The Bottom Line
An op-ed in today's New York Times by Harvard economics professor Martin Feldstein says that while reducing our debt will require more revenue, that doesn't necessarily mean higher tax rates. Feldstein proposes the idea of capping the amount that tax expenditures as a whole can save an individual taxpayer to a maximum percentage of their income. This reform would decrease the amount of revenue lost through tax expenditures without having to go through the politically difficult process of singling out specific tax deductions for elimination.
Feldstein developed and studied this reform with CRFB president Maya MacGuineas and Daniel Feenburg of the National Bureau of Economic Research. They published their findings in a paper released last month, Capping Individual Tax Expenditure Benefits, which projects that capping the amount that tax expenditures can reduce each individual's tax burden at 2 percent of their adjusted gross income (AGI) would raise $278 billion in 2011.
Click here to read the full op-ed.
Click here to read the full paper.
Martin S. Feldstein, a professor of economics at Harvard, was the chairman of the Council of Economic Advisers from 1982 to 1984 under President Ronald Reagan.
The excess property map comes as the White House is proposing a BRAC-like (Defense Base Closure and Realignment Commission) commission for federal property. In addition, deputy OMB director Jeff Zients said that the administration would release the full list of surplus property and that they would push for the streamlining of rules that govern agency sales of federal property.
This is not the first time that President Obama and OMB have targeted excess property. Last year, OMB asked agencies to save no less than $3 billion by 2012 on real estate, which included not only getting rid of unneeded property, but also cutting building operating costs and being more energy efficient. The idea for a commission could presumably help that goal if it is passed and implemented quickly. Nonetheless, the BRAC-esque commission and the other proposed changes are a good way to remove some of the political and legal hurdles to selling excess property.
It seems that the Administration will have a lot of support for this proposal. On Capitol Hill, there are some proposals involving the sale of excess property. Rep. Jason Chaffetz (R-UT), a sponsor of one of those measures, says that he supports the idea of a property commission.
In addition to property, there is the broader question of the sale of certain government assets, which we addressed on The Bottom Line last year. Of course, many of these assets would be more controversial to sell. But sales of assets lawmakers deem appropriate and the sale of excess property are good ways for the government to save a little.
Bumping Up on the Debt Ceiling – On Monday, Treasury Secretary Tim Geithner sent a letter to congressional leaders saying that his department this week would begin the “extraordinary measures” necessary to stave off a U.S. default absent an increase in the statutory debt limit, which will be breached around May 16. On Friday, Treasury will suspend the issuance of State and Local Government Series (SLGS) Treasury securities. In the letter Secretary Geithner cautioned that the action “is not without costs; it will deprive state and local governments of an important tool to manage their outstanding debt expenses.” While the letter also said that better-than-expected tax receipts mean that default can be delayed until around August 2, Geithner warned that delay could hamper market confidence in the U.S. and impact the economy. August should not be seen as the deadline for increasing the statutory debt ceiling; an agreement should be reached in a timely manner that increases the limit and includes concrete steps to improve the nation’s fiscal outlook. CRFB co-chairs Bill Frenzel and Charlie Stenholm offered ideas in The Hill for a deal. While a comprehensive, multiyear fiscal plan along the lines of that being negotiated by the Senate Gang of Six would be ideal, there may not be time to enact it, making a “Plan B” consisting of statutory debt and savings targets enforced by triggers as proposed by the Peterson-Pew Commission on Budget Reform the best alternative. See CRFB’s paper on responsible approaches to increasing the debt limit.
Biden Meeting Sets Stage for Debt Limit Negotiations – A Thursday meeting led by Vice President Biden will effectively commence talks over increasing the debt limit. Biden will meet with a bipartisan, bicameral group of lawmakers hand-picked by congressional leaders. Democrats and Republicans agree that budget enforcement mechanisms like budget caps and debt targets will be key to an agreement. Republicans have also dropped demands on overhauling Medicare in order to focus on areas that can achieve bipartisan agreement, like cutting farm subsidies. While these signs are positive, getting to an agreement will still be difficult. The Washington Post’s Steven Pearlstein suggests sending in the Navy SEALs, but there may be a more subtle approach. Perhaps if the VP serves margaritas in observance of Cinco de Mayo, agreement can be reached quickly.
Triggers? Figures – With the increasing focus on budget process as a part of a debt limit compromise, budget enforcement mechanisms like debt triggers are receiving increased scrutiny. A Senate Finance Committee hearing on Wednesday addressed the subject where witnesses generally agreed that mechanisms like triggers can be part of the solution, but that they are no substitute for making the tough policy decisions required to get our fiscal house in order. See the Peterson-Pew Commission recommendations for making triggers work.
No Sense of Cloture – On Wednesday the Senate failed to invoke cloture on small business legislation (S. 493) that has become the vehicle for several fiscal measures, including amendments from Sen. Tom Coburn (R-OK) that would reduce duplication in government and cut other spending. The fate of the legislation is unknown.
Senate Budget to Proceed – Senate Budget Committee Chair Kent Conrad (D-ND) says that he will mark-up a FY 2012 budget resolution next week, perhaps as early as Monday, in his committee. The proposal reportedly will reduce the deficit by some $4 trillion over ten years.
White House Wants to Sell Excess Federal Property Brick-by-BRAC – The Obama Administration on Wednesday proposed that Congress form a BRAC-like commission to oversee the sale of over 12,000 federal properties it has identified as excess, which it estimates could bring in some $15 billion over three years.
Corporate Tax Reform Awaits – The White House is gearing up to promote corporate tax reform, proposing to reduce the top rate to under 30 percent. The plan could be considered alone or be added to the 2012 budget or a long-term debt reduction deal.
Since President Obama put the idea of a debt trigger in the public's mind, it has become a hot topic. Third Way recently put out a piece detailing different types of triggers, including the recommendation from Peterson-Pew Commission on Budget Reform. And this morning, the Senate Finance Committee held a hearing on budget enforcement mechanisms.
At the Finance Committee hearing, Susan Irving of GAO and Paul van de Water of CBPP both were cautious about the effectiveness of triggers or other mechanisms. Specifically, when comparing Gramm-Rudman-Hollings (deficit targets and sequestration) and the Budget Enforcement Act (discretionary spending caps and PAYGO), they came to the conclusion that these mechanisms were better at enforcing an already-made agreement rather than forcing an agreement to be made. Former Sen. Phil Gramm, however, was more optimistic about the possibility of forcing an agreement, and for good reason: he is the Gramm in Gramm-Rudman-Hollings. He had a particularly colorful comment:
Our experience with Gramm‐Rudman showed clearly that if you hoped to deal with the deficit by building a four‐sided fort, pulling up the drawbridge and going back to sleep, you were going to be disappointed. Probably the best that any mechanism can provide is to help force action and tilt the process to encourage hard choices and compromise. At its best it can become a good stone wall to your back in a gunfight.
There was further disagreement on how an enforcement mechanism should be designed. Gramm said that spending sequesters/triggers/caps were the only way to go, because involving tax increases would somehow create perverse incentives for Congress to simply let the trigger be activated. Both Irving and van de Water disagreed with Gramm's view, saying that a spending-only approach ignored the other side of the equation and would be a poor way to budget, instead offering their support for a trigger that hits both spending programs and tax expenditures. However, while Irving supports the idea that the broader the trigger, the better, van de Water would prefer to exempt low-income programs from a trigger, specifically mentioning the Corker-McCaskill spending cap as a poor enforcement mechanism.
Even though the three had some disagreements about enforcement mechanisms, they did agree on one thing: enforcement mechanisms are useful budgetary tools, but they are not substitutes for the real policy decisions necessary to get our fiscal house back in order.
CRFB has long supported debt targets and triggers. In a paper we released last week, we explained the key considerations to make when designing a new debt trigger, including whether it should be a "forcing" or "enforcing" trigger and what should be hit versus what should be exempted if the trigger is pulled. CRFB believes the best course is to enact a forcing trigger as soon as possible, perhaps as part of a debt ceiling increase, to spur action on a budget deal, followed by enactment of an enforcing trigger with any subsequent budget deal to keep the plan on track. CRFB also supports a trigger that is as broad as possible, making adjustments to every category of spending and revenues, including tax expenditures.
In an op-ed in The Hill today, CRFB co-chairs Bill Frenzel and Charlie Stenholm propose a fiscally responsible approach to raising the debt ceiling. They recommend including a comprehensive fiscal reform plan along the lines of the Fiscal Commission's proposal as part of a debt ceiling increase.
The authors note, however, that it may be unrealistic to expect such a plan to pass before action on the debt limit is needed. Frenzel and Stenholm recognize that we may need a Plan B to start getting control of future deficits while also responsibly increasing the debt limit:
So, we need a Plan B to buy some time. Over the past two years, we have worked on the Peterson-Pew Commission on Budget Reform with a team of colleagues who have headed the Office of Management and Budget, the Congressional Budget Committee and the Fed, developing a plan for statutory debt and savings targets. These targets would commit policymakers to bringing down our deficits and debt as a precursor to agreeing on the specifics of a deal. Attaching these enforceable targets to the debt ceiling would allow us to take the first step to moving the budget in the right direction immediately.
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.
From the President's recent deficit-reduction framework to policy forums on Capitol Hill, budget process reform has recently become an increasingly popular issue in the world of politics. A recent release from the Concord Coalition offers insight into this issue and analyzes the strengths and weaknesses of several budget process proposals.
Among the proposals examined in the release is Red Ink Rising, a report released in December 2009 by the Peterson-Pew Commission on Budget Reform that lays out a plan to stabilize the debt at 60 percent of GDP. The proposal establishes specific deficit targets enforced by a trigger that would require automatic spending cuts if the targets were missed. The Commission continued its work on budget process reform with a second report released in November 2010 -- Getting Back in the Black -- that built upon the Commission's earlier work by detailing a specific framework to meet those fiscal targets.
Other proposals considered by the Concord Coalition are:
- McCaskill-Corker CAP Act: Starting in 2013, this bill would gradually cap spending over a 10 year period until it reached 20.6 percent of GDP, the historical average.
- Paul Ryan's Proposal: House Budget Committee Chairman Paul Ryan's budget proposal called for a binding cap on total spending as a percentage of the economy. The House budget resolution, which was based on Chairman Ryan's proposal, would reduce spending over 10 years to 20.5 percent of GDP and then to 19.9 percent of GDP by 2021.
- President Obama's Debt Failsafe Trigger: The "debt failsafe" proposed in the President's deficit-reduction framework would require automatic spending cuts if projections of the deficit-to-GDP ratio averaged more than 2.8 percent during the second half of the decade. Social Security, Medicare, and low-income programs would be exempted from the spending cuts.
- Bipartisan Policy Center's SAVEGO Proposal: This proposal calls on Congress to set annual savings targets to reach a specific deficit reduction goal. SAVEGO would require separate annual savings targets from each of three portions of the budget -- savings from a cap on discretionary spending, savings from health care programs, and savings from other mandatory spending, reductions in tax expenditures, and other increases in revenue.
The report goes on to further explore the "mixed track record" of budget process reforms, specifically noting the importance of putting everything on the table, setting realistic and bipartisan targets, and the danger of including exemptions and loopholes. It also states that the proposals from the Peterson-Pew Commission and the Bipartisan Policy Center "represent the most complete and thoughtful alternatives with the greatest chance for success."
Emphasized throughout the report, however, is the underlying theme that process reforms cannot replace tough policy decisions.
"To be effective, a process proposal must still be accompanied by an honest discussion of the policy changes that will be necessary to comply with the targets. Budget process reform is a useful starting point, but it is no substitute for these difficult choices. Whether it is the existing budget process or a new process, deficit reduction requires elected officials to lead by saying which programs will be cut and which taxes will be raised."
Click here to read the full release.
Wedding Vows and Vows Kept – Last week the royal wedding in England between William and Kate garnered a great deal of attention on this side of the pond. Meanwhile another union seemed to blossom in this country – the pairing of a debt limit increase with some type of trigger mechanism. Now, the word that Osama Bin Laden has been killed and buried at sea puts an end to the quest for the man most responsible for the 9/11 attacks and finally fulfills a promise to bring him to justice that spanned two administrations. The news comes amid a trend where the primary focus for Americans is shifting from foreign entanglements to domestic economic concerns and confronting what the chairman of the Joint Chiefs of Staff and others have called the greatest security threat to the U.S. – the national debt. Will the new avenue for compromise and foreign policy success spawn bipartisan collaboration to address the debt?
An Arranged Marriage – The debt ceiling (read the CRFB debt limit primer) has been looking for a suitable partner for some time. Failure to increase the statutory debt limit is not an option as it would have catastrophic consequences for the economy, yet many lawmakers want to take advantage of the opportunity to address the unsustainable fiscal policies that have brought us to this point by taking concrete steps to reduce mounting federal budget deficits and national debt. [Read the CRFB paper on responsible approaches to raising the debt limit.] With a wide divide among party leaders over how to reduce the debt and with time growing short before action on the limit is required (the Department of Treasury says it can stave off a national default no later than early August), coupling a debt ceiling increase with a budget enforcement process designed to ensure that the debt is brought under control has become the prime candidate for a compromise solution. Leaders in both the House and Senate support pairing a debt limit increase with a trigger mechanism, although there is no agreement yet on exactly what the trigger would look like. The growing interest in the concept was evident in a Capitol Hill briefing on triggers convened on Thursday by the Peterson-Pew Commission on Budget Reform that attracted a packed room of congressional staffers and many others. The commission (a project of CRFB) last week released a paper answering the types of questions that policymakers are now asking about how to make a trigger work and offering recommendations on how to create an effective trigger. Furthermore, CRFB President Maya MacGuineas wrote about the subject in a Washington Post op-ed. A trigger is a worthy suitor for the debt limit increase and this is one arranged union that could work.
Ganging Up on the Debt – The hats at the royal wedding sure were…interesting. Hopefully, we soon will be able to say ‘hats off’ to the bipartisan “Gang of Six” senators who have been busy working on a comprehensive debt reduction plan. Members of the group say they are close to a deal and it could be unveiled as early as this week. The group is eying a mix of spending cuts and revenue increases. Word is the group is also discussing a trigger mechanism to accompany the plan to ensure it stays on track once enacted. Once an agreement is reached, the focus will turn to the “Gang of 64” senators who signed a letter in March calling for leadership and bipartisanship on a comprehensive deficit reduction solution. These will be the senators most likely to support the plan. Another bipartisan group of lawmakers will meet at the White House on Thursday to begin talks led by Vice President Joseph Biden aimed at finding common ground. A plan from the Gang of Six could inform those talks.
No Honeymoon for Congress – Congress is back in session this week after a spring recess that featured scores of town hall meetings where the budget received more attention than Kate’s wedding gown. Senate Majority Leader Harry Reid (D-NV) has promised to put the FY 2012 budget that the House passed just before the break to a vote on the Senate floor, where it very likely will fail. Republicans want to have a vote on the President’s budget as well, to show that it also cannot pass. Committee hearings on the budget continue and the House hopes to begin mark-ups in the Appropriations Committee on spending bills this month. House leaders are keen to have an orderly appropriations process this year that produces all 12 spending bills, in order to contrast with the recent budget failures under a Democratic House. The Senate, however, is not likely to move quickly or go along with anything the House passes. Senate Budget Committee Chair Kent Conrad (D-ND) has been waiting on the Gang of Six, of which he is a member, to produce a plan before he marks up his budget resolution.
Panetta to Pentagon – Last week the White House officially announced that CIA Director Leon Panetta will be nominated to replace Defense Secretary Robert Gates when he steps down later this year. In addition to directing U.S. military strategy in a post-Osama world he will also manage the effort to streamline the Pentagon and find significant savings in the massive Defense budget. In addition to his experience at the CIA, as a former House Budget Committee chair and OMB director (and former CRFB co-chair for that matter) Panetta is uniquely qualified to administer organizational changes in the department’s bureaucracy and budget and increase efficiency without damaging the military's missions.
Can Oil Subsidies Grease the Skids for Tax Reform? – Much was made of comments last week from House Speaker John Boehner (R-OH), even though they were walked back some soon afterwards, that he would consider eliminating some of the tax breaks for the oil and gas industry. Other prominent conservatives like House Majority Leader Eric Cantor (R-VA) and House Budget Committee Chair Paul Ryan (R-WI) have also expressed a willingness to eliminate tax subsidies like those for oil and gas in the context of a larger reform of the tax code. This is part of the growing momentum on both sides of the political aisle to eliminate and reduce tax expenditures as a part of fundamental tax reform and a comprehensive debt reduction plan. Read the CRFB paper on tax expenditures here and see more ideas for tax expenditure reform here and here.
Key Upcoming Dates
- Senate Finance Committee hearing on Budget Enforcement Mechanisms at 10 am.
- First meeting at the White House of the bipartisan talks led by Vice President Biden to seek consensus on reducing the deficit.
- Senate Homeland Security and Governmental Affairs Committee hearing on duplication in the federal government at 2:30 pm.
- April unemployment data from U.S. Department of Labor, Bureau of Labor Statistics.
- Treasury Secretary Tim Geithner says the statutory debt limit will be reached no later than May 16.
- Treasury Secretary Geithner says that the U.S. will default on its obligations by around August 2 if the statutory debt ceiling is not increased before then (revised).
The Chairmen of the Joint Chiefs of Staff, Admiral Mike Mullen, made some important statements recently regarding our national debt and defense spending (hattip to Gordon Adams over at Capital Gains and Games).
There are four main budgetary points he brings up:
- Our national debt is the largest national security threat our nation faces because we would have fewer available recourses for defense spending
- Defense needs to be on the table for fiscal readjustment, with defense health care costs exploding in recent years, eating up a larger and larger portion of the defense budget
- Defense spending has not been subject to significant scrutiny over the past several years
- We have reduced defense spending in the past
Admiral Mullen is completely correct on all of these points. Our fiscal situation requires us to act to prevent a fiscal crisis, one that would negatively effect our economy and standard of living, but would also decrease our ability to protect ourselves. We need to include defense in any fiscal plan and make sure that the defense budget we have is one that we need and can afford.
ADM. MULLEN: "...[T]he reason I talk about the debt as the single biggest threat to our national security is – it’s basically not very complex math. I mean, I think the worst situation that we are in as a country fiscally, the likelihood of the resources made available for national security requirements continue to go down is very high. This is the third time I’ve been through this. We did this in the ’70s. We did it in the ’90s. And, actually, if you look at the data going back to the ’30s, our defense budget goes up and down, and it does so on a fairly regular basis. So certainly this is not unexpected, from my point of view. What I’ve seen, though – and I’ve been in the Pentagon most of the last decade – with the increasing defense budget, which is almost double, it hasn’t forced us to make the hard trades. It hasn’t forced us to prioritize. It hasn’t forced us to do the analysis.
And it hasn’t forced us to limit ourselves and get to a point in a very turbulent world of what we’re going to do and what we’re not going to do. And so I see that on the horizon, and we need to be paying an awful lot of attention to that. I have said the defense needs to be on the table, and I’m comfortable with that. That said, I’m required to articulate our national security requirements and certainly advise the president and others, but particularly the president, about how we best can achieve them with the force that we have. And we find ourselves at a particularly difficult time for, let’s say, our modernization in our Air Force. I mean, we are running out of life in those assets that we bought in the ’80s under the Reagan administration, at a time where – I don’t have to tell you or this audience – where our national security requirements continue to challenge us."
Last week we issued an analysis of the fiscal framework that President Obama recently unveiled. We noted that, while it was a strong step in the right direction, it still fell short of the debt reduction required. Well, the Onion has stepped in to fill the hole.
Saying the nation must face the "grave realities" of its mounting debt, President Barack Obama unveiled a deficit-reduction plan Wednesday that included far-reaching spending cuts, pulling off a daring robbery of the heavily fortified Fort Knox bullion deposi-tory, and repealing Bush-era tax cuts for the wealthy.
Let's hope the White House and Congress can come up with something a little more reasonable.
Read the full article here.
At 3:15 p.m. today, as part of the New America Foundation's 2011 Retreat, Slate Group Chairman Jacob Weisberg will moderate The Moment of Truth: America's Fiscal Crisis, featuring several fiscal policy experts--including CRFB president Maya MacGuineas.
It's sure to be an interesting and informative discussion, so don't forget to check it out!
Click here to watch the live video.
Today's Washington Post features an op-ed by CRFB president Maya MacGuineas on ways to improve President Obama's debt failsafe proposal. She writes that in order to succeed, debt targets and triggers need to be "well structured and politically realistic" and lays out several suggestions to make the President's failsafe proposal more effective. She states:
"Ideally, we would attach a full budget reform framework, as the Gang of Six (a bipartisan group of senators pushing a comprehensive plan) is working on, to the debt ceiling increase. But time is short; we bump up against the debt ceiling in the coming weeks. Targets and triggers may work as a perfect bridge to the larger plan. However, they will only work if they reflect the political will to make changes, rather than a political punt, and even the best debt fail-safe mechanism needs to include some specific spending cuts upfront to help pave the way. The Gramm-Rudman budget act failed because the targets became too stringent to be realistic; the Medicare solvency trigger failed because there was never really any intent to fix the program. So while the debt fail-safe may be the perfect starting point to help buy some time, only real policy changes will get the job done."
"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.
“Trigger” has become the term du jour in the budget world as of late, particularly as it relates to the debt limit, and it doesn’t refer to shooting ourselves in the foot. On the contrary, agreement on a debt or deficit trigger could be just the thing to help us come together on raising the statutory debt ceiling and avoid facing the firing squad.
Ever since President Obama proposed a “debt failsafe” in his big fiscal policy speech earlier this month, interest has grown in the concept of a trigger mechanism that can help meet budget targets designed to put the country on a sound fiscal course. Senate Majority Leader Harry Reid (D-NV) said yesterday that legislation to increase the debt limit should be coupled with a deficit “cap” enforced by triggers. And the bipartisan Gang of Six Senators working on a comprehensive fiscal plan is also devising a trigger to ensure that debt reduction targets are met. The group may release its plan as early as next week.
Amid growing recognition that a stand-alone debt limit increase will be politically difficult with lawmakers and voters increasingly concerned about mounting national debt and clamoring for concrete steps to reduce it, momentum is building for coupling a debt ceiling increase with a trigger mechanism. The increased attention raises important questions such as: What exactly is a trigger? and How can a trigger be implemented?
Fortunately, the Peterson-Pew Commission on Budget Reform (a project of CRFB) has been studying and deliberating on the issue for more than two years. Fiscal targets and triggers figured prominently in the Commission’s November 2010 report, Getting Back in the Black, which offered a comprehensive framework for reforming the federal budget process to help the nation put its fiscal house in order. Today they shared their vast knowledge with a new briefing paper and accompanying forum.
“Peterson-Pew Fiscal Targets: Ten Issues in Designing a Debt Failsafe” answers the questions that policymakers and others are asking concerning how a trigger would work and offers recommendations for designing effective triggers. It was unveiled and discussed this morning at a standing-room-only briefing on Capitol Hill. Attendees included congressional staff, media, and other Washington movers and shakers.
After introductory remarks from CRFB Chair Bill Frenzel, Steve Redburn, project director of the Peterson-Pew Commission, provided an overview of the concept. He described three basic types of triggers. A “forcing” trigger is designed to compel policymakers to adopt specific policies to meet a set target. An “enforcing” trigger can be established as part of a comprehensive budget deal to ensure that the intended savings are attained through specific policies. And a third option involves a trigger that complements a comprehensive budget plan where specific polices achieve only a portion of the goal and the trigger kicks in to finish the job. The paper recommends adopting a forcing trigger as soon as possible and making an enforcing trigger part of a subsequent budget plan to help keep it on track. Redburn advised that triggers are most useful when, if applied, they are applied annually.
Of course, triggers are only effective if the proper fiscal targets are set. Peterson-Pew Commissioner William Hoagland noted that the targets in the Graham-Rudman-Hollings deficit control act were fixed and based on rosy economic scenarios, triggering two sequestrations of funds that were so large that Congress substantially reduced one and overrode the other. The Peterson-Pew Commission has recommended a medium-term goal of stabilizing the debt at 60 percent of GDP by the end of the decade and reducing the debt further to historical levels of below 40 percent thereafter, with corresponding annual debt targets to attain those ultimate goals. For purposes of a trigger, those debt targets should be translated into annual savings targets so that policymakers are held accountable for what they can control each year—policies they adopt—as opposed to economic outcomes. The savings targets can then be updated along the way so that they are aggressive enough to keep the country on track but not so unreasonable that they will be ignored or circumvented.
Hoagland also cautioned that a trigger based on spending cuts alone could be gamed by lawmakers via spending through the tax code. “Tax expenditures” is another term that has gained prominence recently as these tax exemptions and exclusions with little oversight or review of their cost effectiveness have grown to a cost of over $1 trillion annually in lost revenue. Legislators on both sides of the aisle have targeted them for reform. [See the CRFB paper on tax expenditures here.] The panel agreed that tax expenditures must be integrated into the budget process and included as one of the areas subject to a trigger. CRFB President Maya MacGuineas added that any spending caps must be accompanied by a “PAYGO for tax expenditures” to guard against gaming, and that allowing tax expenditures to become a spending cap loophole would set back the growing momentum for fundamental tax reform. Ms. MacGuineas recently co-authored a paper with Martin Feldstein and Daniel Feenberg about potential ways to cap individual tax expenditure benefits.
MacGuineas also counseled that while the debt ceiling must be increased without political brinksmanship, the debt limit debate provides a useful “speed bump” to prompt fiscal reform, and legislation increasing the debt limit could include budget process reform to make it more palatable. Although she said a comprehensive, multi-year fiscal plan would be the preferable route for budget reform, the compressed timeframe before the limit is reached precludes such an option, making agreement on a trigger the most viable alternative.
While the track record of previous triggers is not spectacular, the lessons learned from those past experiences can improve the prospects for future success. The key is finding the right balance between inflicting enough broad-based pain so that policymakers are motivated to avoid the trigger through sensible policies while not being so harsh that it is evaded through gimmicks or outright overridden. As Peterson-Pew Commissioner Barry Anderson said at the briefing, the best triggers are the ones that are never pulled.
The paper recommends capping the size of the automatic adjustment in any given year at no more than one percent of GDP, which would diminish any adverse effects on economic growth and reduce the likelihood that it would be subverted. It also recommends waiving any trigger in the face of severe economic circumstances or a national emergency such as a war.
The Peterson-Pew Commission recognizes that process reforms alone will not put us on the road to fiscal sustainability, but fiscal targets and triggers must be part of any comprehensive, long-term approach. Putting triggers in place now can help us avoid shooting even larger holes in our fiscal outlook and help heal our gaping debt wounds.
Yesterday, Senate Majority Leader Harry Reid (D-NV), proposed adding a "deficit cap" to forthcoming legislation to increase the debt ceiling. While the details of this deficit cap are as of yet unknown, in theory, it sounds like a mechanism similar to the "debt failsafe" that President Obama proposed within his Budget Framework. A deficit trigger would presumably require deficits to be at or below a certain level, and, if not, would require automatic spending cuts and/or additional revenue. A deficit trigger corresponding to medium-term fiscal targets is something that CRFB has advocated for. A recent Peterson-Pew Commission report, Getting Back in the Black, and a briefing paper on debt triggers and targets (released today) include similar recommendations.
Fiscal targets and their enforcing mechanisms would be a helpful part of any deficit reduction package, as they would help nudge lawmakers into action to get control of our country's finances while also keeping fiscal discipline on track. While budget process reform should only be one piece of a fiscal plan and is no substitute for policy, it can help make a good fiscal plan better. Senator Reid's deficit cap could be just one way to implement some budget reforms to ensure lawmakers get serious about debt reduction.
We are encouraged by the Senator's words and hope he will continue to flesh out this idea in the coming days.
In early 2009, lawmakers enacted an economic stimulus package to help stem the economic freefall which was shedding hundreds of thousands of jobs per month as the unemployment rate was on a quick climb towards ten percent. Regardless of the merits or size of a fiscal stimulus package, we at CRFB warned against supposedly temporary provisions lasting much longer than the stimulus dictated. Now, more than two years out, we can take a look at what has happened with some of those provisions and other stimulus measures that have been enacted since then.
Here is a list of several stimulus measures that were set to expire in 2009 (post-stimulus) and 2010:
- Making Work Pay tax credit: Since MWP, an $800 refundable tax credit (costing $116 billion over two years) created in the 2009 stimulus, was considered one of the centerpieces of President Obama's economic plan, it seemed one of the most likely provisions to be extended beyond 2010. However, political reality came into play. In negotiating the 2010 tax deal, Congressional Republicans said they would only allow MWP to continue in non-refundable form, which would have significantly cut its size. Instead, Obama dropped MWP from the deal and the two sides agreed on a payroll tax cut instead. Verdict: Expired.
- Other refundable tax credits: Making Work Pay was not the only tax credit contained in the stimulus. The 2009 stimulus contained numerous expansions of refundable credits. It increased the generosity of the Earned Income Tax Credit (EITC) for families with three or more children, significantly increased the refundability of the Child Tax Credit (CTC), and created the American Opportunity Tax Credit (AOTC) to help pay for college expenses. Together, these three credits cost $30 billion in 2009 and 2010. President Obama got these provisions extended as part of the 2010 tax deal, so they are currently set to expire at the end of 2012. Verdict: Extended.
- HIRE Act: The HIRE Act was passed last year with little fanfare, although it included targeted stimulus at a cost of $13 billion. It provided an exclusion for employers of the employer side of payroll taxes for each new employee hired for the remainder of 2010 and gave them a $1,000 credit if the employee was retained for more than a year. Although a few lawmakers expressed interest in extending the HIRE Act, it received little, if any, attention during the tax deal negotiations. Verdict: Expired
- Unemployment and COBRA benefits: Unemployment benefits were both extended and increased in the 2009 stimulus, and extended COBRA benefits were included. Since the extension only lasted through the end of 2009, lawmakers have had to extend these benefits numerous times. Initially, COBRA and UI benefits were extended in concert. However, in the spring and summer of last year, Congress had trouble passing an extension of many ARRA provisions, including these two. Provisions were repeatedly stripped from the extension bill until only UI benefits passed in July. Since then, UI benefits were extended once more in the tax deal through the end of 2011, but extended COBRA benefits have not been revived. The total for all of these extensions after the stimulus comes to about $125 billion. Verdict: Mostly extended
- Homebuyer tax credit: Yes, the $8,000 first-time homebuyer tax credit predates the 2009 stimulus (passed in July of 2008), but it was extended through November 2009 under the stimulus package. In November 2009, Congress passed an extension of the homebuyer tax credit through April 2010 and expanded its eligibility criteria at a cost of $13 billion. Potential homebuyers rejoiced, and many economists and policy wonks sighed; however, the credit did expire as scheduled thereafter. Verdict: Extended once
- State aid: In order to help cash-strapped states through the recession, the 2009 stimulus created the State Fiscal Stabilization Fund to avoid sharp cutbacks in state services (especially education) and increased the portion of Medicaid the federal government would pay. Combined, these two provisions cost almost $150 billion. Democrats in Congress attempted to extend state aid for most of 2010 in comprehensive extender bills (like the one mentioned above) until they finally succeeded in passing a stand-alone measure in August that created an Education Jobs Fund and extended increased Medicaid matching through June 2011. While the Education Jobs Fund is more narrow than the SFSF, we'll still count it as an extension. Verdict: Extended
- Build America Bonds: As a way to help unfreeze municipal bond markets, ARRA included Build America Bonds, which subsidized 35 percent of the borrowing costs. The purpose of BABs was to help state and local governments finance transportation projects. Through the end of 2010, about $180 billion of BABs were issued. Because of the widespread popularity of the program, Democrats also attempted to extend it in the aforementioned stimulus extender bills and President Obama proposed to make it permanent --albeit with a reduced subsidy--in his FY 2012 budget. Obama's proposal would have cost $60 billion. However, neither proposal has been passed yet. Verdict: Expired
- Cash for Clunkers: Cash for Clunkers was created in June 2009 to give a tax credit to car owners who traded in their vehicles for more fuel efficient ones. After the program opened in late July, it became swamped by unexpectedly high demand within a few weeks. As a result, Congress basically "extended" the life of the program by pumping in $2 billion in early August. This new money lasted Cash for Clunkers until late August, when the program expired. Verdict: Expired
The combined cost of the extensions above comes to about $225 billion (only about $100 billion if you exclude UI extensions), while the expired provisions would have cost an additional $75 billion had they been extended for a year.
If you look at ten-year cost estimates for extensions of the two provisions we could have reasonably expected to be made permanent--Making Work Pay and the refundable credits--they would come to $570 billion and $160 billion, respectively (including the cost of the extension of the refundable credits in the tax deal).
As for 2011, there are a few expiring provisions to look at.
- State aid: As we mentioned earlier, increased Medicaid matching will expire at the end of June, although it seems unlikely that it will be passed. Presumably, the Education Jobs Fund could be given more money, which would act as an extension, but that also seems unlikely. States are already putting together their budgets assuming none of this federal money will be there (contrary to what they had done in the past few years).
- Payroll tax cut: Although most of the tax deal is set to expire at the end of 2012, the payroll tax cut will be up for extension a year earlier. For a provision that made such a stir in December, it has gotten little mention since then. None of the recent fiscal plans that have been put out have proposed extending it. However, if, say, the unemployment rate stays flat or even rises by the end of this year, lawmakers may look to the payroll tax cut as a quick and easy way to stimulate the economy.
- Unemployment benefits: Here is another provision from the tax deal that only got a one year lifespan. Extension of UI benefits is sure to be a contentious issue at the end of the year. The unemployment rate is likely to still be in the eight to nine percent range, so pressure to extend the benefits will be enormous (and there is significant historical precedent for doing so when the unemployment rate is that high). However, Republicans in Congress have opposed unpaid-for UI benefit extensions in the past year, making life difficult for those who advocated for them. It's unclear how the Republicans will respond with control of one house of Congress, though. This may be the centerpiece of another end-of-the-year deal.
Looking at the past and future, it seems likely that Congress and President Obama aren't going to do too bad in terms of extensions. While few provisions from the stimulus have the prospect of being made permanent, we can reasonably expect certain extenders to continue.
To see all stimulus provisions (extended or otherwise) enacted since the start of the recession, check out Stimulus.org.
UPDATE: Gordon Adams over on CG&G argues that Panetta is the right man for the job for three reasons: he knows budgets, he's a decisive administrator, and he's bipartisan. Overall, he thinks it's a great appointment.
In what the Washington Post called "a long-anticipated shakeup" of President Obama's national security team, several news outlets have reported that CIA director Leon Panetta is expected to become the next Secretary of Defense, with Gen. David H. Petraeus assuming the role of CIA director from his current position as the top U.S. commander in Afghanistan.
Leon Panetta -- a former chairman of CRFB who left for the Administration more than two years ago -- has many years of experience working in Washington, and especially with budgets. A member of Congress for almost 20 years, he served as Chairman of the House Budget Committee from 1989 to 1993, then as head of the Office of Management and Budget (OMB) and chief of staff under President Bill Clinton, where he played a major role in the balanced budget negotiations of the 1990s.
We hope Panetta's move to the Pentagon is a sign that the Administration is serious about controlling costs within the Defense budget -- they have certainly picked someone with the necessary knowledge and experience.
Congratulations, Mr. Panetta. We wish you all the best in your next position!
Megan McArdle at The Atlantic writes about what happens if China stops buying U.S. Treasury bonds. She points out that a fiscal crisis is unlikely to be foreshadowed by signs such as a gradual rise in interest rates or other countries merely slowing down lending. Rather, citing the studies of Carmen Reinhart, she argues that changes would be much more precipitous.
According to economist Carmen Reinhart, who has made an intensive study of crises, there's no reason to expect the change to be orderly and gradual. She says the lesson of history is pretty unequivocal: interest rates are not a good predictor of who is about to tip into a crisis. People are willing to lend at decent rates, until suddenly they're barely willing to lend at all.
When you look at how much of our debt comes due by the end of 2012, it's easy to see how fast higher interest rates could turn into a real problem for us. To be sure, we're no Japan--but that's not necessarily a happy thought, because Japan finances something like 95% of its debt from its pool of thrifty (and nationalistic) savers. Their stock of lenders probably isn't going anywhere. Ours might.
Read the full post here.
In Sunday's New York Times, CRFB board member David Stockman wrote an op-ed discussing the recent budget proposals from President Obama and House Budget Committee Chairman Paul Ryan and how "the resulting squabble is not only deepening the fiscal stalemate, but also bringing us dangerously close to class war." He writes,
"So the Ryan plan worsens our trillion-dollar structural deficit and the Obama plan amounts to small potatoes, at best. Worse, we are about to descend into class war because the Obama plan picks on the rich when it should be pushing tax increases for all, while the Ryan plan attacks the poor when it should be addressing middle-class entitlements and defense."
Click here to read the full commentary.
"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.
After the Bunny – Easter has come and gone. Chocolate-induced comas are being overcome and many -- though not Congress -- return this week from spring break. Are there still hidden Easter eggs waiting to be found? The debt ceiling and negotiations over a debt reduction deal will continue to be top items of interest.
President Makes the Case for His Plan – The Easter Bunny wasn’t the only one making the rounds last week. President Obama hit the road promoting his debt reduction proposal, convening town halls in Northern Virginia, Palo Alto, California and Reno, Nevada. CRFB took a deeper look at the President’s plan last week in a paper. We found that although the framework represents a step in the right direction, it falls short of the debt reduction proposed by the President’s Fiscal Commission.
Just Biden Time? – Deficit fighting “Gangs of Six” seem to be multiplying like bunnies now. The lawmakers have been chosen and a date has been set for the first meeting of the bipartisan, bicameral group called by the President to negotiate a debt reduction agreement, but it remains unclear if the new gang led by Vice President Joseph Biden will have any traction. What was first proposed by President Obama as a 16-member group will only have six members – Rep. Chris Van Hollen (D-MD), Rep. James Clyburn (D-SC), Rep. Eric Cantor (R-VA), Sen. Max Baucus (D-MT), Sen. Daniel Inouye (D-HI), and Sen. Jon Kyl (R-AZ). The group will have its first meeting on May 5. Meanwhile, the original “Gang of Six” senators continues its work on a bipartisan compromise, with a deal possible soon.
Trigger Talk Gets Bigger – The idea of a trigger mechanism to help reduce the debt -- and possibly coupling such a trigger with a debt limit increase -- continues to grow. The Peterson-Pew Commission on Budget Reform illustrated how such a mechanism can be implemented and a recent CRFB brief offered ideas on how the “debt failsafe” proposed by the President can be improved. A forthcoming paper will provide more detailed recommendations. And see the CRFB paper on responsibly raising the debt ceiling.
Key Upcoming Dates
- New home sales for March.
- Consumer Confidence Index for April from The Conference Board.
- Advance estimate for Gross Domestic Product for the first quarter of 2011 from the Department of Commerce.
- Consumer Sentiment Index for April (Thomson Reuters/University of Michigan).
- Treasury Secretary Tim Geithner says the statutory debt limit will be reached no later than May 16.
- Treasury Secretary Geithner says that the U.S. will default on its obligations around July 8 if the statutory debt ceiling is not increased before then.
Yesterday, CBO released a report on the effect of automatic stabilizers on the deficit, showing that in recent years, they have added hundreds of billions to the deficit. This report follows a report they released last year on the same subject.
Automatic stabilizers broadly refer to elements of the budget that work to increase deficits during downturns and reduce them during times of strong economic growth. In a recession (for example), programs like unemployment insurance, food stamps, and TANF see larger enrollment as employment and wages stagnate or fall, driving up outlays for these programs. A downturn also decreases the amount of payroll and income taxes collected by the government as wage and employment growth decline. Automatic stabilizers work as automatic countercylical fiscal policy.
As one can imagine, automatic stabilizers have contributed significantly to recent deficits: $315 billion in 2009, $363 billion in 2010, and $332 billion projected in 2011.
CBO's data show, not surprisingly, that automatic stabilizers track the output gap very closely, which we have compiled into the graph below. (Note: positive numbers for automatic stabilizers mean that they are reducing the deficit and vice versa.)
CBO's data also show that because the output gap has generally been greater in magnitude on the negative side than on the positive side, automatic stabilizers have a tendency to add more to deficits during downturns than they reduce them when the economy is above its potential over the longer term. More precisely, over the past fifty years, they have added about $910 billion (in nominal dollars) to the deficit. However, this number masks the fact that they will add another $1 trillion over just the next five years (demonstrating the depth of the recession and the long road back to a full recovery). But as the economy strengthens, the net effect of automatic stabilizers will be more muted, nearing zero by 2016.
Yesterday, CRFB released an analysis of President Obama's new deficit reduction framework meant to save $4 trillion dollars over 12 years. Using CBO's economic and technical assumptions and looking at a standard 10-year period, we find the plan would save $2.5 trillion and would result in a slightly increasing debt-to-GDP ratio toward the end of the decade.
Overall, this would be a substantial improvement from the President's February budget -- and a huge positive step forward. But it would still save substantially less than either the Fiscal Commission plan or the House Republican budget.
|President's Framework^||President's Budget
||House Budget||Fiscal Commission|
|10-Year Savings (billions)|
|From Adjusted Baseline*||$2,480||$0||$4,020||$4,060**|
|From Current Law||-$250||-$2,730||$1,290||$1,420|
|2021 Debt (%GDP)|
|2021 Deficit (% GDP)|
Note: Negative numbers represent costs as opposed to savings.
*Adjusted baseline assumes Congressional Budget Office estimates to extend tax cuts for all but top earners, declining war costs, and annual doc fixes.
**Excludes savings from assuming lower war costs than in the adjusted baseline.
# As re-estimated by the Congressional Budget Office.
^ Debt Failsafe is not activated.
Within the President's Framework, however, is a "Debt Failsafe" not accounted for in our analysis. This failsafe would aim to ensure a declining debt-to-GDP ratio (or a 2.75 percent of GDP average deficit) in the second half of the decade, through the threat of an across the board cut in certain spending and tax expenditures. Social Security, Medicare benefits, and programs for the poor would be exempted under the President's Debt Failsafe.
We strongly support a failsafe like this, in fact the Peterson-Pew Commission has been pushing a similar mechanism for some time. In a short analysis released on Monday, we proposed several ways that the President could improve his debt failsafe. As we wrote:
"It is encouraging that the President has embraced the idea of debt targets and a trigger....We believe that some sort of automatic, fiscal straitjacket will be helpful in getting Congress and the White House to address the nation’s fiscal problems."
In the case of the President's Framework, such a failsafe will do a tremendous amount to lock in the President's savings. It appears the Administration is projecting that debt would be at 70 percent of GDP in 2021 under the President's Framework, while our re-estimate show it at 77 percent of GDP. This is where the failsafe comes in handy. If the Administration is correct in its debt projections, the failsafe will not be triggered, and the debt would fall toward more sustainable levels. If our CBO-based re-estimates prove to be correct, however, the failsafe would force policymakers to enact further reforms -- or else face across the board cuts.
As an illustrative example, we assume the failsafe limits annual deficits to no higher than 2.75 percent of GDP (the Administration does not specify exactly how the failsafe would actually work, just that it would stabilize and reduce the debt and keep average deficits below 2.8 percent of GDP per year). Under this scenario, debt would be on a stable to declining path after 2015, falling below 75 percent of GDP. The failsafe would generate about $450 billion of additional deficit reduction by 2021. As a result, the President's Framework would genreate over $2.9 trillion in total deficit reduction over ten years (as opposed to nearly $2.5 trillion without the trigger). Moreover, hopefully the debt would be even lower as the failsafe would force policymakers to enact sensible deficit reduction measures.
Overall, the President's Debt Failsafe could be an excellent budgetary tool to help put and keep the country on a firm fiscal path -- though we believe it should be strengthened. For instance, we believe the failsafe should:
- Be matched with more aggressive savings and debt targets, such as stabilizing the debt by the end of the decade at or below 60% of GDP;
- Include annual savings targets that put the debt on a glide path to meet the medium-term debt target;
- Begin immediately with an annual savings target in place for FY 2012 and each of the subsequent years this decade;
- Include a broader base of all spending programs as well as tax expenditures, to provide added incentives to put in place the policies to avoid triggering the failsafe.
Such a failsafe would be a welcome addition to any deficit reduction plan and we are pleased the President recommended such a mechanism as part of his proposal.