The Bottom Line
In today's release of the Fiscal Commission's final recommendations, the report undoubtedly, unequivocally, indubitably joined the Announcement Effect Club. In the section on how the plan can fit into "fostering an economic recovery", here's what they had to say:
"Put in place a credible plan to stabilize the debt. A number of economists have argued that putting into place a credible plan to reduce future deficits can have a positive effect on the economy. This so-called “announcement effect” could help to prevent interest rate increases and also mitigate uncertainty among individuals and businesses. In addition, stabilizing the debt will improve the country’s long-term growth prospects by reducing the “crowd out” of private investment and by forestalling a potential fiscal crisis."
They even used the phrase "announcement effect"!
Of course, co-chairman Erskine Bowles of the Fiscal Commission was was already a card carrying member of the club from remarks he made during a June meeting of the Commission. But we welcome into the club all other members of the Commission who sign on to the plan as well.
The co-chairs of the President's fiscal commission today released the deficit reduction plan that members will be asked to vote on Friday. Alan Simpson and Erskine Bowles, co-chairs of the National Commission on Fiscal Responsibility and Reform, said they had tweaked some proposals slightly since they released their original Co-Chairs' proposal (read our analyses of the tax and spending sides of that proposal for more details). The overall savings number is roughly the same--now at about $3.9 trillion, up from about $3.8 trillion in the Co-Chairs' draft--and the spending cut to tax increase ratio largely remained the same at roughly two to one (excluding interest). The composition of the savings, however, changed somewhat.
CRFB has also updated our chart comparing all of the existing fiscal plans, which can be found here. (Note: This is also a great resource to compare the final Fiscal Commission plan to the Co-Chairs' proposal.)
Among the changes:
- Discretionary spending: The final proposal would freeze 2012 discretionary spending at 2011 levels and then cut it to inflation-adjusted 2008 levels by 2013. For the rest of the decade, discretionary spending would grow at half the inflation rate. Additionally, the final plan includes some proposals that were not included in the Co-Chairs' proposal, such as a 15 percent cut to White House and congressional budgets. The result: $200 billion more in savings over ten years, with about $50 billion more in 2020 alone.
- Tax reform: The plan still includes the "eliminate all tax expenditures and lower rates" option that would result in 8/14/23 percent income tax brackets and a 26 percent corporate tax rate, but it also includes a new illustrative option. This option would have 12/22/28 percent income tax brackets and a 28 percent corporate rate. At the same time, it would repeal the Alternative Minimum Tax, the personal exemption phaseout, and the limitation on itemized deductions; tax capital gains and dividends as ordinary income; and maintain the Earned Income Tax Credit, child tax credit, standard deduction, and personal exemptions. It also would keep, but also reform the mortgage, health, charitable giving, municipal bonds, and savings tax expenditures; and eliminate nearly all other tax expenditures. These options for reform raise about $35 billion more over ten years than the Co-Chairs' proposal. Most of the Commissioners at today's meeting lauded the focus on tax reform, especially on reforming tax expenditures. See our paper on the topic here.
- Health savings: Just as in the Co-Chairs' proposal, the so-called "doc fix" is paid for. The final plan specifically includes additional health care savings, rather than providing only illustrative options as the draft proposal did. Among the options included in the report were: ending Medicare payments for bad debts, reducing Medicaid taxes states can levy on providers, accelerating the home health cuts in health care reform, placing dual-eligibles (Medicaid and Medicare) in Medicaid managed care, eliminating provider exemptions from Independent Payment Advisory Board cuts, and reducing spending on Medicaid administrative costs. In addition, the plan introduces a pilot program to turn the Federal Employee Health Benefits program into a premium support system and it includes a repeal of the CLASS Act, which cost $75 billion through 2020 but likely would strengthen the long-term fiscal outlook. Because the CLASS Act would be repealed and because the new plan does not include an "additional $200 billion savings" assumption, total mandatory savings are about $175 billion less than the Co-Chairs' proposal.
- Process reform: Hurray! The final plan also dives deeper into budget process reform than the Co-Chairs' proposal. While the draft eliminates any mention of biennial budgeting, it calls for allowing spending cap adjustments for program integrity measures, reforming budget concepts (the way things are accounted for in the budget, such as GSEs), and having a better automatic trigger for extended unemployment benefits. These recommendations are in addition to a recommendation to establish a "debt stabilization process." For more info on budget process reform, check out the Peterson-Pew Commission on Budget Reform's recommendations.
Social Security, which was a major issue when the Co-Chairs' proposal came out, remains largely unchanged, except for a new "hardship exemption" for changes in the normal and early retirement ages.
It was great work by the Commission to actually develop a plan. Now comes the hard part--finding the 14 votes needed to approve the plan. As we argued yesterday in a release:
“The members of the Fiscal Commission have the critical task of leading the nation in a discussion about how to fix our budget challenges before credit markets turn against us and force more painful actions. Supporting a plan need not mean that a member supports every aspect of it, but rather that they understand that real leadership will require compromise.”
As it stands, seven members have pledged support for the plan, one member--Rep. Jan Schakowsky (D-Ill.) , who offered her own alternative a few weeks ago--explicitly opposed the plan, and eight members did not declare their intentions. Two members, Sen. Max Baucus (D-Mont.) and Rep. Dave Camp (R-Mich.), were absent from the meeting.
Many Commission members at the meeting said that regardless of how they vote, the proposal represents a good framework for discussion and debate. Congressional leaders have agreed to consider the proposal if it garners 14 Commission votes. With support halfway there, we hope the Commission can reach that goal. But more importantly, we're hoping this excercise, one way or another, will spur action soon in Congress.
As they read over the draft Fiscal Commission plan released today, many politicians will wonder why in the world should they agree on a plan – any plan - that contains so many features they don't like and which would more than likely set in motion painful adjustments for their constituents?
To better understand that the economic - and political - costs of doing nothing might be even higher than the costs of taking fiscal action, take a close look at Fed Vice Chair Janet Yellen’s timely speech today on “Fiscal Responsibility and Global Rebalancing”. In her words:
... the problem is that, in the absence of significant policy changes, and under reasonable assumptions about economic growth, demographics, and medical costs, federal spending will rise significantly faster than federal tax revenues in coming years. As a result, if current policy settings are maintained, the budget will be on an unsustainable path, with the ratio of federal debt held by the public to national income rising rapidly.
A failure to address these fiscal challenges would expose the United States to serious economic costs and risks. A high and rising level of government debt relative to national income is likely to eventually put upward pressure on interest rates, thereby restraining capital formation, productivity, and economic growth. Indeed, once the economy has recovered from its downturn, fiscal deficits will crowd out private spending. Large fiscal deficits will also likely put upward pressure on our current account deficits with the rest of the world; the associated greater reliance on borrowing from abroad means that an increasing share of our future income will be required to make interest payments on federal debt held abroad, thereby reducing the amount of income available for domestic spending and investment. A large federal debt will also limit the ability and flexibility of policymakers to address future economic stresses and other emergencies, a risk that is underscored by the critical fiscal policy actions that were taken to buffer the effects of the recent recession and stabilize financial markets in the wake of the crisis. And a prolonged failure by policymakers to address America's fiscal challenges could eventually undermine confidence in U.S. economic management.
We should not defer charting a course for fiscal consolidation. Timely enactment of a plan to eliminate future unsustainable budget gaps will make it easier for individuals and businesses to prepare for and adjust to the changes. Moreover, the sooner we start addressing the longer-term budget problem, the less wrenching the adjustment will have to be and the more control we--rather than market forces or international creditors--will have over the timing, size, and composition of the necessary adjustments.
She also made an observation that might even help bridge a political divide in the lame duck session: in her view, there may be scope for fiscal policy to address the continuing weakness of the economy now but in the context of a "well-timed and credible plan to bring deficits down to sustainable levels over the medium and long terms".
The December 1st deadline for the President’s Fiscal Commission has nearly arrived. With a Co-Chairs draft proposal already in circulation (see our commentary here), the commission’s final proposal is something CRFB is eagerly awaiting. We were given a small taste of what is to come during today’s press conference.
- The final proposal will be released either sometime tonight or tomorrow morning (note that the Commission will be holding a public meeting tomorrow at 9:30am, which we will be live tweeting on our Twitter page!). Co-Chairs Erskine Bowles and Alan Simpson said that Commission members will have until Friday to vote in support of the plan or not.
- The revised plan will not be a “watered-down” version of the draft proposal and will not include less than the $3.8 trillion in savings over the coming decade identified in the draft proposal.
- The revised plan will include significant reform of the tax expenditure budget, which Simpson and Bowles referred to as "tax earmarks."
- The revised plan includes reforming tax expenditures for deficit reduction as well as for tax base broadening and rate reduction.
No other specifics were given.
The Co-Chairs reaffirmed the important point that no deficit reduction will “balance the books” on the backs of the most vulnerable. They also declared that the “era of deficit denial is over.”
Be sure to continue checking back to CRFB for more commentary as soon as the Commission releases its final proposal.
Rep. Mike Quigley (D-IL) released a report today proposing 15 ways that the federal budget process could be improved to give a clearer picture of the fiscal situation and more focus on achieving long-term stability.
- All taxpaying Americans should receive an itemized receipt from the federal government that shows how their tax dollars are being spent.
- This receipt should include information on both the revenue side and the spending side.
- The Congressional Budget Office and the Joint Committee on Taxation should analyze the second decade budget impact for any bill that they score for Congress.
- The CBO and JCT should provide a net present value (NPV) estimate for any major pieces of legislation for which costs escalate outside the 10-year budget window.
- The Office of Management and Budget should issue an annual report examining our un-budgeted fiscal exposures.
- The President’s Budget and the Congressional Budget Resolution should include specific long-term deficit and debt sustainability targets.
- The OMB should issue a Quadrennial Fiscal Sustainability Review.
- Upon submission of the President’s Budget, the President should be invited to deliver a “Fiscal Sustainability State of the Union” address to a joint session of Congress.
- All tax expenditures that are enacted should “sunset” inside the 10-year budget window.
- The Department of Treasury, in conjunction with the OMB and the relevant federal agency, should issue regular performance reviews of all tax expenditures.
- There should be more data made public evaluating tax expenditures.
- The Department of Defense should be audit-ready by 2014 and required to pass a comprehensive audit by 2015 so that policymakers can conduct effective oversight of Department expenditures.
- All federal spending on security—including military, homeland security, and foreign engagement—should be considered under one unified security budget.
- The Department of Defense should resolve internal control weaknesses and other uncertainties in long-term cost estimates for environmental liabilities.
- More up-front information should be required about the costs of environmental liabilities that would be incurred with the purchase of new assets.
It is good to see that other great minds are working on how to improve the budget process. Many of Rep. Quigley’s recommendations closely parallel those made by the Peterson-Pew Commission on Budget Reform in its latest report, Getting Back in the Black. The result in either case would be a budget process that is more disciplined, forward-looking, and transparent. Notably, like the Commission’s report, Rep. Quigley addresses the need for better information and more transparency regarding the long-term fiscal outlook. Like the Commission, he would have the President present a report annually on the long-term fiscal challenges and how his budget would address them. Rep. Quigley also calls for closer review of “tax expenditures,” the provisions of the tax code that provide special treatment and function much like spending, noting that revenue losses from these provisions now total over $1 trillion annually.
Some of Quigley’s proposals go beyond what the Peterson-Pew Commission has recommended. For example, he would require that the Congressional Budget Office and the Joint Committee on Taxation provide a net present value (NPV) estimate for any major pieces of legislation for which costs escalate outside the 10-year budget window. Additionally, he would have all tax expenditures expire within 10 years of enactment. Another interesting idea--he would have all taxpaying Americans receive an itemized receipt from the federal government that shows how their tax dollars are being spent.
The report is an excellent contribution to the essential conversation on reforming the budget process. It is good to hear another voice observing that the current budget process is not up to the task of supporting the big policy adjustments needed to stabilize the federal debt. Rep. Quigley’s ideas are ones that members of both parties can endorse. We applaud the Congressman for producing such a detailed and thoughtful document and hope it presages a healthy debate and prompt action on reforms such as these.
As the Fiscal Commission discusses its final proposal for deficit reduction, CRFB issued a press release today urging the Commission’s members to come together and agree on a bipartisan, comprehensive deficit reduction plan. “Watering down” what they proposed in an effort to get more votes when the plan goes before Congress next month will not help the country get on a sustainable fiscal path—“no plan will be perfect in anyone’s eyes,” but the most important feature of the plan should be that “it gets the job done,” said Maya MacGuineas, president of CRFB.
Agreement will require compromise from Commission members on both sides of the aisle. It is critical that the United States take preventative measures in the medium term to prevent having to make even more painful decisions further down the road, and an agreed-upon plan from the Commission could be a great starting point. We eagerly await the Fiscal Commission’s decision.
Commission Co-Chairs Erskine Bowles and Alan Simpson will be holding a press conference at 3:30pm today. CRFB will be live tweeting this event on our Twitter page, so be sure to check back!
CBO has issued new numbers for the total costs of the Troubled Asset Relief Program (TARP). CBO now estimates that TARP will cost $25 billion over the life of the program. This is down $41 billion from CBO's previous estimate of $66 billion in their August 2010 Budget and Economic Outlook, $84 billion less than CBO's March 2010 estimate, and $88 billion less than OMB's most recent analysis (which relies on data up to May 31, 2010).
CBO gives the reasoning as to why the cost estimate has gone down over the past year:
"...additional repurchases of preferred stock by recipients of TARP funds; a lower estimated cost for assistance to AIG and to the automotive industry; lower expected participation in mortgage programs; and the elimination of the opportunity to use TARP funds for new purposes (because of the passage of time and the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act."
Additionally, CBO found that:
"...the outcomes of most of the transactions made through the TARP were favorable for the federal government."
CRFB welcomes this bit of good news. Each new estimate seems to bring TARP's overall cost lower and lower, and we can only hope that continues. Even so, however, $25 billion is an incredibly low cost number for a program that likely prevented the U.S. economy from going into freefall.
You might have missed it last week if you were preparing to chow down on some turkey, but Our Fiscal Security (OFS)--a joint project of the Economic Policy Institute, Demos, and the Century Foundation--became another in a long list of groups/experts to put out a specific proposal for our long-term fiscal situation.
This plan, like a few others, starts off by suggesting additional efforts to stimulate the economy. However, they don't stop with a one or two year stimulus. They would continue to make public investments in things like education, infrastructure, and R&D over the course of the ten-year outlook to the tune of $200-$300 billion per year. The result is higher discretionary spending relative to the President's Budget.
We should point out that this is the third plan, after Rep. Jan Schakowsky's plan and the Debt Reduction Task Force's plan, to offer short-term stimulus in the context of a deficit reduction proposal.
Here's what they'd do in each area of the budget:
- Social Security: Eliminate payroll tax cap on employer's side and raise it to 90th percentile for employee's side.
- Health Care: They endorse many of the reforms in the Affordable Care Act and suggest building upon them. Also, they propose a public option for the new health insurance exchanges.
- Defense: They suggest cuts of the size of the Sustainable Defense Task Force, about $960 billion over ten years. However, they only use the SDTF report as an illustrative option.
- Taxes: Numerous revenue-raisers. Highlights are a carbon tax/cap-and-trade system, taxing capital gains as ordinary income, a millionaire's surtax, and a financial transactions tax.
We applaud OFS for getting specific. They acknowledge that we have a debt problem that demands action from lawmakers.
However, the plan does not go far enough. The ten-year savings amount to only about $500 billion. But the $500 billion in savings is on top of a baseline that would have ten-year deficits in the $8 or $9 trillion neighborhood. In fact, by 2020, debt is only about two percentage points of GDP lower at 83 percent (versus 85 percent), compared to the President's Budget, with a deficit of about four percent. And the trajectory of debt still points up in 2020, albeit less so than under current policy. The plan stabilizes debt at 90 percent of GDP over the long-term. The debt goals in the plan are likely not aggressive enough to reassure credit markets that we're serious about significant deficit reduction, and risk creating a significant drag on economic growth.
The plan also largely depends on raising additional revenue to bring down future deficits, which would be a hard sell for bipartisan cooperation. For all the concerns about growth--a focus with which we completely agree--this proposal risks harming growth through such high tax and debt levels as a share of the economy.
Another plan, another addition to the debate. It's great to see the flurry of activity that has gone on this past month.
Pete Davis over at Capital Gains and Games joined the Announcement Effect Club over the weekend and FDIC head Sheila Bair came very close.
In a blog post at CG&G, Davis called for a fiscal plan to put our debt on a sustainable trajectory. But how soon?
I wouldn't wait past next summer, HOWEVER, I would delay the effective dates until 2012 or 2013 to get the market benefit of the anticipation of deficit reduction without endangering our fragile recovery.
Classic Announcement Effect.
Bair shook off the turkey to join the So Close Club with an op-ed in Friday's Washington Post. Her comments are important in a broad perspective, as she emphasizes the role of confidence in economic performance. Her remarks are below.
Establishing a comprehensive plan now would demonstrate a firm commitment to the type of long-term budget discipline that will be needed to preserve our nation's credibility in the global financial markets and a stable banking sector at home.
The quiet confidence of the American public in the FDIC's deposit insurance guarantee was one of the bulwarks that helped to stem the tide in the recent crisis and avert even greater economic calamity. But we must never take public or investor confidence for granted. In the end, that confidence is only as great as the resolve shown by our government in identifying emerging risks and taking concerted action to head them off.
Her comments in the first paragraph are almost Announcement Effect Club material, but she doesn't state that taking action now could help the economy in the short term.
But it's the second paragraph that should really make an impression. Bair makes a great point: yes, we may have the confidence of investors right now, with interest rates very low on federal debt, but that is no reason to test the boundaries of our borrowing capacity when we can instead head off the risk of a fiscal crisis. Just because we may have more breathing room than, say, EU countries doesn't mean we should wait to act.
President Obama announced today that he is freezing federal pay for the next two years. This action will save $60 billion over the next ten years, and about $2 billion for the remainder of FY 2011.
This freeze will apply to all civilian federal workers, including those who work under alternative pay scales (such as those not in the G-S scale) and includes civilian workers in the Defense Department. According to the New York Times, the two-year pay freeze will affect roughly 2.1 million federal workers in total. The freeze effectively removes a 1.4 percent pay increase scheduled for 2011, but will not affect members of the armed services.
The White House said in releasing this news:
"This freeze is not to punish federal workers or to disrespect the work that they do. It is the first of many actions we will take in the upcoming budget to put our nation on sound fiscal footing -- which will ask for some sacrifice from us all."
This is a great first step in deficit reduction. While this will not by itself solve our long term fiscal problem, it is a great pyschological step towards that eventual goal. This plan also is a symbol that everyone must share in deficit reduction efforts going forward, especially when many believe that federal workers are paid more than private sector workers.
While this is largely a symbolic gesture in deficit reduction, CRFB applauds President Obama for taking this bold action.
Martin Feldstein has an interesting op-ed in today's Washington Post on tax expenditures. Tax expenditures -- the list of special tax credits, deductions, and exemptions written into the tax code -- constitute over $1 trillion in lost revenues every year and distort economic activity. In our recent paper on the deficit reduction plans, CRFB noted that a common theme among the plans was in reducing the tax expenditure budget (click here to read CRFB's plan for tax expenditure reform). Feldstein has his own unique and interesting approach.
Feldstein proposes capping the credits, deductions, and exemptions that individual taxpayers can use from itemizing, thus limiting the revenue impact of tax expenditures. In response to other proposals that cut or eliminate specific tax expenditures, or nearly all of them, he does not believe that it is politically feasible to do so as people would be strongly opposed to changes affecting them while others, benefitting other people, were left in place.
Feldstein uses the following example to illustrate his proposal:
"To be clear, the cap would not apply to the amount of any deduction but would limit the total tax savings that result from such deductions. Someone with a 25 percent marginal tax rate who pays annual mortgage interest of $4,000 would still deduct that $4,000. The cap would apply to the $1,000 tax saving that individual could expect on mortgage interest, not to his or her deduction. The idea is not to single out a particular tax expenditure."
Feldstein then uses the example of a cap on all tax expenditures equal to a person's adjusted gross income. Feldstein says that such a cap would reduce the deficit by $262 billion in 2011, which would be 1.7 percent of GDP or one third of the projected deficit. Doing so would move more people to the standard deduction which would thus simplify the tax code (the actual cap amount would thus be crucial in having the correct incentive effects). Feldstein notes that an additional dollar cap would have larger deficit reduction effects.
As Feldstein puts it:
The cap would not discriminate among taxpayers who benefit from various forms of tax expenditures. It would, however, reduce the deficit by hundreds of billions of dollars a year without raising tax rates and thus without reducing the incentive to work, to save or to expand businesses.
Overall, CRFB applauds Dr. Feldstein for his excellent idea on tax expenditure reform. We sincerely hope that if (hopefully "when") Congress gets around to deficit reduction, tax expenditures will be part of any plan.
Washington Still Has a Full Plate -- Congress returns this week from its Thanksgiving break as fiscal issues will jolt policymakers from their turkey-induced comas. A Tuesday meeting between President Obama and congressional leaders may shed some light on how Congress will proceed on matters such as the 2001/2003 tax cuts and fiscal year 2011 spending bills. And Wednesday may bring a proposal from the White House fiscal commission that will drive debate over the direction of U.S. fiscal policy.
Fiscal Commission Still Cooking -- The President's National Commission on Fiscal Responsibility and Reform faces a deadline of Wednesday to present a plan to reduce the federal budget deficit. If 14 of the 18 members of the panel agree on a proposal, then congressional leaders have agreed to consider it this year.
Plans Keep Coming -- Like the endless streams of turkey, fiscal plans continue to be placed before us. Last week the Cato Institute offered its ideas to cut spending and today the Our Fiscal Security initiative offered a plan. You can create your own plan using CRFB's "Stabilize the Debt" simulator.
Is the Message Sinking In? -- A recent Rasmussen poll indicates that all the attention paid to rising deficits and debt during the election had an effect on the electorate, allowing voters to understand the issue a bit better. Perhaps, like that cornbread stuffing, the message about our fiscal challenge is sticking with us.
Marking Lines on Earmarks -- The Senate is expected to vote today on an amendment to a food safety bill that would ban earmarks for three years. The amendment will have a tough time passing since it will require 67 votes. As we said before, earmark reform represents a symbolic step, but alone will not significantly reduce the deficit. The Peterson-Pew Commission on Budget Reform provided detailed recommendations for reforming the budget process in the recent report, Getting Back in the Black.
As Thanksgiving approaches, we at CRFB wanted to take a moment to reflect on what we are thankful for. We are most thankful for the Simpson-Bowles preliminary debt reduction plan, which has set a new bar in Washington for what serious fiscal plans should acheive, and led to a flurry of other plans. Additionally, over the past year fiscal year the deficit has come down (well, that’s good), lawmakers took some important first steps in controlling health care cost growth (very good, though it is problematic that the rest of the bill was so costly and at a time when we should be scaling back, not increasing, entitlements), and the economy has so far avoided a double-dip back into recession (also very good). And… let’s see….
Okay, now we’re scroungin’.
Have lawmakers acted in a bipartisan manner to tackle our fiscal challenges down the road head on instead of continuing to punt the issues further down the road? (Sigh) Nope. But at least we’re starting to see some real progress taking root on the specific kinds of policies and the magnitude of changes necessary to get our country out of the red and back into the black!
We hope that the growing momentum in Washington around the need to address our longer-term fiscal challenges continues gaining traction in coming months. Lawmakers must be prepared to offer their specific proposals for controlling the growth in U.S. debt, and they must ultimately come together around a plan that builds a consensus among both political parties. Those are our wishes.
We hope that everyone has a terrific Thanksgiving. See you next week!
We at CRFB have been calling for people to Get Specific on ways to deal with our long-term fiscal crisis for quite some time. Well, since that has finally started to happen and deficit reduction plans seem to be in vogue (which couldn’t make CRFB happier), the second stage of the process, seeing where the plans intersect, is now beginning. And to start this process, we have a new paper that will help.
Today, we released a policy paper entitled "10 Themes Emerging from the New Debt Reduction Plans", looking at many of the major plans that have been released so far (Rep. Paul Ryan's Roadmap, the Co-Chairs' of the Fiscal Commission draft proposal, the Esquire Commission, the Galston-MacGuineas plan, the Bipartisan Debt Reduction Task Force, and Rep. Jan Schakowsky's proposal). We analyzed each of the plans and noticed that no matter what some of the critics say, there is significant agreement among most, if not all, of the plans on several large themes.
We break the similarities into ten themes:
- Yes, the Deficit Does Matter
- A Credible Fiscal Plan Is a Necessary Part of an Economic Recovery Strategy
- There Is Plenty of Room for Defense Cuts without Compromising National Security
- Health Care Needs a Budget
- Domestic Discretionary Freezes—or Cuts—Are on the Way
- Social Security Needs a Lasting Fix
- Tax Expenditures—Spending Through the Tax Code—Are Desperately in Need of Reform
- The Gap Is Too Large to Keep Revenues Off of the Table – Changes Should Be Part of Fundamental Reform in the Longer-Term
- It Is All about Entitlement Reform
- Fiscal Goals: 60 is the New 40
Overall, most of the plans address these issues. This is great news. While the plans have significant different approaches, such as the Ryan and Schakowsky proposals, they share many priorities. There is enough in common among plans that span the political spectrum that we hope policymakers will begin ironning out the details.
Talking Turkey – Congress takes a break this week for Thanksgiving. Lawmakers can be thankful for the brief respite, but the time is quickly coming when they can no longer speak in sound bites and generalities on fiscal matters and must get down to business. When they return next week they will have to face up to some deadlines, promises, and reality.
McConnell Gets Off the Omnibus – One deadline facing Congress is the December 3rd date when the current continuing resolution expires. Legislators must either pass another stopgap measure or enact the appropriations bills to fund government operations by then. Senate leaders have been working on an omnibus bill rolling up all twelve spending bills into one massive piece of legislation, but Senate Minority Leader Mitch McConnell (R-KY) last week seemingly put the brakes on the omnibus when he declared he would not support it. This likely means another continuing resolution will be required, perhaps into next year. Congress has failed to enact any of the bills to finance the government for the fiscal year that began October 1; the latest example of how dysfunctional the budget and appropriations process in Washington is. The Peterson-Pew Commission on Budget Reform recently unveiled detailed recommendations for reforming the process in the report, Getting Back in the Black.
Ideas Keep Coming – Another looming deadline in Washington is the December 1st date by which the President’s National Commission on Fiscal Responsibility and Reform must report its recommendations. If 14 of the 18 members of the panel agree on a proposal, congressional leaders have promised to consider it. Policymakers have no dearth of ideas to work from in considering how to put the country on a sustainable fiscal course. Many have heeded CRFB’s calls to get specific. Last week the Deficit Reduction Task Force unveiled a plan, as did Congresswoman Jan Schakowsky (D-IL), a member of the president’s commission, who presented a progressive alternative to the plan offered recently by the commission’s co-chairs. Other progressive plans are expected at the end of the month. CRFB President Maya MacGuineas developed a plan with Bill Galston of the Brookings Institution. Check out our ongoing Let’s Get Specific series. The question is: Will all these ideas inform a constructive dialogue that produces real solutions; or, like with the upcoming Thanksgiving dinner overload, will policymakers take a nap and make lots of turkey sandwiches afterwards?
Promises to Keep – Many of the newly-elected members of Congress successfully campaigned on promises of fiscal responsibility and reducing the federal budget deficit and last week lawmakers took largely symbolic steps. Senate Republicans approved nonbinding resolutions within their caucus to cut spending to 2008 levels; ban earmarks and encourage Democrats to do the same; support a balanced budget amendment; freeze hiring of non-security federal employees; and cancel about $12 billion in unspent stimulus funds. House Republicans voted to continue their moratorium on earmarks. And a bipartisan group of senators led by Claire McCaskill (D-MO), John McCain (R-AZ), Mark Udall (D-CO), and Tom Coburn (R-OK) will attempt to force a vote on the Senate floor for a Senate-wide earmark ban. As CRFB wrote in a blog last week, earmark reform represents a good symbolic step, but won’t reduce the deficit. These recent actions are just the appetizers; lawmakers will have to get down to carving the turkey soon.
‘Poll’-ar Opposites? – Public opinion on what to do about the deficit is not bringing much clarity to the debate. A recent poll sponsored by the John D. and Catherine T. MacArthur Foundation found that 72 percent of those surveyed believe it is “very important” that “the next Congress take steps to reduce the national debt.” On the other hand, a NBC News/Wall Street Journal poll indicated that voters are not enthusiastic about the specific ideas put forth by Erksine Bowles and Alan Simpson, the co-chairs of the White House fiscal commission. Kind of like those who want to lose weight, but eat whatever they want over the holidays.
Setting the Table for Tax Reform? – Incoming House Ways and Means Committee Chairman Dave Camp (R-MI) last week promised to launch a battle for fundamental tax reform. He took particular aim at reducing tax expenditures and said that tax reform could play a significant role in reducing the deficit. Treasury Secretary Tim Geithner also called for tax reform, and Politico reported that the two met last week. [Update: Greg Mankiw also singles out tax expenditures for reform in the New York Times] Also, former White House and Treasury official, Glenn Hubbard, called for reform as well. Check out CRFB’s paper on tax expenditures.
Who is Coming to Dinner? – It is becoming clear who will be the key players in fiscal policy in the next Congress. Last week it was announced that Representative Chris Van Hollen (D-MD) will be the Ranking Member on the House Budget Committee. He will be the counterpart to incoming Chairman Paul Ryan (R-WI). In the Senate, Budget Committee Chairman Kent Conrad (D-ND) decided to keep his post; he had been contemplating taking the reins of the Agriculture Committee. Senator Jeff Sessions (R-AL) is set to be the Ranking Member. And Jacob Lew was officially confirmed last week to be the next director of the Office of Management and Budget after Senator Mary Landrieu (D-LA) withdrew her hold on his nomination over unrelated objections to the administration’s moratorium on offshore oil drilling.
Docs Get Short-Term Fix; Unemployed Still Hanging – The Senate approved a one-month extension of the “doc fix’ preventing a steep reduction in Medicare payments to physicians. While the $1 billion cost is paid for, we noted last week that the offset represented something of a gimmick. The House failed to extend expanded unemployment benefits for three months, which also expire at the end of this month. Agreeing on offsets continues to complicate progress on those and many other issues.
The Economist joined the Announcement Effect Club last week in an article calling for leadership on the deficit. Following many other plans put out over the past few weeks, they offered some of their own preferred policies for putting the budget back on a sustainable path. And in discussing the timing of cutbacks, they said (as many others have) that long-term deficit reduction and short-term stimulus are not contradictory; in fact, they can work hand-in-hand. Here's the money quote:
There is legitimate concern that, done hastily, austerity could derail a weak recovery. But this strengthens the case for a credible deficit-reduction plan. By reassuring markets that America will control its debt, the government will have more scope to boost the economy in the short term if need be—for instance by temporarily extending the Bush tax cuts.
It's a close call, but we believe this statement qualifies for the AEC because even though they didn't explicitly state that medium/long-term deficit reduction would help short-term growth, they do imply that a plan would reduce upward pressures on interest rates (giving the government "more scope" to enact stimulus).
And the deficit reduction policies they support? Many. Block-granting Medicaid; increasing Medicare cost-sharing; raising the retirement age, lifting the payroll tax cap, and instituting progressive price indexing for Social Security; and enacting the type of base-broadening, rate-lowering tax reform that has come up recently in other plans.
We'd like to welcome The Economist into the Announcement Effect Club and thank them for getting specific.
Of particular interest for us, Fed Chairman Bernanke noted the following in his speech today on “Rebalancing the Global Economy” at the European Central Bank’s conference in Germany:
“For their part, deficit countries need to do more over time to narrow the gap between investment and national saving. In the United States, putting fiscal policy on a sustainable path is a critical step toward increasing national saving in the longer term.”
The Senate late Thursday passed another short-term “doc fix” that spares physicians from a 23 percent Medicare payment reduction through the sustainable growth rate formula. The cost of the one month extension will be $1 billion over ten years, which will be paid for by reducing payments for multiple therapy services provided to patients in one day by 20 percent.