The Bottom Line
To continue shedding light on the details of the Gang of Six proposal, below we provide a clear and concise overview of how the Gang of Six's proposal would wrestle control of future debt from its current course.
The Gang's plan is a two part process: enact $500 billion in savings now as a downpayment on future deficit reduction, and then instruct the relevant committees in Congress to recommend additional savings, with, at times, clear instructions and conditions for those additional savings.
The downpayment would enact discretionary caps through 2015, saving about $500 billion over that period with a firewall between security and non-security spending to ensure that savings come from all areas of the discretionary budget. Although the specific levels have not been made public, the levels are presumably similar to the Fiscal Commission's updated estimates given that the security savings over ten years directly match those from the Fiscal Commission (see the Gang's charts here). The caps only go through 2015, but the Budget Committee is charged with extending the caps and enforcement mechanisms through 2021.
The Gang's discretionary caps appear lower than the Fiscal Commission's because, as we have noted before, many of the discretionary cuts have already been put in motion--from downward economic projections and enacted discretionary cuts--and are now part of the baseline. The Gang's plan would lock these savings in with enforceable caps.
Also included in the downpayment are a minimum benefit for Social Security, using the more accurate chained CPI for all inflation-indexed programs, and repealing the CLASS Act, among other smaller changes.
Getting the Rest of the Savings
To make the process of finding savings for deficit reduction more open and transparent--recognizing the reality that big reforms take time and deserve expert attention--the proposal would instruct several committees within Congress to find specified savings levels. Presumably over a few months, these committees would then report back to the Budget Committee where all the recommendations would be assembled into a larger package for lawmakers to vote on. Following this vote, lawmakers would then be required to enact Social Security reform that ensures 75-year solvency for the program.
Some critics have commented that there is a dearth of specificity in the Gang's proposal, and that it is unclear how lawmakers could achieve these targets. However, the Committee targets are based largely on the recommendations of the Fiscal Commission. Of course, this doesn't mean that lawmakers need to agree to the same policies as were proposed by the Fiscal Commission -- though some Committees do have specific instructions, there is a fair amount of wiggle room in terms of which policies to propose.
That said, the Fiscal Commission plan shows that all the targets are fully achievable. As you can see below, enacting the Fiscal Commission recommendations would do enough to achieve the targets in every area except for health care -- where there are plenty of other options out there to strengthen the Commission's proposal. Additional health savings ideas from Senators Lieberman and Coburn, proposals from MedPAC, among many others could be used to achieve the Gang's target.
The table below shows some of the Committee targets in bold, with the Commission recommendations that would fall under those targets. Note that in addition to what is below, the Gang's proposal calls for the Budget Committee to extend discretionary caps through 2021, the Finance Committee to enact Social Security reform, and the implementation of a number of procedural changes.
|Committee||Targets and Illustrative Savings
|Finance (Taxes)||$1,133 billion|
|Comprehensive reform (Eliminate and reduce tax expenditures and marginal rates)||$1,000 billion|
|Revenues for Highway Trust Fund||$133 billion|
|Finance (Health)||$500 billion|
|Reform SGR||$36 billion|
|Require Medicare drug rebates for dual eligibles in Part D||$57 billion|
|Reduce spending on graduate medical education||$70 billion|
Expand Medicare cost-sharing, restrict Medigap coverage, and crate catastrophic coverage
|Restrict Medicaid state gaming||$51 billion|
|Other health savings||$51 billion|
|Health savings beyond the Commission recommendations||$108 billion|
|Health, Education, Labor, and Pensions (HELP)||$70 billion|
|Eliminate in-school interest subsidies for student loans||$64 billion|
|Reform the Pension Benefit Guaranty Corporation (PBGC)||$10 billion|
|Armed Services||$80 billion|
|Reform TRICARE for Life||$43 billion|
|Reform military retirement||$0 to $93 billion*|
|Homeland Security & Government Affairs||$65 billion|
|Reform federal civilian retirement||$0 to $93 billion*|
|Pilot Premium Support through Federal Employee Health Benefit (FEHB)||$22 billion|
|Reduce farm subsidies||$12 billion|
|Enact tort reform||$20 billion|
|Extend/expand auction authority, enact spectrum fees, and other savings||>$10 billion|
|Sell or impose fees on SEPA and TVA, end certain abandoned mine payments, restructure power marketing administration, and other savings||>$10 billion|
*The Fiscal Commission called for $93 billion in total federal civilian and military retirement system savings but was not specific on how the money would be allocated.
As part of an initiative called Do We Have a Deal Yet?, 115 college student body presidents from over 40 states have sent a letter to President Obama and Congressional leaders, calling for a balanced and bipartisan solution to the debt ceiling and our longer-term debt problem.
The non-partisan initiative started just last week in reaction to the gridlock that has gripped Washington (though we hope that has been lifted some by the Gang of Six plan). In addition, they support the Gang's plan as a "realistic framework from which to work."
Getting college students involved on this issue is important, since ultimately they will be the ones most affected by our action or inaction on the debt. We especially like the quote from Kaveh Sadeghian of the College of William and Mary, who appeared on CNN: "Our leaders are used to kicking the can down the road. Well, we’re that can, and we’re here to kick back."
Former acting director of CBO and CRFB board member Barry Anderson appeared on Bloomberg TV today, where he explained that he sees "good things" in the Gang of Six proposal. Anderson voiced optimism that we seem to be making "positive steps that are getting closer to a longer term big deal, and that is very positive news." Asked about whether a short term deal to buy time to work out deficit reduction would be a good move, Anderson explained that a two-step process like that might work well:
[I]t may well take two months or something in that nature to draft all the legislation, submit it to the Congress and have both the houses approve it and the president sign it. But that is not abnormal, and I think with that positive view of where we're going, to get a better idea of sustainability in our debt, I think that the markets and the rating agencies would welcome it with open arms.
In a blog earlier today, we endorsed a very short-term debt ceiling increase if it allowed time for the Gang of Six plan to be passed. We floated this basic model a while back when we said that lawmakers should avoid any long-term debt limit increases without concrete steps on controlling our debt. Considering there is less than two weeks until the predicted default date for the U.S., a small increase in the debt ceiling may be necessary to buy time for any piece of deficit reduction legislation. So, we decided to look historically at how many times deficit-reduction or budget agreements had been preceded by short-term debt ceiling increases.
Since 1940, there have been 37 short-term debt ceiling increases, which we define as an increase that lasts less than six months. Of these 37, 14 have preceded budget agreements or budget-related pieces of legislation, mostly in the mid 80s through the early 90s. The first case is the Balanced Budget and Emergency Deficit Control Act of 1985 (commonly known as Gramm-Rudman-Hollings). That piece of legislation required a debt ceiling increase one month in advance before a longer-term debt increase passed with the final bill. Other lesser-known budget bills in the 1980s required short-term increases prior to passage, such as the budget acts of 1986 and 1989 (passed through reconciliation) and the reauthorization of Gramm-Rudman-Hollings in 1987.
Examples from the 1990s can be found in our most recent debt ceiling paper. The 1990 budget deal required numerous short-term debt limit increases to stave off default while negotiations of the final package were going on. In total, six short-term increases were passed prior to the final package being agreed on. In addition, the deficit reduction package in 1993 required an increase that lasted four months prior to its passage. The final short-term increase connected with a budget agreement was the December 2009 increase, which preceded the February 2010 long-term increase that included statutory PAYGO rules and the creation of the Fiscal Commission.
|Historical Examples of Short-Term Debt Limit Increases|
|Budget Bill||Number of Short-Term Increases Passed|
|Stat. PAYGO and Fiscal Commission (2010)||One|
As we said earlier, lack of time is not an excuse for failing to act. The Gang of Six plan or a similar one can, and should, be put into place in accordance with an increase in the debt ceiling.
Gang of Six Unveils Plan – The bipartisan Gang of Six senators that had been left for dead when one of its members left the group earlier this year quickly sprang back to life on Tuesday when Sen. Tom Coburn (R-OK) rejoined the group and it unveiled its long-awaited plan to colleagues. The plan has been well received on both sides of the Senate aisle and the White House. Members of the Gang are in the process of briefing their colleagues in the House. The plan offers a path forward in reducing the deficit by about $3.7 trillion over ten years with sensible changes to all areas of the federal budget. The Gang has rejuvenated hopes that a comprehensive fiscal plan can be achieved along with a debt limit increase. Read CRFB’s statement on the Gang of Six plan and our thoughts on what needs to come out of the debt ceiling talks.
House Votes for Cut, Cap and Balance – The House late Tuesday passed the “Cut, Cap and Balance” bill on a largely party-line 234-190 vote. Republicans hailed the measure as the best approach to reducing the national debt, while Democrats feared it would result in massive cuts to important programs. The legislation would increase the debt limit by $2.4 trillion in exchange for significant cuts in FY 2012 federal spending, capping spending as a percentage of the economy for ten years, and a balanced budget amendment. The Senate will vote on the bill Friday or over the weekend, but it is not expected at all to pass, and President Obama has promised to veto it if it somehow does. Congress may also hold votes on balanced budget amendments in the next few days. Budget process tools do have an important role to play in reducing the deficit, and the Peterson-Pew Commission on Budget Reform has offered a blueprint in Getting Back in the Black. The Commission has also provided a Fiscal Toolbox that summarizes and compares fiscal tools like spending caps, balanced budget amendments and debt triggers along with a one-stop resource on the topic. However, with time running short, the focus right now should be on agreeing on a comprehensive fiscal plan and then discussing budget process reforms to best implement it.
Senate Leaders Finalizing Fallback Plan – Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) say they are close to completing their “Plan B” option that would allow the debt limit to be increased in three installments. One of the Gang of Six members, Sen. Mark Warner (D-VA), is meeting with Reid to discuss the Gang’s plan and how possibly parts of it could be incorporated into the Reid-McConnell approach.
No Limit to Talks on Debt Limit – Negotiations continue towards a deal to raise the debt limit while reducing the deficit. President Obama meets separately today with congressional leaders from both parties. Earlier today Obama said that he would be willing to accept a short-term debt limit increase if both parties had agreed to a broader deficit reduction deal that required more time to enact.
Students Become Teachers – Over 100 university student body presidents have signed on to a letter to leaders in Washington asking them to agree on a bipartisan approach that raises the debt limit and reduces the deficit. The group will publicly release the letter on Thursday at the National Press Club.
More Plans Added to the Mix – In addition to the Gang of Six proposal, budget plans also have been presented in recent days by Senate Budget Committee Chair Kent Conrad (D-ND) and Senator Coburn. And today, CRFB board member and Comeback America Initiative founder David Walker released a plan. You can easily compare all the proposals out there using CRFB’s comparison tool.
“I don’t want to do anything to jeopardize the enthusiasm for the Gang of Six, but I am the one who runs the Senate and I understand what the rules of the Senate are... Remember, we have only 13 days."
According to Senator Reid, CBO will need at least two weeks to score the Gang's proposal. We share the commitment to making sure the debt ceiling is lifted in a timely and responsible way. The truth is, though, putting this framework together is not all that complicated.
The proposal outlined by the Gang of Six is essentially composed of three elements:
- A straightforward down-payment of immediate savings.
- Instructions to congressional committees to report legislation achieving specified savings targets and policy objectives.
- A process for consideration of implementing legislation with strong enforcement mechanisms.
The Gang has been working on this proposal for many months, and significant parts of it are based on or similar to current or past legislative proposals and existing procedures.
While it is true that there are details that may still require careful thought and consideration as they are fleshed out into legislative language, the basic components of each element are relatively straightforward and to a large extent can be drafted by incorporating or building on existing proposals and procedures. The downpayment consists mainly of provisions that have been proposed before, while the process -- instructions to committees -- resembles the reconciliation instructions that can be included in a budget resolution under the regular budget process (with some innovations). But because much of what the Gang proposes is instructions, the arduous task of drafting and scoring an entire $4 trillion proposal is handed over to the committees and deferred for several months.
In terms of scoring, there is very little in the legislation which actually requires a CBO score. The downpayment consists mainly of a repeal of the CLASS Act (which CBO has already scored as costing $86 billion), a move to the chained CPI (which has also been scored by CBO numerous times), and discretionary spending caps which can be estimated easily through a simple CBO formula that converts budget authority into outlays.
The rest of the legislation is largely instructions to committees with (enforceable) savings targets. If policymakers need our help estimating the savings from this part, we are happy to lend a hand. Requiring the Agriculture Committee to find $11 billion in savings will save $11 billion. Requiring the HELP Committee to find $70 billion in savings will reduce the deficit by $70 billion. And so on. If legislators want an understanding of what the savings targets would mean in terms of policy changes, they can look to the Fiscal Commission report. The savings targets in the Gang of Six are broadly consistent with the savings from the policies contained in the Commission report. While the Gang of Six proposal doesn’t require committees to adopt the exact proposals put forward by the Commission, the Commission report demonstrates that the savings targets are realistic and provide a guide as to how they could be achieved.
We think that even if these instructions were negotiated to different levels, from $11 billion to $15 billion, and $70 billion to $80 billion, say, we could run the new numbers through our complex model to estimate the potential savings. (Yup, done, $15 billion and $80 billion.)
So if the only real problem is writing this into law and scoring it, this is not much of a problem at all.
The Gang of Six proposal recognizes that big reform takes time and requires expert attention. Rather than dictate precisely where deficit reduction should come from, therefore, the package asks the committees of jurisdiction to work out the exact details. Instead of a few insiders coming up with a fait accompli behind closed doors with little input from the outside, the Gang approach would facilitate a transparent process where congressional committees would devise deficit savings through an open, but not open-ended, process allowing input from all sectors. The committees would have plenty of ideas to work from given the Fiscal Commission and other proposals (check out CRFB's interactive comparison grid to see all the plans). The Gang approach provides a framework for ensuring that these decisions are made in a focused and expedited manner.
If, however, there is a desire to have an agreement on the policy details up front instead of directing committees to develop savings, this would be one of those moments where we could lift the debt ceiling for a short amount of time while negotiators work out the details, as has been done in the past. The ticking clock is no reason to give up on the 'Grand Bargain' that would actually fix our budget problems.
We have an incredible opportunity here that we should not miss. Now's not the time for excuses or delays, it’s the time for action.
Today, the Comeback America Initiative (CAI), a non-partisan organization that promotes discussion around fiscal solutions, released their "Restoring Fiscal Sanity" Report, a plan to bring debt down to sustainable levels. At the launch event today, CRFB board member and former U.S. Comptroller General David Walker presented the report’s two fiscal frameworks which provide policymakers with specific reforms to avoid a debt crisis and encourage job growth.
The first approach and preferred approach, the Preemptive Framework, outlines a proactive plan to address our fiscal challenges before a debt crisis occurs, making gradual changes now to avoid a fiscal crisis or much larger deficit reduction later on. The Preemptive Framework would bring the debt down to 63 percent of GDP by 2021.
The second Framework, the Reactive Framework, specifies what could be done in the event that lawmakers fail to act on time to curb future debt or to a sufficient extent. In this Framework, which is intended to act as an illustration of what lawmakers might have to do in such an event, CAI calls for deeper spending cuts and tax increases under a much faster timeframe. Under the Reactive Framework, debt would fall to about 51 percent of GDP by 2021, given that lawmakers would have to act much more dramatically to restore markets’ faith in the credit worthiness of the U.S.
Here are some of the specific recommendations under the Preemptive Framework:
- Switch all inflation-indexed programs to a chained CPI
- Impose a budget cap on all major spending categories except Social Security and interest on federal debt
- Make Social Security solvent with reforms that include indexing yearly COLAs to the chained CPI, increasing the normal and early retirement ages by two years, and reducing benefits for high-earners
- Save $1 trillion in defense by reducing DoD overhead by at least 25 percent and requiring the department to implement the acquisition and contracting reforms recommended by the GAO
- Make a $500 billion investment in infrastructure and energy
- Phase out the Affordable Care Act by 2020 and replace it with universal preventative and catastrophic coverage, increase cost-sharing in Medicare, and negotiate drug prices in all health programs
- Reform the tax code to reduce the maximum individual and corporate rates to no more than 25 percent and reduce many tax expenditures, while allowing the 2001/2003/2010 tax cuts to expire
- Institute a 5 percent consumption tax if needed
In addition to presenting the highlights of the two plans at the launch event, Mr. Walker also spoke about the recent proliferation of pledges to special interest groups. He believes that politicians from both ends of the political spectrum should rescind and reject all pledges and be willing to compromise. As Walker said, "Never say never."
We commend CAI for proposing their two-pronged plan and furthering discussion about what needs to be done to avoid a debt crisis. Hopefully, the plan can inject additional ideas into the current debate so that we can avoid experiencing a fiscal crisis and having to enact some of the larger, more immediate spending and tax changes illustrated in the Reactive Framework.
As CRFB has noted many times before, it is also best to make changes gradually, well in advance, and on our own terms. The CAI plan shows just how that is truly the case.
The Gang of Six has been working on a fiscal plan for months now, and it appears that they are now ready to step into the debt debate in the eleventh hour. More positively, it looks like they may have a wide swath of support in the Senate.
Just this morning, the Gang unveiled its proposal to put the debt on a sustainable path to a group of 40 to 50 Senators. There, Sen. Tom Coburn (R-OK), just a day after releasing his budget plan, announced that he was back with the group. The reaction from the meeting has been very positive, with indications that the Gang of Six plan could pass the Senate. The Washington Post reported:
"President Obama on Tuesday praised a new bipartisan plan emerging in the Senate, calling it 'broadly consistent' with the White House’s approach to raising the debt limit and describing it as a 'very significant step.'
'We’re in the same playing field,' he said, speaking from the White House.
The ambitious plan to slice $3.7 trillion from the federal budget over the next decade was gaining momentum in the Senate on Tuesday, after more than 40 Republicans and Democrats attended a morning briefing on the proposal.
The plan, drafted by a bipartisan group of senators known as the “Gang of Six,” has been in the works for months. After struggling to reach consensus and apparently disbanding last week, the group now says it’s nearing agreement on a proposal, which could offer an alternative strategy for pushing an increase in the debt limit through Congress before the Aug. 2 deadline.
'We’ve gone from a Gang of Six to a mob of 50,' exulted Sen. Joe Manchin (D-W. Va.), as he emerged from the meeting. The proposal, Manchin said, 'shows great promise.'
'I will support it. It is a fair compromise,” added Sen. Kay Bailey Hutchison (R-Tex.). 'This is a way forward where we can do the work that we have come here to do.'
The details of the proposal are unclear so far, but the Gang has based its work off of the President's Fiscal Commission, which capped both security and non-security discretionary spending, reduced health and other mandatory spending, made Social Security sustainably solvent, and reformed the tax code to dramatically reduce rates, broaden the tax base, and make the code fairer and more efficient. The Gang's plan has been reported to save between $3.7 to $4.7 trillion depending on which set of projections it is compared to.
We are very encouraged by the support the Gang of Six seems to have in the Senate. CRFB president Maya MacGuineas said in a statement:
"If enough lawmakers are willing to stepup to the plate along with the Gang, it would renew our chances of getting a 'grand bargain' sufficient to reassure markets that we can put our fiscal house in order and to reassure the public that Washingon is still fit to govern. This is how Washington is supposed to work -- let's hope it does."
The Gang represents a real opportunity for a major bipartisan plan that sufficiently deals with our rising debt. If there is to be a grand bargain, it seems likely they will be the foundation for it given that they have been negotiating this proposal for months and know the ins and outs of where lawmakers can find consensus. Fiscal Commission co-chairs Erskine Bowles and Alan Simpson agree:
"[B]eyond the policy – good, balanced, bipartisan policy – today the Gang of Six offers us something more: hope. Hope that there is indeed an arena for bipartisan compromise on this crippling debt and these endless deficits. Hope that in fact Washington is not broken. Hope that America can continue to be great – something that won’t be possible if we go broke. Hope that a crisis can be averted and our children and grandchildren will continue to have the same opportunities and bright future we had."
If you are following the machinations over raising the nation's debt limit, you know that both political parties expect much of the progress on the budget to be delayed until at least 2013—after the next major election. Not one compromise on the table has even come close to addressing the nation's deficit issues head on. The big question is whether markets and the public will allow our elected officials to flounder around until 2013. Even if politicians can't agree on adequate benefit cuts and tax increases to bring about a sustainable budget before then, their bigger mistake would be to avoid putting in place a process to make budgeting far more rational than it has been.
One crying need is to increase transparency and force more accountability on both the president and Congress. Our budget talks break down for lots of reasons, but one concerns how hard it is for our leaders to get on the same page and admit what this budget is doing to our economy. Getting there means considering what rule changes are needed and making them into laws so future elected officials have no choice but to budget more rationally. And that work must start now—not in 2013.
For example, for any future budget Congress could require any or all of the following:
- The president must submit a budget that is balanced over an economic cycle no longer than eight years. If the Congressional Budget Office finds that the president's submitted budget violates this rule, the budget would formally be returned to him on grounds that it fails to meet his responsibilities to Congress;
- Any bill that increase the deficit (and any table that reports on the distribution of gains for those who get the additional spending or tax cuts) must formally make clear that the accounts are balanced through commensurate obligations on future taxpayers;
- All bills that likely increases the long-term deficit —not just over 5 or 10 years— must be "scored" that way by the Congressional Budget Office (perhaps without full quantitative detail after 10 years), so it's easier for Congress to subject such bills to special limitations on enactment;
- In their initial presentations of any proposed or adopted budget, the president (through the Office of Management and Budget) and Congress (through the Congressional Budget Office) should list tax expenditures next to direct spending when categorizing the budget. That way, for instance, all housing subsidies, whether direct spending or tax subsidies, would be reported in one place;
- Total health spending should be reported in the budget in one place, along with the effective tax rate on a tax base such as adjusted gross income that would be required to finance that spending annually without borrowing; and, my favorite,
- The budget changes proposed by the president and passed by Congress would be reported first as year-to-year differences in spending and taxes—rather than the current method, which implies that Congress is responsible merely for new legislation and not for past legislative changes that it passively allowed to be implemented under its watch.
My point here isn't to defend these particular changes or detail their implications. Nor is my list comprehensive or tested for support by Congress. In this short space, I simply want to suggest that progress in 2013 requires preparation now for more than grand bargaining sessions replete with triumphant winners and sore losers.
None of the rules would force any particular action. But each would add considerably to transparency and accountability. Many echo bipartisan suggestions from the Committee for a Responsible Federal Budget (which—full disclosure here—I helped draft).
If Congress and the president's political advisers think that debating rule changes like these can wait until 2013, along with the rest of the unresolved budget issues, they're wrong. Planning ahead always has some advantage. But the politics here also play out better before than after the next election. Any rule aimed at increasing transparency in the future is as likely to constrain the other party as much as one's own, so its chances of being accepted are greater when neither party can be certain that it won't be the minority. After the election, only one party may have a strong desire to impose transparency and accountability on the other.
Many of these rules create no partisan advantage. It's like agreeing to a set of rules for Monopoly before the game starts, instead of letting whoever becomes banker pay out as much money as she wants and whoever becomes the real estate mogul charge any rent. If the banker or property owners can set up rules after they obtain power, they are likely to game the system.
Budget policy isn't just about who wins and who loses. It is about operating under clear, fair, and widely understood rules—including, for starters, those inculcating transparency and accountability. Only inertia or myopia—not politics in the nitty-gritty sense—stops the president and the speaker of the House, or the two heads of the budget committees in each house, or any other bipartisan group from putting forward a better set of rules than we have today for how future presidents and Congresses report on the budget.
Gene Steuerle is a member of the board of directors of the Committee for a Responsible Federal Budget. He also is a senior fellow at The Urban Institute, co-director of the Urban-Brookings Tax Policy Center, and a columnist for Tax Notes Magazine.
"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.
Note: This article was originally published as a Government We Deserve column at the Urban Institute.
At a press conference earlier this afternoon, Sen. Tom Coburn (R-OK) officially released his deficit reduction plan, Back in Black--not to be confused with the Peterson-Pew report Getting Back in the Black. The package offers a wide range of savings options, totaling a little over $9 trillion. The plan is extremely detailed -- as Sen. Coburn put it today, it offers “detail like you’ve never seen”-- and totals more than 600 pages.
According to Sen. Coburn's website, the plan "saves roughly $3 trillion from entitlements, $3 trillion from discretionary and other accounts, $1 trillion in defense, $1 trillion from ending some spending in the tax code, and about $1 trillion in interest costs", would reduce the size of government by about 25 percent, and would balance the budget within ten years.
Highlights of the plan include:
- $1 trillion in defense spending cuts, including reforms to TRICARE, reduced spending on lower priority programs, and other changes to weapon systems, troop levels, and DoD staffing
- Elimination and/or modification of many existing tax expenditures, saving a little over $962 billion over ten years
- Switching to the chained CPI to more accurately measure inflation (for more on the chained CPI, see our policy paper)
- Social Security reform, including indexing the retirement age to longevity and reducing benefits for higher earners
- $2.64 trillion in savings from reforms to Medicare and Medicaid. These changes include increasing the Medicare eligibility age, increasing and further means-testing Medicare premiums, fully offsetting the doc fix, and saving $770 billion from block-granting Medicaid as called for in Rep. Ryan's budget proposal, among many other health care reductions.
We applaud Sen. Coburn for releasing a plan with this level of detail that puts all areas of the budget on the table. Sen. Coburn also deserves credit for going through the budget line by line, agency by agency, and offered specifics on exactly where the plan’s savings would come from. However, just proposing a plan is no longer enough--policymakers need to work together to reach a bipartisan compromise that can be enacted into law. Hopefully, with his ideal plan now released, Sen. Coburn (and other lawmakers) can work toward a bipartisan compromise that reduces our debt as a share of the economy.
Be sure to check out CRFB's Deficit Reduction Plan Comparison Tool very shortly to see how Sen. Coburn's plan compares to the other roughly 30 fiscal plans.
In Need of Magic – The Harry Potter saga has come to a conclusion with the blockbuster release of the final movie in the series. Sadly, an end the debt-limit drama is not yet in sight. With only two weeks before the August 2 deadline in which the Treasury Department says it can no longer hold off default, some serious legislative magic will be required to avoid our own “Deathly Hallows.” President Obama is still pushing for a “big deal” of $4 trillion in deficit reduction (an idea seconded by CRFB President Maya MacGuineas in a CNN commentary), but such an enchanting solution becomes the stuff of fantasy the closer we get to the deadline. CRFB has prescribed its own recommendations for the right spell that should come out of the debt limit talks. And since Washington is talking about nothing else, we also wrote a tell-all life story of the debt ceiling so everyone can better understand what we are up against.
Conjuring Up a Deal – Absent agreement very soon on a long-term, comprehensive deficit reduction package, the best hope for averting default now appears to be a scheme being concocted by Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) that would enable a series of increases to the debt limit while also allowing Congress to vote against the increases. The sleight of hand worthy of Dumbledore would allow President Obama to put forth three increases that Congress can vote against through a “resolution of disapproval” that the President could then veto, allowing the increases to move forward. Reid and McConnell are negotiating further provisions to make such an option more palatable and substantive, such as including $1.5 trillion in discretionary spending cuts that both sides agree on and a congressional deficit commission that would recommend $2.5 trillion in further deficit reduction through entitlements and the tax code, perhaps by the end of the year, which Congress would have to vote either up or down without amendments through an expedited process.
More Political Theater on Tap – Before any debt-limit agreement is reached, Washington will see more theatrics as both sides posture and appeal to their bases in what may make the Battle of Hogwarts look tame. On Tuesday, the House will vote on the “Cut, Cap and Balance Act,” which would increase the debt limit by $2.4 trillion in exchange for enacting deep budget cuts, capping federal spending at 19.9 percent of GDP by 2021 and congressional approval of a balanced budget amendment. The measure stands no real chance of passing the Senate, which may vote on a balanced budget amendment this week. See our one-stop resource for more on ideas to improve the budget process to promote fiscal responsibility.
S&P Says Averting Default Alone Won’t Do the Trick – Bond rating agency Standard & Poor’s put the AAA credit rating of the U.S. on “CreditWatch” last week, saying that the rating could be lowered within 90 days “if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.” S&P suggests that agreement on a plan with about $4 trillion in deficit reduction in the medium-term would prevent a diminished rating.
IPAB Hexed – Some lawmakers have labeled the Independent Payment Advisory Board (IPAB), which won’t issue its first report until 2014, as the new Voldemort. The panel-that-cannot-be-named was created in the health care reform law to issue recommendations to curtail Medicare costs that must be implemented unless blocked by Congress. Both the House Budget and Energy and Commerce Committees held hearings on IPAB last week where some legislators expressed concerns that the board would usurp power from Congress. House leaders are planning a floor vote in the fall to repeal it. CRFB has defended IPAB as one of the most promising cost-control features of the health reform law and provided ideas for strengthening it.
Business Leaders Join the Fight – Nearly 500 business leaders and organizations signed on to a letter last week calling on the U.S. to avoid a default and to “agree to a plan to substantially reduce our long-term budget deficits with a goal of at least stabilizing our nation's debt as a percentage of GDP.”
Coburn Readies His Wand – The closest thing to the Order of the Phoenix in the deficit debate has been the bipartisan Gang of Six senators. Although last week there was some hope that Sen. Tom Coburn (R-OK) would rejoin the group after leaving earlier this year and that the senators would unveil a comprehensive fiscal plan that could influence the current talks, this has not come to pass. However, Coburn will unveil his own proposal today that promises to reduce the deficit by some $9 trillion. Once the details are available, CRFB will add the plan to its handy interactive tool that allows users to compare the various budget plans out there.
Key Upcoming Dates
- Senator Tom Coburn (R-OK) will unveil his $9 trillion deficit reduction plan at a 2:30 pm press conference.
- The group No Labels will hold a rally in front of the U.S. Capitol Building calling for a bipartisan solution to the fiscal crisis at 3:30 pm.
- House votes on H.R. 2560, “The Cut, Cap and Balance Act.”
- Leading economic indicators for June released by The Conference Board.
- 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.
- Fiscal Year 2012 begins for the federal government.
CBO recently released its analysis of a hypothetical deficit reduction plan's effect on the economy. They use a $2.4 trillion deficit reduction plan (about the same as the hypothetical Biden group plan) to illustrate the short-term and long-term economic effects of fiscal consolidation, while showing how these effects either add to or detract from the original deficit reduction.
Their analysis states that the immediate short-term effects of a deficit reduction plan would reduce real GNP by between 0.3 and 0.6 percentage points in 2012, assuming $100 billion of savings in that year. However, by 2021, the plan increases real GNP by 0.6 to 1.4 percentage points, and it has an overall positive effect on the economy in every year after 2015. This improvement is due to the decrease in interest rates that the deficit reduction causes.
|Economic Effects of Deficit Reduction (Medium-Sized Effects)|
Because the effect of the plan is more positive on the economy within the ten-year window, the original $2.4 trillion of savings is enhanced by an additional $200 billion. The table below shows both the original deficit reduction and the additional savings from potential dynamic effects of the plan on the economy (assuming "medium-sized" effects).
|Dynamic Effects of Deficit Reduction Plan (billions)|
|Original Deficit Reduction||$101||$127||$154||$185||$217||$252||$288||$325||$365||$406||$2,419|
|Additional Deficit Reduction||-$4||$3||$7||$12||$18||$21||$25||$28||$33||$40||$185|
|Total, Dynamic Estimate||$97||$130||$162||$197||$235||$272||$312||$354||$398||$446||$2,604|
CBO does have some caveats for its estimate. For one, a deficit reduction plan of the same size could time its cuts much differently. For example, a plan that cuts less in the first few years and backloads the savings more or provides a temporary stimulus upfront would have less of a negative short-term impact or possibly a positive one. The latter option is an example of the "walk and chew gum" approach that many people have talked about in the past year: stimulus in the short term, coupled with a longer-term deficit reduction plan.
Another caveat CBO outlines is the plan they use is a generic deficit reduction plan. CBO assumed its plan would have no effects on labor supply, business incentives, or long-run productivity; that is, the plan would not effect marginal tax rates, depreciation schedules, unemployment insurance, or government spending on education and infrastructure. Any plan that alters these variables in a positive direction--for example, by lowering marginal tax rates or spending more on infrastructure--could have an even greater economic effect.
Yet, even if their dynamic analysis doesn't hold true for all fiscal plans, it shows the positive effect that deficit reduction alone can have on the economy in the medium-term. If we design a plan the right way, the positive long-run effects could be magnified further.
S&P has followed Moody's in issuing the frequent warning about how not raising the debt ceiling by August 2 will affect the U.S.'s credit rating. With all the political wrangling that is still occurring just three weeks before the scheduled default date, the rating service continues to issue warnings just as it had earlier in the year.
Further delays in raising the debt ceiling could lead us to conclude that a default is more possible than we previously thought. If so, we could lower the long-term rating on the U.S. government this month and leave both the long-term and short-term ratings on CreditWatch with negative implications pending developments.
These continued warnings seem to have further convinced many lawmakers that not raising the debt ceiling will have disastrous consequences. Since the "big deal" of $4 trillion does not seem to be possible at this point (despite the President's continued push for it in today's press conference), leaders have been discussing alternatives: a $2 trillion deal, a mini-mini deal, or the plan proposed by Senate Minority Leader Mitch McConnell to allow the President to raise the debt ceiling himself. But this is where it gets tricky. S&P is also warning that if lawmakers do not enact a $4 trillion deficit reduction plan, they will not consider the medium-term debt problem to be sufficiently solved and may downgrade the US's rating this year even if the debt ceiling is raised in time.
We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.
They mention a few times in their rating that $4 trillion is their benchmark for a successful and credible deficit reduction plan. It seems that if any of the other alternatives accompanies a debt ceiling increase, S&P may still be looking to downgrade the US in the near future. Not a good sign, considering where the current debt ceiling negotiations are.
Right now, we are between a rock and a hard place. If we don't raise the debt ceiling on time, we would default on some of our obligations and would certainly be downgraded by S&P and other rating agencies. If we don't enact a $4 trillion plan, we would likely get downgraded by S&P within a few months. Looks like raising the debt ceiling and putting in place a $4 trillion plan is the way to go.
In an exclusive op-ed today for CNN, CRFB president Maya MacGuineas urges lawmakers not to give up on trying to use the debt limit increase as an opportunity to reach a "grand bargain," arguing that a small deal simply won't be enough. She writes, "[t]his is not supposed to be who we are: a country fighting over whether to pay our bills, being scolded by rating agencies -- including in China -- and on track to leave a shredded economy to the next generation because we spent years on a spending spree without paying the bills."
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.
Appearing before the House Financial Services Committee yesterday, Fed Chairman Ben Bernanke signaled that the Fed was keeping all options on the table should the economy need another round of monetary stimulus. Bernanke said that the "economy still needs a good deal of support" right now given the slow recovery in home prices and 9.2 percent unemployment--in addition, as he mentioned, to the threat that future deficits and debt pose to interest rates if left unaddressed.
At the same time, however, Bernanke noted the Fed would be prepared to move in the opposite direction if conditions warrant, exiting from the extraordinary measures employed so far to buttress the economy since the recession began if inflation picks up faster than expected. Internally, the Fed is far from unanimous about what to do next, with some members of the Federal Open Market Committee (FOMC)--the Fed's decision making body--calling for additional support if growth continues to slip while others, including Dallas Federal Reserve President Richard Fisher, are worried about a rising risk of inflation.
CRFB has continued to track the Fed's actions on Stimulus.org, where we catalog how the Fed has increased the size of its balance sheet from about $850 billion before the recession to roughly $2.9 trillion right now. In the wake of the panic of the financial crisis in the fall of 2008, the Fed created a number of new lending facilities--such as the Term Auction Facility and the Money Market Mutual Fund Liquidity Facility--to provide liquidity in the face of frozen financial markets.
Many of these facilities have already expired, but there are a few other actions that the Fed has taken that are ongoing. Right after the government placed Fannie Mae and Freddie Mac under conservatorship the Fed began buying mortgage-backed securities and Fannie and Freddie debt. These purchases rose gradually to a peak of about $1.3 trillion in May 2010, then declined to about $1 trillion. However, since August of last year, the decline in these purchases--that is, the amount of debt and MBSs that have matured--have been reinvested in Treasury securities to keep the size of the balance sheet from shrinking. That move, combined with the $600 billion of additional Treasury purchases that took place between November and June, constitutes QE2.
QE3 would likely look similar to QE2. As of right now, the Fed is still reinvesting maturing MBSs into Treasuries, so its balance sheet is holding steady. Which direction it heads next--and by how much--will be up to Chairman Bernanke and the rest of the FOMC. Certainly, a few more weak jobs reports and moderating inflation expectations could raise the likelihood of another round of quantitative easing.
Update 7/15: S&P has joined Moody's in issuing new warnings to the United States. Putting the country on "negative watch," S&P warned that it could downgrade U.S. debt before the August 2nd deadline.
Today, Moody's announced that they are currently reviewing the United States' credit rating given the current stalemate in negotiations over raising the debt limit. The small but growing likelihood of lawmakers failing to increae the debt limit on time has prompted them to prepare for potentially downgrading the United States. In a statement today, Moody's said:
The review of the U.S. government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default. An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate.
With the August 2nd deadline approaching, policymakers must raise the debt limit as soon as possible to reassure creditors and credit rating agencies that we will not default on our debt. At the same time, policymakers should use this moment to begin addressing our fiscal challenges.
The budget and debt-limit negotiations are approaching the 11th hour. Congressional leaders and the President continue negotiating over a deficit-reduction package, the size of which is still up in the air. Estimates have ranged from a “small package” of somewhere between $1 and $2 trillion to a larger deal of about $4 trillion, both over ten years. Some details of the discussions can be surmised from a presentation that House Majority Leader Eric Cantor (R-VA) gave to his caucus on 7/12.
But it seems that each day brings a flurry of new developments and proposals over how to raise the debt ceiling. For a while, there was talk that a “mini-deal” would consist of what was left of the low hanging fruit: a switch to the chained CPI and more discretionary cuts, most likely with a large portion coming from non-defense spending and other changes to some mandatory programs -- such as spectrum incentive auctions and changes to federal retiree benefits.
Last week, Speaker Boehner (R-OH) and President Obama had discussed the possibility of a "grand bargain" that would save roughly $4 trillion over ten years that would touch entitlements as well as tax reform. Over this past weekend, Speaker Boehner then said that the "grand bargain" was dead. In Monday's press conference, President Obama voiced his willingness to take “significant heat” from his party in order to reach a $4 trillion deal. Reports indicate that entitlement reforms, such as raising the Medicare entitlement age (see here for our analysis of this issue), means testing Medicare and Social Security and moving to the chained-CPI have been floated in negotiations, but it's hard to know at this point what is still on the table. There is also a long list of health care cuts offered by Rep. Cantor such as Medigap reform, reform rural hospital programs and reducing bay debts.
Yesterday, Senate Minority leaders Mitch McConnell (R-KY) floated a proposal that would give the President more or less the authority to raise the debt limit three times (which have sparked sharp rebuke from many conservatives) this year through the use of three short term increases. The Congress would be allowed to prevent an increase with a two-thirds majority vote, which is highly unlikely.
Chairmen of the Senate Budget Committee Conrad (D-ND) also released a blueprint yesterday for a Senate budget resolution (read more about that on our blog here), although the full details are not yet known but are expected to be released soon.
Time is running short and it's not necessarily clear that we're getting closer to a deal. But a deal must happen and it should include both an increase in the debt limit and meaningful deficit reduction. It is absolutely imperative that lawmakers raise the debt ceiling as soon as possible. But they also need to enact the beginnings of a comprehensive fiscal plan (or perhaps even a full plan). Failing to do either could seriously jeopardize the financial strength of the U.S. in the future.
Talk of switching to the chained CPI for all inflation indexed elements of the federal budget has continued gaining much attention in the past few months, and the policy has been included in the ongoing debt ceiling negotiations (we'd like to think our policy paper had something to do with it). Predictably, it has come under attack from both the right and the left for raising taxes and affecting Social Security benefits, respectively. But people from across the political spectrum have also come to its defense.
On the right, Charles Blahous, a Social Security trustee, has defended the chained CPI as a justified technical change to keep with the government's goal of using a correct measure of inflation to adjust programs and provisions of the tax code.
Some federal policies (like the fixed income thresholds for the recently-enacted 0.9% Medicare surtax) aren’t indexed at all. Others (like Social Security’s benefit formula) are indexed to wage growth. But currently expressed policy in many other areas of the federal budget is to index for general price inflation, no more and no less. To use the best available measure of such inflation is therefore not a “benefit cut” or a “tax increase” as much as it is the most faithful available method of complying with the policy basis of various statutes.
On the left, Chuck Marr of the Center on Budget and Policy Priorities echoed our clarification of the distributional analysis of the tax impact of the chained CPI, in response to a Joint Committee on Taxation estimate. We argued that the JCT estimate both excluded the effects of AMT patches from the analysis and did not account for low-income people who do not file tax returns. Also, they used percent change in taxes paid, rather than the more commonly used percent change in after-tax income to measure the distribution. Here is Marr's take:
The Tax Policy Center, which does not face the same current-law requirement, has conducted a parallel analysis that gives a more realistic assessment of how switching to the chained CPI would affect different income groups. The results show that the percentage reduction in after-tax income — the best way of measuring the progressivity or regressivity of a tax policy change — is modest and nearly identical in all income brackets.
Many other individuals and groups have supported/defended the chained CPI: Donald Marron, the Washington Post editorial board, Reihan Salam, the Progressive Policy Institute, the Heritage Foundation, and Jared Bernstein. Also, the Center for American Progress included it in their Peterson Foundation fiscal plan.
As our policy paper on the chained CPI said:
Addressing our fiscal challenges will require many tough choices and policy changes - but switching to the chained CPI represents neither. Such a change offers policymakers the rare opportunity to achieve significant savings spread across the entire budget by making a technical improvement to existing policies. As such, across-the-board adoption of the chained CPI should be at the top of the list for any deficit reduction plan or down payment.
Update 7/14: Gov. Dayton and the legislature have reached an agreement to fund the government through the biennium.
The federal government narrowly avoided a shutdown in April, but one state has not been so lucky in its fight over the budget: Minnesota. New governor Mark Dayton (DFL--Democratic-Farmer-Labor) and the Republican-controlled legislature have been sparring over the correct way to close its estimated $5 billion shortfall for 2012-2013 (13 percent of projected spending over that period). Although we have already looked at Minnesota in talking about the attention they paid to tax expenditures, this blog will go through the broader budget showdown that has caught the nation's attention.
The back-and-forth started in February, when the legislature passed a bill that would cut $900 million of spending, mostly from local aid and public colleges. The bill got no DFL support in either house and Gov. Dayton vetoed it. He countered with his own budget proposal, which would balance the budget over the biennium. The proposal included $2 billion in spending cuts and $4 billion in tax increases, including a three percentage point income tax rate increase for people making over $150,000 and a three percent surcharge on top of that for people making over $500,000.
However, the Republican-controlled legislature rejected the tax increases. So, the state House and Senate spent the next few months working to pass the appropriations bills necessary to fund the government with an overall goal of limiting spending to expected tax revenue. As they were working, a number of policies from these bills became lightning rods of criticism for DFL legislators and Gov. Dayton: rolling back Medicaid coverage for childless adults, broad education cuts, a 15 percent reduction in the government workforce, and the aforementioned local government aid cuts. Given the polarized discussion that took place over these bills and united DFL opposition to them, it became clear that the two sides were far apart.
On May 16, Gov. Dayton offered to scale back his tax increase to $1.8 billion, matching the size of his spending cuts. The additional $1.4 billion of (presumably) spending cuts needed to close the budget gap would be negotiated. This offer was also rejected by Republicans, who reiterated their call for no tax increases. The need for compromise was underscored just a week after the offer when Gov. Dayton vetoed all eight budget bills and the tax bill that the legislature had passed. The sides came no closer to passing a budget throughout the next month, so the government had to shut down at the start of the fiscal year a few weeks ago.
New updates on the impasse have come in the past week. Last Wednesday, Gov. Dayton made himself open to other forms of taxation to raise revenue, such as "sin" taxes, instead of his preferred income taxes on high earners. Last Thursday, a bipartisan group led by former Vice President Walter Mondale and former Minnesota governor Arne Carlson released a proposal that contained $1.4 billion of tax increases and $3.6 billion of spending cuts.
Still, these proposals have gone nowhere. Republicans remain unwilling to consider revenue increases, whether on cigarettes or on higher-income earners, and DFL'ers will not accept the spending levels passed by the legislature. The roughly $2 billion difference between the two sides is making all the difference in the world for the citizens of Minnesota.
If you think Minnesota's story sounds like the tale of budgeting in Washington over the past six months, you wouldn't be far off. Hopefully, lawmakers in Minnesota, as well as those here in Washington, can agree on bipartisan plans to control future deficits in the very near future and, in Minnesota's case, actually keep the government running.
Yesterday, nearly five hundred business leaders and organizations sent a letter to the President and members of Congress joining the chorus of other concerned groups and citizens (including CRFB! Read more here) urging policymakers to raise the debt limit and also "agree to a plan to substantially reduce our long-term budget deficits with a goal of at least stabilizing our nation's debt as a percentage of GDP". Some notable signatories include: Vikram Pandit CEO of Citigroup Inc., John Chamber CEO and Chairman of Cisco, and Robert McDonald CEO of Proctor & Gamble Co.
The United State's economic future is inextricably linked to the nation's budget. A predictable long-term deal will likely provide business leaders with a renewed sense of confidence and certainty regarding future tax and spending levels, which could help create additional investment and job growth. It is essential for policymakers to put aside partisan differences and act in the nation's best interest by avoiding default and agreeing to a comprehensive long-term deal that will set the United States on a sound fiscal footing.
As the letter says:
"First, it is critical that the US government not default in any way on its fiscal obligations. A great nation - like a great company - has to be relied upon to pay its debts when they become due...
Second, our political leaders must agree to a plan to substantially reduce our long-term budget deficits with a goal of at least stabilizing our nation's debt as a percentage of GDP - which will entail difficult choices. The resulting plan must be long-term, predictable and binding. As businesses make plans to invest and hire, we need confidence that, in the absence of a crisis, our government will not reverse course and return to large deficit spending."