The Bottom Line
Now that the government shutdown and debt default threat are in the rearview mirror (for now), analysts have been taking time to survey the economic damage, in particular the more quantifiable effects of the shutdown on the economy and the budget deficit. The results, of course, are not good and highlight the need to avoid confrontations like this in the future and not wait until the eleventh hour to find a solution. Since we will back in a similar position again at the beginning of next year, we will see soon if policymakers have learned their lesson.
Perhaps the most widely cited number on the economic cost of the shutdown is from Standard & Poor's (S&P), who estimate that the shutdown reduced GDP growth by $24 billion, or 0.6 percent in the fourth quarter of 2013. Macroeconomic Advisers estimates an effect of about half that size. The economic hit comes from the lost demand as employees did not receive pay checks and certain government purchases and services were not completed. IHS Global Insight also estimated that lost wages alone knocked $3.1 billion off GDP, and they lowered their 4th quarter growth forecast by 0.6 percentage points. Granted, some of this may simply be consumption deferred until the first quarter of next year, but some of it is permanent output loss, particularly the effect on federal contractors who did not receive back pay.
And the hit did not stop when President Obama signed the law funding the government. In an interview in the Washington Post, Office of Management and Budget director Sylvia Mathews Burwell, who by now is as familiar as anyone with the technical messes of recent budget policy, noted that in addition to the backlog of work that awaited affected workers when they got back, there could definitely be an effect on employee morale and future recruitment. If there is significant uncertainty about how the federal government will operate -- and consequently whether employees will have uneven paycheck schedules -- fewer people will be willing to work for it.
Lawmakers shouldn't be patting themselves just for narrowly avoiding default and getting out of the shutdown. The economic pain was unnecessary, and the shutdown will hurt the confidence of people in the government going forward, whether they are employed by it or not. Lawmakers should work well ahead of the deadlines next time to avoid these stand-offs.
The shutdown may be over and fears of a default adverted for now, but the reality remains that we still haven't made any progress on our debt problem. CRFB President Maya MacGuineas writes in zpolitics that with a few months before we approach the next fiscal hurdles, lawmakers should get busy and begin to work toward a permanent solution.
As we finally emerge from what was simply the most recent in a long series of short-term fiscal crises, it is abundantly clear what our leaders in Washington should do to prevent themselves from governing on the edge of a cliff in the future: they must stop the madness of shutdowns and showdowns, start earnest bipartisan negotiations and solve the problem of our unsustainable national debt once and for all.
The just-concluded fiscal near-disaster proves that short-sighted political gamesmanship produces very few winners, and a whole bunch of losers. Worse still, such crises divert attention from the real issues that are driving our debt over the long term – namely our outdated tax code and our ever-more-costly entitlement programs.
If lawmakers needed any more reason to work for the problem, the voters clearly view solving the debt problem as our most important priority:
Moreover, Americans understand that the national debt is problematic. In a recent poll we commissioned with prominent Democratic and Republican pollsters, a plurality of respondents said that the debt was the single most pressing issue Washington must tackle – more than jobs, immigration reform or health care.
We need to take advantage of this opportunity, especially with the conference committee beginning to negotiate. If we do not, we can we expect more of the crisis to crisis approach that has plagued us so much in the past. Write MacGuineas:
The time for our elected leaders to be worrying about short-term political gains has long since passed – if it ever existed at all. Now, they must use this latest opportunity to stop all of the fruitless chicanery, start honest negotiations and solve our fiscal problems – before they get even worse than they were last week.
Click here to read the full article.
"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.
Recent reports have suggested the new budget conference committee may focus its attention of a deal to replace sequestration. A recent paper from the Center for American Progress suggests a set of principles that any sequester replacement should meet; yet that set, unfortunately, ignores the importance of maintaining fiscal responsibility and fixing our long-term debt.
The four principles CAP outlines are:
- Keep it manageable: Replace the sequester for three years.
- We have already paid for 60 percent of the sequester in the fiscal cliff deal, so we should only offset 40 percent of any repeal costs.
- Balance is a necessary component: Savings should consist of revenue increases as well as spending cuts.
- Focus on the economy: Include further short-term jobs measures in addition to sequester repeal.
We do agree that fixing the debt will require deficit reduction from both tax and entitlement reform and that economic growth should be a central concern in any fiscal deal. However, we worry CAP's proposal to replace only three years of sequester will fall short of what is needed, and their proposal to offset only 40 percent of the costs threatens fiscal responsibility and credibility.
While a three-year replacement of sequester could help the short-term economy and modestly improve the long-term fiscal picture, it would unnecessarily leave the threat of sequester in place, would be too small to put our debt on a downward path, and would make sequester replacement that much harder next time.
More troubling is CAP's proposal to offset only 40 percent of sequetration. As we've explained before there is no basis to count the revenue from the fiscal cliff deal (which was a revenue loss compared to current law) against the sequetration:
[T]here were no serious offers during the Super Committee which would have turn off most of sequestration and extend most of the tax cuts without a much larger deal. Indeed, had the Super Committee agreed to pass $4 trillion in tax cuts and $800 billion of sequester reductions for only $800 billion of revenue, such a deal would have been incredibly irresponsible.
While the CAP paper argues we've already accomplished some of the Super Committee's goal, in many ways the opposite is true. As it turns out, the sequester only contains two-thirds of the savings in the original Super Committee target. A return to the Super Committee's goal would therefore mean offsetting 150 percent of the costs of sequester, not 40 percent.
CAPs sequester principles, unfortunately, do not pass the basic test of fiscal responsibility. Policymakers should adopt an alternative set of principles which more closely match the following:
- At Minimum, Don't Worsen the Deficit: Lawmakers should put in place a plan large enough to put the debt on a clear downward path; but at absolute minimum they must abide by Pay-As-You-Go (PAYGO) principles to replace every dollar of sequester relief with a dollar or more of gimmick-free deficit reduction.
- Replace Mindless Cuts with Smart Reforms: We've extensively explained the problems with the mindless, abrupt, across-the-board spending cuts. Replacing them with gradual, targeted, and pro-growth deficit reduction measures could be a win-win both in the short and long term.
- Replace Temporary Savings with Permanent Deficit Reduction: Sequestration expires after 2021 and would technically produce no long-term savings, even though our greatest fiscal problems are long-term. Policymakers should replace these temporary cuts with permanent savings -- particularly with provisions that grow over time or address growing health costs and the aging of the population.
- Aim for a Permanent Sequester Solution: Rather than dealing with sequestration one year at a time, policymakers should agree to a sustainable set of caps on a longer-term basis, accompanied by long-term deficit reduction to replace sequester.
Few would argue that sequestration is good policy or that it truly restrains long term debt growth. Yet repealing it without replacing it would both worsen our fiscal situation and send a message that our policymakers cannot credibly keep to their fiscal committments.
Sequestration should be replaced, but only if done so in a fiscally responsible manner.
With President Obama's signature on Thursday morning, the nation went from the brink of default to having a least a little elbow room on the debt ceiling for a few months. The actual date on which the nation would default (the "X date") is uncertain given the question of whether extraordinary measures will be available, but the bill will at least prevent a breach of the debt ceiling through February 7. With extraordinary measures, the Bipartisan Policy Center estimates that Treasury would be able to delay the X date until sometime between late-February and mid-March.
Although lawmakers need to address our unsustainable long-term debt, bringing the nation to the precipice and threatening default are not the way to do so. With enough lead time to avoid scaring markets, however, short-term debt ceiling increases in the past have helped to foster negotiations and achieve significant deals. Extending the nation's borrowing authority through at least February 7 should give lawmakers more time to work out the details for a comprehensive deal to reform entitlements, restore investments, and reform our tax code. The graph below shows that in at least five different budget deals, temporary debt limit increases bought time for and preceded the final deal.
This is not to say that reaching an agreement after a temporary increase is particularly easy, and this can no better be seen than the 1990 Omnibus Budget Reconciliation Act. Negotiations on a budget agreement began in mid-May of 1990. By August 9, a deal still had not been worked out, so the debt limit was temporarily extended to October 2. The initial agreement between President George H. W. Bush and Congressional leaders was rejected by the House, requiring further negotiations and five other debt ceiling extensions in October before a compromise could be reached. On November 5, President Bush signed the Omnibus Budget Reconciliation Act, which raised the debt ceiling by $915 billion, the largest increase in history at the time in nominal dollars. In total, negotiations went on for 139 days, but the result was a deal containing nearly $500 billion in deficit reduction over the next five years, including discretionary spending caps and the Pay-As-You-Go (PAYGO) rule. The agreement played a large role in the budget surpluses of late 1990s, so while the road may have been rocky, it provided significant fiscal gains.
A permanent deal by now would have been preferable, rather than a stopgap measure, but the worst possible outcome would be going over the brink and defaulting. The temporary increase buys some time for lawmakers to work on a fiscal deal, but it's up to them to use it wisely.
In additional to reopening the government and suspending the debt ceiling, last night, both the House and Senate agreed to go to Budget Conference. Both Houses named their conferees, and the conference leaders -- House Budget Committee chair Paul Ryan (R-WI), House Budget Committee ranking member Chris Van Hollen (D-MD), Senate Budget Committee chair Patty Murray (D-WA), and Senate Budget Committee ranking member Jeff Sessions (R-AL) -- had a breakfast this morning to discuss the best way forward. Under the agreement last night, the conference is supposed to submit a final report on December 13th. That final report should include a plan to put the debt on a clear downward path relative to the economy.
Essentially, the conference committee will be looking to reconcile the House and Senate budget resolutions which passed their respective chambers earlier this year. While it may seem like those budgets have little in common, there was one overarching theme which was embodied not only in those two budgets (see a comparison here), but in every single budget resolution proposed this year. All of the budget proposals -- including from as far left as the Congressional Progressive Caucus and as far right as the Republican Study Committee -- put the debt on a downward path as a percent of GDP. Where these budgets succeeded, the conference must succeed as well.
Source: HBC, SBC, CBC, CPC, RSC, CRFB calculations
Note: Debt numbers are adjusted for changes in CBO's baseline and GDP numbers since the plans were released
The upcoming budget conference offers a real opportunity to agree to a package of deficit reduction. Although their recommendations are by no means bindings, they can put forward a process ("reconciliation") and create the political space (through a bicameral bipartisan agreement) to allow Committees of jurisdiction to enact comprehensive debt reduction.
Both parties have released a number of plans which put debt on a downward path and as a result of the many plans that have been put in recent years, there are many options that could be accepted on a bipartisan basis. The foundation for a deal is there. Now both sides have to come together in the spirit of principled compromise to truly address the country's long-term finances. For this budget conference, failure should not be an option.
This is the eleventh post in our blog series, The Tax Break-Down, which will analyze and review tax breaks under discussion as part of tax reform. Our last post was on the American Opportunity Tax Credit, which provides a credit for undergraduate tuition.
Intangible drilling costs are one of the largest tax breaks available specifically to oil companies, allowing companies to deduct most of the costs of drilling new wells in the United States.
In order to determine taxable income, U.S. businesses can normally deduct expenses from revenues so they are only taxed on profits. Under normal income tax rules, a company that pays expenses in order to make future profits would need to deduct the expenses over the same time period as profits. The costs for drilling exploratory and developmental wells would need to be deducted as resources are extracted from the well.
The break for intangible drilling costs (IDCs) is an exception to the general rule. Independent producers can choose to immediately deduct all of their intangible drilling costs. Since 1986, corporations have only been able to deduct 70% of IDCs immediately, and must spread the rest over 5 years.
Intangible drilling costs are defined as costs related to drilling and necessary for the preparation of wells for production, but that have no salvageable value. These include costs for wages, fuel, supplies, repairs, survey work, and ground clearing. They compose roughly 60 to 80 percent of total drilling costs.
The deduction for intangible drilling costs has been permitted since the beginning of the income tax code, in order to recognize the risks involved in drilling developmental wells—not every well strikes oil. Only IDCs associated with domestic or offshore wells may be deducted; foreign wells cannot be expensed in this way.
How Much Does It Cost?
According to the Joint Committee on Taxation (JCT), the tax break for intangible drilling will cost roughly $1 billion in 2013, and $16 billion over the next decade. This is the largest tax preference specifically for oil and gas and totaled about 8 percent of the total value of tax preferences for energy and natural resources in 2013. In contrast, expensing for exploration and development costs for nonfuel minerals (like coal) will cost $0.1 billion in 2013, and $1 billion over the next decade.
What are the Arguments For and Against the Deduction for Intangible Drilling Costs?
Supporters of the deduction argue that oil and gas and exploration and development is a high-cost industry, and allowing expenses to be recovered immediately encourages companies to invest. They explain that altering the deduction could result in job losses, since wages are included in the deduction.
More broadly, supporters point out that the oil and gas industry receives the same treatment that other manufacturing or extractive industries receive, and are merely a target because of the now-controversial nature of reliance on fossil fuels. Finally, supporters of energy independence often support the IDC deduction, as it promotes further exploration and development of wells within the United States.
Opponents argue that since this tax provision was introduced over a hundred years ago, technology has advanced to the point where dry wells are less of a problem. The success rate of striking oil (or gas) is about 85%, which means producers are spending less on exploring wells that won’t become profitable.
More generally, opponents say that oil prices are expected to remain high, and that demand continues for oil and other fossil fuels. They believe there is no need to subsidize an industry that is already booming.
What are the Options for Reform?
President Obama has continually proposed repealing the break for intangible drilling costs in his yearly budgets, a proposal also suggested by Senator Sanders and Representative Ellison. Fully repealing this tax break would raise $14 billion through 2023, though importantly would largely represent a timing shift, and raise only about $100 million in 2023 alone. A number of other tax reform plans, including the Domenici-Rivlin plan, the Simpson-Bowles plan, and the Wyden-Gregg/Coats plan would also repeal the preference for IDCs.
Alternatively, the deduction could be repealed for most wells, but still allow a company to deduct costs for unproductive dry wells, raising $10 billion. Or, the deduction could only be eliminated for the five biggest oil companies, raising $2 billion over ten years.
If the deduction were repealed, drilling costs would need to be treated like other depletable property, deducted over the life of the well.
|Options for Reforming the Expensing of Intangible Drilling Costs|
|Options||2014 - 2023 Revenue|
|Repeal expensing for all extractive industries, including oil, gas, coal, and other hard mineral mining||$18 billion|
|Repeal intangible drilling cost expensing for oil and gas companies completely||$14 billion|
|Repeal intangible drilling cost expensing for oil and gas companies, only for C-Corporations||$10 billion|
|Repeal expensing for the 5 largest oil producers||$2 billion|
|Keep expensing only for dry wells||$10 billion|
Where Can I Read More?
- Joint Committee on Taxation – Description Of Present Law And Select Proposals Relating To The Oil And Gas Industry
- Internal Revenue Service – Intangible Drilling Costs Deduction
- American Petroleum Institute – Repeal Intangible Drilling Costs (Discussion)
- Center for American Progress – Big Oil’s Misbegotten Tax Gusher
- The Atlantic – America’s Most Obvious Tax Reform Idea: Kill the Oil and Gas Subsidies
- American Enterprise Institute - The Truth About All Those "Subsidies" for "Big Oil"
* * * * *
The deduction for intangible drilling costs allows oil and gas producers to deduct most of the costs associated with finding and preparing wells. When the deduction was created in 1913, it was intended to attract business to the costly and risky business of oil and gas exploration. Some argue that technology has advanced enough that locating wells is no longer as costly, and this deduction is an unneeded subsidy to a profitable oil industry. Others argue the deduction is an important way to support the domestic energy industry and promote energy independence. As part of tax reform, policymakers will need to decide whether to keep this incentive for energy production, or repeal it in favor of lower tax rates or a lower deficit.
Read more posts in The Tax Break-Down here.
Yesterday, former Defense Secretary and CRFB board member Leon Panetta headlined a press conference at the National Press Club on the need for our lawmakers to come together and work toward a comprehensive debt deal. Panetta was joined by CRFB President Maya Macguineas, former Director of the Office of Management and Budget and Congressman Jim Nussle (R-IA), President & CEO of US Hispanic Chamber of Commerce Javier Palomarez, Executive Director of Leaders Engaged on Alzheimer's Disease Ian Kremer, President of the National Small Business Association Todd McCracken, President of the Association of American Universities Hunter Rawlings, and President & CEO of Research!America Mary Woolley.
Panetta said that at a very least lawmakers shouldn't take actions that cause harm. Of particular note given his background as Secretary of Defense, Panetta argued that the combination of this shutdown and the sequester was hurting national defense by "virtually hollowing out our military." From ships and infantry that could not be deployed because of the sequestered to the furlough Department of Defense workers, Panetta explained that the "negotiate-by-crisis" approach taken by lawmakers was having real consequences.
On today's agreement in the Senate, former OMB Director Nussle was pleased but emphasized the need to do more. "We have an opportunity, cooler heads did prevail," he said. But in order to take advantage of this second fact, lawmakers needed to begin to look at entitlement and tax reform - and that would require tough choices. "No one is going to agree 100 percent of the time" said Nussle. But he added that everyone should be able to find some areas of compromise.
MacGuineas called for lawmakers to move forward on a comprehensive plan to put debt on a downward path. She said that the nation would only get its fiscal house in order after taking a hard look at entitlement programs, other spending, and the tax code. That was a common sentiment among the other speakers, with many expressing frustration of the failure of lawmakers to protect key investments as we work to address the national debt.
It's always important to remember that fiscal responsibility is hard, and requires difficult choices on the behalf of lawmakers. But for Panetta, that is part of the job description and lawmakers needed to trust the other people in the room. Panetta reflected on his own experience:
It was tough. Not easy. It took courage, and there were risks involved. But that’s what governing’s all about. That’s why we elect people. We don’t elect people to simply serve blind in office. We elect people to make the tough choices of governing this country. Hopefully, having been through this experience of a shutdown and the implications of not increasing the debt ceiling, that will be a sufficient enough incentive for them to now turn to governing.
The budget deal has at least averted disaster, but the hardest work lies ahead. Hopefully, lawmakers hear the message that was delivered today.
Click here for video of the event.
Ending the Shutdown and Cranking Up the Debt Limit – It’s been an up-and-down past couple of weeks. The federal government has been shut down since October 1 and the U.S. loses its borrowing authority on October 17 absent a deal to increase the statutory debt ceiling. Several times there have been hopeful signs of an end only to fizzle out. But on Wednesday a deal was announced to end the short-term crises, albeit temporarily. With the political and economic toll of the shutdown and prospective default coming into focus, Standard and Poor’s said the shutdown took $24 billion out of the economy and congressional ratings dropped, policymakers finally stepped up and addressed the short-term crises, only to create more in a few weeks. And the longer-term fiscal challenges still remain. Will they continue to kick the can down the road?
The Lowdown on the Deal – On Wednesday Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell announced an agreement to reopen the government and extend the debt ceiling. The deal will fund the government at current spending levels through January 15, 2014 through a stopgap continuing resolution (CR) and extend the debt ceiling through February 7, 2014. A bicameral conference committee will also be appointed to hash out a budget for the rest of the fiscal year as well as a longer-term spending and deficit reduction plan. The committee must report by December 13. The Senate and House approved the deal late Wednesday and the President will sign it, meaning that federal employees will return to work and a default will be averted, for now.
Americans Stood Up for a Solution – In the run up to the deal, Americans made clear they were sick and tired of the gridlock and posturing. Starbucks sponsored a petition that customers could sign at stores or online to demand that policymakers reopen the government; pay our debts on time to avoid another financial crisis; and pass a bipartisan and comprehensive long-term budget deal by the end of the year. In addition, our partners at the Campaign to Fix the Debt initiated a national advertising campaign calling for short- and long-term solutions, featuring Fiscal Commission co-chairs Alan Simpson and Erskine Bowles. Fix the Debt also recruited a bipartisan group of forty former governors who also called for swift and meaningful action. These efforts helped put pressure on policymakers to stop the games and start working together to end the stalemate.
Rising Up to Address the Debt Ceiling – Just before the agreement was announced, markets, creditors and economists began expressing concern that failure to increase the debt limit would cause a national default that would have widespread economic consequences. America’s biggest foreign creditors, Japan and China, urged the U.S. to act. In addition, credit rating service Fitch put the country on Rating Watch Negative, warning that a default would likely cause the U.S. to lose its AAA credit rating status with the service. The country lost its AAA rating with Standard & Poor’s during the last debt limit standoff. Need to learn more about the debt limit? Check out our debt ceiling FAQ.
Deadlines Moved Down the Road (Slightly) – While the deal will reopen the government and prevent an immediate default, it will only move back the deadlines a few weeks. We need a more comprehensive budget plan to stop the cycle of mini crises and fiscal speed bumps. The conference committee offers an opportunity to devise a broader approach that addresses the long-term fiscal challenges, or at least puts in place a credible process for doing so. No doubt replacing the automatic, across the board cuts of sequestration will be a priority. While that is important, it is imperative that policymakers recognize that savings from the sequester itself are not enough to put the country on the right track. Additional savings, phased in over a longer period of time, will be required to put the debt as a share of the economy on a downward path over the long haul. As Robert Litan of Bloomberg Government points out, the long-term fiscal challenges remain. And contrary to what some may say, addressing the long-term debt remains a priority. There are plenty of ideas that have been put forth by bipartisan commissions and other efforts that can inform the committee’s work. While plenty of bad ideas have been put forward, there are also many good ideas as well that can be drawn from. House Budget Committee chair Paul Ryan (R-WI) and former Senate Budget Committee chair Kent Conrad (D-ND) offered some ideas recently in separate op-eds. So did former White House economic adviser Michal Boskin. Fix the Debt provided a framework to stop the madness of government shutdowns and risks of default, start talking on a bipartisan basis, and solve our long-term economic and budget problems. It can lead the way to finding common ground through common sense solutions. Fix the Debt’s Congressional Fiscal Leadership Council also provided ideas to include in a comprehensive package.
Farm Bill Moves Back Up the Agenda – Lost amid the shutdown and debt ceiling crises, some movement has occurred on the farm bill. A conference could begin deliberations next week to resolve differences between the House and Senate. The $500 billion bill has significant implications for the budget. Key issues involve cuts to SNAP (food stamps), farm subsidies and conservation programs.
Key Upcoming Dates (all times are ET)
October 30, 2013
- Bureau of Economic Analysis releases advance estimate of 3rd quarter GDP.
December 13, 2013
- Date by which the budget conference committee must report to Congress
January 15, 2014
- The continuing resolution funding the federal government expires
February 7, 2014
- The extension of the statutory debt ceiling expires
After a few weeks of government shutdown and a nerve-wracking lead-up to hitting the debt ceiling, the Senate leadership announced today it had come to an agreement to resolve the current crisis. Under this deal the government would be funded through January 15 at the FY 2013 level of $986 billion and the debt ceiling would be suspended through February 7 (though extraordinary measures would extend the default date past then). The leaders have also agreed to set up a budget conference committee that would be instructed to report recommendations by December 13. The agreement still needs to be passed by both the Senate and House, although Speaker Boehner has indicated he will bring it to the floor and urge Republicans to vote for it.
While there had been speculation about what other policies would be thrown in to the deal, particularly those related to the Affordable Act, reports suggests only one made it into the final deal. The agreement would require income verification for the Affordable Care Act subsidies in state-run exchanges starting in 2014, after the Administration delayed this verification until 2015 this summer.
In response to the announced agreement, Maya MacGuineas, President of the Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt issued the following statement:
The Campaign to Fix the Debt is relieved that leaders in the Senate have agreed to a plan to re-open the government and avoid a dangerous default. We encourage Congress to pass and the President to sign this plan, and immediately turn their attention to the critical issue of how to put the nation on a sustainable fiscal path.
It is incredibly disheartening that we are once again relying on last-minute deals that merely delay the real issues instead of addressing them. Playing with default was an incredibly dangerous game, but continuing to delay confronting our debt is letting a fire burn that could get out of control at any moment. We have to be able to expect more from our leaders – we cannot continue to lurch from one crisis to the next. If we do not change course, we will be dealing with these same issues all over again in only a few months’ time.
This agreement provides for a process, through the appointment of budget conferees, to deal with the fact that the country is operating without a budget. Congress and the President must use this opportunity to put in place the long - overdue changes of making our entitlement programs more sustainable, reforming our tax code, replacing sequestration with smarter reforms, and putting the debt on a sustainable downward path.
Both houses should act quickly to stop the madness, start bipartisan discussions, and solve our debt problems once and for all.
The prolonged government shutdown and debt ceiling debate are a clear indication that our government is not functioning as it should. Furloughed workers, closed national parks, and shuttered government offices are the byproduct of an unwillingness to compromise by our elected officials. In an editorial in the South Bend Tribune, CRFB Senior Policy Director Marc Goldwein takes our leaders to task for failing to address the national debt, projected to rise uncontrollably over the long run. Goldwein explains that lawmakers have only scratched the surface of what needs to be done to ensure fiscal sustainability:
As my old boss Erskine Bowles likes to explain, our leaders have done the easy stuff -- raising taxes on the top 1 percent of Americans. They've done the sneaky stuff -- capping defense and non-defense discretionary spending so future lawmakers can identify the specific cuts. They've even done the stupid stuff -- allowing a deep, abrupt, across-the-board cut to all the programs not causing our debt to grow through something called "sequestration."
What our leaders haven't done is the hard stuff. What they haven't done is worked together to reach principled compromise on a plan that neither side loves, but both know would be a win for the American people.
We've always known what reforms were needed and how important it is to address the long-term growth of debt before it's too late. Any serious deal must encompass both entitlement and tax reform, as Goldwein notes. He believes that by working together to create a bipartisan plan, lawmakers can responsibly tackle our biggest challenge:
The solutions are relatively straightforward: bend the health care cost curve by improving the way we pay for medicine and changing incentives for providers and beneficiaries; make Social Security solvent by slowing the growth for wealthier beneficiaries, adjusting for growing life expectancy and bringing in new revenue from those who can afford it; reform the tax code by cutting many of the $1.3 trillion of annual tax preferences and using the money to lower rates and deficits; and replacing the mindless cuts of the sequester with thoughtful cuts to wasteful and low-priority programs.
But those solutions are hard. They require Democrats to take on their base and pursue entitlement reforms. They require Republicans to break their pledges and support new revenue. And they require both sides to put the next generation ahead of the next election.
Despite the hard choices required, Goldwein remains hopeful that lawmakers can rise to the challenge:
We face before us a choice. Either both sides can stop the blame game and come together on a plan to fix the debt. Or we can keep jumping from crisis to crisis without ever solving the problem. We are a great nation, and it is time we start acting like one. The alternative is to continue walking toward oblivion.
Click here to read the full article.
Yesterday, Former Treasury Secretary and director of the National Economic Council Larry Summers argued that “budget deficits are now a second-order problem” and the focus should instead be on economic growth. Although the piece is in many ways insightful, it could perpetuate the myth in Washington that our debt problems are either solved or are no longer a pressing concern. In addition, Summers’ piece suggests that deficit reduction and “growth strategies” are in conflict – when in fact they are complements. Below, we respond to a number of the arguments in the FT piece.
Our Debt Problems are Far From Solved
In his piece, Summers argues that deficits need not be a major concern given that they will fall to 2 percent of GDP by 2015. While it is true that deficits are falling and debt is projected to decline from 72.5 percent of GDP now to 69.5 percent by 2018, this decline is only temporary. After 2018, debt levels will again begin to rise – reaching the size of the economy by 2035 under CRFB's Realistic Baseline, and doubling it by the 2060s. Although these levels have fallen significantly as a result of the deficit reduction enacted over the past few years, they are nonetheless unsustainable.
Even if this unsustainable growth in debt levels were stopped, moreover, more would need to be done to reduce the debt from its extraordinarily high levels. Debt as a share of GDP is currently twice its historic average and highest they have ever been since the aftermath of World War II. Once the economy recovers, these high levels of debt are likely to “crowd out” investment and growth; and are certain to reduce our fiscal flexibility. It is not clear that, under these levels of debt, the United States would have the capacity to appropriately respond to another recession, a war, or another large-scale national emergency.
Our debt problems remain far from solved, by our estimates, and an additional $2.2 trillion in deficit reduction to put debt on a downward path as a share of the economy this decade alone.
Uncertainty is Not So Uncertain
In his piece, Summers argues that even if debt levels are projected to rise, those projections could be off as they are well within a margin of error. Yet while CBO’s estimates are certainly imperfect, there is little reason to think they are directionally wrong. While economic variables and health care costs are particularly hard to project, demographics are destiny. Over the next quarter century, 19 percent of the projected increase in entitlement spending is due to increased spending from the health law and 54 percent from population aging, which have long been baked in the cake. We've known about the retirement of baby boom generation for years now so forecasters can make better informed projections about demographics than they can about health care costs or economic growth.
Moreover, uncertainty is a double-edged sword. The fiscal situation could be far worse than projected as easily as it could be far better. And considering our high levels of debt and risk of unattainability, it would be prudent to lock in a sustainable path now and relax enacted policies later if projections are too pessimistic. This is especially true given that most of the necessary entitlement changes will have to phase in slowly, meaning they will need to start soon to have a significant impact when they are needed most.
Growth is Not Enough
One common myth surrounding the nation's debt problem is we can grow our way out of the problem. Summers, in fact, suggests that an increase of just 0.2 percent in annual growth would be enough to close the gap. Although we do not have access to Dr. Summers’ calculations, our math suggests that 0.2 percent faster growth would be far from sufficient. While it is true that economic growth would increase revenues, it would also increase spending in a number of areas such as Social Security and thus reduce the budgetary improvement. In CBO's Long-Term Outlook, a 0.5 percentage point increase in productivity growth still resulted in debt levels that debt would still be between 65 and 77 percent of GDP in 2038, and on an upward path. We used these results to roughly approximate the effect of a 0.2 percentage point increase in productivity growth, under current law, and found that debt levels would remain on a clear upward track – reaching between 89 and 94 percent of GDP by 2038. Or in other words, growth certainly helps but will not solve the problem alone.
Long-Term Deficit Reduction is a Growth Strategy
In his piece, Summers rightfully calls for pursuing “growth strategies.” Yet long-term deficit reduction is a growth strategy, and is an important complement to many other growth strategies. Because lower debt levels reduce “crowd out,” of investment, deficit reduction on its own is likely to promote growth. CBO's recent Long-Term Budget Outlook found that a $2 trillion illustrative plan would increase real GNP by 0.8 percent by 2023 and 4 percent by 2038.
In addition to this direct impact, a comprehensive plan to reduce the debt may be the best avenue for pursuing a number of other growth strategies. For example, most plan to reduce impact of sequestration – which is currently reduced GDP by 0.6 percent in the fourth quarter of 2013 alone – would rightly do so by offsetting the cost through future deficit reduction. In addition, a comprehensive debt deal offers one of the best opportunities to pursue individual and corporate tax reform, which could increase the size of the economy significantly by offering lower rates and a broader base to better encourage work and investment while reducing various distortions. On the spending side, policies which reprioritize public investment over consumption and encourage work and investment can also promote growth. And finally, just the announcement of a comprehensive plan could have some positive growth impact by offering households and businesses increased certainty, stability, and confidence in the nation's economy.
At the end of the day, deficit reduction remains a first-order concern exactly because it is the key to economic growth. Or at least it can be if it focuses on putting in place the gradual tax and entitlement reforms which are so sorely needed.
Bipartisan discussions over how to end the partial government shutdown and raise the debt ceiling are coming down to the wire as this week begins, with only three days left until October 17 -- the date that Treasury Secretary Jack Lew says the U.S. government would be left with a dangerously low amount of cash on hand and default could potentially be imminent.
There are a number of good ideas out there for breaking the impasse, but there are also a number of bad ideas. As policymakers negotiate over how to re-open the government and lift the deal celing, they should avoid the following fiscally irresponsible policies:
- Waiving sequestration (without offsets): There is currently broad agreement in Congress to continue funding government at current levels of $986 billion on a temporary basis -- which is about $20 billion higher than what is called for under sequestration. Although ideally policymakers would work to replace the sequestration with more intelligent spending cuts, there are some rumors that they may waive sequestration without other spending cuts. As we previously explained, any reduction in the sequestration cuts not accompanied by offsets would send the message that Washington is not committed to controlling deficits and debt and that it cannot responsibly stick to already enacted savings.
- Repealing or delaying the medical device tax (without offsets): A number of policymakers have suggested accompanying a continuing resolution with a repeal or delay of the 2.3 percent medical device tax established by the ACA ("Obamacare"). As we've explained before, repealing or delaying this tax would add to the deficit to the tune of $3 billion per year. Policymakers should avoid making any changes to the medical device tax -- or any other deficit-increasing policies -- without fully offsetting the cost of doing so.
- Using pension smoothing as an offset: Several policymakers have suggested a change in pension contributions rules to help offset the costs of other policies. As we've explained before, this "pension smoothing provision" would represent a timing shift that would raise revenue in the short-run but lose revenue over the long-run. Using temporary revenues from a timing shift to offset a permanent reduction in revenues or increase in spending would be a budget gimmick.
- Enacting a year-long Continuing Resolution: Some proposals have called for funding the government on a long-term basis -- for six months to a year. Yet continuing current funding levels on a long-term basis would be a mistake on a number of fronts. For one, it would lock in the mindless across-the-board sequestration cuts implemented in March of this year. It would also lead to a second $20 billion defense sequester in January. Ultimately, policymakers must agree to a sustainable level of discretionary spending and then pass appropriations bills which make the hard choices as to how to allocate funds within that level. Cuts should be focused on low-priority spending, not applied across the board.
- Repealing IPAB: Particularly in the House, there is bipartisan support for repealing the Independent Payment Advisory Board (IPAB) established under the ACA; and some rumors suggest this could be part of a broader deal to raise the debt ceiling and open the government. Yet IPAB provider an important backstop if Medicare grows quicker than anticipated by automatically implementing targeted provider savings when costs grow too fast. Although there is plenty of room to improve IPAB, it should not be repealed unless replaced with an alternative mechanism to control long-term Medicare growth.
- Offsetting Sequestration with a Repatriation Holiday: The idea of replacing part of sequestration with revenues from a repatriation holiday for multinational companies has been floated in recent days. While a repatriation holiday would generate more revenue in the short run, it would likely reduce revenues later in the decade and over the long term. Although a broader discussion over how to reform international taxation is long overdue, using short-term revenue from a repatriation holiday to finance spending increases would be a serious gimmick.
- Waiting until the last possible moment to gain leverage: The country is only days away from exhausting all of our borrowing authority. After Thursday, the Treasury would only be able to pay bills with the cash it has on hand, greatly increasing the risk of a default. At the same time, the government shutdown continues to drag on and certainly is not helping give consumers and businesses the confidence they need to spend and invest and is taking money out of the economy. Taking the United States to the brink might result in a better outcome for one side over the other but at the expense of the U.S. economy. It isn't worth it.
Lawmakers need to stop the madness, start discussing responsible solutions, and solve the debt problem.
Today begins week three of the government shutdown, and we are now just days away from when the Treasury will exhaust its borrowing authority and risk a default. So far, lawmakers have yet to agree on a fiscally responsible way out of this dilemma. However, former chairman of the Council of Economic Advisors Michael Boskin chimes in today with several suggestions.
Boskin writes in The Wall Street Journal about a possible proposal that could replace part of sequestration and contain "smart" deficit reduction. From Boskin:
First, appoint a commission to propose by, say, next May 15 specific reforms to reduce and eliminate waste, inefficiency and fraud in government programs—with a minimum target of $1 trillion in the next decade. Yes, "government commission" has often been a synonym for inaction—witness the Simpson-Bowles commission on fiscal reform created by President Obama, who ignored its report. Yet several rounds of Defense Base Realignment and Closure Commissions since the 1990s have led to the closure of hundreds of military installations, most recently in 2005.
This time a commission to fix wasteful spending might work. The commission must consist of highly respected, high-ranking officials from both parties—the likes of Paul Volcker, Alice Rivlin, George Shultz and James A. Baker III who have no recent policy to defend. Then make Congress vote up or down on the recommendations (as they do on base closings), so voters can hold their officials accountable.
Second, for every $2 of savings from reducing waste and inefficiency, ease up to $1 of the sequester spending caps. Lest projected savings evaporate before they occur, the 2-for-1 rule would apply only after the fact. In other words, for every $2 of verified savings from the past year, a maximum $1 of sequester relief would be granted this year. The procedure is similar to the look-back provisions many states employ to enforce balanced budgets.
Boskin believe that both parties might accept the proposal: Democrats for reducing the size of sequestration and Republicans for sequester relief and less spending. Boskin argues that finding these savings won't be a problem, there are many good ideas out there. In particular, lawmakers could:
- Consolidate and reform duplicative programs that are not achieving their goals
- Curtail improper payments and fraud, improve collection of vast unpaid loans and penalties
- Modernize and upgrade personnel and technology
- Move government programs closer to their original intent, such as reforming Social Security's disability program and adopting the chained CPI for government programs
There are many ideas of this type in the Government Accountability Office's annual report on duplication and overlap. These ideas and others should be considered in the current debate, but Boskin acknowledges that this plan would not eliminate the need for entitlement and tax reform. Boskin's idea is worth considering and might be a helpful part of a comprehensive plan, but it's worth remembering that solving our debt problem will not be easy. Unless lawmakers are willing to look at all parts of the budget, we will have difficulty getting our fiscal house in order and undoing the sequester with more targeted reforms.
Naturally, the country has been consumed by the developments (or lack thereof) in the government shutdown and debt ceiling impasse. But there is some movement on another piece of legislation which will need to pass before the end of the year: the farm bill. Last year, the farm bill was set to expire, but the fiscal cliff deal extended it for another year to give time for lawmakers to come to an agreement. If the bill does expire (it technically has but the effects mostly aren't felt until at least January 1), the law would revert back to 1949 law, and among the many consequences, milk prices would skyrocket -- a consequence we dubbed the "farm bill cliff" -- as a result of the price floor set in that law. The actual "expiration" of the farm bill is a number of different dates, but the first significant one for commodities is dairy products on January 1 with other commodities' expiration dates not coming until their first harvest in 2014.
In the last Congress, the Senate passed a farm bill with modest bipartisan support, but the House was unable to agree on one, let alone reconcile a bill with the Senate. This Congress, the Senate has again passed a similar farm bill, and the House's bill was shot down as about one-quarter of Republicans joined all Democrats in voting against it. To make the task of passing a bill easier, House leadership splintered the farm bill, passing just the nutrition portion last month by a narrow 217-210 margin.
Now, the House appears ready to move to a conference with the Senate. The main sticking point will be nutrition programs as the broad outlines of the other parts of the bill are relatively similar. The biggest change in both bills is that they eliminate direct payments to farmers and replace them with a shallow loss program which guarantees a certain level of revenue for farmers.
On nutrition, the Senate bill's main change to the food stamp program is to the standard utility allowance, which provides extra food stamp benefits for recipients who have heating and cooling expenses. However, they are able to qualify for the allowance simply by getting as little as $1 of heating assistance. The Senate bill raises this threshold to $10, while the House bill raises it to $20.
The bigger points of contention, though, are in two other provisions the House bill includes that the Senate bill does not. The first has to do with "categorical eligibility," or the ability of people to receive food stamps by virtue of qualifying for other low-income programs, regardless of whether they meet the food stamp program's means tests. The House bill would restrict categorical eligibility to cash assistance programs only. The second provision, which was not in the full House farm bill that failed to pass, would eliminate the state waiver authority for the three-month time limit for receiving benefits for childless adults. The 1996 welfare reform law included the time limit, which applies to non-disabled adults who do not work 20 hours per week or participate in a job training program. The waiver allows states with high unemployment rates to ignore these requirements.
A conference committee would have a number of issues to settle, but the biggest would clearly be nutrition. The House's full farm bill failed in part because the food stamp cuts were not deep enough for some Republicans. Whether the committee is able to thread the needle on these differences will be a big deal come the end of the year.
As the government shutdown continues into its 11th day, the two parties have just begun having serious negotiations about reopening the government and raising the debt limit to prevent a catastrophic default in the next week or so. According to press reports, Senate Republicans are seriously discussing a proposal that would deal with both. The plan has several promising elements: it would give federal agencies two years of flexibility to deal with the sequester cuts, in addition to funding the government and raising the debt limit. However, the proposal has one troubling element: it relies on a budget gimmick that would end up increasing deficits in later years.
Any deal struck as a part of budget negotiations should decrease the deficit, not increase it. This proposal would repeal the 2.3 percent tax on medical devices that was passed as part of the Affordable Care Act. However, it would pay for the $30 billion cost with "pension smoothing," a provision we've previously described as a budget gimmick. The provision produces one-time revenues which artificially improve the short-term budget picture while leading to greater long-term liabilities.
If the proposal is similar to one included in the 2012 transportation bill, the proposal would raise money by temporarily reducing the amount that companies are required to pay into their pension funds. Even though pension smoothing saves the government money in the short term, it increases future deficits by more than it saves. In the short term, this raises revenue because companies have higher profits (or employees have higher wages) subject to taxes since companies take fewer deductions for employee compensation (or employees have more taxable income). However, contributing less to pension plans now means that companies must make greater contributions in later years, thus increasing their deductions, reducing revenue, and increasing the deficit. Also, any seriously underfunded pensions that are unable to pay benefits would be bailed out through the Pension Benefit Guaranty Corporation.
Any bipartisan solution to end the government shutdown is a step in the right direction, and we welcome proposals that would end the fiscal showdown and allow lawmakers to turn their attention to addressing our long-term fiscal imbalance. However, Congress needs to focus on solutions that decrease, not increase, the long-term deficit.
With the recent improvement in medium-term budget projections, some are trying to advance the myth that our debt problems have been solved. But as we've shown before, lawmakers still have a great deal of work left to do to put the budget on a sustainable path. In the New America Foundation's Weekly Wonk series, CRFB Senior Policy Director Marc Goldwein writes that this couldn't be further from true. Goldwein notes:
It is true that we have made substantial progress in addressing our short- and medium-term debt. In combination with the economic recovery, a number of spending cuts and tax increases enacted over the past three years have helped to stabilize debt levels as a share of the economy for the next five years. Yet temporary stability does not suggest a permanent solution. Though growth has slowed, our debt levels are the highest as a share of the economy they have been since the aftermath of World War II. At roughly twice the historical average, our extraordinarily high debt levels put us at substantial risk if interest rates rise and leave little flexibility if new needs or emergencies arise.
More frightening, our debt levels are likely to begin growing again sooner rather than later. As health care costs continue to grow faster than the economy and the large baby-boom population enters retirement, the costs of Social Security, Medicare, and Medicaid will balloon and revenue simply won’t keep up.
The result: debt is projected to exceed the size of the economy by 2035, double the size of the economy in the 2060s, and triple it in the 2080s.
As we've said many times before, the cure is well-known, but lawmakers will need to make hard choices. Without a plan that includes entitlement and tax reform, we are unlikely to be able to get our fiscal house in order. But despite the challenges ahead, there are some signs of hope. Writes Goldwein:
Despite the dysfunction in the halls of Congress, efforts to design and agree to these changes are already underway. The President’s budget took an important step by putting a number of entitlement changes into his budget, including the adopting of the chained CPI which would switch to a more accurate and slower inflation index for calculating Social Security COLAs, changes in the tax code, and various indexed provisions in the budget.. The relevant Committees in both Houses are taking another important step by looking at ways to reform and replace the so-called “sustainable growth rate” (SGR), which threatened to cut Medicare physician payments by about 25 percent. And perhaps most encouragingly, Republican House Ways & Means Chairman Dave Camp and Democratic Senate Finance Chairman Max Baucus are working together to enact the first comprehensive overhaul of our tax code in over a quarter century.
The true test will be whether these efforts can be joined and ultimately enacted into law. Every bipartisan effort to reduce the deficit – the Simpson-Bowles Commission, the Domenici-Rivlin Commission, the Boehner-Obama discussion – found that the best way to get a budget deal was through shared sacrifice. Everyone has to be part of the solution, and all policymakers has to be willing to put their own sacred cow on the table. The retirement age must be on the table.
Click here to read the full piece.
In yesterday's New York Times, the paper asks in its "Room for Debate" series what federal spending we are better off without in light of the sequester and the government shutdown. CRFB President Maya MacGuineas answers that we've always known the real fiscal solutions won't exclusively involve tackling wasteful spending but rather taking up entitlement and tax reform.
So far, lawmakers efforts during the government shutdown appear to be mostly political, rather than focused on finding a way to solve our fiscal problems. MacGuineas argues lawmakers need to think bigger if they want to get out fiscal house in order.
There definitely is plenty of wasteful and overlapping spending in Washington -- and the sequester pushes policy makers to focus on where they can get savings. The Government Accountability Office has identified dozens of areas of duplication and overlap in the federal government, like that between the Agriculture Department and the Food and Drug Administration over catfish inspections. There's still much needed oversight that is lacking. But a government shutdown isn't the way to solve it.
There is still room to cut in areas like farm subsidies. Reforms to federal retirement and health benefit programs can also achieve savings. Privatize the Tennessee Valley Authority. Charge more to cover the cost of the national parks. The list goes on. We need to do all of these and more, but it's not where the real money is.
What we’ve learned from sequestration and the shutdown is that despite the significant economic disruption caused by these efforts in the near term, they have done little to reduce the long-term debt. Under realistic assumptions, public debt is expected to reach 100 percent of the economy by 2035 and will continue increasing.
Cutting waste, fraud, and abuse, while necessary, just simply won't cut it. Even sequestration fails to put our budget on a sustainable path. Writes MacGuineas:
The budget cuts so far have come from a small sliver of the federal budget and are poorly timed, coming as the economy struggles to recover. A smarter approach deals with all parts of the budget, including tax and entitlement reform, and is phased in over a longer term, allowing for more deficit reduction without stunting growth.
A much better investment is to start bipartisan discussions to comprehensively address our longer-term fiscal challenges.
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.
In an op-ed in The Wall Street Journal, House Budget Committee chairman Paul Ryan (R-WI) presents a possible down payment on the debt as a way out of the government shutdown/debt ceiling impasse. The deal would involve entitlement reforms that have some bipartisan support and tax reform.
About the entitlement reforms, he writes:
Here are just a few ideas to get the conversation started. We could ask the better off to pay higher premiums for Medicare. We could reform Medigap plans to encourage efficiency and reduce costs. And we could ask federal employees to contribute more to their own retirement.
The president has embraced these ideas in budget proposals he has submitted to Congress. And in earlier talks with congressional Republicans, he has discussed combining Medicare's Part A and Part B, so the program will be less confusing for seniors. These ideas have the support of nonpartisan groups like the Bipartisan Policy Center and the Committee for a Responsible Federal Budget, and they would strengthen these critical programs. And all of them would help pay down the debt.
We have already discussed increasing Medicare premiums for high earners as a source of bipartisan health care savings, expanding upon that which has previously been enacted into law by both parties -- in the Medicare Modernization Act and the Affordable Care Act, for example -- and has continued to recieve bipartisan support. The Medicare cost-sharing reforms Ryan offers also have the potential for bipartisan support, as plans from both parties have included variations of similar proposals.
Ryan also calls for tax reform which broadens the tax base and lowers rates. Although he does not explicitly mention raising revenue (or not) from it, a commitment to tax reform could pave the way for more revenue as well.
We should also enact pro-growth reforms that put people back to work—like opening up America's vast energy reserves to development. There is even some agreement on taxes across the aisle.
Rep. Dave Camp (R., Mich.) and Sen. Max Baucus (D., Mont.) have been working for more than a year now on a bipartisan plan to reform the tax code. They agree on the fundamental principles: Broaden the base, lower the rates and simplify the code. The president himself has argued for just such an approach to corporate taxes. So we should discuss how Congress can take up the Camp–Baucus plan when it's ready.
Ryan notes in the op-ed that these policies would not be transformative or widespread enough to constitute a "grand bargain" but would represent a good down payment for deficit reduction. It could certainly offer a good start, and he hopes could provide a path to end the impasses that have dominated Washington the past few weeks.
The government is still shut down, and the debt ceiling is looming around the corner. Markets are beginning to worry, and the country is facing its first ever default if action is not taken soon.
In today's The Hill, former Senator Kent Conrad (D-ND), co-chair of the Campaign to Fix the Debt and CRFB board member, captures the danger of failing to raise the debt ceiling. Conrad writes:
We are on a collision course with financial calamity. A first-time-ever failure to extend the federal debt limit would lead to higher interest rates not only for the U.S. government, but also for every business, home, car, student and personal loan in America. The looming debt ceiling — and the ongoing government shutdown — is causing harmful uncertainty around the world and here at home.
But there is a way out.
This is no doubt a difficult position for lawmakers, but the good news is that much of the work of developing a way out has already been done in bipartisan plans. The way out Conrad recommends is:
- Extend the debt limit for at least one year, preferably two, without condition. That aligns with Obama’s position that we not negotiate on the debt limit.
- Do the negotiating within the context of a continuing resolution to fund the government and end the shutdown.
- Agree to the Republican funding level of $988 billion for this fiscal year.
- Agree on a process for individual and corporate tax reform next year. The goal should be to reduce rates and raise additional revenue to go toward deficit reduction. A reasonable goal would be $300 billion to $400 billion in additional revenue over the next 10 years.
- Agree to additional savings in Medicare and other healthcare accounts by better coordinating care, especially of the chronically ill. A reasonable target would be $300 billion to $400 billion over the next 10 years.
- Take the savings from numbers 4 and 5 above and use them to cut in half the effects of the sequester.
- Adopt “chained CPI” as a more accurate measure of inflation that both reduces spending and raises revenue. The combined effect is a savings of about $250 billion over the next 10 years
- Repeal the medical device tax of 2.3 percent, about which no one seems enthusiastic.
- Name a commission to reform Social Security to ensure its long-term solvency. The longer we wait, the more draconian the solutions will have to be.
Some lawmakers might not like all of these proposals, but Conrad feels we need everything on the table. That has been the theme of bipartisan plans so far -- each side will have to make sacrifices to get a deal. Compromise still remains the best way out for lawmakers.
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.
As we draw ever nearer to the projected deadline for hitting the debt ceiling, Congress still has not been able to make a deal. Today, CRFB board member Rudy Penner authored an piece in CNN Money describing the folly of the debt ceiling and the possibility of a default. He compared the United States' budgeting practices to those of third world countries and criticized lawmakers for failing to resolve a self-inflicted crisis.
Penner explains that countries like Ukraine or Egypt in the past essentially did not have an option to borrow, as the marketplace refuses to buy their debt. While the U.S. does not have this problem, we are faced with lawmakers who imperil our full faith and credit because they cannot agree on a budget. Penner describes what could happen if we continue down this road and are faced with payment prioritization:
To avoid a formal default, we will likely continue to pay interest on old debt. And lacking the ability to borrow more, the Treasury Department could pay bills and make other payments only when it collected sufficient revenues from taxpayers and other sources.
The House has passed a bill that would set priorities among the government's creditors, such as ensuring that Social Security recipients get paid on time.
But the Bipartisan Policy Center has cast doubt on this strategy. It believes that it would take a very long time to reprogram government computers to make payments consistent with specific priorities.
The BPC thinks it is more practical to put bills and other required payments in a queue as they become due, then pay them when the needed funds become available.
Unfortunately, payment delays would lengthen very rapidly. Hopefully the process would remain free of political favoritism and corruption.
But as the United States starts down the road toward third-world budgeting practices, who knows what will happen next?