The Bottom Line
With the G8 summit over and the G20 summit approaching, CRFB board member and former chair of the Council of Economic Advisors Laura Tyson takes a look at one area that has been discussed as being ripe for reform: our corporate tax code. Despite taking in less revenue as a share of GDP than many other industrialized nations, we also have the highest statutory tax rate of those countries. Like the individual tax code, the corporate code is riddled with many tax expenditures, and there are many other design features that could be changed to make it more efficient.
Tyson makes the case for a bipartisan effort at reforming the corporate tax code in 2013 to allow American companies to better compete:
As a result of years of cuts in corporate tax rates by other countries, the US now has the highest rate among the advanced economies. Reducing the top US federal rate, currently at 35%, to a more competitive level – the OECD average is around 25% – would encourage investment and job creation in the US by both domestic and foreign MNCs.
Paying for a rate cut by eliminating various corporate credits and deductions would simplify the code and trim the cost of compliance. It would also enhance efficiency by curbing tax-based distortions in companies’ investment decisions (what and where) and their choices concerning how to finance investments and which organizational forms to adopt. The Obama administration and Congressional leaders from both parties agree that a cut in the corporate tax rate should be revenue-neutral.
Other advanced industrial countries have paid for corporate rate reductions partly by restricting depreciation and other deductions. Despite lower tax rates, corporate tax revenues have not declined in these countries and represent a larger share of GDP than they do in the US.
Eliminating some of these tax provisions will be a difficult task for lawmakers, but a more efficient tax code is well worth the trouble. This is no better shown than by our corporate tax calculator, which allows users to set a revenue target and check off a number of options while the calculator shows the tax rate that would fulfill those parameters.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Up next on the list of Fiscal Speed Bumps is the July 1 deadline upon which the 3.4 percent interest rate for subsidized Stafford loans is set to revert to 6.8 percent. Unfortunately, recent reports indicate that the Senate is unlikely to make the deadline as they have to find a passable bill. The delay is especially disappointing considering the proposals each side has made and their seeming willingness to find a solution.
In the Senate, the current proposal from the Democratic majority would pay for two years of the extended 3.4 percent rate with tax increases. The Senate Republicans would tie all Stafford loan rates to the ten-year Treasury rate plus three percentage points, which would reduce the deficit over ten years. Neither bill was able to pass the Senate. The Hill reports that a bipartisan group of Senators are working on a bill that would set student loan rates at the 10-year Treasury rate plus 1.9 percentage points.
Meanwhile, the House has passed on a 221-198 vote a bill to set the Stafford loan rates at the ten-year Treasury rate plus 2.5 percentage points but capped at 8.5 percent. The loans in the House bill would be vary year-to-year but could be repackaged into a fixed rate loan upon graduation if the student chooses. There is also a proposal in the President's budget to set the subsidized Stafford loan rate to the ten-year rate plus 0.93 percentage points and the unsubsidized rate to two percentage points above that. In contrast to the House's proposal, the rate would be fixed over the life of the loan. These two proposals and the potential Senate proposal are similar in their mechanism, but there would need to be an agreement on the rate.
There are many different ways to reform the student loan rate, and most are better than the status quo of letting student loans immediately double. Hopefully, with the deadline in sight, Congress will come to an agreement that permanently deals with the student loan rates. The ten-year Treasury rate solution is a particularly elegant one in that it keeps rates low upfront but pays for that cost over the longer term.
But this episode is also a reminder of the need to come to the negotiation table early -- as we approach the fiscal hurdles upcoming this fall -- last minute solutions could be politically and economically destabilizing. Even though going past the deadline for a short period of time is not a huge deal, the uncertainty for prospective borrowers is unnecessary. This principle applies similarly to other budget negotiations.
The Congressional Budget Office's cost estimate of the Senate's immigration bill attracted a great deal of attention due to the $197 billion in deficit reduction the bill would produce over ten years. But with this positive news comes a danger that if lawmakers are not careful, there may be a temptation to spend the windfall money on things like enhanced border security or other initiatives. Even if new initiatives are warranted, they should think twice before trying to use these savings as a slush fund.
On net, more than the entirety of the $197 billion in savings comes from payroll tax revenue dedicated to the Social Security trust fund. This is real money that will have real fiscal implications, but it is also technically "off-budget" and dedicated to a specific purpose. We've written before that Social Security can be viewed in one of two ways: as part of the broader budget or as its own self-financed program. Those who view it as the latter should be particularly wary of using Social Security revenue to offset non-Social Security spending. But even those who view Social Security as part of the budget should recognize that money counted both to offset new spending and strengthen the trust fund (to 2035, by our estimate) will result in less net long-term debt reduction as policymakers target only trust fund solvency. Savings cannot be used twice; either they result in deficit reduction or the extend the life of the trust fund.
Indeed, this is part of the reason that PAYGO rules and law exclude the effects of Social Security. And on an on-budget basis, the legislation currently increases the deficit by $14 billion, meaning it violates PAYGO rules.
Deficit Impact of the Original Senate Immigration Bill
Given this reality, future amendments to the immigration bill must actually fill a $14 billion hole, not dig that hole $200 billion deeper.
This is important, as recent proposal from Sens. John Hoeven (R-ND) and Bob Corker (R-TN) to enhance border security would likely add to the deficit relative to the prior bill. The admendment includes an additiona $38 billion in border security spending to hire nearly 20,000 new Border Patrol agents and construct fencing. Their proposal attempts to avoid the pitfall of spending the Social Security surplus funds by allowing DHS to collect more fees, but CBO estimates that the authority would not result in additional deficit reduction, as it does not mandate these fees and the authority would be subject to future appropriations. The admendment, while making an attempt to offset the additional spending, falls short and would reduce the total savings by "something less than $40 billion" compared to the original bill, according to CBO.
Of course, we expect there will always be an urge to drop the offset in favor of simply counting the Social Security savings. Short of transferring money out of the Social Security trust fund, however, doing so would be akin to double counting and would be an unfortunate act of fiscal irresponsibility.
Today, the Moment of Truth Project has released a new report,"Modernizing the Medicare Benefit: A Closer Look at Reforming Medicare Cost-Sharing Rules," along with a one-page summary of the different approaches to reforming Medicare’s complex and disjointed set of cost-sharing rules. The paper provides an explanation and rationale for cost-sharing reforms and outlines the recommendations included in A Bipartisan Path Forward. It also analyzes other recent proposals put forward to reform cost-sharing rules and includes an appendix comparing the cost-sharing reforms in several major proposals.
Currently, Medicare beneficiaries face two separate deductibles – a $1,184 deductible for Medicare Part A (hospital insurance) and a $147 deductible for Medicare Part B (physicians' offices) -- along with a hodge podge of other copays and coinsurance. And with no out-of-pocket spending cap, beneficiaries are exposed to significant cost sharing and therefore purchase private supplemental coverage, known as Medigap, to cover the possibility that they will face huge costs. Due to this extra coverage and complicated benefit structure, beneficiaries do not always make cost-conscious decisions, leading to overutilization and driving up spending. As a result, many health economists and experts have called for modernizing cost-sharing rules by creating a single, combined deductible with a uniform coinsurance and an out-of-pocket cap.
The paper makes the case that modernizing the Medicare benefit and reforming cost-sharing rules would not only strengthen the financial state of Medicare, but would also improve Medicare’s value for beneficiaries and make it easier to navigate and understand. Designed properly, comprehensive cost-sharing reform can achieve significant savings for the Medicare program and reduce Medicare premiums by limiting overutilization of care while providing seniors with greater protection from risk of catastrophic health care costs and reducing total out-of-pocket spending on health care over their lifetime for most seniors.
We’ve discussed before the growing consensus around cost sharing reforms. "Modernizing the Medicare Benefit" further highlights commonalities across proposals and the broad support it has from policymakers on both sides of the aisle. The report includes a comparison chart of proposals from other organizations and lawmakers such as the Bipartisan Policy Center, the Urban Institute, MIT economist Jonathan Gruber, Senators Tom Coburn (R-OK) and Richard Burr (R-NC)’s Seniors’ Choice Act, and President Obama’s FY 2014 budget proposal.
While lawmakers continue to consider options to reduce Medicare spending and bend the health care cost curve, this report can help serve as yet another resource and guide on potential areas for bipartisan support. As the report explains:
By enacting a set of reforms to rationalize Medicare cost-sharing rules and limit supplemental insurance plans, policymakers can improve the Medicare benefit for beneficiaries and lower costs for the Medicare program and beneficiaries by reducing the use of unnecessary care, while providing new catastrophic protections. As growing numbers of baby boomers enter Medicare rolls and federal health spending over the next several decades is projected to increase, reforming Medicare’s cost-sharing rules will be an important part of the discussion on serious entitlement reform that could forge a bipartisan agreement.
To read the full paper click here.
To read the one-page summary click here.
While reforming entitlement programs continues to be a critical challenge for policymakers, recent developments suggest that bipartisan support for addressing rising Medicare spending may be growing. Yesterday, Senators Tom Coburn (R-OK) and Claire McCaskill (D-MO) unveiled The Medicare Fair Share Act, which would modify existing premiums so that higher-income seniors would pay a greater portion of program costs than they do under current law. Specifically, it would increase the amount that seniors subject to income-related premiums pay by 10 percent of program costs.
Currently, most Medicare beneficiaries pay 25 percent of Part B (physician’s offices) premiums, while those with incomes over $85,000 ($170,000 for couples) pay between 35 to 80 percent, depending on their income. Below are the changes Coburn and McCaskill recommend for increasing specific income brackets:
Coburn-McCaskill Income-Related Premium Reform:
Source: Senator Coburn and Senator McCaskill's
Not only does the bill have bipartisan sponsors, but it is similar to other proposals that have addressed income-related premiums. In fact, the bill is very similar to the proposal included in The Bipartisan Path Forward. That plan recommended increasing existing premiums by 15 percent, creating a minimum threshold so that 15 percent of the senior population would be subject to income-related premiums, and freezing thresholds through 2030. Savings through 2023 were estimated around $65 billion.
Earlier this year, President Obama also included additional means-testing of Medicare in his FY 2014 budget proposal, which CBO scored as saving $56 billion over ten years. Starting in 2017, the President's proposal would add more income brackets than the Coburn-McCaskill bill, but similarly would increase premiums with a maximum premium of 90 percent of the program costs for those making more than $196,000.
Comparison of Current Law and the President's FY14 Proposal:
There is some concern that higher-income beneficiaries who are typically healthier would drop out of Parts B and D and simply buy less expensive coverage on their own or self-pay for medical care, thereby increasing risk in the program and making it more expensive. However, by limiting income related premiums to no more than 90% of program costs the bill would retain a government subsidy for the Medicare benefit which will make Medicare a better option for seniors than unsubsidized private insurance.
As we look to the upcoming budget negotiations, it is clear that income-related premiums may be one area where lawmakers may be able to achieve a bipartisan compromise, along with cost-sharing reforms and a raising the Medicare age with a buy-in. We commend Sens. Coburn and McCaskill for putting forward this proposal, and hopefully, the growing support for these bipartisan proposals can advance the entitlement reform conversation.
In our paper on CBO's analysis of the Senate immigration bill, we used CBO's numbers to produce deficit and debt estimates for the next twenty years. Since CBO only produced rounded ten-year estimates for the second decade, however, we had to construct our own rough estimates for each individual year. Although we did not include each of these numbers in our paper, we did use them to construct overall debt and deficit paths. This paper shows how the numbers were constructed in the first place.
As CBO explains, their second decade estimates are very rough. Our year-by-year estimates are even more rough, and we had to make some relatively broad assumptions. Fortunately, CBO made our task easier by giving some information about the growth paths for many policy areas. Specifically, they tell us:
- Increased low-income health spending would grow by about 10 percent per year
- Increased refundable tax credit spending would grow by less than 3 percent per year
- Increased Social Security and Medicare spending would be slowing but growing by more than 20 percent by 2033
- Increased revenue would be growing by about 9 percent per year
With those facts in mind, we constructed the spending and revenue paths to match the 2024-2033 numbers that CBO laid out in its report. Here's what we came up with. Note that these numbers are only a rough approximation of what we think CBO's numbers would be.
Source: CBO, CRFB extrapolations
Click the picture to see the table in a Word document.
By 2033, we figure that the bill would have about $115 billion of increased spending, $220 billion of increased revenue, and $60 billion of interest savings for a total deficit impact of around $165 billion. Debt would be about three percentage points lower.
As we already showed in our paper, the current Senate immigration bill would improve the deficit and debt situation on paper, but obviously it cannot be relied on to take care of the problem by itself. More broadly, this exercise shows the value of looking at longer-term numbers. In some cases, lawmakers have enacted policies that looked like savings upfront but ended up likely costing the government over the long run (such as easing rules for converting to Roth retirement accounts). Looking at the long term is important, considering the large fiscal issues the federal government in that timeframe.
This blog has been updated from its original posting.
CBO's recent budgetary and economic analyses of the Senate immigration bill have been making waves in the political sphere as lawmakers rush to highlight or disavow the findings of $197 billion of total deficit reduction through 2023 and almost $700 billion in the 2024-2033 period. CRFB already summarized the analyses on the blog yesterday, but now we have a full length paper with further breakdown and additional analysis based off of CBO's findings. The paper discusses CBO's method of scoring, their findings for the budget, their findings for the economy, and how the budget would look like if those numbers were incorporated.
The paper first notes the atypical method by which CBO analyzes the bill in its primary cost estimate. Normally, CBO does not utilize "dynamic scoring" for macroeconomic variables like GDP or employment. However, considering the clear direct impact that the bill would have on certain variables, CBO relaxes this assumption for US population, employment, and taxable compensation. It still does not use dynamic scoring in its cost estimate for variables that are indirectly affected like GDP or wages; rather, the effect on these other variables is forecasted and described in the supplemental economic analysis.
Our paper stresses that CBO's estimate differs widely for the on-budget portion of the federal budget and the off-budget (Social Security) portion. In fact, the on-budget experiences a projected $14 billion deficit increase as a result of the bill, while the off-budget reduces the deficit by $211 billion. Social Security gets such large deficit reduction because immigrants pay into the system upfront but are generally younger than the average population and take many years to accumulate a sufficient work history to receive meaningful benefits.
CBO's economic analysis is a very informative look at how they project the bill would affect a slew of economic indicators that are not done for the initial cost estimate. As mentioned before, CBO does include macrodynamic scoring for population, employment, and taxable compensation. But changes in variables like GDP, wages, productivity, and the capital stock are only analyzed in the supplemental analysis. The table below shows CBO's estimate of the changes in each of these metrics.
The budgetary feedback of these economic effects is deficit-neutral through the first ten years and an additional $300 billion of deficit reduction in the second decade. We used these numbers to show how the legislation itself and the dynamic effects would affect deficits and debt over the next twenty years. For debt as a percent of GDP, it would be reduced from 91 percent in 2033 in the CRFB Realistic baseline to 88 percent incorporating just the budgetary effects of the legislation and reduced further to 83 percent incorporating the dynamic effects (including the new GDP numbers).
Budgetary implications should not be the only driver behind what lawmakers do with immigration reform, but it is helpful for them to at least be cognizant of the impact. Lawmakers should make sure that immigration reform continues to be a net positive for the budget, and hopefully the final bill will be PAYGO-compliant (not increase the on-budget deficit). We will continue to provide further analysis of this and other immigration bills as analyses become available.
Click here to read the paper.
As we look toward our worrisome long-term outlook, the drivers of future deficits are clear: our growing entitlement programs and an inefficient tax code littered with loopholes. If we are to solve the long-term problem, both must be reformed.
However, tax and entitlement reform will both require hard choices, and there may be a temptation to take these two off the table or go for small-ball options. On our entitlement programs, the U.S. Chamber of Commerce has developed a list of "Ten Truths About American's Entitlement Programs," that argues that these programs are financially unsustainable.
Their list is as follows:
- Entitlement programs are huge, expensive, and reach into every corner of American life.
- Entitlement programs are not self-funding and are a main driver of deficits
- Entitlement costs are growing at an alarming rate
- Longer life expectancies, changing demographics, and soaring costs explain why entitlements as we know them today are unsustainable
- Not a single major entitlement program is projected to be financially solvent 20 years from now
- The cost to make these programs financially solvent for the next 75 years is almost $40 trillion
- Mandatory spending - entitlement programs and interest on the debt - are already squeezing out important investments in other essential programs
- We have nothing to fear from carefully crafted, phased-in adjustments to our entitlement programs.
- We can reform entitlements without baseline cuts and without breaking our commitment to the nation's seniors, people with disabilities, and poor.
- The biggest threat imaginable to Medicare and Social Security as we know them will be if we do nothing at all.
The Chamber has also created a set of myths and facts along with four charts that show the growth of this mandatory spending. The purpose, according to Bruce Josten of the Chamber, is to start talking about the problem so lawmakers can work toward a solution.
We need a national conversation, not a filibuster—a conversation that leads to understanding and drives us toward swift action. But reform is not going to happen until we agree on these 10 truths. So let’s get the truth out there. Let’s start the debate. Let’s find the right solutions.
Josten's lesson is important. Putting the budget on a sustainable path will require tough choices and all options to be on the table. But the first step is acknowledging that the problem exists and detailing its extent. We are unlikely to get our debt under control through revenue increases and cuts to other spending alone, so entitlement reform must be part of the equation.
Yesterday, the CATO Institute hosted a panel discussion featuring CATO Senior Fellow Jagadeesh Gokhale, MIT economics professor David Autor, University of Chicago professor Harold Pollack, and Social Security Administration Chief Actuary Stephen Goss. In response to the recently released 2013 Social Security Trustees Report, the panel gathered to discuss their views on the projected depletion of Social Security Disability Insurance (SSDI) trust fund reserves by the year 2016. Although each panelist disagreed on the severity of DI's financial situation and the causes of its increasing costs, they all agreed that policy changes should ultimately be made to maximize efficiency and work towards fiscal solvency.
Source: Social Security Actuaries
Stephen Goss spoke largely on how the number of SSDI beneficiaries increased by 187 percent from 1980 to 2012 and why the drivers of this increase are not as threatening as they may appear. He stated that 41 percent of the increase was a result of the nation's growing population, 38 percent was a result of aging demographics, 21 percent of the rise was caused by increasing employment as women entered the labor force, and the remainder was fueled by the 2010 recession, the one year increase in the natural retirement age, and age-adjusted incidence rates. In reality, Goss stated that these trends were following a foreseen path and should not come as a large concern. He stated that, as predicted, DI costs have peaked and will remain stagnant as the Baby Boomers retire and the female participation rate in the work force steadies.
On the other hand, David Autor argued that SSDI's future is much bleaker. Contrary to Goss, he showed that aging and the expanding labor force really only accounted for roughly 40 percent of the growth in SSDI beneficiaries. In reality, Autor believes, 60 percent of the rise was fueled by large increases in SSDI incidence within age groups. Essentially, a higher proportion of the population has been applying for and receiving disability benefits. Furthermore, Autor argued that another large driver of costs is the transition from circulatory and neoplastic disabilities under SSDI in the 1980's to musculatory and mental disabilities today. These disabilities are all given the same weight, yet this transition strains SSDI as musculatory and mental disabilities are difficult to identify, are diagnosed young, and are generally incurable. Autor ultimately believes that SSDI reforms are necessary and should ultimately ensure positive incentives for work.
Next, Jagadeesh Gokhale discussed some of the critical problems associated with SSDI, most notably the huge variation in allowance rates by administrative law judges (judges who adjudicate applicants in the program). He called for a better design for decision procedures, improved decisional consistency, and reduced system costs. Gokhale stated that disability insurance has transformed from "an 'early retirement' program for disabled workers age 50 and older, to a program that provides wage-replacement insurance to all workers." He said that postponing policy changes by temporarily transferring funds from OASI would only accelerate old-age Social Security's insolvency and compromise the program's goal of providing support to the "genuinely permanently disabled."
Finally, although Harold Pollack mentioned potential reforms to SSDI, including stronger work incentives, he viewed it in a much more positive light. He discussed disability legislation as a "quiet policy success" for the United States and stressed its importance. Ultimately, Pollack reminded the audience that while working to enact SSDI's necessary reforms, policymakers cannot retract from the program's original purpose.
SSDI's continuation is critical but, like the Social Security program as a whole, it faces financial problems. In only three years, the SSDI program will have exhausted all trust fund reserves. As a result, in 2016, the program will have to begin transfer funds from the old-age trust fund (which would accelerate its insolvency by two years) or face 20 percent cuts to benefits. Although the event's panelists came from a variety of perspectives, they all agreed on the necessity for effective reform and urge Congress and our nation's policymakers to do the same.
The United States has the highest statutory corporate tax rate in the developed world, but substantial revenues are forgone through a variety of tax loopholes and provisions. Responsible corporate tax reform could lower statutory rates while simplifying the tax code and eliminating these loopholes. The bipartisan RATE (Reforming America’s Taxes Equitably) Coalition, made up of 31 businesses and associations, recently sent a letter making the case for reform to the majority and minority leaders of the House Ways and Means Committee and the Senate Finance Committee:
The negative effects of standing still are clear. According to a recent Ernst & Young study, U.S. GDP in 2013 is expected to be between 1.2 and 2.0 percent lower as a result of our OECD-leading corporate tax rate. These foregone resources could be used to make further investments in the economy. Additionally, American workers will continue to feel the pinch in their paychecks as a result of our uncompetitive tax system. Over the long term, U.S. wages will be depressed by 1.2 percent as other countries seek to lower their corporate tax rates. The American economy, American business and American workers can no longer afford our tax system. It is outdated, unfair and in desperate need of reform – this year.
Our companies understand that such an approach may require some businesses to pay a little more and some to pay a little less, and that nearly all businesses will need to forgo certain provisions that are in place today. As members of the RATE Coalition, our companies collectively recognize that base broadeners, such as the elimination of tax expenditures, may be required in order to achieve a corporate tax rate that is globally competitive, supports U.S. economic growth and is equitable to all U.S. businesses.
Thankfully, the time is ripe for tax reform as politically momentum and public interest has grown dramatically, especially in the past year. If you would like to try your hand at corporate tax reform, visit our Corporate Tax Reform Calculator and choose from some of the options policymakers have to modify the corporate tax rate. Tax reform will be no easy feat to accomplish, but with the clear rewards that can be gained, hopefully Congress will follow through.
In its annual June report to Congress, the Medicare Payment Advisory Commission (MedPAC) explores a number of reforms that could help improve outcomes and reduce spending in Medicare. MedPAC’s recommendations and analysis have been used in the past to help provide policy ideas for much needed payment reforms and reductions, some of which have been used to pay for doc fixes. This year’s report provides lawmakers with yet another set of options as they work to address the long-term sustainability of the Medicare program. MedPAC’s recommendations include:
Equalizing Medicare Payment Across Sites of Care: Last year, MedPAC recommended that Medicare payment rates for office visits should be the same regardless of if care is provided in an outpatient department (OPD) or in a freestanding physician’s office. The new report identified 66 groups of services where OPD payment rates can be aligned with physician office rates, and 12 groups of services where OPD payment rates can be aligned with ambulatory surgical center (ASC) rates. The recommendation also includes a stop-loss policy to limit the loss of Medicare revenue for hospitals that provide services to a disproportionate share of low-income Medicare patients. Together, MedPAC estimates these reforms can provide $1.5 billion a year in savings to Medicare and beneficiaries. A recent New York Times article reported on this recommendation, explaining:
"When a Medicare beneficiary receives a certain type of echocardiogram in a doctor’s office, the government and the patient together pay a total of $188. They pay more than twice as much — $452 — for the same test in the outpatient department of a hospital. (The test is used to evaluate the functioning of the heart.) The commission urged Congress to “equalize payment rates” or at least reduce the disparities, for doctor’s office visits and hospital clinic visits in which similar patients receive the same or similar services."
Post-Acute Care Bundled Payment: To encourage accountability, care coordination, and efficiency in Medicare, MedPAC examined expanding current bundled payment reforms to post-acute care services. While they do not provide an official recommendation, the Commission discusses an illustrative model where a bundled payment could be given for services within 90 days of a triggering event. Under this approach, a value-based withhold could be designed where Medicare would continue FFS payments to participating providers, but would withhold a certain amount and return some portion of savings if average spending is below a spending target.
Reducing Hospital Readmissions: Building upon the Hospital Readmissions Reduction Program enacted under the ACA, MedPAC recommends several changes to improve the measurement of hospital readmissions. These recommendations include: establishing a fixed readmissions rate target; lowering penalties when industry-wide readmissions rates improve; using an all-condition readmission measure; comparing readmissions rates with peer hospitals; and possibly developing a joint readmission/mortality measure in the long run.
To inform future policy development, MedPAC’s report also provides information on the prevalence of long-stay patients and the use of hospice services among nursing home patients. Additionally, it studies care coordination for dual eligibles (beneficiaries eligible for both Medicare and Medicaid), noting that federally qualified health centers and community health centers may be uniquely positioned to coordinate care for these beneficiaries because they provide primary care, behavioral health services, and care management services, often at the same clinic site.
Finally, MedPAC discussed the potential for what they call “competitively-determined plan contributions,” but what is commonly referred to as premium support. MedPAC simply explores Medicare plan competitive bidding and does not recommend any specific policies. However, it is still significant in that it’s the first time they look at premium support and consider it worthwhile to discuss.
While most of these recommendations and policy issues have been discussed and debated before, MedPAC’s latest report helps to inject renewed support and analysis behind many of them at a time when momentum for Medicare reforms on Capitol Hill is critical. Lawmakers would be wise to take on these suggestions and restart the debate on how to put Medicare and overall federal health spending on a more sustainable path.
Yesterday, the Congressional Budget Office released two analyses, a cost estimate and an economic analysis, of the Senate's immigration bill -- S.744, the Border Security, Economic Opportunity, and Immigration Modernization Act. The score is good news for immigration proponents, as CBO expects the bill would decrease deficits and boost economic growth.
CBO's cost estimate for the immigration bill is more complex than its usual cost estimates, in that it is partially macrodynamic. As the CBO explained a little over a month ago, it breaks its normal scoring convention to incorporate the effects of a sizable increase in the labor supply into its estimates. While employing dynamic effects is rarely practiced, in this case it is necessary because the changes in the labor supply and overall economy would be significant enough that excluding those factors would produce very different results for cost estimates. The Senate bill, CBO determines, would increases the labor supply by approximately 10.4 million people, not including the nearly 8 million illegal residents who would gain citizenship if the bill was passed. However, CBO's estimate does not incorporate changes in productivity, savings rates, and many other economic effects. CBO's methodology broadly mirrors the approach it took to score the 2006 immigration reform proposal.
CBO estimates the legislation would decrease deficits by $197 billion over 2014-2023. Under the same time frame, spending would increase by $262 billion, mostly from increases in refundable tax credits and health care outlays. However, the rise in employment and wages would increase revenue by $469 billion over ten years as a result of greater output and total wages. Not included in the deficit estimates is an expected increase of $22 billion in immigration related discretionary spending, which would require cuts in other areas under the current BCA caps. A greater breakdown of the legislation's impact on specific programs is available in the report.
CBO and JCT produce estimates for the second decade as well, determining that the legislation would decrease deficits by $700 billion over 2024-2033 period. By 2033, the net increase in the labor force would total 16 million.
CBO's economic analysis of the immigration reform bill examines other possible economic changes not incorporated in the cost estimate, such as changes in productivity or relative wages. They expect that the net effect of these other economic effects not included in the cost estimates would not change budget deficits estimates in the first ten years, but are nevertheless interesting to policymakers concerned about how the legislation would affect the wider economy beyond the budgetary effects. Incorporating these other assumptions in a longer-term outlook would further reduce projected deficits, according to CBO.
In summary, CBO expects enacting S.744 would:
- Increase economic growth by 3.3 percent by 2023, and by 5.4 percent in 2033
- Increase the size of the labor force
- Increase average wages in 2025 and beyond (but decrease them before 2025)
- Raise the unemployment rate modestly through 2020
- Increase capital investment
- Increase productivity of capital and labor
- Increase interest rates
As noted above, average wages are projected to be lower for the first ten years if the legislation is passed, but are projected to be higher for the second decade and beyond. Lower short-term average wages are due to the inclusion of many low-wage workers in the population; CBO does not expect the wages of existing workers to fall significantly.
CBO's cost estimate may be a positive development for those seeking immigration reform, but there are many different factors to consider besides the budgetary impact. We will examine the two studies from CBO in more depth very soon -- so keep checking back!
Over the past few weeks, we've seen a common argument in favor of turning away from solving our long-term debt problem due to short-term improvements in the last CBO Economic and Budget Outlook. While the short-term improvements are a welcomed sign, we've also shown that work still remains and our current long-term outlook carries many serious risks that demands a plan to deal with our debt.
In a The New York Times piece titled "This Can't Go On Forever," the author portrays the consequences of a rising debt path well (emphasis added):
Realistic budget projections say that current policies aren't remotely sustainable. For example, a month ago a joint report of the Committee for Economic Development (a business group), the bipartisan Concord Coalition and the Center on Budget and Policy Priorities concluded that under current policies, federal debt would rise by $5 trillion over the next decade. And then baby boomers will start collecting benefits, and our debt will really explode.
Such explosive growth in debt can't go on forever, and it won't. Yet our current leaders and their apologists insist that the problem will magically solve itself. Last year's deficit came in slightly below forecasts, and we've had one quarter of good economic growth -- see, we'll grow out of the deficit!
But we won't, and there will eventually be a day of reckoning.
Another piece by the same author called "A Fiscal Train Wreck" argued that the real problem is the long-term:
What's really scary -- what makes a fixed-rate mortgage seem like such a good idea -- is the looming threat to the federal government's solvency.
That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 -- make that 3, O.K., maybe 4 -- percent of G.D.P. But that misses the point [that the real fiscal threat is the future Social Security and Medicare liabilities]…
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared -- the ultra-establishment Committee for Economic Development now warns that ''a fiscal crisis threatens our future standard of living'' -- investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic. But I've done the math, and reached my own conclusions -- and I've locked in my rate.
The author? Surprisingly, the answer is economist Paul Krugman. He wrote this column in 2003 about the deficits under President Bush, which were the same size as a share of GDP as they are projected to be in 2014 under current law. But this Sunday's column by Krugman in the Times, "Fight the Future," presents a different take.
What’s the problem with focusing on the long run? Part of the answer — although arguably the least important part — is that the distant future is highly uncertain (surprise!) and that long-run fiscal projections should be seen mainly as an especially boring genre of science fiction. In particular, projections of huge future deficits are to a large extent based on the assumption that health care costs will continue to rise substantially faster than national income — yet the growth in health costs has slowed dramatically in the last few years, and the long-run picture is already looking much less dire than it did not long ago.
Now, uncertainty by itself isn’t always a reason for inaction. In the case of climate change, for example, uncertainty about the impact of greenhouse gases on global temperatures actually strengthens the case for action, to head off the risk of catastrophe.
But fiscal policy isn’t like climate policy, even though some people have tried to make the analogy (even as right-wingers who claim to be deeply concerned about long-term debt remain strangely indifferent to long-term environmental concerns). Delaying action on climate means releasing billions of tons of greenhouse gases into the atmosphere while we debate the issue; delaying action on entitlement reform has no comparable cost.
In fact, the whole argument for early action on long-run fiscal issues is surprisingly weak and slippery. As I like to point out, the conventional wisdom on these things seems to be that to avert the danger of future benefit cuts, we must act now to cut future benefits. And no, that isn’t much of a caricature.
So who is right, Paul Krugman in 2003 or Paul Krugman today? In our view, the earlier Krugman is still right. While some of the surrounding economic conditions have changed, the long-term problem associated with population aging and health care cost growth, just as in 2003, has not been adequately addressed. Indeed, the threat of population aging is now far more immediate. We’ve made the case many times before on the need for further deficit reduction over the next decade and beyond. And while it is true that, as Krugman points out, sharp immediate cuts can be counterproductive when the economy is so weak, most responsible plans actually talk about replacing sharp cuts (sequestration) with phased-in and targeted reforms that protect a recovering economy.
But why act now, if most of the deficit reduction will be back-loaded anyway? There are a number of important reasons.
From a fiscal standpoint, even small upfront savings can compound going forward and reduce future interest costs, thus helping to protect against the risk of an interest rate shock. From an economic perspective, enacting long-term reforms today can help provide market confidence and certainty while also serving as an opportunity to enact pro-growth tax and spending reforms. From a generational perspective, acting sooner will allow less cuts and tax increases to be shared more broadly across more Americans than if we wait and are forced to exempt more generations of Americans from the price of deficit reduction. And from a policy perspective, acting soon allows policies to be phased in gradually and with ample warning rather than implemented abruptly and without warning. This not only reduces the risk of excessively harsh austerity, but has the moral and economic benefit of allowing individuals and business to plan and adjust for any changes.
Finally and perhaps most importantly, from a political economy perspective it is likely only possible to enact major long-term adjustments absent a crisis if done so well in advance. It is highly unlikely that in 2018 – when debt starts to grow again relative to GDP – policymakers will be able to snap their fingers and instantly shrink the size of government or grow the pot of revenue. In the real world, most changes occur gradually -- often through freezing, slowing, or accelerating the growth of various provisions rather than dramatically cutting or increasing their nominal value. The implication is that even though our debt problems are likely at bay for the next five years, they are large enough in the future that we need to start making gradual adjustments now which build over time.
This is why in their own budget, the Obama Administration replaces abrupt cuts from sequestration and the SGR with gradual changes like adopting the chained CPI (0.25 percent slower growth per year), slowing the growth of post-acute care payments (1.1 percent slower growth per year), and slowing the growth of discretionary spending (about 0.7 percent slower per year from 2017 to 2023) in order to begin to put the debt on a downward path relative to the economy.
Paul Krugman’s thoughts on the budget (emphasis added)?
We have good priorities and plausible projections. What’s not to like about this budget? Basically, the long run outlook remains worrying.
According to the Obama administration’s budget projections, the ratio of federal debt to G.D.P., a widely used measure of the government’s financial position, will soar over the next few years, then more or less stabilize. But this stability will be achieved at a debt-to-G.D.P. ratio of around 60 percent. That wouldn’t be an extremely high debt level by international standards, but it would be the deepest in debt America has been since the years immediately following World War II. And it would leave us with considerably reduced room for maneuver if another crisis comes along.
Furthermore, the Obama budget only tells us about the next 10 years… America’s really big fiscal problems lurk over that budget horizon: sooner or later we’re going to have to come to grips with the forces driving up long-run spending — above all, the ever-rising cost of health care.
Unfortunately, that was the Paul Krugman of 2009.
While the latest Medicare Trustees report showed slightly improved projections, the long-term challenges of health care cost growth and population aging remain unresolved. Fortunately, some policymakers in Congress remain committed to slowing the growing spending in Medicare and bending the health care cost curve.
In a speech last week, Senator Ron Wyden (D-OR) outlined several major reforms to improve the care of people with chronic diseases, which is a leading driver of health care spending growth. These include:
- Reforming the attribution rule for Accountable Care Organizations (ACOs) in the Affordable Care Act, which prevents ACOs from avoiding sick beneficiaries but also limits them from specializing in chronic care coordination. Senator Wyden proposes creating specific consumer protections for beneficiaries in plans that specialize in senior chronic care, while fully retaining the current protections against discrimination.
- Reforming Medicare reimbursement to target areas with high rates of chronic illness by rewarding providers who improve care and lower costs.
- Requiring individual care plans for seniors with more than one chronic condition.
- Enabling ACOs to create incentives to encourage beneficiaries to be as healthy as possible.
Wyden’s proposals offer a framework that could help change incentives toward greater care coordination for those Medicare beneficiaries who are the most expensive and most chronically ill. Especially as baby boomers become older beneficiaries in Medicare, targeted reforms that slow spending growth on chronic care can help to gradually bend the cost curve downward.
Similarly, the House Ways and Means Committee's Subcommittee on Health held a hearing on Friday on bipartisan proposals to reform Medicare post-acute care payments. Post-acute care is another high-cost area of Medicare spending, accounting for $62 billion, or 17 percent, of Medicare Fee-For-Service (FFS) spending in 2012. Additionally, Medicare post-acute care payment rates widely vary. One recent Institute of Medicine study found that variation in per capita spending on post-acute care caused 40 percent of the variation in overall Medicare spending. To address these issues, a number of proposals, such as A Bipartisan Path Forward and the Bipartisan Policy Center’s health care cost containment plan, have offered reforms to improve the cost and quality of post-hospitalization care for beneficiaries. We highlighted a few of these reforms in our Health Care and Revenue Savings Options report.
At the hearing, CMS Acting Principal Deputy Administrator Jonathan Blum testified about some of the current efforts CMS has underway to improve post-acute care, but said that "more work remains to be done to make Medicare spending on post-acute care sustainable for the long term and improve the overall delivery of care."
MedPAC Executive Director Mark E. Miller also testified before the Subcommittee, outlining some of the post-acute care recommendations MedPAC has made in recent years, primarily focused on payment reductions, realigning payments with actual costs, and encouraging greater care coordination. Miller’s testimony came the same day MedPAC released their annual June report to Congress. In the report, MedPAC recommended equalizing Medicare payment across sites of care by aligning outpatient department payment rates with those of physician offices and ambulatory surgical centers for certain groups of services. MedPAC also provides an illustrative reform to bundle payments for post-acute care services within 90 days of a triggering event.
It’s promising to see lawmakers continuing to discuss these important reforms which target the delivery of high-cost care. The Ways and Means hearing was the fourth in a series examining bipartisan Medicare proposals, and the reforms outlined by Senator Wyden were yet another set of constructive ideas he has put forth in recent years. These are exactly the kind of discussions lawmakers should be having if they’re serious about putting Medicare spending on a more sustainable path.
Entitlement reform remains essential to the creation of a fiscally sustainable future, but it has been hard for lawmakers to agree on policies to do it. Fred Hiatt’s latest op-ed in the Washington Post presents the argument that liberals should be leading entitlement reform because they appear to be the ones with the most at stake. The projected growth of mandatory spending over the coming years will put pressure on the rest of the budget, such as non-defense discretionary (NDD) spending. This category of the budget includes things like Head Start, primary education spending, and infrastructure, among many other things.
The tradeoff for lawmakers between the two categories of spending can be illustrated by the projections of each category of spending. Under current law, non-defense discretionary spending is set to decrease from 4 percent of GDP in 2012 to 2.7 percent in 2023 while Social Security and health care spending is scheduled to grow from 9.5 percent of GDP in 2012 to 11.6 percent by 2023.
Hiatt points out that part of the reason we are allowing discretionary spending to shrink is a refusal to raise additional revenue. However, that doesn't tell the whole story:
But there’s another reason for the squeeze on liberal-favored programs: the inexorable growth in entitlement spending as health-care costs grow and the population ages. Mandatory spending will reach 14 percent of GDP by 2022, compared with an average of 10.2 percent over the past 40 years. Social Security, Medicare and the other major health-care programs will account for more than half of all federal spending 10 years from now, CBO says. That takes into account the recent good news of slower-than-expected growth in health-care costs, and it assumes Medicare cuts that are unlikely to be implemented.
He states that the argument for turning away from deficit reduction in favor of other priorities has it backwards: deficit reduction is essential to freeing up resources to tackle other issues.
[The Center for American Progress] argues that the country faces many problems as or more important than the fiscal deficit, and I agree. Income and wealth inequality, slow economic growth, persistent joblessness, crumbling infrastructure, terrible inner-city schools — these all cry out for creative policy.
But they all will also be hard to address as long as government resources tilt more and more toward the older, often better-off generation.
Hiatt sends an important warning on the threat to non-defense discretionary spending if we fail to address entitlement growth. What he doesn’t mention is that this squeeze is already happening. The sequestration – which will cut non-defense discretionary spending by about 7 percent next year – is the consequence of a failure to agree to entitlement (and tax) reforms. In August 2011, this sequestration was written as a fallback to a “Super Committee” when Speaker Boehner and President Obama could not agree to these reforms previously. And the failure of the Super Committee to agree to sensible tax and entitlement changes is ultimately what led to the activation of the sequester.
Indeed, the best way out of the sequester is to replace it with more gradual and intelligent reforms that take some of the cuts away from NDD and refocus deficit reduction on other areas of the government. Hiatt is right that if we don’t address entitlements, there won’t be room for much else.
The recent slowdown of health care spending growth is one of the more positive developments in the budget over the past few years. Despite the slowdown, Doug Holtz-Eakin, former CBO director and current president of the American Action Forum, writes in The Hill that Medicare is still in need of reform to slow its cost growth. Population aging is still a significant driver of Medicare's projected spending increase, and it is difficult to say how much of the slowdown in health care costs is permanent -- one study from the Kaiser Foundation and Altarum Institute estimated that 77 percent could be attributed to the weak economy. Holtz-Eakin explains:
However, despite this good news, or perhaps because of it, it is important that we make a point to emphasize the real and continued need for Medicare reform. Unfortunately, we’ve seen slow-downs in health care spending before, and just as quickly as they came, they have gone away. As much as I would love to believe the trends we’ve seen in recent years will continue, and that the problem of excess costs in Medicare is over, such belief would be naïve. Much of the slow-down in spending growth can be attributed to the recession, which inevitably slows spending patterns across the board. In addition, the imminent implementation of Affordable Care Act subsidies and Medicaid expansions will further boost spending.
Moreover, if the slow-growth trend holds, Medicare is projected to add 30 million new beneficiaries in the next 20 years – which will place significant added cost pressure on the program. This trend cannot be altered, nor avoided nor wished away. Adding 30 million people to the program will raise the cost of program and must be dealt with.
Regardless of the interpretation of recent trends, Holtz-Eakin argues that attention should turn to reforms that could improve the program in addition to shoring up its finances:
Steps include reforms to the program’s payment and delivery systems, enhanced transparency and accountability, better support and coordination for vulnerable populations – the list goes on. All of these steps (and more) should be part of a comprehensive effort to reform the Medicare program.
With Medicare looking at more beneficiaries than ever before in the next couple of decades, reforming the program should go beyond small fixes like replacing the Sustainable Growth Rate (SGR) formula. Policymakers should turn to comprehensive reform, especially reforms that bend the health care cost curve as we look to address the growth of health care spending.
Click here to read the full op-ed.
The economic stimulus package enacted in 2009 is now four years behind us. According to recovery.gov, $796 billion has been disbursed as of the end of April, with $505 billion in the form of spending and $290 billion in tax cuts. CBO's latest estimate of the cost of the stimulus through 2019 is $830 billion. While some pieces are still going on, in particular food stamp spending and infrastructure spending, most provisions have run their course or were set to expire a few years ago. At the time of passage of the 2009 stimulus, CRFB warned that many of these temporary provisions could last longer than originally stated and permanently add to future deficits.
To be clear, extending or making these provisions permanent is not necessarily inappropriate given the economic situation and/or priorities of lawmakers, especially if the extensions are paid for. Still, it is worth examining what has happened to some of the main provisions of the stimulus. In one of our previous posts in April 2011, we covered many of the measures which had been set to expire already.
Back then, we found that the results were mixed. The HIRE Act (tax breaks for expanding payroll), Build America Bonds, Cash for Clunkers, the homebuyer tax credit, extended COBRA benefits, and the Making Work Pay tax credit all had been allowed to expire by then (although MWP was replaced by the payroll tax cut). Meanwhile, other refundable credit expensions, unemployment benefits, and state aid had all been extended at least partially. The refundable credits and unemployment benefits were generally deficit-financed, while the state aid extension was fully paid for over ten years.
Incidentally, the fiscal cliff deal this past winter conveniently presented policymakers a window of opportunity to address some of the provisions which had been extended and were set to expire in 2012. Below is a list of some of the stimulus measures which were previously extended or enacted in 2010:
- State aid: The original 2009 stimulus package created the State Fiscal Stabilization Fund (SFSF) to avoid cutbacks in state services such as education and Medicaid payments. It was scheduled to expire in 2010 but a portion of it was extended through 2011 in the form of the Education Jobs Fund and additional Medicaid money, which together had a more narrow scope than the SFSF. These provisions were not extended further. Verdict: Expired
- Unemployment Insurance benefits: Since our last blog, UI benefits have continued to be extended, with the latest one lasting through the end of this year (costing $30 billion). However, UI has not been kept in its original extended and expanded form as passed in 2009. For one, the July 2010 extension declined to extend the 2009 stimulus's increase in benefit levels. Then in the February 2012 extension, the maximum number of weeks a person could collect UI was reduced from 99 weeks to 73 weeks. Verdict: Mostly extended.
- Earned Income Tax Credit: The 2009 stimulus increased EITC benefits for working families with three or more children and further increased benefits for married couples beyond what the 2001 tax cut already did. The fiscal cliff deal extended these provisions through 2017 at a cost of $17 billion. Verdict: Extended.
- Child Tax Credit: The stimulus made the child tax credit more refundable by allowing refundability to extent that a person's income exceeded $3,000, as opposed to the previous $10,000 threshold. This provision was extended in the fiscal cliff deal through 2017 at a cost of $51 billion. Verdict: Extended.
- American Opportunity Tax Credit: The AOTC aims to help lower-income families pay for college by allowing qualifying families to claim up to $2,500 each year. The AOTC replaces a previous higher education credit, the Hope credit, which was not refundable. It also has been extended through the end of 2017 at a cost of $67 billion. Verdict: Extended.
- Payroll tax cut: The payroll tax cut, originally enacted in the 2010 tax cut, reduced the employee portion of the payroll tax by two percentage points for 2011. In two separate pieces of legislation, it was ultimately extended through the end of 2012. While many Democrats favored extending it in the fiscal cliff deal, it was ultimately allowed to expire. Verdict: Extended once, then expired.
- Business expensing: Starting with the 2008 stimulus, businesses were allowed to write off the cost of certain equipment quicker than normal, with a 50 percent deduction in the first year. This provision was extended in the stimulus and then expanded to a 100 percent write-off for 2011 in the 2010 tax cut (with it reverting back to 50 percent in 2012). The expensing was extended through 2013 in the fiscal cliff deal at the 50 percent level. Verdict: Extended
|Extended or Expired?|
|Making Work Pay credit||N/A||Expired and replaced||Expired|
|EITC and CTC Expansions||N/A||Extended||Extended through 2017|
|AOTC||N/A||Extended||Extended through 2017|
|UI Benefits||Mostly extended||Mostly extended||Mostly extended through 2013|
|COBRA Benefits||Extended twice, then expired||Expired||Expired|
|Homebuyer tax credit||Extended once, then expired||Expired||Expired|
|State Aid||Partially extended||Partially extended||Expired|
|Build America Bonds||N/A||Expired||Expired|
|Cash for Clunkers||Expired||Expired||Expired|
|Payroll tax cut||Not yet enacted||Enacted and extended for 2012||Expired|
|Business expensing||Extended||Expanded and extended||Partially extended|
Combining these observations with the ones we made two years ago, it appears that many of the 2009 stimulus's provisions have been allowed to expire (though some later than originally envisioned). Also, extended UI benefits are likely to be allowed to expire at a point at which the unemployment rate has fallen far enough (this has been the case in past recessions). A more cloudy case is the one of business expensing, which could become permanent but is generally seen as a temporary stimulus measure. We will have to see how lawmakers decide to treat the refundable credits, which will expire at the end of 2017.
Whether these expirations/extensions were appropriate given the timing is debatable. However, when the economy is back on truly solid ground, policymakers should certainly either make the remaining temporary provisions permanent, allow them to expire, or replace them with an alternate policy. Keeping them on a temporary basis is not a good solution.
Weathering the Storms – Stormy weather has wreaked havoc on much of the country recently, including Washington. Meanwhile, storms of a different nature, namely a potential government shutdown and debt ceiling fight, are brewing. These squalls may not hit until fall, but they could pack a punch if policymakers don’t act now to mitigate them. The inability of lawmakers to address our fiscal challenges no doubt has contributed to the record-low approval ratings for Congress, with a new Gallup poll showing public confidence in the institution almost in single digits. Policymakers need to rise above the storm clouds on the horizon.
Debt Limit Tempest Builds – It may seem far off now, with the Congressional Budget Office (CBO) saying it may be as late as November until the statutory debt ceiling is reached, but the contours of the coming debt limit debate are forming now. House Speaker John Boehner (R-OH) said that the House GOP wants “cuts and reforms” greater than the amount of the debt ceiling increase in order to go along with raising the limit. He also signaled that they will seek long-term savings through entitlements. On the other hand, the White House wants a clean debt limit increase separate from deficit reduction discussions. Some lawmakers are trying to prevent the last-minute brinksmanship of the last debt ceiling fight by proposing legislation that would suspend lawmaker’s pay until the debt ceiling is raised.
Flurry of Activity on Appropriations – The other major approaching front concerns the federal spending process. While lawmakers are busy moving legislation funding the various federal departments, because of deep differences between the House and Senate it doesn’t look hopeful that Congress will agree on spending measures by October 1, the beginning of the fiscal year, meaning that a stopgap measure will be required to prevent a government shutdown. The Senate wants to approve about $91 billion more in spending than the House by ignoring the budget caps under sequestration. While the House plans to abide by the general level of the caps, it wants to spend more on security than the caps allow, cutting more spending from other areas to make up the difference. The Senate Appropriations Committee has come up with a preliminary schedule calling for 8 of 12 spending bills to be marked up within the next month. On Thursday the Committee will vote on the spending allocations to each of the 12 areas. Senate Minority Leader Mitch McConnell (R-KY) promised to block any Senate spending bill that does not abide by the caps. In the House the process is already under way, with the House Appropriations Committee passing Agriculture and Defense spending bills last week.
Bipartisan Lightning Strikes Three Times – While finding broad bipartisan support for a comprehensive fiscal plan remains difficult, collaboration across party lines is sprouting up on more targeted bills. Senators Tom Coburn (R-OK), Jeff Flake (R-AZ), Angus King (I-ME), and Joe Manchin (D-WV) introduced legislation to end the practice of overlapping unemployment and disability insurance payments, which could reduce the deficit and pave the way to broader Social Security reform. Representatives Patrick Murphy (D-FL) and David Joyce (R-OH) introduced the SAVE Act to make the federal government more efficient, including reforms recommended by the Government Accountability Office (GAO) to end government duplication and overlap. And a bipartisan group of Senate and House members introduced legislation to reduce waste, fraud and abuse in Medicare and Medicaid.
Barnstorming for Tax Reform – The leaders of the two congressional tax-writing committees, Sen. Max Baucus (D-MT) and Rep. Dave Camp (R-MI), continue to push for fundamental tax reform. Camp is meeting individually with each member of his committee and held the latest in a series of hearings on the topic last week. Baucus plans to release a timeline soon detailing how he will push the issue on Capitol Hill and his committee continues to churn out options papers. And the two will hit the road travelling the country to seek input from Americans and advance the issue.
Debt Wildfire Partially Contained for Now, But By No Means Extinguished – With Standard & Poor’ s changing its long-term credit outlook for the U.S. from “negative” to “stable” some are arguing this is a sign that we can give up on further deficit reduction and even pull back some of the savings already enacted. But S&P did not upgrade U.S. credit back to AAA and its rosier outlook, like that of CBO, assumes that sequestration stays in place. The Washington Post notes that our long-term debt problems remain and that a debt plan is required to create fiscal space to deal with any additional financial crises we may face. CRFB board member Bill Frenzel also argues that we haven’t solved our fiscal problems and board member Gene Steuerle writes on the false stimulus versus austerity dichotomy. And the International Monetary fund (IMF) also mentioned the need to replace the sequester with a long-term plan. The good news is that the White House and congressional Republicans continue to meet and discuss a comprehensive debt deal and that long-term savings are being discussed. But the talks still have not progressed very far.
Sandbags Not Enough to Stop Pentagon Flooding – According to CQ (subscription required) Defense Secretary Chuck Hagel has rejected requesting supplemental funding from Congress to meet an anticipated budget shortfall. Instead he wants Congress to replace sequestration with a comprehensive deficit reduction plan that will allow the Pentagon to spend more in the short run while cutting more in the long run.
Key Upcoming Dates (all times are ET)
- Dept. of Labor's Bureau of Labor Statistics releases May 2013 Consumer Price Index data.
- Senate Finance Committee hearing on health care costs at 10 am.
- Senate Budget Committee hearing on the President's FY 2014 budget request for education with Education Secretary Arne Duncan at 10:30 am.
- House Committee on Ways and Means Social Security Subcommittee hearing on the Social Security Disability Insurance program at 10 am.
- House Budget Committee mark-up of budget process reform bills at 10 am.
- House Committee on Ways and Means Health Subcommittee hearing on the 2013 Medicare Trustees report at 9:30 am.
- Senate Appropriations Committee hearing to adopt FY 2014 spending allocations and mark-up spending bills for Military Construction-Veterans Affiars and Agriculture at 10:30 am.
- Bureau of Economic Analysis releases third estimate of 2013 1st quarter GDP.
- The date Treasury Department expects a nearly $60 billion payment from Fannie Mae, which will help delay the time by which lawmakers will need to raise the debt ceiling.
- Bureau of Labor Statistics releases June 2013 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases June 2013 Consumer Price Index data.
- Bureau of Economic Analysis releases advance estimate of 2013 2nd quarter GDP.
After finishing its preliminary annual review of the U.S., the International Monetary Fund (IMF) concluded the U.S. could spur additional economic growth by adopting a balanced and more gradual pace of deficit reduction, while not abandoning fiscal sustainability. Possibly as a result of the automatic spending cuts enacted by the sequester, the IMF has lowered its growth forecast for the U.S. economy in 2013 to 1.9 percent from 2.2 in 2012. Rather than continuing the unnecessarily harsh short-term cuts in the sequester, lawmakers should replace it with a more back-loaded deficit reduction plan that gets more savings in the long term and (unlike the sequester) protects important investments in things like infrastructure and education.
IMF director Christine Lagarde puts their recommendations as follows:
There are signs that the U.S. recovery is gaining ground and becoming more durable. However, it has a way to go before returning to full strength. The IMF’s advice is to slow down, but hurry up: meaning slow the fiscal adjustment this year—which would help sustain growth and job creation—but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability.
Within its assessment, the IMF highlights a series of fiscal policy measures to help promote economic growth in the short term, but more importantly, they also address the medium and long-term fiscal sustainability challenges the U.S. continues to face with demographic and health care pressures and increased interest payments from growing debt. Its recommendations include:
- Repealing the sequester and adopting a more balanced and gradual pace of fiscal consolidation
- Raising the debt ceiling to avoid a severe shock to the United States and the global economy
- Adopting a comprehensive and back-loaded set of measures to restore long-run fiscal sustainability
As the IMF notes, the sequester is currently harming the economy's ability to recover. Thus repealing the sequester and replacing it more substantial long-term deficit reduction will give the economy more breathing room in the short term while shoring up the long term. A medium- to long-term-oriented deficit reduction plan would allow us to simultaneously support the current economic recover -- which will be necessary to help put our debt on a sustainable path -- while addressing many of the future fiscal issues the U.S. will be dealt within the next decade.
At times, the fiscal debate can be confusing, as it is often set up as a simplistic contest between an argument for austerity against an argument for stimulus. However, the budget debate is much more complex than that, and many positions, including CRFB's, do not fit strictly into one of those two categories.
On his blog, The Government We Deserve, CRFB board member Gene Steuerle writes about this false dichotomy and the many different factors that must be considered in fiscal policy.
Nothing better exemplifies our gridlock over the future of 21st century government, as well as how to recover from the Great Recession, than the false dichotomy of austerity versus stimulus.
The austerity thesis, reduced to its simplest form, suggests that government has been living beyond its means for some time, only exacerbated by the actions that accompanied the recent economic downturn. Sequesters, tax increases, and spending cuts become the order of the day.
The stimulus hypothesis, reduced also to simplest form, suggests that more government spending and lower taxes puts money in people’s pockets and helps cure a country’s economic doldrums. Once the economy is doing better, government spending will naturally fall and taxes rise.
The debate then plays out largely over deficits: do you want larger or smaller ones?
But reduced to this form, the debate is a fallacy, for several reasons.
First, one must define larger or smaller relative to something. Last year’s spending or taxes or deficits? What’s scheduled automatically in the law? The public debate often glosses over these issues. Which is more expansionary when keeping taxes at the same level: an economy whose growth in spending is cut from 6 to 4 percent or one whose growth is increased from 1 to 3 percent?
Second, a country’s ability to run deficits depends on its level of debt. A recent debate over whether at some point higher debt starts to slow economic growth doesn’t change the fact that lenders want to be repaid. People won’t loan to Greece now, but they still find the U.S. Treasury securities a safe haven for their money.
Third, and by far the most important, what timeframe is involved? Is the Congressional Budget Office pro-austerity or pro-stimulus when it concludes that sequestration hurts the economy in the short run, but is better in the long run than doing nothing about deficits? No one on either side suggests that debt can grow forever faster than the economy. Everyone implicitly or explicitly believes that to accommodate recessions when debt grows faster there are times when debt must grow slower.
We often make this point on The Bottom Line, that it is the timing and composition of a deficit reduction plan that is just as important, if not more so, than the size of the plan. While some cast fiscal sustainability plans as "austerity," this term usually refers to immediate deficit reduction, while most budget plans focus on longer-term sustainability.
Ideally, lawmakers would have a bipartisan package that would include both entitlement and tax reform, areas that will make the biggest difference for long-term fiscal sustainability. Changes should be phased in to ensure that the economy can recover, and they should be sufficient to ensure that oversized debt won't cloud our economic future.
Click here to read the full piece.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.