The Bottom Line
Yesterday, CBO released an update on the effects of the American Recovery and Reinvestment Act of 2009 (ARRA) on employment and economic output in the second quarter of 2011. (They also released their updated Budget and Economic Outlook, click here to read CRFB’s analysis.) Enacted in 2009 as an effort to stimulate the economy, ARRA's legislation requires CBO to regularly report on its effects. The table below shows CBO's latest estimates of ARRA's effects (given in ranges) for the second quarter of 2011, as compared to what CBO estimates would have occurred if ARRA had not been enacted.
CBO Estimates of ARRA's Economic Impact from April 2011 - June 2011
|Real GDP Increase||0.8% to 2.5%|
|Unemployment Rate Decrease||0.5% to 1.6%|
|Employment Number Increase||1.0 to 2.9 million|
|Increase in Full-Time-Equivalent Jobs||1.4 to 4.0 million|
|Budget Deficit Increase (2009-2019)||$825 billion|
Yesterday's analysis slightly lowered CBO's estimate of the legislation's impact on budget deficits, as CBO's May update estimated that ARRA would increase budget deficits by $830 billion. The report also stated that ARRA's effects on employment began weakening at the end of 2010 and continued to weaken throughout 2011. CBO's projections, however, have ARRA raising real GDP in 2012 by 0.3 to 0.8 percent and increasing employment numbers by 0.4 million to 1.1 million.
In a related post over on Ezra Klein's blog, Dylan Matthews looks at nine different studies conducted to determine ARRA's effects on employment and economic output. He found that six studies reported that the stimulus "had a significant, positive effect on employment and growth," while three claimed that "the effect was either quite small or impossible to detect." Matthews looks at the methodologies behind the studies, including yesterday's CBO report.
CBO's estimates are calculated using different "multipliers" for each category of ARRA's provisions, which are meant to represent the direct and indirect effects on the nation's output of every dollar spent implementing a certain policy. So, CBO applies the provision's multiplier to the total amount spent on that provision to estimate its overall impact. CBO's report acknowledges potential problems with their method, such as disagreement among economists about the economic models used to calculate multipliers. Another approach could estimate a policy's indirect effects on output differently, thus changing the conclusions of the study.
We just released our in-depth analysis of CBO's Budget and Economic Outlook, published earlier today. In the paper we explain how CBO's current law projections differ from their March baseline, what underlying economic and policy assumptions they are making in their calculations, and what CBO's projections say about our fiscal situation. We also update our CRFB Realistic Baseline -- our own budget projections that make more realistic assumptions about what lawmakers will do -- and compare the two. And while CBO's current law baseline now shows debt declining (!) as a share of the economy by mid-decade, as you will see, the picture painted by our baseline is much gloomier.
A post on the CBO Director's Blog also explains a bit about why current law projections now show debt declining, and what things might more realistically look like should several current policies be extended.
If some of the changes specified in current law did not occur and current policies were continued instead, much larger deficits and much greater debt could result (see figure below). For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, 2009, and 2010 were extended (rather than allowed to expire on December 31, 2012, as scheduled); the alternative minimum tax was indexed for inflation; and cuts to Medicare’s payment rates for physicians’ services were prevented, then annual deficits from 2012 through 2021 would average 4.3 percent of GDP, compared with 1.8 percent in CBO’s baseline projections.
We also wanted to point you to a slideshow from the report posted by CBO. Is it just us, or is the CBO graphics team getting more adventurous? (On a side note -- if you didn't see it, check out the neat infographic on Social Security projections CBO published recently.)
CBO's updated economic and budget projections, released this morning, show for the first time in many years a declining debt path under current law. Unfortunately, these projections are wildly optimistic, given that they assume things like the tax cuts and AMT patches expire in 2013. But we'll take whatever progress we can get!
Under current law, CBO projects debt to reach 67 percent of GDP this year, rise to about 73 percent in 2013, and then fall to 61 percent by 2021. Clearly, the current law scenario shows that if policymakers were to strictly adhere to PAYGO, our debt path would be much, much healthier.
The National Association for Business Economics (NABE) published the findings of its August 2011 Economic Policy Survey yesterday, in which 250 panel members were asked various policy questions between July 19 and August 2 of this year. The findings were very interesting, particularly that most panelists supported a mixture of spending cuts and revenue increases to reduce deficits.
When asked whether fiscal policy in the near-term was too stimulative, too restrictive, or just about right, about 49 percent of participants supported more restrictive fiscal policy whereas about 37 percent supported a more stimulative approach. While a large majority of respondents (over 70 percent) predicted that fiscal policy would be more restrictive over the next two years, about half expressed support for more restrictive fiscal policy.
Most participants expressed support for deficit-reduction that included a combination of both higher taxes and spending cuts. More specifically, respondents cited containing health care costs as the most successful way to reduce deficits, followed by comprehensive tax reform. The chart below shows how much support other policies received.
While a majority of survey participants favored a combination of tax increases and reduced spending to reduce the deficit, more panelists supported spending cuts than tax increases. Of those who favored such a combination approach, 44 percent favored a package with more spending cuts, compared to 37 percent who favored a package split equally between the two (less than 6 percent supported more tax increases than spending cuts). However, about 75 percent felt that if comprehensive tax reform is pursued, increased revenues should be a result.
Click here to read more about the survey's findings.
Defense spending is an area within the federal budget where significant savings can be found, and specifically within the military retirement system. Just take a look at the roughly 30 fiscal plans that have been proposed and you will see that several of them recommend savings from not just civilian but military retirement programs too. Reforms to military retirement are also being considered by the current Secretary of Defense, Leon Panetta, given comments he made in a recent speech.
With that in mind, the Defense Business Board (DBB) released the framework of a reform package of the military pension system, with a full report expected later this month.
First, the problems with the current system. According to the DBB, military retirement is based off a 100-year system that is tied to years served and thus lacks fairness to high-risk positions. Furthermore, 83 percent of those who serve receive no retirement benefit, and the system likely overpays with roughly 40 years of retirement benefits for 20 years of service. For those who serve more than 20 years, they receive a benefit more than 10 times greater than private sector equivalents with the federal government spending a total of $46 billion on military retirement in 2011.
With that in mind, the DBB offers a framework for a new system.
The new proposed system would move to a new defined contribution plan, based on the Uniformed Military Personnel Thrift Savings Plan, but would also include annual contributions from the federal government. The Uniformed Military Personnel Thrift Savings Plan is a defined contribution plan where the retirement income received depends on how much the user contributed to the account, and the earnings on it, during the working years. The plan would include an option for military member contribution and the ability for the plan to be transferred to the private sector, and back to the military after that if needed. It would apply to both reserve and active duty personnel.
The plan would vest after 3-5 years and would be payable after ages 60-65 or Social Security (the ranges depending on type of military position, accounting for things like risks involved). This is different from the current system that vests after leaving the military, which can happen after only 20 years of service (as early as someone in their late 30’s in some cases). Additionally, the level of government contribution is funded based on a percentage that is similar to the “highest end of a private sector plan”. Moreover, the plan would allow for certain payouts for education, home ownership or business acquisition.
Finally, a key element of the plan would be the adjustment for different military roles, something that is currently lacking. The plan would double contributions for years in “combat zones or high risk positions”, would increase contributions for “hardship tours,” or could even have lower retirement ages based on similar metrics.
The plan would not affect the current military retiree population and would exempt fully disabled veterans. Overall, this plan, while not having a cost estimate as of yet, is a proposal that warrants attention from lawmakers and should be on the table for deficit reduction. As Secretary of Defense Leon Panetta recently said, "[changes to retirement benefits are] the kind of thing you have to consider”.
To the Shores of Tripoli – With President Obama on vacation and Congress in recess, most eyes are turned away from Washington and towards developments overseas. The Middle East is being closely watched with a strongman in Libya on the verge of falling and another in Syria involved in bloody fighting to stay in power. But Europe also is worthy of attention with the debt crisis there compelling leaders to discuss major fiscal and economic policy changes. In the U.S., we are seeing the quiet before the storm, as the so-called super committee on deficit reduction takes shape and policymakers consider how to spark a flagging economy while also addressing the national debt. Finally, on Wednesday, the Congressional Budget Office (CBO) will release its latest update on the federal budget and economic outlook.
Europe Considers Fiscal Reforms – With Europe struggling to contain a debt crisis that threatens the economic union that the continent has worked so hard to build, leaders are considering major fiscal reforms to shore up the situation. The leaders of France and Germany are calling for all Eurozone governments to adopt constitutional balanced budget amendments to promote fiscal discipline. European leaders are also discussing closer fiscal integration among the European Union members as a result of the debt crisis.
The Other Paul Ryan Rumor – House Budget Committee Chairman Paul Ryan (R-WI) has been prominent in the news as of late due to persistent rumors that he is considering a run for president. The White House rumors have overshadowed news that Ryan plans to pursue major changes to the federal budget process. In a statement praising Speaker Boehner on his choices for the Super Committee, Ryan also stated that he asked Boehner not to be selected for the group so that he can pursue budget process reform in his Budget Committee. He said he plans hearings and mark ups this fall in parallel with the Super Committee’s work. The dysfunctional budget process is definitely in need of reform. The Peterson-Pew Commission on Budget Reform produced a detailed framework that fixes the budget process in a manner that will promote making and carrying out the fiscal policy decisions necessary to put the country on the right path.
Obama Working on Plan – President Obama has announced that he will unveil a plan to boost the struggling economy that also reduces the deficit shortly after Labor Day. The plan will include extending the payroll tax holiday for another year. Meanwhile, prominent commentator E.J. Dionne writes in his latest column that Obama must “go big, go long and go global.” Dionne recommends investments in infrastructure and aid to state and local governments now while also saying that, “[a]t the same time, Obama should put forward a plan of his own to close the long-term deficit.” We definitely must go big and long with a fiscal plan that reduces the deficit substantially and promotes long-term growth.
Administration Looks for Spending Cuts – Last week the Office and Management and Budget (OMB) sent to all department and agency heads a memo requesting that their FY 2013 budget submissions be at least 5 percent lower than their FY 2011 spending levels and to identify further cuts that could reduce the level to 10 percent below FY 2011 funding. The memo states that the effort is “to support the President's commitment to cut waste and reorder priorities to achieve deficit reduction while investing in those areas critical to job creation and economic growth.” As CRFB pointed out in a blog, it will also help the administration comply with the new spending caps under the Budget Control Act.
Key Upcoming Dates
- Congressional Budget Office (CBO) releases its update on the budget and economic outlook.
- Second quarter GDP revision from the Commerce Department.
- Senate back in session.
- House of Representatives back in session.
- Debate at the Ronald Reagan Presidential Library in California for 2012 Republican presidential candidates.
- GOP presidential debate in Florida.
- The Joint Select Committee on Deficit Reduction (Super Committee) must hold its first meeting by this date.
- Second GOP presidential debate in Florida.
- New fiscal year begins. Legislation fully funding the federal government, or a stopgap measure with temporary financing of government operations, must be enacted by then.
- GOP presidential debate in New Hampshire.
- Congressional committees must submit any recommendations to the Super Committee by this time.
- GOP presidential debate in Nevada.
- The Super Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.
- The Super Committee report and legislative language must be transmitted to the president and congressional leaders by this date.
- Any congressional committee that gets a referral of the Super Committee bill must report the bill out with any recommendation, but no amendments, by this date.
- Congress must vote on the bill recommended by the Super Committee by this date. No amendments are allowed.
On OMB's blog, OMB director Jack Lew talked about his instructions to agencies to cut 5 percent off their 2011 budget for their FY 2013 request. In addition, they are instructed to list additional savings that would result in a 10 percent cut.
This type of request is nothing new. Last year, the Administration requested that agencies do the same thing, asking for a 5 percent cut off of their 2010 budget for FY 2012. However, the purpose of that exercise was to maintain a proposed discretionary spending freeze. The purpose of this year's 5 percent cut is to adhere to the discretionary spending caps in the Budget Control Act (BCA).
The BCA has a FY 2013 discretionary cap at $1.047 trillion, which is about 2 percent below the 2011 number from the final CR. The Administration is overshooting that target by asking for 5 percent cuts from lower priority programs so they can plug some of the savings back into higher priorities. In addition, Lew instructed agencies to only hit discretionary spending rather than also hitting mandatory programs, a strategy Congressional Democrats used to "spread the pain" in the April 2011 CR.
|Discretionary Spending Under the BCA|
|Discretionary Caps (billions)||$1,067||$1,043||$1,047|
|Percentage Change from FY 2011||N/A||-2.2%||-1.9%|
|Discretionary Caps with Trigger (billions)||$1,067||$1,043||$948*|
|Percentage Change from FY 2011||N/A||-2.2%||-11.2%|
*Rough estimate based on a Bipartisan Policy Center table.
Although the purpose of the 10 percent cut is to provide an alternate way to cut deeper and re-invest in higher priority spending, it is worth noting that this cut would almost bring discretionary spending in line with the trigger that would hit if the Super Committee fails. That mechanism would further cut discretionary spending by roughly $100 billion below the $1.047 trillion topline number, corresponding to about an 11 percent cut from the 2011 total. The trigger comes down on January 1, 2013, so it would hit three months into FY 2013.
Obviously, the Administration is not planning on having to comply with the trigger, but they are clearly already planning ahead to life under the BCA caps.
In the Christian Science Monitor, Donald Marron argues that the distinction in fiscal policy should not be between hawks and doves, but rather foxes and hedgehogs. What separates a fox and a hedgehog, you ask?
"The fox knows many things, but the hedgehog knows one big thing," wrote the ancient Greek poet Archilochus. Both foxes and hedgehogs play important roles in the policy ecosystem in normal times. In times of great change, however, society needs more foxes and fewer hedgehogs. More citizens and leaders who can adapt to new conditions, and fewer who want to preserve the status quo.
In short, foxes are the ones taking more nuanced views of fiscal policy, while hedgehogs take stubborn, unyielding, and black-and-white views. For example, on taxes:
Revenue hedgehogs know one big thing: Taxes place a burden on taxpayers and the economy. Thus, they oppose all tax increases, even efforts to reduce the many tax breaks that complicate our tax code.
Revenue foxes see things differently. They recognize the burden that taxes place on taxpayers and the economy. But they also know that tax increases are not all created equal. Higher tax rates, for example, are usually worse for the economy than cutting back on tax breaks. Indeed, cutting tax breaks sometimes frees taxpayers to make decisions based on real economic considerations rather than taxes, thus strengthening the economy. That's why revenue foxes support eliminating many tax breaks.
The same goes for entitlements. Hedgehogs oppose any benefit changes whatsoever to (for example) Social Security, while foxes "know, in short, that the future will be different from the past and that the program needs to evolve to remain sustainable." Foxes recognize the importance of these programs, but they do not take that to mean that they are untouchable.
Marron comes to the conclusion--rightfully--that what we need right now is more fiscal foxes, people who are willing to make smart changes in order to improve our fiscal situation. These are the people who reject the lines in the sand that both sides of the political spectrum have drawn. Ideally, these are the people who would be on the Joint Committee.
Marron's attempt to shake-up the budget lexicon with new animals is not the first this year. Back in March, Ruth Marcus of the Washington Post called herself a "deficit panda," one who both cared about the deficit and believed in an active social policy for government. At CRFB, we're excited to muse on what animals are used next.
Faithful readers of this blog know by now how the trigger contained in the Budget Control Act generally works. The BCA creates a twelve-member Joint Committee that is tasked with finding $1.2 trillion in savings over ten years. If the Committee fails or Congress fails to pass legislation that saves at least $1.2 trillion, a trigger will make up the difference starting in 2013 (unless a balanced budget amendment passes Congress).
Those familiar with the broad outline of the trigger may not be as familiar with the details, though. Specifically, the total annual deficit reduction that the trigger would contain is calculated as follows:
- Start with $1.2 trillion
- Subtract savings from a joint committee bill
- Reduce that total by 18 percent to account for interest savings
- Divide the result by 9
If nothing is done, the trigger should generate a total of $984 billion of primary savings (savings excluding interest) from 2013-2021, or about $110 billion per year. So, the bill somewhat softens the blow of the trigger by allowing interest savings to be counted in the $1.2 trillion total.
The required primary savings would be taken half from defense and half from domestic spending, and the trigger would be pulled on January 1, 2013, more than a year after the Committee will have failed or succeeded in making its recommendations.
The trigger would reduce both mandatory and discretionary programs somewhat proportionally. For mandatory programs, the trigger would implement across-the-board outlay cuts (with exemptions), while the discretionary cuts would come from reducing the budget authority caps for defense and non-defense discretionary spending.
Within mandatory spending, most programs would be off limits -- including Social Security, Medicaid, and nearly all low-income programs. Medicare cuts would be limited to 2% of provider payments, and the cuts would come from reductions in those payments rather than benefit changes.
Discretionary spending reductions would be generated by taking the existing caps and reducing them further. Since the caps are on "budget authority" -- the amount of spending allocated -- they affect outlays with a little bit of a lag. As a result, some of the outlay savings from the triggers actually come after 2021 and therefore do not count toward the ten years savings.
The Bipartisan Policy Center has a very helpful table that shows the distribution of savings from each category, assuming the Joint Committee cannot reach agreement on any savings.
|Breakdown of Trigger Savings (billions)|
|ACA Cost-Sharing Subsidies and Related Spending||$7|
Importantly, the across the board cuts come on top of what was agreed to and on top of whatever is recommended by the Joint Committee -- so some categories could be hit twice or even three times if they are cut by an insufficient Committee plan and hit again by the trigger (after already being hit by the Budget Control Act's discretionary spending caps).
Of course, across-the-board spending cuts are not a good way to implement policy (never mind the fact that $1.2 trillion is too little in deficit reduction to put our fiscal house in order). The entire point of the trigger is specifically to be unpleasant, so that enacting a broader deal that saves more money than the trigger becomes more likely. From a fiscal perspective, we certainly hope to not have to see the trigger be used.
The three Democratic Senators on the Joint Committee--Max Baucus (D-MT), Patty Murray (D-WA), and John Kerry (D-MA)--have a lofty op-ed in the Wall Street Journal. In it, they talk about the need for bipartisanship and their willingness to contribute to a plan that helps solve the deficit problem.
This moment demands leadership, but it also demands consensus. The Joint Select Committee on Deficit Reduction was set up to require bipartisanship, and we are going to work hard to achieve it. We know that each of us comes into this committee with clear ideas on the issues and what our priorities are for our nation. But a solution can only be found by merging these priorities across party lines and finding a solution that works for the American people.
Also, since all three Senators have been around for three terms or more, they all can look back to their experience with the deficit reduction agreements of the 1990s.
We know it may seem like the problems we face are intractable. But we were around in the 1990s when Democrats and Republicans came together to balance the budget and put us on the path to eliminating our national debt. As a result of our bipartisan work back then, we helped usher in an era of unrivaled prosperity, tens of millions of new jobs, and greater wealth for American families. We did that by making tough choices and casting tough votes—including raising revenue. Some of our colleagues lost their seats because of the decisions they made. But we put our country on the right track, and American families and the world are watching closely to see if we can do it again.
Of course, our struggle will be different than the 1990s, since we have a longer way back to fiscal sustainability, but we hope that the bipartisan spirit that prevailed in the 1990s will result in the changes that we need in the 2010s. The real answer as to whether this will happen will not come in op-eds, but in the fall months when the joint committee meetings occur.
Yesterday, the United States Chamber of Commerce sent a letter to the members of the super-committee calling on it to exceed its mandate of $1.2 trillion in deficit reduction and create a plan that truly addresses our fiscal challenges.
The Chamber calls on the committee to reform our entitlement programs and enact comprehensive tax reform. In the letter, the group says:
While this magnitude of deficit reduction is a step in the right direction, it would fall far short of fixing the deficit and debt problem America currently faces; it would not stabilize the debt to GDP ratio and would not put this ratio on a downward trajectory; and it would fall far short of achieving a balanced budget. It alone would likely not prevent future downgrades to the debt rating of the United States. Even with successful implementation, the amount of publicly held debt outstanding by the United States would rise to $16 trillion at the end of 10 years. The Chamber urges you and your colleagues on the Joint Select Committee to make every effort to fundamentally address these issues by engaging in a true reform of entitlement programs and a complete restructuring of the U.S. tax code.
We couldn't agree more - $1.2 trillion, on top of the $917 billion in deficit reduction from the recent debt deal will not solve our problem. The Joint Committee is in a good position to enact real reform and save our nation from the fiscal crisis that is coming. CRFB continues to urge the members to exceed its mandate and create a plan that reduces our deficit by at least $3 trillion.
Today at 1:30, the Budgeting for National Priorities Project at Brookings will host a distinguished panel to discuss the challenges that the new Joint Select Committee will face in their task to reduce the federal deficit. The panel will talk about the implications of choosing a baseline for measuring deficit reduciton, the history of previous "super committees," and the congressional politics involved in any debt deal agreement. CRFB Co-chair Bill Frenzel will be among the panelists speaking at the event.
Click here to watch the full video of the event.
Today, one of the other big three credit rating agencies, Fitch Ratings, reaffirmed their AAA rating of the United States and held our outlook at "stable". This is, of course, a break from the recent S&P downgrade of the United States from AAA to AA+ with a negative outlook. For Fitch, AAA is their highest rating.
In a statement, Fitch said:
"The affirmation of the US 'AAA' sovereign rating reflects the fact that the key pillars of US's exceptional credit worthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks.'"
With this announcement, each of the three major rating agencies now have a different assessment of the United States. Moody's has also affirmed our AAA rating (which they call Aaa), but has put the U.S. on a negative outlook and warned that a downgrade might be on the horizon. Standard & Poor's (S&P), on the other hand, downgraded the U.S. to AA+ and put the country on a negative outlook for further downgrades.
In explaining its downgrade of the U.S., we explained last week that S&P did not dispute Fitch's assessment of the nation's economic capacity to repay its debt. Rather, their downgrade was primarily due to concerns over America's political capacity to put its debt on a stable path. As they said:
“[T]he downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned… we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics anytime soon."
As CRFB policy director Marc Goldwein explained, "The country's most critical structural problem isn't employment or entitlements. It's Washington."
Even despite the recent affirmation of our AAA rating from Fitch, policymakers must remain vigilant in tackling our debt problems. As CRFB President Maya MacGuineas argued in our recent press release:
“Between now and December policymakers will either be involved in a serious national discussion over how to bring our debt under control or else another round of theater and brinksmanship... We still have a real opportunity to enact serious entitlement changes, tax reform, and an economic growth strategy. But if we fail, I fear other rating agencies will follow suit with S&P, with economically dangerous consequences.”
As the world continues to struggle with the economic recovery and increasingly overwhelming debt levels, many are looking to Switzerland’s rather novel method of controlling its government debt, the Swiss “debt brake.” Germany has recently adopted a partial debt brake rule, and there are some discussions taking place about a debt brake rule to cover the entire set of euro zone countries.
The Swiss made it through the Great Recession relatively unscathed compared to most countries. In fact, the Swiss economy is facing a different kind of crisis: their currency is becoming too strong and the country’s exports are having trouble competing. Nevertheless, the Swiss “debt brake” is cited as one of the reasons for the country’s largely successful navigation of recent economic turbulence. With Germany and others looking to the Swiss debt brake as a model for their own fiscal rules – and as the U.S. debates its own fiscal future – we thought it would be helpful to provide some background. In this blog we will attempt to go into some detail on the history and function of the Swiss debt brake, and talk a little about how it works.
The Swiss government is generally known for its fiscal frugality. Toward the end of the 1990s, however, the country’s debt level grew to an uncomfortable 51 percent of GDP (still far below many other developed countries at the time). Subsequently, the debt brake was enshrined in the country’s constitution in 2001 after receiving 84 percent of the popular vote.
Effectively, the rule aims to maintain a structural budget balance every year. The rule allows deficits to be run in a recession, but requires surpluses in better economic times so that over the cycle the budget is in balance.
The debt brake rule specifies a ceiling on central government expenditures, looking forward a year, equal to predicted revenues adjusted by a factor reflecting the cyclical position of the economy. It is then possible to run deficits in a recession, but over the medium-term deficits and surpluses are expected to roughly cancel each other out. Differences between budget targets and estimates and actual outcomes are recorded in a notional account. If the negative balance in the account exceeds six percent of expenditure, Swiss authorities are required by law to take measures sufficient to reduce the balance below this level within three years. An escape clause exists, by which Parliament may allow deviations to the rule in exceptional circumstances. Because of its flexibility in allowing for surpluses and deficits, the debt brake rule evades one of the shortcomings of a typical balanced budget rule, which is that they are inherently pro-cyclical and often do not allow governments to respond to economic downturns.
The Swiss economy weathered the economic crisis much better than most countries, and many credit the debt brake for helping the country maintain a relatively stable debt level. In the Peterson-Pew Commission on Budget Reform’s 2010 report, Getting Back in the Black, the commission suggested that Switzerland offers lessons for the U.S. and other countries to learn from on controlling debt. As getting our own fiscal house back in order seems increasingly difficult and unlikely, perhaps its time to look abroad for some guidance.
Fair Time – We are smack in the middle of fair season. Fair goers across the country are getting their fill of fried food and tractor pulls. It is fair time for the economy, too, as every day the markets seem to mimic a carnival ride with large fluctuations signaling uncertainty and volatility, and slow growth fueling fears of another recession. How to spur the economy in the midst of mounting national debt will be a key question for presidential candidates as campaigns rev up and as the new congressional super committee begins its deliberations.
“Super Committee” Members Named – The 12 members of the “Super Committee” tasked with reducing the deficit got their capes last week. The bipartisan, bicameral group was created by the debt ceiling agreement. Its goal is to produce a plan with $1.5 trillion in deficit savings by November 23 that Congress must vote up or down. If such a plan is not agreed to, then automatic spending cuts in defense and domestic spending will be triggered. The members of the Joint Select Committee on Deficit Reduction are Sen. Patty Murray (D-WA, co-chair), Sen. Pat Toomey (R-PA), Sen. John Kerry (D-MA), Sen. Jon Kyl (R-AZ), Sen. Max Baucus (D-MT), Sen. Robert Portman (R-OH), Rep. Jeb Hensarling (R-TX, co-chair), Rep. Chris Van Hollen (D-MD), Rep. Dave Camp (R-MI), Rep. James Clyburn (D-SC), Rep. Fred Upton (R-MI), and Rep. Xavier Becerra (D-CA).
US still Aaa OK with Moody’s, for Now – Credit rating service Moody’s reaffirmed its highest rating (Aaa) for the US last week, choosing not to follow Standard & Poor’s in downgrading the US (read “Understanding the S&P Downgrade”). However, Moody’s did put the US on a “negative outlook” and warned that a downgrade could occur in the next year if additional savings were not found. As reported by Reuters, a Moody’s analyst said in a report, “For the Aaa rating to remain in place, we would look for further measures that would result in the ratio of federal government debt to GDP, for example, peaking not far above the projected 2012 level of near 75 percent by the middle of the decade and then declining over the longer term.”
Presidential Campaign Kicks Off – The 2012 presidential campaign began in earnest last week with a major debate among the GOP candidates in Iowa and the Ames Straw Poll on Saturday. In advance of the debate, CRFB offered some questions the candidates should be expected to answer. No doubt that fiscal policy will be a big issue in the campaign.
Key Upcoming Dates
- Senate back in session.
- House of Representatives back in session.
- Debate at the Ronald Reagan Presidential Library in California for 2012 Republican presidential candidates. [Corrected]
- The Joint Select Committee on Deficit Reduction must hold its first meeting by this date.
- New fiscal year begins. Legislation fully funding the federal government, or a stopgap measure with temporary financing of government operations, must be enacted by then.
- Congressional committees must submit any recommendations to the new Joint Select Committee on Deficit Reduction by this time.
- The Joint Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.
- The Joint Committee report and legislative language must be transmitted to the president and congressional leaders by this date.
- Any congressional committee that gets a referral of the Joint Committee bill must report the bill out with any recommendation, but no amendments, by this date.
- Congress must vote on the bill recommended by the Joint Committee by this date. No amendments are allowed.
In a commentary for CNN, CRFB co-chair Bill Frenzel lamented the small goal that the Joint Select Committee on Deficit Reduction (or the "super committee") is aiming for, arguing that it will not lead to the kind of grand compromise that we need.
Because the goal of $1.2 trillion in savings is so small, he said, even if the committee succeeds, it will not do much to stem the tide of red ink or address the drivers of our long-term debt.
Until the major drivers of deficits and debt are one the table -- entitlements -- the Congress will be playing touch football with the deficit/debt problem. Democrats protect entitlements; Republicans protect taxes. Difficult compromises are required, but the super committee, unfortunately, does not have this kind of heavy lifting in its charter.
Even assuming super committee success, the net of all this is that our president and our Congress will have spent a year at hard labor working on modest reductions, none of them aimed at the real drivers of our deficits and debt.
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.
Over at Ezra Klein's blog, Sarah Kliff writes about the "Maple Leaf Miracle," or how Canada was able to turn itself around after it was downgraded. Considering our current situation, it seems appropriate to revisit the countries that we talked in our paper on fiscal turnarounds last year and see how well they line up with our table released the other day of countries that have lost their AAA credit rating only to regain it at a later time.
Our fiscal turnarounds paper went into four countries' fall from grace and subsequent rebound: the aforementioned Canada, Denmark, Finland, and Sweden. We also talked about Ireland, but they have fallen on hard times again in the wake of the 2008 financial crisis and have yet to rebound.
The table below is from our paper on the S&P downgrade, detailing all the countries that have been downgraded from AAA by S&P. After the table is a detailed summary of the four countries' journey from AAA and back.
- Canada: After years of running deficits, Canada suffered from a high and mounting debt. After the Mexican peso crisis in 1994, Canada was seen as next on the global "chopping block," and after Moody's downgraded Canada from AAA in 1995 (with debt at 70 percent of GDP), our neighbors to the north decided to act on their fiscal imbalance. Most of the fiscal adjustment came on the spending side, with cuts to civil service, wage freezes, transfer of some responsibilities to provinces, and other program reductions. Aided by the slide of Canadian dollar against the U.S. dollar--which boosted Canadian exports--and the general economic boom in the mid- to late-1990s, the measures worked, returning surpluses to the Canadian budget in the late 90s and returning Canada to AAA status in 2002.
- Denmark: In Denmark's case, they experienced a serious fiscal deterioration as a result of the early 1980s recession; public debt rose from 29 percent of GDP in 1980 to 65 percent in 1982. In addition, in an environment of high interest rates, the interest costs on that increased debt were also severe. Faced with a downgrade from S&P in 1983, Denmark undertook a huge fiscal consolidation plan, which relied on revenue for a little more than half of the deficit reduction. Also, many benefit and transfer programs were cut. As a result, the sharp rise in debt was halted by the middle part of the decade. A further deficit reduction program put debt on a declining path in the 1990s, and Denmark regained its AAA rating with S&P in 2001.
- Finland: Finland had a banking crisis in the early 1990s that led to a severe recession. The annual fiscal balance swung from 6 percent of GDP surpluses before the crisis to an 8 percent deficit in 1993. Government debt shot up 50 percentage points of GDP from 1990 to 1994 (10 to 60), and S&P downgraded the country in 1992. In response to both the banking and the fiscal crisis, Finland took many steps. They attempted to shore up the banks by issuing a blanket guarantee of deposits; also, they injected capital into banks or took them over when necessary. On the fiscal side, much of the adjustment was on the spending side, including reforms to many entitlements. However, the consolidation effort also included some tax base broadening and the introduction of a value-added tax (VAT). As with many deficit reduction efforts, the plan was helped by a devaluation of the currency that increased global competitiveness. The efforts helped stabilize, then reduce, the debt path of Finland, returning them to surpluses in the late 1990s. They regained their AAA rating in 2002.
- Sweden: Sweden faced a similar situation to Finland. Financial problems lead to fiscal problems in the early 1990s. As a result of the financial crisis, Sweden turned to fiscal expansion, partially through efforts to shore up the banking sector, which resulted in spending rising from 59 percent of GDP in 1990 to 70 percent in 1993 (while revenue stayed at 59 percent of GDP). Sweden was hit with a downgrade in 1993 and turned to fiscal consolidation in 1994. Much of the adjustment was to a wide variety of social benefits, although increased income and payroll taxes were also involved. Again, an exchange rate that helped boost Swedish exports played a role in diminishing the contractionary effects of the deficit reduction. The combination of economic recovery and fiscal consolidation put debt on a declining path as of the mid 1990s, while the fiscal balance went from an 11 percent of GDP deficit in 1994 to a 5 percent surplus in 2000. Sweden regained their rating in 2004.
These countries faced broader concerns about their fiscal position, yet were still able to turn things around and regain their fiscal credibility. The U.S. has only been downgraded by one major credit rating agency, and we still have time to make the necessary adjustments without the context of a crisis. But we have to get going on a comprehensive plan.
To read our fiscal turnarounds paper, click here.
To understand the S&P downgrade, click here.
With the housing market still depressed almost five years after the housing bubble burst, the Obama administration is seeking input from private investors on methods to convert foreclosed properties owned by Fannie Mae and Freddie Mac into rental homes.
Currently, the two GSEs have about 250,000 foreclosed homes, which is about half of the total unsold repossessed properties on the market. Obviously, this collection of unsold homes is depressing the market by pushing down housing prices, and the lack of recovery in the housing market in one of the major attributions to why the pace of overall economic recovery has been tepid. Also, rents in many urban areas have been rising rapidly due to increased demand of rental units and not enough supply.
Faced with these two problems, the administration is trying to take the foreclosed properties off the housing market and push them into the rental market. This proposal would push housing prices up by removing the glut of foreclosed homes from the market, while putting downward pressure on rental costs by increasing the supply of rental units available.
The administration is looking for proposals from investors, so the exact details of this move are not clear. As for budgetary effects, it does not appear that this plan would have significant direct effects (although since the US is backing Fannie and Freddie, their losses might have to be recouped from the budget), but we will have to see what the final move is. What we do hope is that this plan can get the housing market going and, of course, the broader economy. We will need a robust economy to get our deficit down.
Considering recent developments, fiscal policy is likely to be the number one topic at tonight's debate in the race for the 2012 Republican presidential nomination, hosted at Iowa State University in Ames, Iowa just days before the much-ballyhooed Ames Straw Poll this Saturday. The S&P credit rating downgrade brought heavy criticism from candidates Michele Bachmann, Mitt Romney, and Jon Huntsman, but you can be sure that the debate will be filled with questions about how they would get us on the path back to AAA (at least with S&P).
As candidates debate tonight, and as they form their policy agendas in the coming weeks, we hope they look to be specific on fiscal issues. Candidates should offer concrete ideas for the deliberations of the Joint Select Committee on Deficit Reduction -- the special joint committee created under the debt limit deal that is tasked with finding $1.5 trillion in 10-year savings by the end of November. President Obama has said he will present his own ideas to the committee for how they can reach their savings target, and the Republican presidential candidates should look to do the same, offering detailed plans and policies that can help set our nation on a sound fiscal path. Generalities about cutting spending or platitudes about rolling back the size of government will not suffice.
Candidates should also explain how they intend to pay for any jobs creation programs, tax cuts, or other deficit-increasing proposals included in their policy agendas. We cannot afford to be digging ourselves a deeper hole.
Here are some of the key questions we think candidates should be ready to answer:
- How would you recommend the special joint committee reach its goal of $1.5 trillion in savings?
- How would you craft a plan to reach at least $4 trillion in deficit reduction in order to stabilize the debt and put our country on a stronger financial footing?
- What are your priorities for the nation and how do you plan to pay for them?
- How would you address unsustainable cost growth in Medicare and Medicaid?
- How would you look to fix Social Security's financing gap?
- What is your plan for the extension or expiration of the 2001/2003/2010 tax cuts, and how would you go about comprehensive tax reform?
- How would you meet and build upon the savings enacted in the recently passed discretionary caps?
- How would you reform the budget process to better promote effective and responsible budgeting?
Make sure to tune in tonight and keep an ear out for what the candidates are saying about their plans for fiscal policy. We know that it is not necessarily easy to lay out specific deficit reduction policies in the context of a political debate, but considering the events of the past few weeks and the events still to come later in the year, we expect more than general statements and cliches.
photo / Flikr user Gade Skidmore
Updated to reflect House Minority Leader Nancy Pelosi's appointments.
Over the past several hours, congressional leadership has begun naming the lawmakers for the 12 member Joint Select Committee on Deficit Reduction, created as part of the recent debt ceiling deal. The debt deal stipulated that the appointees must be named within two weeks of passage, or August 16th. On Tuesday night Senate Majority Leader Harry Reid (D-NV) made his choices and yesterday Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) nominated theirs. Today, House Minority Leader Nancy Pelosi (D-CA) has made her choices. Senator Murray and Rep. Hensarling will be the co-chairs of the new committee.
The members are:
- Senator John Kerry (D-MA)
- Senator Patty Murray (D-WA) (Co-Chair)
- Senator Max Baucus (D-MT)
- Senator Jon Kyl (R-AZ)
- Senator Robert Portman (R-OH)
- Senator Pat Toomey (R-PA)
- Rep. Jeb Hensarling (R-TX) (Co-Chair)
- Rep. Dave Camp (R-MI)
- Rep. Fred Upton (R-MI)
- Rep. Chris Van Hollen (D-MD)
- Rep. James Clyburn (D-SC)
- Rep. Xavier Becerra (D-CA)
To recap: the special joint committee, made up of 6 Democrats and 6 Republicans, is tasked with finding $1.5 trillion in deficit reduction over the next ten years, or face a sequestration in 2013 of 50 percent defense and 50 percent domestic spending. The committee must agree on deficit reduction measures by a simple majority and recommend them to Congress by November 23rd, and Congress must vote on them by December 23rd.
As the recent debt downgrade from S&P signals, we are running out of time to address our long-term fiscal challenges. The special joint committee should at least double its target from $1.5 trillion in savings to no less than $3 trillion in order to stabilize and reduce debt as a share of the economy. The committee must focus on making fundamental reforms to slow the growth in Social Security, Medicare, and Medicaid spending while also revamping the tax code to improve efficiencies, fairness, and growth.
The committee has a huge opportunity over the coming months to help get the country on a healthy fiscal track. CRFB congratulates all the newly appointed members on their new responsibilities and wish them success in hopefully going beyond their mandate to truly control our mounting debt.