The Bottom Line

October 30, 2014

As soon as the election is over, the lame duck Congress will be pressed to deal with several pieces of must-pass legislation before the end of the year, including their last chance to retroactively extend a set of tax breaks that have been expired since last year. These tax extenders are routinely extended for a year or two at a time without offsets so they add to the national debt, causing it to grow even more than already projected under current law.

An article from Bloomberg suggests that some lawmakers may be considering breaking tradition -- but not in a good way. Instead of extending the provisions for just one or two years (adding a smaller amount to the debt), they will select a few of the bigger provisions to extend permanently.

For example, one potential deal between the two parties could permanently extend and expand the research & experimentation tax credit (as provided for in H.R. 4438); permanently increase the amounts that small businesses can write off immediately; and continue the expansions to refundable tax credits like the Child Tax Credit and American Opportunity Tax Credit that were originally passed in the 2009 stimulus (ARRA) and that currently expire in 2017.  Along with these new provisions this potential deal would also provide for a two-year (2014 and 2015) extension of all the other provisions. This is bipartisanship in the worst sense: both parties adding provisions they want to the national credit card.

October 30, 2014

The National Academy of Social Insurance (NASI) released a survey last week (see video of CRFB President Maya MacGuineas at the release event) showing that a majority of Americans are willing to raise taxes – including their own – to preserve Social Security. Given the program's funding gap, it is an encouraging sign that Americans are willing to pay higher taxes to improve Social Security's solvency. Trade-off analysis, which NASI used, is an excellent way to get Americans to consider complex issues with pros and cons to all sides. Unfortunately, the design of the survey prevents the answers from being as useful as they could have been.

NASI's survey set out to determine how Americans would prefer to improve Social Security. Most respondents favored raising taxes (both the payroll tax rate and the taxable maximum) and increasing benefits. Respondents opposed raising the retirement age or means-testing benefits. This result differs from other similar surveys that found support for balanced packages of tax increases and decreased benefits for high earners.

Although it is impossible to know for sure, this survey's divergent results may have been driven by its framing of certain choices.

October 29, 2014

The last few months have seen a number of new ideas to save money in Part D of Medicare by encouraging more efficient use of drugs by prescription drug plans and beneficiaries. But Part D has also grown significantly slower than expected since its inception.

On this blog and in Health Affairs, we've highlighted the disproportionate role that Part D has played in the federal health care spending slowdown. One quarter of the $900 billion downward revision in the Congressional Budget Office's (CBO's) health care spending projections through 2021 came from Part D. And Part D's downward revision was by far the largest as a percent of program spending (nearly one quarter) among the major health care programs. Looking back further, actual 2013 Part D spending ended up almost 50 percent lower than CBO's original projection when the law passed ($50 billion vs. $99 billion), and total spending over the 2004-2013 period ended up being 36 percent lower ($353 billion vs. $550 billion).

In their Health Affairs post analyzing the Medicare slowdown, CRFB analysts Loren Adler and Adam Rosenberg cited a CBO report breaking down the sources of the slowdown in Part D. In this post, we examine more closely that report, which not only goes into the reason for slower growth in Part D but also how Part D's design compares to Medicaid in controlling costs.

In analyzing the source of the slowdown, CBO's conclusion is clear:

Taken together, the faster-than-expected slowdown in national drug spending per person and the smaller-than-expected enrollment in Part D account for nearly all of the difference between CBO’s initial projection and actual Part D spending. CBO’s original projection reflected the agency’s judgment that elements of the program’s design that were intended to foster price competition between private plans would help to limit the costs of Part D, yielding lower costs per enrollee than would be expected for a similar population under a typical employment-based drug plan offered at that time.

October 28, 2014

House Majority Leader Kevin McCarthy (R-CA) tells Politico that his priorities for the next Congress include the budget process, and in particular, evaluating the budgetary impacts of legislation over the long term and biennial budgeting. We generally share McCarthy's support for biennial budgeting though our enthusiasm depends on what emerges from the legislative process –  and it is by no means a silver bullet.

On long-term budgeting, Politico's Jake Sherman writes:

Also in McCarthy’s crosshairs: the congressional budget process. He thinks writing a budget each year is antiquated, and said Congress should consider budgeting once every two years. Also, he wants to reform the Congressional Budget Office so it studies the impact of legislation over, say, 20 years, instead of 10. He said Congress often times gets “stuck in our subcommittees” and he wants to “start looking at what we’re doing in the next 50 years.” McCarthy says Washington is frozen because the “structure holds us back.”

“The ideas are great,” McCarthy said, “but what stops the ideas from becoming law? Some of the archaic things we do.” McCarthy added, with a hefty dose of incredulity, “The budget act is the Budget Act of 1974. Does the world look like it did in ‘74?”

We are encouraged to hear McCarthy discuss the importance of long-term budgeting. Our recent paper "The Budget Act at 40: Time for a Tune Up?" shared McCarthy's concerns about a lack of focus on the long term as one of the key problems in the current budget process:

October 28, 2014
Urgency of Federal Deficit Remains

Erskine Bowles is a former co-chair of the Simpson-Bowles Fiscal Commission and member of the Committee for a Responsible Federal Budget. He wrote an op-ed that appeared in USA Today.

The good news that the budget deficit declined to $486 billion in fiscal year 2014 has prompted a declaration in some circles that the deficit is no longer a concern, and we should now turn our focus to making investments in economic growth. This either/or analysis is shortsighted and the source of many of our nation's current problems created by both parties. America is and will continue to be constrained from pursuing dynamic economic growth opportunities and from making smart investments in the future until we put our budget on a fiscally sustainable course.

I wish I could believe the recent decline in the deficit is sustainable. The temporary factors related to the recession — which caused the deficit to increase dramatically — are now receding, but the structural problems with our budget remain.

October 24, 2014

Social Security's finances are far from secure, and every year that Congress waits before addressing the problem makes it harder to fix. This week, the Social Security actuaries updated their estimates of options to restore solvency based on the assumptions in the 2014 Social Security Trustees report. Most of the options save a similar amount as last year but close a smaller percentage of the larger shortfall.

The most recent Trustees report showed a slightly bigger shortfall than last year, mostly because of slower short-term economic growth and the addition of one more high-deficit year at the end of the 75-year estimation window. Even though most policies would save about the same amount, the shortfall has grown by 6 percent, so each option closes a slightly smaller percentage of the shortfall.

October 23, 2014

In response to Howard Gleckman's piece on the FY 2014 deficit where he noted that the budget had returned to "normal," Donald Marron wrote that the most common concept of normal is not all that useful. The 2014 budget ended up being close to the 40-year historical averages for spending, revenue, and deficits. That average is often considered a benchmark for fiscal metrics, and it is frequently used by the CBO and others.

Still, Marron notes that this average may not be helpful in assessing the appropriateness of the size of deficits because of what those deficits have lead to and how bad years can skew the numbers.

But what has been the result of that “normal” policy? From 1975 to today, the federal debt swelled from less than 25 percent of GDP to more than 70 percent. I don’t think many people would view that as normal. Or maybe it is normal, but not in a good way.

Just before the Great Recession, the federal debt was only 35 percent of GDP. Over the previous four decades (1968 through 2007), the deficit had averaged 2.3 percent of GDP, almost a percentage point lower than today’s 40-year average.

But what would be a better benchmark? Brad DeLong suggests having deficits to keep debt-to-GDP constant, but that has a few problems. In the current context, it would leave debt at a historically high level and leave no room for error. Below, we will look at a few other benchmarks.

October 22, 2014

Although the Veterans Affairs (VA) and the Patent Office are infamous among federal agencies for the long wait times and lines, their backlogs pale in comparison to another office that manages court hearings for the Social Security Disability Insurance (SSDI) program. According to an article by David A. Fahrenthold from the Washington Post, with 990,399 people waiting to get a decision on their disability claims, “That is Washington’s backlog of backlogs — a queue of waiting Americans larger than the populations of six different states.” In contrast, the VA has 526,000 cases pending and the Patent Office has 606,000 applications waiting.

The Social Security’s old age program uses a very clear, measurable standard to award benefits: the Full Retirement Age. Determining eligibility is easy, since it is purely based on your age.

Conversely, determining if a worker is eligible for SSDI benefits is not as simple. To qualify for benefits, insured workers have to suffer from one or a combination of physical impairments that render them unable to perform any job available in the economy. This requires medical evidence, a complex set of guidelines, and government employees who make determinations whether a person is disabled.

October 22, 2014

The Center for American Progress' Katherine Blakeley and Lawrence Korb recently issued a report recommending how lawmakers should wind down war spending, known as Overseas Contingency Operations (OCO), as U.S. involvement in Afghanistan wanes. OCO has become a headache for budget enforcement because, unlike base defense spending, it is not capped and so it has been used to avoid the discretionary spending caps.

Making matters worse, the continuing resolution funding the government for the first two-and-a-half months of FY 2015 continued OCO spending at last year's levels, $26 billion above the Administration's request (at an annualized rate). Congress should address this issue during the lame duck session by making prudent use of the OCO designation in any government funding bill to limit spending to war needs and codify criteria for use of the OCO designation in the defense authorization bill.

Blakeley and Korb make five main recommendations:

    • Keep OCO funds tied to the costs of war
    • Stop using OCO funds as a ‘safety valve’ for the base defense budget
    • Do not make OCO a permanent emergency fund
    • Exercise authorizing and oversight authority for military action
    • Have the tough conversations about defense resources and trade-offs
October 22, 2014

Year after year, Senator Tom Coburn (R-OK) refuses to simply give lip service to "wasteful government spending" and has instead called out controversial government spending by name. Today, his office published the fifth annual edition of his Wastebook, detailing 100 examples of what he describes as "stupid spending," totaling almost $25 billion. The Wastebook looks at little-used government programs, unusual research projects funded by government grants, and tax breaks given to companies to compile these examples.

As Senator Coburn explained,

This report, the fifth annual Wastebook, gives a snapshot of just a fraction of the countless frivolous projects the government funded in the past twelve months with borrowed money and your tax dollars. Every year taxpayers, regardless of their personal political leanings, raise their eyebrows and shake their heads in disbelief at how billions of dollars that could be been better spent—or not spent at all—were squandered. Then they ask, “but what are you doing about it?”

Some of the spending examples highlighted in his report are:

  • Paid vacations for bureaucrats gone wild—$19 million: Many situations that would cause private-sector employers to fire their employees instead results in federal employees going on “administrative leave.”  Most of these situations can be described as personnel matters such as criminal investigations, misconduct and security concerns.  GAO estimates that the paid leave costs the government about $19 million.
  • Pentagon to spend $1 billion to destroy $16 billion in unneeded ammunition—$1 billion: The Pentagon is spending a billion dollars to destroy $16 billion in excessive purchases of military-grade ammunition. The amount of surplus ammunition is now so large that the cost of destroying it will equal the full years’ salary for over 54,000 Army privates.  How the military came to purchase so much ammunition it didn’t need was uncovered in a 2014 Government Accountability Office (GAO) investigation.
  • FAA upgrades low traffic airport serving high-end ski resort—$18 million: The Federal Aviation Administration awarded $18 million dollars for a construction project at an airport that serves a ski and golf resort in Idaho.  There are on average four daily commercial flights leaving the airport. Construction was to include “comfortable chairs and a fireplace.”
  • DOD sends 16 planes to the scrap heap for $32,000$468 million: After spending over $468 million on a fleet of 20 planes that were supposed to be the backbone of the Afghan Air Force’s air transport mission, the Defense Department scrapped 16 of those planes as opposed to selling or dispatching them for their purpose.
  • Watching grass grow$10,000: The Interior Department's U.S. Fish and Wildlife Service is spending $10,000 to watch how fast grass grows in Florida after its been pulled out plug by plug and “painstakingly document how fast it returns."
  • Spouses stab voodoo dolls more often when “hangry”$331,000: A National Science Foundation grant provided money to research the phenomenon of being “hangry,” in which a subject is angered because of a lack of food.  Spouses with lower levels of blood sugar were more likely to harm the voodoo doll representing their significant other.
October 21, 2014

In a Health Affairs blog post, CRFB's Loren Adler and Adam Rosenberg find that most of the recent slowdown in Medicare's costs is attributable to the prescription drug benefit, Part D, and cautions that this might not bode well for the slowdown's permanence.

In looking at changes in CBO's Medicare projections since March 2011, and building on work we did previously, they note that 60 percent of the slowdown in Medicare benefits (excluding sequestration) has taken place in Part D. More specifically, Part D spending was revised down by $225 billion over ten years, while Parts A and B are $145 billion lower. The sequester accounts for another $75 billion, and increased recoveries of improper payments are another $85 billion.

Adler Figure 1

October 21, 2014
Yes, the Deficit Is Smaller. But That Wasn’t the Main Problem.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

Some influential people would have you believe that with the deficit shrinking our fiscal problems are behind us. Nobel Prize winner Paul Krugman recently wondered why the fiscally responsible crowd wasn’t celebrating the news that the deficit was down to $483 billion. The White House has been touting the recent two-thirds decline as a major accomplishment.

The irony should not be lost on anyone: Both Mr. Krugman and the White House have long argued–correctly–that short-term deficits were not the problem and that reducing them too much too fast would harm the economy.

While the massive deficits of recent years were startling, they were never the country’s key fiscal problem.

Deficits, which grew more than 750% from 2007 to 2009, were a symptom of the near-calamitous economic crisis in which revenues plunged and automatic spending kicked in. Much of the growth in the federal deficit was a sign of just how bad the economy was. But deficits were also a partial cure for our economic woes in that the automatic stabilizers and the additional spending in the 2009 stimulus (for all its flaws) stopped the economic tailspin from becoming far worse.

October 21, 2014

Fraud -- along with the closely related waste and abuse -- is too often cited as a big factor affecting our high deficits, even though  this is not the case. Nonetheless, rooting it out can be a non-controversial path to marginally reduce spending and to help assure Americans that their taxes are not being wasted. A new CBO report discusses anti-fraud efforts in federal health care programs and how they are accounted for in the agency's scoring of costs and savings in legislation.

There are a number of agencies and mechanisms tasked with reducing fraud in health care programs. The Center for Medicare and Medicaid Services (CMS), of course, is the main one. But there is also the Health and Human Services Inspector General, the Department of Justice, and the Health Care Fraud and Abuse Control (HCFAC) program, a dedicated fund for pursuing fraud that has both a mandatory and a discretionary appropriation.

Despite this anti-fraud efforts, significant improper payments (a broader category than fraud) of $65 billion in health care still exist, at least some of which is fraud. CBO discusses a number of different strategies to reduce it, including increasing anti-fraud funding, allowing new authority for agencies to pursue fraud, shifting funds to activities expected to provide higher returns, and increasing penalties.

In terms of the first strategy, based on previous efforts, CBO assumes that an additional dollar of HCFAC spending yields $1.50 of savings (see the table below for an example). The Budget Control Act allowed for adjustments to the discretionary spending caps for HCFAC totaling $3 billion in additional funding, providing estimated savings of $3.7 billion. (The ratio is less than 1.5 to 1 in this case since it takes time for the savings to materialize). Notably, however, these net savings cannot be used for budget enforcement like pay-as-you-go rules because of their uncertain nature.

October 20, 2014
Barrow is 'brave'

Alan Simpson and Erskine Bowles are the former chairs of the Simpson-Bowles Fiscal Commission and members of the Committee for a Responsible Federal Budget. They co-wrote an op-ed in the Statesboro Herald.

Our nation needs to get its fiscal house in order, and to do so citizens must fully demand leaders who are willing to put partisan differences aside and come together to present the American people with honest solutions and consensus proposals that put the national interest ahead of special interests. That is why we were so disheartened to learn that John Barrow is being criticized for his support of a budget based on the plan recommended in 2010 by a bipartisan majority of the National Commission on Fiscal Responsibility and Reform which we co-chaired (Simpson-Bowles Commission).

The Simpson-Bowles plan is a comprehensive, tough-minded and pragmatic approach to attacking our national debt and ensuring that Social Security is fiscally sound for future generations.

Because it seeks to tackle the hard problems, it came under savage attack from partisan interests from both ends of the spectrum.

October 17, 2014

With FY 2014 officially in the book, it’s time to look back at how spending and revenues have changed since the FY 2009’s highest nominal deficit of all time (and 5th highest as a percentage of GDP since 1930).  

The FY2014 budget deficit totaled $483 billion with $3.02 trillion of revenue and $3.50 trillion of spending. This deficit was nearly 30 percent below the FY2013 deficit and 66 percent below its 2009 peak. In FY 2009, the budget deficit was $1.41 trillion with $2.11 trillion in revenue and $3.52 trillion of spending.

Annual deficits have fallen substantially over the past five years, largely due to rapid increases in revenue (mostly from the economic recovery), the reversal of one-time spending during the financial crisis, small decreases in defense spending, and slow growth in other areas. This temporary improvement in our nation's short-term finances, while likely too quick for the struggling economy, comes as nominal spending is only about $15 billion lower (though it has declined sizably as a percent of GDP).

Between that time, health care and Social Security spending have grown significantly due to natural upward pressure, aging of the population, and to a lesser extent, the coverage expansions in the Affordable Care Act. Interest spending is also higher as a result of the huge increase in debt since 2009. Meanwhile, discretionary and other mandatory spending are down from fading stimulus, the economic recovery, and legislated deficit reduction like the sequester.


October 17, 2014

In response to the release of final FY 2014 deficit numbers, Tax Policy Center's Howard Gleckman writes that this year's outcome just returns the budget to "fiscal normalcy" -- and only temporarily. Although the deficit has fallen significantly in recent years, this year's budget is largely in line with the averages of recent decades.

In 2014, federal tax receipts reached 17.5 percent of GDP, a level unseen since 2007, just before the economy cratered. That’s only slightly higher than the 40-year average of about 17.4 percent of GDP.


The story is similar on the spending side. In 2009, federal outlays topped out at 24.4 percent of GDP. By the fiscal year just ended, they had declined to 20.3 percent, a shade below the 40-year spending average of 20.5 percent.

October 16, 2014

We noted in our discussion of the final Monthly Treasury Statement for 2014 that the deficit has fallen by two-thirds since 2009 after rising by nearly nine-fold between 2007 and 2009. However, much of this decline was already expected as a result of a recovering economy and unwinding stimulus, so another way to look at what's happened with the budget in the last five years is how the projected 2014 deficit has changed since 2009.

For this analysis, we use the August 2009 Congressional Budget Office (CBO) baseline as a starting point, since it was the first CBO update after the passage of the 2009 stimulus and when CBO and other economic forecasters were getting a better grasp at how deep the recession actually was. That baseline showed a projected 2014 deficit of $558 billion, $75 billion higher than the actual deficit of $483 billion. Notably, however, the projected deficit excluded the effects of the 2001/2003 tax cuts set to expire after 2010, even though it was widely expected that most or all of them would eventually be extended permanently. Also notable is that debt-to-GDP was only projected to be 66 percent of GDP in 2014 compared to the actual 74 percent; debt ended up being higher due to worse-than-expected economic performance, the aforementioned tax cut extensions, and further short-term stimulus.


If you incorporate the presumption that all of the 2001/2003/2010 tax cuts would be extended into CBO's 2009 projections, then this year's official deficit was $375 billion lower than projected. $220 billion of that decline stems from changing economic and technical assumptions (including the $25 billion drop in the deficit since CBO's August 2014 update), and legislation prompted the remaining $155 billion reduction in 2014's deficit (primarily through discretionary spending cuts, the fiscal cliff deal, and the Affordable Care Act). Perhaps surprising at first blush is that changes to economic projections actually contributed $70 billion to the declining 2014 deficit, even though in 2009 CBO expected GDP to have reached its potential by now and unemployment to average 5 percent for the year. A slower than expected recovery, however, has also led to interest rates remaining extremely low, saving the government significantly on debt service costs.

October 16, 2014

Medicare Part D costs have leveled off in recent years as pharmaceutical innovation has slowed and a number of blockbuster drugs lost patent protection, but a new wave of expensive specialty drugs threatens to revitalize cost growth. To help control the high prices of unique drugs paid for by Part D, Richard Frank and Joseph Newhouse recommend an innovative approach to apply binding arbitration as a fallback to price-setting negotiations.

The authors argue that policymakers overestimated the negotiating power that prescription drug plans (PDPs) would hold in setting prices when they created Part D through the Medicare Modernization Act (MMA) of 2003. Price negotiation in Part D proves most difficult for unique drugs, or those without any direct substitute. Setting prices too low for important, clinically unique drugs could harm future research and development as pharmaceutical companies could lose vital capital to continue incentivizing such research and development.

Frank and Newhouse offer a solution that incorporates binding arbitration into price setting for unique drugs. In their proposal, binding arbitration would take effect only after the government and manufacturer cannot come to an agreement, thereby encouraging the two parties to reach a negotiated settlement.

October 15, 2014

With the Treasury Department's year-end Monthly Treasury Statement having been released, we have revised last week's report today showing what the 2014 totals mean for the budget. The FY 2014 budget deficit totaled $483 billion, according to Treasury's statement. Although this is nearly 30 percent below the FY 2013 deficit and two-thirds below the 2009 peak, the country remains on an unsustainable fiscal path.

Source: CBO

Last week the Congressional Budget Office (CBO) projected the FY 2014 budget deficit at $486 billion.  While the CBO works closely with Treasury to come up with their estimates, CBO's report was preliminary. Treasury's statement, which is considered final, shows revenues and outlays in FY 2014 that were $8 billion and $5 billion higher, respectively, than CBO's estimates. The result is a FY 2014 deficit of $483 billion, which is $3 billion lower than last week's CBO projection.

October 15, 2014

Republicans and Democrats do not agree on much, but both parties are talking about business tax reform that is "revenue-neutral," raising the same amount of money as the current tax code. But "revenue-neutral" can mean drastically different things, depending on which baseline policymakers choose to use. Discussing budget baselines might put most people to sleep, but the choice could mean an extra trillion dollars added to the debt over the next ten years.

Playing Baseline Games

Much of the disagreement over which baseline to use focuses on tax extenders, a set of mostly business tax breaks that expired in 2013. These breaks expire every year or two, and Congress routinely extends almost all of them. The Senate Finance Committee has a bill that would extend nearly all of them for two years, at a cost of $85 billion. Yet if all those provisions are extended year after year, the total ten-year cost would be almost $700 billion. Although Congress will likely deal with the extenders before the end of the year, their fate could set the parameters for future tax reform efforts.

Unfortunately, House Budget Chairman Paul Ryan (R-WI) is proposing to lower the bar for revenue-neutrality. He recently suggested policymakers should make some of the tax extenders permanent during the lame duck session, arguing that they do not need to be paid for and should add to the debt (which makes their costs disappear from the budget process and from needing to be offset in a revenue-neutral tax reform). If these were made a permanent part of the tax code, a future "revenue-neutral tax reform" would raise $700 billion less than before. Essentially, he is suggesting that this Congress lock in lower revenue levels – and higher debt – to make it easier for the next Congress to pass tax reform that they can claim is revenue-neutral.

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