2001/2003 Tax Cuts||n/a||-$536|
|Eliminate Various Itemized Deductions||+$131||+$175|
|Repeal Exclusion of Section 125 Cafeteria Plans||+$567||+$567|
|Index Tax Code to Alternate Measure of Inflation (Chained-CPI)||+$100||+$103|
|Other Income Tax Provisions||+$264||+$197|
|Subtotal, Income Tax Provisions||+$233||-$3,812|
|24 Percent Tax Rate||-$990||-$990|
|Other Corporate Tax Provisions||$768||$739|
|Subtotal, Corporate Tax Provisions||-$222||-$251|
|Internet Gambling Tax||+$11||+$11|
Overall, the Wyden-Gregg proposal is a good start for tax reform, but it is not a finished product. It does significantly simplify the individual and corporate income taxes, but it leaves many of the largest tax expenditures completely untouched. It also does not raise enough revenue to help put a dent in our deficits, though it is an improvement over current policy. The plan could shoot for being closer to deficit-neutral relative to current law, either by itself or when combined with spending reforms. They could accomplish the goal, for example, by scaling back the corporate rate cuts, increasing the standard deduction less, making the income tax rates a little higher, or going after the biggest and most distortionary tax expenditures. Nonetheless, making our tax code more efficient should be a top priority if we are to raise revenue in a less economically damaging way; Wyden-Gregg puts us on the right path in that respect, even if they fall short in terms of revenue.
The U.S. Census Bureau came out with with a report this month on aging in the United States. Not to anyone's surprise, the report found that between now and 2050 we are projected to experience rapid growth among the older population. In fact, the number of Americans that will be aged 65 or older in 2050 is projected to double from what it is now (40.2 million in 2010). And as the Baby Boomers age, there will be a shift in the age structure, to the point where the older population will make up 19 percent of the population by 2030, as opposed to it's current 13 percent. The U.S. population as a whole will increase by 42% during this time period, growing from 310 million to 439 million.
This rapid aging of the population has a number of effects -- one of the main ones being entitlement spending. As data from CBO's long term outlook shows, projected entitlement spending is affected significantly by aging.
Note: The data in this chart is based on pre-health reform numbers.
As the chart shows, aging is a considerable contribution to long term entitlement growth. During the years when the Baby Boomers begin to put pressure on entitlement programs, the effect of aging rises, and does not go back down at any point in the long term picture. And it is not only that a huge group of people (the Baby Boomers) will be entering this group at one time; it is also that people are living longer than ever. While this is undoubtedly a positive statistic regarding the quality of life in this country, it does effect the safety net systems which are designed to support people during the last decades of their lives.
With a rapid increase in aging comes a number of costs. These include costs to Social Security and Medicare and Medicaid, as the graph above depicts. It also, however, affects revenue levels given fewer taxes paid on income as well as a smaller labor supply. This leads to lower savings and investment, and slower growth.
Growing entitlement spending also drives future debt levels. As we have pointed out before, Medicare, Medicaid, and Social Security will grow significantly over the next few decades, as the number of people covered by those programs grows. Social Security will grow by well over 1 percent of GDP over the next two decades, and Medicare and Medicaid will double as a portion of the economy (to 10 percent) by 2035. As these programs grow as a share of the budget, they will either serve to crowd out other spending or simply pile on to our already unsustainable debt.
And aging has even further effects on Social Security. According to the Office of the Chief Actuary, the number of covered workers per OASDI beneficiary has dropped over the last few decades, and is scheduled to drop even further.
The aging of our population affects the dependency ratio; that is, the number of workers per retirees. There are, broadly speaking, two ways to deal with these effects:
We could (and should) treat the symptoms. For entitlement programs like Social Security, Medicare and Medicaid, this means ultimately raising taxes or cutting benefits. For individuals and the economy, it means increasing personal and national savings rates.
Alternatively (or more likely, additionally), we could change the effective dependency ratio. Changes to immigration and fertility rates could accomplish this, of course, but there is another way -- encouraging longer working lives. By getting able-bodied retirees to spend a little more time in the labor force, we can essentially change the point at which someone transforms from a worker to a retiree. In turn, that would change the worker-to-retiree ratio.
If individuals work longer, it means a bigger labor supply and greater levels of savings/investment. Longer work also means that individuals would spend fewer years in retirement, reducing the burden of an aging population on the backend. All of this adds up to greater levels of revenue, lower spending, and stronger economic growth. Longer work also offers individual benefits by allowing workers to save longer and spend during fewer years in retirement.
Thus, policy changes which can encourage people to work longer can significantly ease the economic burden of population aging. The normal and early retirement ages in Social Security offer some of the more direct levels. But there are a number of other options, ranging from tax reductions for workers beyond a certain age, to regulatory changes designed to promote flexible work and phased retirement, to changing the 401(k), IRA, and
private pension rules.
To be sure, not all workers will be able to work longer -- and we must be cognizant of that. But to the extent we can encourage productive aging, we must. This represents one of our best hopes to elevate the costs of an aging population.
As Congress debates hundreds of billion of dollars of new deficit-spending this week, they may also begin considering two proposals which can actually help to restrain spending -- discretionary spending caps and advanced rescission authority. The caps, which will be introduced by Senators Claire McCaskill (D-MO) and Jeff Sessions (R-AL), will attempt to control spending for fiscal years 2011 through 2013 as an amendment to the defense supplemental that the Senate will consider this week.
The bipartisan team of Senators has offered such spending cap amendments in the past, but have failed to reach the 60 votes necessary for passage. McCaskill and Sessions want to put in place three year caps on defense and nondefense discretionary spending, making some exceptions for war spending, program integrity adjustments, and emergency spending. The caps would require a two-thirds majority vote of the Senate to waive.
The legislation has been modified in an effort to secure the 60 votes needed. For one, it will now cover only three years, whereas a previous iteration of this legislation had it covering five. Additionally, instead of continuing the $10 billion emergency fund that existed in last year's budget resolution, that money would instead go to non-defense discretionary spending for the three years the spending caps would be in place. This would accomodate the $12.5 billion increase in domestic security funding laid out in Budget Committee Chairman Kent Conrad's mark.
We continue to strongly support discretionary caps as an important tool to help control spending growth. These caps have a proven record, as they contributed to the surpluses of the 1990s. Without caps, as we pointed out in this paper, discretionary spending growth would have increased significantly.
President Obama unveiled another proposal today to help control spending, called the "Reduce Unnecessary Spending Act." This legislation would give the President "enhanced rescission authority" -- which can be thought of as a weaker version of the line-item veto. Esentially, the President would be able to identify wasteful spending, and then Congress would be required to consider rescinding this funding in an up-or-down, amendment-free vote within a certain period of time.
This rescission authority would replace the line-item veto provision which is currently in the books, but was ruled unconstitutional by the Supreme Court in 1998. Though this rescission authority would likely only effect a small portion of the budget, we believe it would be an important and effective tool for reining in pork and low-value spending. We also believe it can play a role in fostering a sense of fiscal responsibility in Washington.
As OMB Director Peter Orszag says in his blog today, "in the current fiscal environment, we cannot afford this waste." We agree, and hope that Congress adopts both the President's enhanced rescission authority and the McCaskill-Sessions spending caps.
CBO and JCT have released updated cost estimates of the most recent version of the American Jobs and Closing Tax Loopholes Act (H.R. 4213), a bill that is scheduled to be brought to the House floor tomorrow. The bill would cost about $190 billion over the 2010-2020 period, only 30% of which would be paid for (meaning the bill will increase the deficit by $134 billion). Though the deficit spending in the bill is technically exempt from statutory PAYGO it is none-the-less unacceptable and dangerous.
The bill's main components include a year and a half extension of unemployment benefits, the continuation of elevated Medicaid matches to states, a five-year "doc fix," and a package of one-year "tax extenders."
Below is a table with more specifics:
|Provisions in H.R. 4213
|Extension of Unemployment Benefits||$47||$47|
|Extension of Elevated Medicaid Matches to States||$24||$24|
|COBRA Health Insurance Subsidies||$8||$8|
|3-Year "Doc Fix"||$65||$63|
|Sub-Total Spending Changes||$155||$150|
|Expansion of Build America and Related Bonds||$4||$8|
|One-Year "Tax Extenders" Package||$32||$32|
|Pension Reform Provisions||-$6||-$2|
|Sub-Total Tax Changes||$30||$38|
|Gross Cost of Bill
|Taxation of Carried Interest as Regular Income||-$13||-$30|
|$0.32/barrel Oil Spill Liability Tax||-$6||-$11|
|Other Revenue Increases||-$8||-$15|
|Net Cost to PAYGO Scorecard
|Addendum: Amount Exempt from PAYGO Requirements||~$140||~$140|
Note: Numbers adjusted to account for timing gimmick between 2015 and 2016; Numbers may not add to totals due to rounding.
Despite increasing the deficit quite significantly, the bill does not appear to violate statutory PAYGO. That's because two types of changes "emergency spending" and "current policy adjustments" (including AMT patches, doc fixes, and the renewal of most of the 2001/2003 tax cuts) are exempt from PAYGO. Since the authors of the bill classified $80 billion as emergency spending (for unemployment, COBRA, and Medicaid matches) and included a 3-year doc fix, they only had to pay for a small portion of the bill.
This may be legal, but its also dangerous. The markets will not let us increase our borrowing by hundreds of billions of dollars at time forever, no matter what type of legal exceptions we make for this borrowing.
We understand that some of these actions are critical -- but they are no more critical than the need to pay for them. Stimulating the economy in the short-term can be accompanied with offsets over the longer-term, so that the economy can receive a near-term boost without further jeopardizing our fiscal footing in the out years.
We've written a lot about this in the past few weeks (see here and here), but it appears that many lawmakers still don't believe these provisions are important enough to offset. The country is currently set to borrow almost $6 trillion over the next decade, but this number could increase to over $12 trillion if current policies continue. Something needs to be done -- but at the very least, we should stop adding to the debt.
Fortunately, there are a few members of Congress who are working to find offsets for this bill. Freshman Congresswoman Kathy Dahlkemper (D-PA), who voted for last year's economic stimulus bill, has said she will likely oppose this package due to its impact on the deficit. Senators Snowe, Collins, and Nelson have also been looking and pushing for more offsets.
As Dahlkemper explained, "it's time to start paying for things... We've done some good things, but one of the best things we could do right now is get control of our fiscal house."
We couldn't agree more.
Heavy Congressional Workload Before Break – Congress has a busy week ahead before it leaves town for next week’s Memorial Day recess. Lawmakers want to complete action on “extenders” legislation and a defense supplemental before leaving town.
Terminating the Extenders Debate – The House is set to begin work Tuesday on legislation that will extend popular tax breaks like the research and development tax credit and safety net provisions such as expanded unemployment and COBRA benefits for the jobless until the end of the year. It will also extend the Medicare “doc fix” through 2013. So far Congress has only been able to enact short-term extensions of the unemployment benefits and doc fix, with the current one expiring at the end of the month. Republicans and many moderate Democrats are concerned about the cost of the bill, with only about $56 billion of its approximately $200 billion price tag paid for. CBO projects that it will add $133.7 billion to the deficit over ten years. CRFB has been outspoken in calling for the full costs to be offset over the longer term.
Supplementing the Deficit – The Senate will first turn to a $59 billion supplemental that includes funding for military operations in Iraq and Afghanistan as well as disaster aid. Because it is considered must-pass legislation, Senators will attempt to add favored proposals to the package on the floor. Senator Tom Harkin (D-IA) will attempt to include $23 billion in funding to states and localities to help retain teachers. Because the bill is designated as “emergency” spending, it is not paid for. Senator Tom Coburn (R-OK) has promised to introduce an amendment to offset the cost through spending cuts. Senators Claire McCaskill (D-MO) and Jeff Sessions (R-AL) plan to introduce an amendment that would institute a three-year discretionary spending cap, very similar to legislation that has come close to garnering 60 votes in the past. CRFB supports spending caps and paying for war costs.
Action Still Awaits on Financial Regulatory Reform – The passage of financial regulatory reform legislation in the Senate last week does not mark the end for the bill. The Senate version must still be reconciled with legislation passed earlier by the House. Conferees will be named this week.
CRFB Does Budgetball on the Mall – CRFB prides itself on keeping its eye on the budget ball. That spirit served us well on Friday as the CRFB Budget Hawks took to the field in the 2nd Annual Budgetball on the Mall. Fielding a team for the first time, CRFB put in a great effort, reaching the semifinals. There it fell to Philander Smith College, which employed a savings strategy on its way to winning the tournament. CRFB did win the website challenge by drawing the most visitors to the Budgetball website. The Budget Hawks are looking forward to soaring even higher next year.
Budget Simulator Stimulates Interest – CRFB’s new “Stabilize the Debt” online budget simulator has been a huge success since we officially launched it last week. Thousands have taken the challenge. If you haven’t done so already, check it out, tell your friends, and share your thoughts on our Facebook page.
Throughout the week, U.S. financial markets continued to be dominated by a global market “flight to quality” in response to perceived EU policy weakness in addressing the Greek and eurozone fiscal crisis.
Already alarmed by the inability of EU leaders to quickly move ahead to put the Greek rescue package in place and to strengthen the EU fiscal framework, markets became even more unnerved when Germany restricted short selling of certain “uncovered” financial instruments out of the blue (ie, selling instruments that are not owned or borrowed). While some policy surprises can have a positive effect, the German move had the opposite effect, by ratcheting up market fears that EU leaders were focusing on punitive solutions that would change the rules of the game without notice, rather than on addressing the basics of their fiscal crisis – the weak EU fiscal framework.
(While financial market reforms can and should be debated – and must be adopted to prevent another financial market crisis – a policy surprise can be destabilizing for reasons that are easy to understand. An abrupt change can be costly to traders, who have staked out certain positions based on the rules in place. With financial sector reforms moving ahead in the U.S. now as well – the Senate just passed a comprehensive financial reform bill – market uncertainty about the U.S. market might increase until a final bill is agreed on in the House.)
As a consequence of this week’s near-panic, investors moved into instruments perceived as safe havens, including U.S. Treasury instruments. Yields on the benchmark 10 year note fell to their lowest point since December.
News from Europe fed into the week’s snapshot of economic weakness, and jolted our stock market. U.S. economic news of the week gave rise to a narrative of a weaker upswing than assumed by many (including our stock market bulls) and suggested that the risks of deflation might be higher than most expected. Consistent with the U.S. domestic news narrative, needed EU austerity plans will slow European growth and thereby dampen U.S. export growth; the stronger dollar (as investors shifted from the euro) is also seen as slowing U.S. exports. The Administration is counting on strong export growth to help improve employment.
As of mid-day today (Friday), looking ahead to next week and beyond, there is a change in market drivers. EU leaders are taking a series of steps that could calm down markets by removing policy uncertainty and signaling that they are taking serious steps to strengthen the EU fiscal framework. The turning point may well be the German Parliament’s decision today to (finally) support the Greek rescue package. And EU leaders are scheduled to meet to discuss proposals by the European Commission to strengthen the eurozone’s fiscal framework.
Princeton's Alan Blinder says the bond market vigilantes are back; in Europe for now, but they'll be coming here soon. The bond vigilantes, for those unfamiliar, are bond market investors who worry about the safety of sovereign debt and begin demanding higher interest rates to compensate for the added risk. As Blinder explains:
The bond market vigilantes have landed in force in Europe. Their beachhead, of course, is Greece, which all but invited them in with—how shall we put it?—a certain lack of fiscal probity. The ensuing roller-coaster ride of ups and downs that have roiled stock, bond and currency markets around the world is apparently not over.
Blinder thinks we have a lot to be worried about. As he explains:
Once the vigilantes get riled up about, say, budget deficits, they can turn into an electronic mob that circles the globe faster than Hermes. Unfortunately, the basic economic message about deficit spending today requires some subtlety: Most countries need fiscal stimulus today but a large dose of deficit reduction in the long run. To fight the 2008-2009 recession, many countries deliberately increased their spending and/or reduced taxes, thereby swelling their budget deficits. That was the right thing to do under the circumstances.
So what is a country to do? How countries stimulate their economies when the subsequent deficits will likely spook the bond vigilantes and could damage the economy?
We've proposed on answer to this conundrum a number of times (see here, here, and here). Our solution is the same as Blinder's: "promulgate major short-run fiscal stimulus programs without spooking investors about the long-run fiscal outlook." Eventually, Blinder explains, that requires "convincing traders that you've got religion on fiscal responsibility"
Blinder has joined the rest of the Announcement Effect Club in supporting the announcement of a future consolidation plan in order to strengthen the markets. As he so eloquently writes:
St. Augustine urged the Lord to make him chaste, but not yet. Now budget and finance ministers around the world, including our own Peter Orszag and Tim Geithner, must make an analogous plea to the bond market vigilantes—and back up their words with deeds.
But Blinder goes further by suggesting a path -- Social Security reform. "Once considered the third rail of American politics," he suggests, this "is now the low-hanging fruit of deficit reduction." It's technically easy to do, everyone knows the options, and by their very nature most reforms phase-in gradually so as to do very little deficit reduction while the short-term economy is still unstable.
We couldn't agree more, and we hope policymakers act quickly to put this program into balance and begin addressing the issues surrounding our aging population.
The Senate Committee on aging just released a long report detailing many of the available options. The Social Security actuaries have many more, along with year-by-year effects. And we'll be releasing our own list in not too long. Options range from slowing the growth of initial benefits to adjusting the retirement age, to raising the payroll tax rate.
Let's put a plan together and get it done!
Last week we wrote about the introduction of YouCut, a project designed to allow people to vote on spending cuts they would like to see Congress enact. The YouCut site reports that 280,000 took this spending challenge and voted. The first winning cut -- of the New Non-Reformed Welfare Program -- would achieve $2.5 billion in savings.
If you missed voting last time, you can vote this time around. This week's candidates include:
- Byrd Honors Scholarships, $420 million in savings over 10 years
- Eliminate the Proposed Federal Employee Pay Raise, $30 billion in savings over 10 years
- Suspend Federal Land Purchases, $2.66 billion in savings over 10 years
- Terminate Funding for UNESCO, $810 million in savings over 10 years
- Eliminate Mohair Subsidies, $10 million in savings over 10 years
We are so pleased our Stabilize the Debt! simulator has been met with such a positive response. Thanks for all your emails and thanks Derek, thanks Reihan. We already feel closer to getting the debt to a better place.
We also know there are many ways to improve the online simulation, so please send us your ideas.
Want more spending cut options? (Or tax increases? Or spending increases? Or tax cuts...). Let us know what, and send the year-by-year savings estimates if you have them. Do you work on the Hill and your boss has an idea? Forward it along so we can include it. Additionally if something is unclear, or is there a kink we didn't find, we are eager to hear what you think.
We'll be adding new ideas along the way (for instance, from YOUCUT) and sharing the responses we get with Members of Congress.
We look forward to your input.
Congress may be dropping the budget ball, but CRFB doesn’t intend to – literally. We will be participating in the 2nd Annual Budgetball on the Mall tomorrow.
Budgetball was created to get Americans to combine physical and fiscal fitness. It is a fun and unique way to get people thinking about the debt and fiscal responsibility. It is fun to play and watch – what other sport has players running around with life preservers, oven mitts and funky hats? Check out http://www.budgetball.org/crfb/ for more on the sport and the event.
The sport has been spreading on college campuses across the country. Tomorrow college teams will face off against the “Washington establishment” in a tournament on the National Mall in DC. CRFB will field a team in the pursuit of glory…or at least to help spread the message.
There will also be entertainment and a “Fiscal Fitness Area“ with interactive exhibits, including CRFB’s new “Stabilize the Debt” budget simulator. So come on out, have some fun, and cheer on the CRFB Budget Hawks.
There's been a lot of discussion over the past few weeks about spending in the Defense Department, following speeches made by Secretary Robert Gates in Maryland and Kansas on the need to rein in defense spending. Secretary Gates has taken aim at spending on Navy vessels and overhead, operating, and military health care costs, arguing for the need to transfer savings directly to the U.S. fighting force. It is very encouraging to hear from a top government military official that even defense spending should not be absolved from doing its fair share in efforts to reduce federal spending. (Check out CRFB's new Budget Simulator to choose among several possible reductions in defense spending yourself.)
Gates argued that all military spending "should expect closer, harsher scrutiny." He specifically mentioned that even spending on health care for military families and veterans needs to be evaluated, since the military health care system has not increased premiums for 15 years, despite the fact that the program's costs have more than doubled to over $50 billion in the past decade.
Defense spending has averaged roughly 21 percent of the budget since 1980, and reached a 17-year high of $669 billion in 2009. It could rise to as much as $682 billion this year. Federal spending levels on defense are second only to Social Security, but only since 1993 -- before which defense spending held the number one slot. Under proposals set forth in the President's FY 2011 Budget, defense spending would peak in 2011 at about $734 billion before falling to $667 by 2014 only to increase to $749 billion by the end of the decade, according to CBO.
Under current plans, the Defense Department expects to decrease troop levels in Iraq while increasing them in Afghanistan over the next several years. However, the savings from a rapid withdrawl from Iraq differ markedly than those of a gradual withdrawl. In the Budget and Economic Outlook and Estimate of the President's Budget, CBO has illustrated what future defense spending might look like under several scenarios:
|Projected Defense Spending under Various Scenarios (billions)|
|Baseline: Grows with Inflation||$690||$701||$696||$705||$716||$730||$749||$761||$773||$795||$813|
|Troops Deloyed in Iraq/Afghanistan Decrease to 30,000 by 2013||$690||$699||$664||$638||$624||$624||$636||$643||$652||$671||$687|
|Troops Deloyed in Iraq/Afghanistan Decrease to 60,000 by 2015||$698||$721||$717||$703||$680||$664||$665||$666||$673||$692||$707|
|President's FY2011 Budget||$698||$734||$695||$669||$667||$680||$699||$713||$726||$749||$769|
Under current scenarios, the lowest yearly spending on defense that we could reach would be $624 billion in 2014, assuming that there is a rapid withdrawl of troops from Iraq and that no new fighting forces will be needed in other arenas. We need to be better.
In order to stabilize the debt at a reasonable level, all parts of the budget will have to be on the table. Recent calls to restrict government spending and cap discretionary outlays have exempted the defense budget. Calls like these from Secretary Gates are right on line - the defense budget will also have to "accept some hard fiscal realities" and will have to share, as other areas of the budget will have to do, in the efforts to reduce future deficits.
See our previous post on Tricare spending here, illustrating some of the tough choices we will all have to consider.
CRFB encourages you to check out our budget simulator: Stabilize the Debt!
It's no secret that America's finances are a mess. The problem of our mounting debt can't be solved overnight, but we need to start addressing it now. In this online simulator, visitors get to make the hard choices themselves in order to stabilize the debt at 60% of GDP by 2018.
With a new government in place, the UK is moving fast to trim their budget deficit. Treasury head George Osborne is expected to announce £6 billion in spending cuts (about $9 billion) next week to cut into their £163 billion deficit ($235 billion, 12.6% of GDP). It seems that the financial market turmoil in Greece has spooked the government into taking action immediately, rather than waiting for the economy to be in full swing. The cuts are relatively modest, bringing the deficit down by only 0.5% of GDP, but they should at least help assuage investors, and The Financial Times suggests that more cuts will be coming in the future. They will be necessary, considering that Britain's debt-to-GDP ratio will hit 90% next year. Just to demonstrate the volatility of European markets and their sensitivity to debt-hiding as Greece did, The Times said that sterling fell just based on an accusation by the new government that the old Labour government had fixed fiscal forecasts.
The UK government should be applauded for moving quickly to get their deficits and debt under control before the markets force severe action on them (we must also note that Nick Clegg, now Deputy Prime Minister of the U.K. is a member of the Announcement Effect Club) . Our own government should take note of the steps that Britain is taking. Although it would be unwise for us to start reducing deficits immediately, we can enact a deficit-reduction plan now that will take effect slowly as the economy recovers. The longer we wait, the more severe our actions must be, and if we wait until crisis, the actions will need to be draconian.
Over the past few weeks, passage of an "extenders" bill has become the top priority of Congress. The bill, HR 4213, finally seems to have a definitive shape to it after both Houses of Congress considered a laundry list of provisions for inclusion. The core of the bill includes many extensions on social spending, such as unemployment benefits, COBRA subsidies, and temporarily increased Medicaid reimbursement rates to states. In addition, a five-year "doc fix" has been included in the bill. It also includes the extension of many temporary tax provisions, such as the research and development tax credit and the state sales tax deduction. A fix to the estate tax was also talked about being added to the bill, but it appears that may not be happening.
Overall, the bill's cost is estimated in the $200 billion neighborhood, with a significant chunk of that coming from the social spending. Extensions for unemployment benefits, COBRA, and Medicaid reimbursements will cost about $80 billion, and the doc fix has a price tag of $88.5 billion. The total cost of the tax extenders comes in at about $50 billion.
The bigger problem with this bill is the offsets. So far, House and Senate Democrats have only committed to offsetting the cost of the tax provisions, with the main offset being the taxation of "carried interest" as ordinary income instead of at the lower capital gains rates. Obviously, this is not enough: only paying for the tax provisions would leave about 75% of the bill unpaid for, with the costs of much of it being deemed "emergency spending."
We've seen this move since the passage of statutory PAYGO back in February. In a press release today, CRFB blasted the use of the "emergency spending" tag in relation to stimulus measures, and argued that statutory PAYGO should be strengthened to close the loopholes that allow fiscally irresponsible measures to be pushed through. Using the emergency spending crutch may be politically convenient, but ultimately PAYGO exists so that we don't continue to add to our long term debt.
Fortunately, Republicans and some moderate Democrats are concerned about the lack of offsets, so Congress may need to pay for the whole bill before it gets passed. We obviously encourage lawmakers to work together to find the offsets necessary to do so. As we have said many times before, if Congress wants to enact a short-term stimulus measure, they would make it more effective by paying for it in the long term.
Little Resolve for Budget Resolution – Leaders in the House have yet to make a final decision on moving forward with a FY2011 budget resolution. But every day that goes by makes it less likely Congress will adopt a budget blueprint this year. House Democrats are split between moderates who want cuts in discretionary non-security spending along with longer-term deficit reduction targets and others who fear social program cuts and think defense spending should also be subject to limits. Limiting discretionary spending and setting deficit reduction goals are critical to putting the country on a sustainable fiscal course. The goal recommended by the Peterson-Pew Commission on Budget Reform of stabilizing the debt at 60 percent of GDP by 2018 is a good place for lawmakers to start.
A Broken Process – If the House does not agree on a budget resolution, it would be the first time since the current budget process was created that the chamber has failed to produce an initial budget. The difficulty in adopting a budget blueprint at a time when leadership on fiscal matters is most needed underscores the need for serious budget process reform. The Peterson-Pew Commission is currently developing budget reform proposals that will be released later this year.
“Deeming” Likely – Under House rules, appropriations bills can now be considered without a budget resolution in place. Congress is now likely to adopt a “deeming” resolution that will set spending figures for appropriators to work under. Such a resolution can simply be attached to other legislation and avoid a floor debate that will highlight the bleak fiscal situation and the inability of politicians to confront it so far.
CRFB Dream Team Set for Budgetball – The CRFB Budget Hawks are set to take their fiscal responsibility message to the field this coming Friday, May 21 for the second annual “Budgetball on the Mall.” The tournament will be played in the shadow of the Washington Monument on the National Mall and will pit college squads against teams representing the Washington “establishment.” Budgetball is a unique sport that promotes physical, and fiscal, fitness by combining athletic activity with sound budget strategy. We won’t try to explain how exactly the oven mitts, life preservers, masks and hats come in; visit http://www.budgetball.org/crfb to learn more about the game and tourney.
Voting on Cuts – Last week House Republicans introduced “YouCut” which will allow people to vote each week on government programs to cut towards reducing the deficit. They promise to push for a floor vote for the top-voted idea. In that same vein of promoting more public engagement in finding fiscal solutions, stay tuned for an announcement this week from CRFB on a new interactive initiative to get Americans thinking and talking about the tough decisions that will be required to stabilize the debt.
Voting and Cutting – Congress wants to finish work on financial regulatory reform and “extenders” legislation that will expand tax breaks like the research and development tax credit as well was social spending such as expanded unemployment benefits and COBRA subsidies for the unemployed before lawmakers cut out of DC for the Memorial Day recess. Financial reform will likely pass by the end of this week. Legislators are still working out the extenders package. The main stumbling point is the cost, which may reach up to $200 billion, with little of it paid for. CRFB has been tracking the proposed spending and related items such as a possible estate tax extension and calling for them to be fully offset over the longer term.
Feldstein Favors Two-Year Extension Over Permanent Tax Cuts – Supply-side icon Martin Feldstein last week argued against permanently extending the 2001/2003 tax cuts in the present environment due to the excessive U.S. debt. Instead he recommends a two-year extension as part of a grand bargain that includes spending cuts. This mirrors an idea that CRFB president Maya MacGuineas has put forward. Feldstein concludes, “The inherent uncertainty about the out-year deficits means that it would be unwise to enact tax cuts that stretch beyond the next two years. Congress should move quickly to reassure taxpayers and financial markets that the current tax rates will be preserved for two years but that further tax cuts will depend on the future fiscal outlook.”