The Bottom Line

July 9, 2015
Pete Peterson: America can't afford Greek complacency

Peter G. Peterson is the founder of the Pete G. Peterson Foundation and is a member of the Committee for a Responsible Federal Budget. He wrote a commentary that appeared on the opinion page of USA TODAY. It is reposted below.

July 9, 2015

Three weeks from the deadline to deal with highway funding, a new report commissioned by the McGraw Hill Financial Global Institute gives Congress some sense of the economic stakes of their decisions. The report, written by American Action Forum President Doug Holtz-Eakin and Progressive Policy Institute Chief Economic Strategist Michael Mandel, looks to apply dynamic scoring to increased infrastructure spending. Although much of the focus on the dynamic scoring rule included in the Congressional budget was on its use to analyze tax changes, they argue that it is also important to extend the requirement to legislation that funds the nation's infrastructure projects.

As the authors note, part of the reason why there is less discussion of infrastructure spending in connection with dynamic scoring is because the rule only applies to changes in mandatory spending and revenue, whereas infrastructure spending is discretionary, so even a large increase in spending wouldn't automatically trigger a dynamic score. In addition, many bills have been small, particularly those involving highway spending since they have generally maintained spending at around current levels. But Congressional leadership has discretion to compel CBO to dynamically score a bill, and the authors argue the agency should do so for infrastructure bills.

Holtz-Eakin and Mandel produce their own 20-year dynamic estimate of the cost of increased infrastructure spending, which accounts for the impact on both short-term aggregate demand and longer-term effects on productivity. Based on estimates from CBO and the IMF, they conservatively assume a short-term multiplier of 0.8 -- $1 of spending increases GDP by $0.8 -- during slack economic conditions and a lower one as the economy approaches full employment. For longer-term effects, they assume a productivity elasticity of 0.03, meaning that a 1 percent increase in spending increases productivity by 0.03 percent per year.

July 9, 2015
How the U.S. and Greece Differ

The Greek saga took another turn last week as the second bailout from the Eurozone countries approved in 2012 expired on June 30, leading to Greece missing a payment to the International Monetary Fund (IMF) and being put in arrears. A referendum asking Greek voters whether they wanted to approve new terms for financial assistance offered by the European creditors subsequently failed, strengthening the hand of the Syriza-led government but also leaving Greece's status in the euro up in the air. The government is putting together another proposal to its creditors to be reviewed later this week.

First, here's how Greece got to this point.

Background

The Greek drama started in late 2009 when the new government headed by George Papandreou revealed that the 2009 deficit would be much larger than previously expected at a time when debt already exceeded the size of the Greek economy. Fears of an inability to afford and service its debt led interest rates to rise, with the ten-year rate doubling from 4.5 percent to 9 percent just between late-2009 and mid-2010.

After receiving several credit rating downgrades, the Greek government enacted austerity measures targeting a deficit of 3 percent of GDP in 2013, down from 15 percent in 2009, in exchange for a 110 billion euro rescue package. The austerity, though, hurt the economy as real GDP shrunk by 5 percent in 2010 and 9 percent in 2011, according to the IMF, and the unemployment rate shot up from 10 percent in late 2009 to over 25 percent by 2012. All the while, interest rates continued to rise dramatically, with the ten-year rate peaking at around 30 percent in early 2012. A second bailout around that time plus a pledge from European Central Bank (ECB) President Mario Draghi to do "whatever it takes" to preserve the euro quelled fiscal concerns for the time being, but Greece's economy remained in terrible shape.

In January of this year, the left-wing party Syriza and party leader Alexis Tsipras won the legislative election and took control of parliament on an anti-austerity platform, creating uncertainty about the path that the new government would take. The second bailout, which was set to expire in February, was extended through the end of June.

July 8, 2015

The Senate Finance Committee has been working all year in five bipartisan working groups on tax reform, and today they have reports to show for it. Of particular interest is the international tax reform working group's report, since there has been some potential common ground emerging between the two parties, and this reform has been linked to a Highway Trust Fund solution. We will summarize the other four reports in a later post.

For background, the federal government taxes U.S. multinational corporations on their foreign income with a deferral system. This means that "active" foreign income is generally only taxed when it is repatriated to the U.S., while "passive" income – basically financial income that is highly fungible and mobile – is taxed immediately. The companies get foreign tax credits for the taxes they pay to foreign governments to prevent double-taxation.

The working group's framework discusses five issues in international tax reform:

July 8, 2015

Over the past few weeks, we have been posting in-depth analysis of the Congressional Budget Office’s (CBO) Long-Term Outlook. In its supplemental data, CBO shows that health care spending is a major driver of our projected spending over the long term. By 2060, federal health care spending as a share of the economy will double from its current level to 10 percent of GDP. The major health care spending programs include Medicare, Medicaid, health exchange subsidies, and the Children's Health Insurance Program. Other sources of growth in spending include Social Security and interest costs. The following graph shows the drivers of our spending growth (excluding interest). Note that interest spending is actually the fastest growing part of the budget.


 

Source: CBO

July 8, 2015

The IMF has released new research showing that fiscal reforms enhance economic growth. These findings are broadly consistent with other analysis of this topic, including work from the Congressional Budget Office (CBO) that showed that a sensible deficit reduction plan could boost per-person income in 2040 by $4,000 relative to our current course.

Examining past reform episodes in nine countries, the IMF report finds that economic growth was around 0.75 percentage points higher per year on average in the decade following the reforms for advanced economies, and 2.5 percentage points higher per year for emerging market or low-income countries. Separate analysis of growth acceleration episodes confirms this positive impact, with higher growth more likely to occur following fiscal reform. Packages that included both revenue and spending reforms lead to faster growth in 60 percent of the cases examined and were also more likely to spur growth than ones that changed only one or the other.

July 7, 2015

To ameliorate some concerns with the original bill, a revised version of H.R. 6, or the 21st Century Cures Act, was recently released, aiming to accelerate the development of medical cures by, among other things, increasing funding to the National Institutes of Health and creating a Cures Innovation Fund. The House of Represenatatives is likely to take up the revised version of the legislation later this week.

Last month, we discussed the prior iteration of the bill, detailing how the anticipated $12 billion gross cost was offset by several changes, including some real health savings, the selling of 64 million barrels of oil from the Strategic Petroleum Reserve (SPR), and a timing shift involving Medicare's prescription drug benefit -- Part D. However, there were a few concerns with the bill that have caused it be revised.

The first concern was technical: the Congressional Budget Office's (CBO) score of the bill scored the $10.55 billion designated for the NIH and Cures Innovation Funds as appropriations subject to the discretionary spending limits, contrary to lawmakers' intent. This meant that the additional money would simply crowd out other spending under the cap and that many of the offsets designated for the bill were unnecessary (it already reduced deficits by $12 billion), since they are only needed to offset mandatory spending.

The new bill lessens this new funding by $1.25 billion and clarifies that it should be classified as mandatory appropriations, thus adding $9.2 billion of costs to the bill on paper (although this is really a $1.25 billion reduction in costs from their original intent).

July 7, 2015

On Tuesday, Sen. James Lankford (R-OK) wrote an op-ed in The Hill advocating for meaningful reform to the Social Security Disability Insurance (SSDI) program. The SSDI trust fund's pending insolvency is one of the Fiscal Speed Bumps that Congress will need to address before the end of the legislative session next year, and many see it as an opportunity to put in place changes that will extend the trust fund's solvency in perpetuity.

Lankford noted:

The Social Security Disability Insurance Trust Fund is sustained by payroll taxes on each check. When the trust fund goes insolvent next year, 14 million disabled Americans will face a drastic cut to benefits of almost 20 percent or the fund will have to be replenished with higher taxes.

Some have suggested to fix the insolvency that Congress should only shift funds from Social Security or the Old-Age and Survivors Insurance Trust Fund, which would reduce those programs’ solvency as well. Clearly, shifting funds does not address the root of the problem.

It is time for a major overhaul of the disability system and a renewed focus on the disabled. Before the SSDI program goes insolvent in 2016, there are things that Congress and the Social Security Administration can do to protect the program for those who rely on it and the taxpayers who fund it.

July 6, 2015

According to the Congressional Budget Office (CBO), rising debt levels could reduce projected annual income by between $2,000 and $6,000 per person by 2040, while a deficit reduction plan could instead increase income levels and reduce interest rates on government debt, an effect that would flow through to mortgages and other loans.

This is just one of many economic findings included in CBO's latest Long-Term Budget Outlook, which shows very clearly that rising debt could be detrimental to the American economy.

While CBO's standard long-term projections are based on "benchmark" economic projections which generally assume no major changes in fiscal policy, they also warn of the limits of such projections. As CBO explains, rising debt can have feedback effects by crowding out private investment in favor of public debt and ultimately slowing economic growth.

CBO's report quantifies these effects and their effect on debt. Under current law – where debt grows from about three-quarters of the size of the economy today to equal to the size of the economy by 2040 – CBO estimates GNP would be 2 percent smaller by 2040. If lawmakers continue to add to the debt in many of the ways that they have recently as in the Alternative Fiscal Scenario (AFS) – and debt reaches 156 percent of GDP by 2040 – CBO estimates the economy would shrink by an additional 5 percent, or roughly 7 percent in total. On the other hand, a $4 trillion deficit reduction would increase the size of the economy by 5 percent as compared to the Extended Baseline and 3 percent above the benchmark level.

 

July 2, 2015
From the Tax Policy Center and Senators Whitehouse and Schatz

The Tax Policy Center (TPC) recently released a primer on carbon taxes. The report outlines how the construction of a carbon tax matters for its efficacy in reducing emissions, overall impact on economic well-being, and distributional impact. Particular focus is given to analyzing the potential winners and losers under a carbon pricing regime and how the revenue generated by the tax can be used to alter these effects. Conveniently, the report comes on the heels of a new carbon tax bill (described below) and new research released by CBO, which forecasts hurricane damage to rise five-fold by 2075 as a result of climate change.

July 1, 2015

The Congressional Budget Office (CBO) has released new estimates of the cost of climate change, specifically as it relates to hurricanes. The report forecasts hurricane damage in 2075 to cost an expected $156 billion in today's dollars, more than five times larger than costs under current climate conditions. Hurricane damage in 2075 is forecasted to cost between $104 billion and $226 billion annually, four to eight times larger than under current conditions.

The increased costs that CBO projects reflect two factors, which are captured in two different scenarios:

  • Rising sea levels and increased hurricane frequency and intensity as a result of climate change.
  • Greater coastal development, which increases the value of property at risk from hurricanes.
Expected Annual Cost of Hurricane Damage (Billions, 2015 Dollars)
  2025 2075
Under current conditions (baseline) $29 $29
Scenario with climate change only $32 $60
Scenario with climate change and increased coastal development $37 $156

Source: CBO

July 1, 2015
The First in a Series of Issue Briefs on the SSDI Program

In advance of the August 4th SSDI Solutions Conference, the McCrery-Pomeroy SSDI Solutions Initiative has released a short primer to kick off its new issue brief series. The series will provide basic explanations on how the Social Security Disability Insurance (SSDI) program functions with issue briefs based on the program basics, the determination process, program financing, program demographics, and demonstration projects that have been piloted in the past.

To RSVP to the August 4, 2015 SSDI Solutions Conference, click here.

Below is a sample of the material covered in the first brief.

What is Social Security Disability Insurance?
Social Security Disability Insurance, or SSDI, is a component of the Social Security program. It provides cash benefits to insured workers below the retirement age who have a significant disability or illness that is expected to preclude substantial work in the labor market for at least a year or to result in death.

July 1, 2015

Ways and Means Ranking Member Sander Levin (D-MI) and Senator Tammy Baldwin (D-WI) have introduced a bill to close a well-known tax loophole that allows investment and private equity fund managers to pay a lower rate on their taxes. The Carried Interest Fairness Act would close a loophole allowing fund managers to classify their income as long-term capital gains, which is taxed at a top rate of 20 percent, instead of wage income, which is taxed at a top rate of 39.6 percent. (Neither number includes Medicare taxes on investments and wages.)

Investment managers often have a partnership share in their investment fund, which is structured as a "passthrough" entity. When the fund does well and its assets increase, each partner's share of the gain is taxed as capital gains. Fund managers receive some of their compensation in the form of capital gains, even though they are being compensated for their work, not investing their own money.

June 30, 2015

Last week, the Senate Budget Committee passed a bill to limit the use of the Crime Victims Fund (CVF) as a back-door method to increase appropriations. The bill, S. 1495, is sponsored by Senator Pat Toomey (R-PA). It creates a point of order against appropriations bills containing a Change in Mandatory Program (CHIMP) that would cause the amount available to be spent from the CVF to be less than the 3-year average of incoming funds.

A similar measure was proposed in this month's markup of the Senate's Commerce, Justice, and Science appropriations bill by Senator James Lankford (R-OK). He proposed an amendment that would have prevented further use of these specific CHIMP funds in the bill after FY 2016, but it was defeated in committee.

As we explained in our blog, CHIMPs are provisions in appropriation bills making changes (usually reductions) in mandatory spending programs. The savings are then available to be used to offset increases in discretionary spending above the spending cap. This can be perfectly acceptable when the savings created are real, but lawmakers often use fake savings to fund real increases in spending.

The Crime Victims Fund is a frequently used source of CHIMPs: according to CBO over half of the $19 billion in CHIMPs from FY 2015 came from the CVF.

To combat gimmickry, the Senate budget included a phasedown and eventual elimination of CHIMPs that saved no actual money. And during markup of the Senate budget, the Budget Committee adopted an amendment by Senator Mike Crapo (R-ID) that would have created a point of order against CHIMPs originating from the CVF. Senator Toomey’s bill forces CVF payouts to equal recent incoming funds, which essentially creates a cap of $10.5 billion in CHIMPs from the CVF, preventing the size of the CVF CHIMPs from growing.

June 30, 2015

In a newly released ticker, the Department of Transportation has shown that there is one month left for lawmakers to decide on funding for the Highway Trust Fund before cash flows to transportation projects are affected. After extending the highway authorization for two months at the end of May, lawmakers will have to come up with a new authorization and find a way to fund that spending to close the gap that has persisted since 2008.

The DOT shows the balance of the highway account of the trust fund dropping from $8 billion at the end of May to $3.5 billion by the end of July, below the $4 billion cushion DOT says it needs to be able to make timely reimbursements of projects. The smaller mass transit account will have a little more time, falling below its $1 billion cushion by the end of August, but lawmakers consider these accounts together since they have the same funding source, so the true deadline is the end of July.

June 30, 2015

In a move that could stall promising health care delivery system reforms and drive up entitlement spending, the House Appropriations Committee last week voted to defund the Center for Medicare and Medicaid Innovation (CMMI) and the Agency for Healthcare Research & Quality (AHRQ) in their 2016 Labor, Health and Human Services, and Education bill.

Abandoning CMMI in particular would increase deficits this decade by $45 billion (or by $37 billion before incorporating the additional interest payments needed to service the higher debt), according to the Congressional Budget Office (CBO), and potentially by much more over the long run. The Innovation Center, created by the Affordable Care Act (ACA), is in charge of testing new approaches to improve quality and reduce cost within Medicare and Medicaid, including promising programs such as Accountable Care Organizations (ACOs), bundled payments, and initiatives to increase care coordination among low-income seniors and people with disabilities who are dually-eligible for Medicare and Medicaid.

Rescinding CMMI’s remaining $6.8 billion ($6.5 billion of outlays) in funding through 2020 (funding beyond 2020 is not eliminated) would put these initiatives and many more in jeopardy or delay them significantly, and severely curtail CMMI’s ability to fine-tune them as time progresses. Moreover, they would no longer be able to undertake new delivery system reform efforts with the potential to improve quality and lower costs, which is part of the reason CBO finds that defunding would increase mandatory federal health care spending by about $37 billion over the next ten years.

The rescission also represents an egregious budget gimmick, and is perhaps the worst CHIMP  (change in mandatory program) we have seen so far. As we’ve explained before, CHIMPs allow policymakers to cut mandatory spending in order to pay for discretionary spending increases. More often than not, the discretionary spending increases are real, but the mandatory cuts are fake – and for one reason or another do not generate actual savings. In this case, the situation is far worse – rather than failing to generate savings, this CHIMP creates significant future costs.

June 29, 2015

Any budget projections, including CBO's long-term outlook, are inherently uncertain, and it is important to understand how projections might change. The agency's usual ten-year projections are uncertain enough and can change based on any number of new developments. That problem only grows when looking out 25 or 75 years into the future.

For example, the Brookings Institution last year discussed the usefulness of long-term projections, how to convey uncertainty in those projections, and how policymakers could make the budget more responsive to changing conditions. In its long-term report, CBO addresses the latter two issues, spelling out a number of ways its projections could change and providing examples for how lawmakers could reduce budgetary uncertainty.

A main source of uncertainty is the actions of lawmakers. CBO's Extended Baseline assumes that Congress will not pass new laws (with some exceptions) to change deficits, allowing temporary policies to expire and keeping permanent savings in place. To illustrate a potential scenario where lawmakers add to the debt, the Alternative Fiscal Scenario assumes that lawmakers extend temporary tax breaks, repeal the sequester, prevent revenue from rising as a share of GDP, and raise non-health care/Social Security spending to its 20-year historical average. Under this scenario, debt exceeds the size of the economy ten years earlier than in the Extended Baseline and in 2050 reaches 250 percent of GDP, twice the Extended Baseline level.

Outside of legislative uncertainty, several economic and technical factors could influence projections.

June 26, 2015

Health care spending is arguably the most important part of CBO's long-term outlook, being a key driver of our nation's growing debt over the long term. Little has changed, though, since CBO's outlook last year, with similar assumptions for excess health care cost growth but a small improvement towards the end of the 75-year period due to a change in an assumption about Medicaid.

As a result of the fiscally-irresponsible physician payment law passed this year and slightly higher assumed long-term cost growth, Medicare spending is projected to be higher than last year's outlook by about 0.1 percent of GDP per year for the next ten years and by increasing amounts in later years. CBO expects Medicare spending to grow from 3 percent of GDP this year to 5.1 percent by 2040 (about as much as all federal health care spending this year), 7.2 percent by 2065, and 9.6 percent by 2090.

Other major health care spending – including Medicaid, the Children's Health Insurance Program, and the Affordable Care Act's (ACA) health insurance subsidies – has improved both as a result of short-term revisions to spending in CBO's ten-year projections and a change in CBO's assumption about Medicaid eligibility over the long term. CBO now assumes that, since Medicaid eligibility is largely determined by the poverty line, which grows with inflation, as real wages increase, more and more of the currently eligible would eventually lose eligibility. In the past, CBO assumed that states would either expand eligibility, increase outreach to the currently eligible, or expand benefits in order to offset this effect, but now it assumes they will only offset one-half of the effect. This assumption reduces their Medicaid eligibility projections by 4 percent over the next 25 years.

June 26, 2015

As Washington digests this year’s CBO Long Term-Budget Outlook, Robert J. Samuelson of The Washington Post offered up his criticism of the country’s current fiscal path: The elderly get too much. The real issue, he argues, is that massive and growing spending on the elderly threatens to crowd out domestic spending that liberals support and defense spending that conservatives support.

As he explains:

...budget deficits are not the problem. They are simply the consequences of the problem, which is that the combination of an aging society and expensive health care threatens many vital government functions. Whatever the economic costs of endless deficits — a controversial subject — the political effects seem straightforward. The young are being forced to subsidize the old through higher taxes and reduced public services. Some essential public services, starting with defense, are being sacrificed to avoid antagonizing the elderly.

Samuelson is not the only one concerned with the disproportionate growth of spending on the elderly. In an opinion piece in February, Forbes contributor Jeffrey Dorfman went as far as to accuse seniors of “bankrupting the country.” A New York Times analysis published earlier this month found that while younger Americans have struggled to see their incomes to keep pace with inflation, Americans ages 65 and older have made substantial gains.

June 25, 2015

In their recently released long-term outlook, the Congressional Budget Office (CBO) laid out multiple scenarios for addressing our unsustainable long-term debt path. They show that it would take a long-term deficit reduction path that would include about $2.6 trillion of deficit reduction over the first 10 years to stabilize the debt at current levels, or about 1.1 percent of GDP per year. However, waiting even 5 years to start would necessitate a reduction of 1.4 percent per year. In other words, stabilizing our debt over 25 years will cost another $850 billion if we wait 5 years instead of acting today.

CBO explains why costs increase with delay:

The sooner significant deficit reduction was implemented, the smaller the government’s accumulated debt would be, the smaller the policy changes would need to be to achieve a particular long-term outcome, and the less uncertainty there would be about what policies would be adopted.

Delaying the start of deficit reduction makes the goals of stabilizing the debt and putting it on a downward path much more difficult.

Quantifying the cost of waiting can be done by estimating the fiscal gap, or the amount of non-interest spending and revenue changes necessary to keep debt stable (or reduce it to some other level) over a period of time. Focusing on the 25-year fiscal gap, CBO shows that keeping the debt stable would require a reduction in non-interest spending and/or an increase in revenues of 1.1 percent of GDP (as indicated above), while reducing the debt to its 50-year historical average share of 38 percent of GDP would require revenue increases and/or spending cuts equal to 2.6 percent of GDP (a path of deficit reduction nearly $6 trillion over the first ten years alone). These figures assume that changes are implemented today and grow considerably larger if policymakers wait five or ten years to take action.

 

Syndicate content