The Bottom Line

February 25, 2015

Federal Reserve Chair Janet Yellen delivered testimony on the Semiannual Monetary Policy report to the Senate Banking Committee on Tuesday. Not surprisingly, the hearing focused on the economic outlook, the timing of an increase in the federal funds rate, and financial regulatory policy. But the topic of federal debt did come up, and Yellen corroborated our view on why debt should be put on a downward path.

In response to a question from Sen. Heidi Heitkamp (D-ND) about longer-term challenges facing the economy, Yellen responded that one was "longer-run issues with the federal budget."

I think Congress has made painful decisions that have now really stabilized, brought down the deficit very substantially and stabilized for a number of years the debt-to-GDP ratio. But eventually debt-to-GDP will begin to rise, and deficits will increase again as the population ages and Medicare, Medicaid, and Social Security get to be a larger share of GDP under current programs. And there are lots of ways in which these are problems we've known about for a long time.

February 25, 2015

This afternoon, Ed Lorenzen, Senior Advisor for the Committee for a Responsible Federal Budget, will testify in front of the Ways and Means Subcommittee on Social Security on maintaining the solvency of the Social Security Disability Insurance Trust Fund.

February 24, 2015

The Council of Economic Advisers released its 2015 Economic Report of the President last week, discussing several recent economic developments and how the President's policies fit into them. One chapter of particular interest given its possibility of being on the policy agenda in this Congress is on business tax reform. The chapter discusses the problems with the current system—notably, its high marginal tax rate, relatively narrow tax base, and economically distorting incentives—and how the President's approach would help the economy, productivity, and living standards.

For background, the Administration's policy on business tax reform can be summarized between the specific policies laid out in the budget, with additional detail in its business tax framework. The budget calls for the corporate tax rate to be reduced from 35 to 28 percent and extensions/expansions of some existing tax breaks, like a permanent extension of the R&E credit and new or extended tax breaks for clean energy. The budget also contains a number of revenue-raisers that would pay for them, including a 19 percent minimum tax for income earned abroad, the elimination of tax incentives for fossil fuel producers, and the changing of inventory accounting rules.

The revenue-raisers would pay for the tax breaks but would leave only $140 billion of revenue to pay for the rate cut, only about one-fifth that is needed. However, the framework states that additional revenue could come from addressing depreciation schedules and limiting the deductibility of interest. Finally, the budget dedicates revenue to the Highway Trust Fund from a 14 percent temporary tax on earnings held abroad by U.S. companies.

Components of President Obama's Business Tax Reform Plan
Policy Savings/Cost (-) Through 2025
Reform the international tax system $238 billion
Change inventory accounting rules $84 billion
Eliminate fossil fuel tax preferences $50 billion
Reform financial and insurance industry tax treatment $34 billion
Enact other revenue raisers $40 billion
Extend and expand R&E credit -$128 billion
Enact/extend small business tax cuts -$94 billion
Enact/extend manufacturing and clean energy incentives -$58 billion
Enact infrastructure and regional growth tax cuts -$26 billion
Total, Business Tax Reform Reserve $141 billion
Make unspecified changes to depreciation and interest deductions ~ $560 billion*
Cut corporate rate from 35% to 28% ~ -$700 billion
Implement 14% transition tax on earnings held abroad $268 billion
Dedicate revenue to Highway Trust Fund -$238 billion

Source: OMB, CBO, CRFB calculations
*Numbers represents roughly the additional revenue needed to finance the rate cut. Actual revenue may be larger since depreciation changes raise less in the long term than the short term

The chapter includes four interesting discussions of elements of business tax reform:

February 24, 2015
Dynamic Scoring Won't Be Perfect But it is Worth Doing

Rudolph Penner was the director of the Congressional Budget Office from 1983 to 1987, and he is an Institute Fellow at the Urban Institute and a member of the Committee for a Responsible Federal Budget. He wrote a guest post that appeared in the Tax Policy Center blog. It is reposted below.

February 23, 2015

CBO unofficially closed the books on the American Recovery and Reinvestment Act (ARRA, or the 2009 stimulus), putting out its final report on the economic and fiscal effects of the legislation. ARRA passed in February 2009 during what ended up being the deepest output and employment decline of the Great Recession; the economy had shrunk by 8 percent in the last quarter of 2008 and was in the process of shrinking another 5 percent in early 2009, while hundreds of thousands of people were losing their jobs each month. The legislation, originally scored as costing $787 billion, included a number of different provisions intended to stimulate the economy, including increased safety net spending, fiscal aid to states, infrastructure projects, and tax cuts for both individuals and businesses. CBO's latest report includes an updated score of ARRA ($836 billion) and adds economic effects for 2014 to the effects they already reported for previous years.

Not surprisingly, CBO finds that ARRA had limited effect on the economy in 2014 given that only 2 percent of the total deficit impact took place in that year. It boosted real GDP by between 0 and 0.2 percent in 2014 and lowered the unemployment by between 0 and 0.2 percentage points. The economic effect peaked in 2010, when nearly half of the deficit impact of the legislation took place, raising real GDP by between 0.7 and 4.1 percent and lowering the unemployment rate by between 0.4 and 1.8 percentage points. Compared to its projections at the time, CBO found much less of a boost to real GDP in 2009 but a greater boost in 2010 and 2011. It also found less of a reduction in unemployment in 2009 and 2010 but a greater effect in 2011 and 2012 than they thought at the time.

February 23, 2015
Congress Can't Dodge Social Security Disability Insurance Trust Fund's Approaching Insolvency

Jim Kolbe and Charlie Stenholm are former members of Congress and members of the Committee for a Responsible Federal Budget. Jim Kolbe (R-AZ) served from 1985 to 2007, while Charlie Stenholm (D-TX) served from 1979 to 2005. They wrote a commentary that appeared in Roll Call, which appears below.

February 20, 2015

Next Tuesday will be the 40th anniversary of the beginning of the Congressional Budget Office, and University of Maryland Professor Phillip Joyce has begun the celebration early, publishing a Brookings working paper reflecting on CBO's growth as an agency and its role in the budget process. The CBO, which was created in the 1974 Budget Act, started on February 24, 1975, when Director Alice Rivlin officially took office.

Joyce notes that CBO's visibility and reputation have grown significantly since its establishment to the point that it is central not only to the budget process but any major legislation:

CBO was created, in large part, to give Congress more leverage over the White House in key policy debates. Time and again Congress has made use of that capacity to place its own stamp on overall fiscal policy and to respond to particular Presidential policy proposals. In fact, the key events that have established and enhanced CBO’s credibility have virtually all involved its response to Presidential initiatives, such as the Carter energy policy, the Reagan budget proposals, or the Clinton and Obama health reform efforts.

February 18, 2015

As we've mentioned frequently, budget projections and economic forecasts are inextricably linked in determining both the nominal dollar budget numbers and their size compared to GDP. Naturally, the ten-year projections that budget agencies like the Congressional Budget Office and Office of Management and Budget make are very uncertain, so deviations from those forecasts can have profound effects on the budget. A recent CBO report helpfully provides some background on how they make their economic projections and in particular, why they assume that the economy will never actually reach potential GDP.

For background, potential GDP is the amount of output the economy would produce if it was at full capacity but not at a level which would risk accelerating inflation. Thus, it does not represent literally the maximum possible output at the time but rather a trend line around which actual GDP moves during the business cycle. Thus, the growth rate of potential GDP and its relationship to actual GDP are very important in longer-term budget projections.

Of course, actual GDP is currently below potential by more than 2 percent, and it has been below it since mid-2006 and for 12 of the past 13 years. Here's how CBO describes its incorporation of cyclical effects:

For roughly the first half of its 10 year projection period (which currently runs through 2025), CBO projects the growth of actual output by estimating both the potential and the cyclical components of economic activity. For the latter part of the projection period, however, CBO does not estimate cyclical components.

In other words, CBO attempts to project economic growth in the first five years of its budget window but relies on a simplifying assumption that the economy is in “steady-state” in the second five years, rather than trying to predict booms or busts. In the past, CBO assumed that actual GDP would be exactly equal to potential GDP in this steady state. However, recently CBO adjusted that assumption.

Starting in last year's February baseline, CBO assumed that the economy would only reach 0.5 percent below potential and grow at the same rate as potential GDP thereafter. As before, CBO does not attempt to project the business cycle in the second five years, instead assuming an average of likely outcomes.

February 13, 2015

We've written extensively about the President's budget since it was released, both in our analysis of the budget and in our blog series. Also notable about this budget is that it is the first to include a chapter on “climate risk.” The chapter explains the direct and indirect financial costs of climate change, both in recent years and well into the future, illustrating how the President sees climate change as a fiscal issue, not just an environmental one. The budget includes several proposals intended to avoid climate change and the associated perceived financial dangers.

In the budget, OMB explains why climate change is a fiscal issue:

The federal government has broad exposure to escalating costs and lost revenue as a direct or indirect result of a changing climate. For example, the federal government plays a critical role in protecting  American families, businesses, and communities against the effects of extreme weather. As economic damages from such catastrophic weather grow, so do the liabilities for the federal government. At the same time, extreme weather exposes federal facilities and federal lands to increased risk.

According to OMB, over $300 billion has been spent on weather-related disaster relief in the past decade. That number includes $179 billion in domestic disaster relief, $24 billion in debt incurred by flood insurance (which was self-sustaining until the last several years), and $61 billion in costs for crop insurance. While the administration says it is “not possible” to know how much of this has been caused by man-made climate change, it believes that these costs “have been increasing and can be expected to continue to increase as the impacts of climate change intensify.”

February 13, 2015

The President proposed last week, through his FY 2016 budget, a number of proposals to reform Social Security in small ways, including measures to shore up the strained Social Security Disability Insurance (SSDI) Trust Fund by shifting funds from the Old-Age and Survivors' Insurance (OASI) Fund and to improve data sharing and coordination with other agencies. Overall, the Office of Management and Budget (OMB) estimates that these measures would save money through better program integrity and increased payroll revenues for the program. OMB expects that over the next 10 years these changes will cut Social Security's costs by $14 billion and increase revenue by roughly $46 billion. 

Here is a summary of the President’s proposed changes to the SSDI program:

    • Reallocating payroll taxes from OASI to SSDI. The budget proposes reallocating an additional 0.9 percent of the payroll tax from the old-age program to the disability program for five years in order to extend the life of the SSDI trust fund to about 2033.
    • Completing Continuing Disability Reviews (CDRs). The budget proposes mandatory funding for CDRs starting in 2017. Annual funding would be determined through a formula rather than the appropriations process. The budget proposes $15.2 billion of new spending for CDRs through 2025 which would generate estimated savings of $37.7 billion. About 80 percent of the spending and a similar proportion of the savings would go to and come from the Supplemental Security Income (SSI) program, leaving $7 billion of net savings to the SSDI program.
February 12, 2015
Cost of Ten Bills Would Be Added to the Deficit

The House of Representatives is considering this week whether to revive several tax breaks known as the "tax extenders" and add their cost to the deficit. The bills under consideration, which include extensions of previously renewed tax breaks in addition to new and expanded tax breaks, would cost almost $320 billion, or almost $385 billion with interest.

The tax extenders are a set of temporary tax breaks that have typically been continued for a year or two at a time. Most recently, about 55 extenders expired at the beginning of 2014 and were renewed retroactively for one year last December, before expiring a few weeks later at the end of 2014.

The House Ways & Means Committee today approved renewing and permanently extending two of these provisions, including a drastically expanded research tax credit and a deduction for sales taxes paid, as well as new modest expansions to 529 education savings accounts. The three approved bills being considered would cost about $225 billion, or $265 billion with interest.

The House is also voting today and tomorrow on permanent extensions of six more provisions, as well as a policy from last year's Tax Reform Act that would reduce taxes paid by private foundations on their investment income.

February 12, 2015

In two months, lawmakers will encounter their third Fiscal Speed Bump of 2015 when the "doc fix" expires, leading to a 21 percent cut in Medicare physician payments starting in April. Replacing the Sustainable Growth Rate (SGR) formula permanently would cost at least $131 billion through 2025, according to the Congressional Budget Office (CBO), or $177 billion if the bipartisan tricommittee bill agreed to in the last Congress is pursued.

At a House Energy and Commerce hearing recently, former Sen. Joe Lieberman (I-CT) stated that it was very unlikely any SGR replacement would pass in this Congress without offsets. To that end, the Heritage Foundation recently specified four reforms that could be used to offset the SGR.

    1. Reforming Medicare cost-sharing: Many Medicare reform plans have proposed to overhaul Medicare's cost-sharing. These policies would replace the many different deductibles, copays, and coinsurance in Parts A and B with a single deductible with unified coinsurance across services. These changes were usually accompanied by a restriction on cost-sharing coverage by supplemental coverage plans like Medigap and a limit on out-of-pocket costs to reduce exposure to exorbitant cost-sharing. CBO's latest estimate had one version of this policy saving $110 billion over ten years.
February 12, 2015

President Obama sent a letter to Congress yesterday asking for a formal three-year authorization for a campaign against ISIS. At the same time, though, the President's budget includes a plan for phasing down the war spending category, known as Overseas Contingency Operations or (OCO), over time. Not only does the budget lay out an aggressive drawdown plan, it also states that the Administration will develop a plan to transition all OCO spending that will remain back to the non-war defense budget by 2020. This blog will take a look at the recommendations of the budget for OCO.

As combat troops have withdrawn completely from Iraq and mostly from Afghanistan, war spending has fallen by 60 percent from its peak in FY 2008 (from $187 billion to $74 billion in FY 2015). The reduction in the spending path for OCO as a result of the drawdown going forward has been made uncertain by the tendency of lawmakers to use the uncapped OCO category to backfill the non-war defense budget that is subject to spending caps. For example, the FY 2015 "CRomnibus" legislation provided $7 billion more than the Administration's OCO request. This included $1.7 billion for Migrant and Refugee Assistance, an amount larger than the State Department's request for that category in both the base budget and OCO combined.

In order to lock in the savings from the drawdown and try to shut down OCO as a slush fund for defense, the budget would cap total OCO spending through 2021. It would establish an aggregate cap of $450 billion of total OCO budget authority between 2013 and 2021, which after a FY 2016 request of $58 billion would allow an average of $27 billion per year after that. Beyond 2021, the OCO category and separate spending for war activities outside the regular defense budget is completely eliminated even though the regular spending caps would be extended through 2025. In total, this path "saves" $557 billion compared to growing current spending with inflation (which nobody plans on doing). CBO's drawdown path has a similar amount of spending but assumes continued troop presence after 2021, so it saves $100 billion less.

February 12, 2015

In addition to a paper and blog series on the President's budget, CRFB has created a number of tables, graphs, and charts focused on specific aspects of the budget.

Today we released a full chartbook on the President's budget. Select charts are below, with more detailed descriptions.

February 11, 2015

Last week, the Heritage Foundation released the Budget Book, a catalog of 106 ways to cut the budget or reduce the size of government totaling roughly $3.9 trillion in ten-year savings. (However, Heritage notes that the total does not include interactions from enacting multiple proposals.) Here are a few highlights:

  • 65 percent of the cuts proposed are from a single item – capping spending on means-tested programs at 110 percent of pre-recession levels and growing that amount with inflation. Heritage estimates that this could save $2.7 trillion over the next decade. Heritage does not provide any details about which programs to cut, leaving it up to "policymakers to direct welfare spending to the areas of greatest priority."
  • Limiting Highway Trust Fund spending to existing revenue would result in about $180 billion in savings. Since transportation spending would be reduced, "states or private sector [could] take over the other activities if they value them."
  • Repealing the Davis-Bacon Act would reduce spending by $86 billion over the next ten years, by Heritage's estimate. The Act requires federally funded construction projects to pay "prevailing wages" based on the project's location. However, the Congressional Budget Office estimated that this would save less than $12 billion. We mentioned this as an option to reduce highway spending in our paper last year, Trust or Bust: Fixing the Highway Trust Fund.
  • Ending Supplementary Security Income (SSI) benefits for children would save $125 billion. Heritage would instead direct SSI toward disabled adults and seniors, and only keep the children's payments for medical expenses that Medicaid does not cover.
  • Other proposals would end Head Start, higher education programs, and job training programs, resulting in $170 billion in education and training services cuts.
February 11, 2015
The Risks of Delaying Fiscal Reforms

Erskine Bowles is a former co-chair of the Simpson-Bowles Fiscal Commission and a member of the Committee for a Responsible Federal Budget. He wrote a letter to the editor that appeared in the New York Times as a response to a column by Paul Krugman.

Paul Krugman’s Feb. 2 column, “The Long-Run Cop-Out,” claims that we don’t need to deal with our long-term fiscal challenges any time soon, and that those who argue otherwise are lazy and lacking in courage. His message is a disservice to the critically important debate about our nation’s economic future.

America’s unsustainable fiscal outlook is not a question — even Mr. Krugman concedes that we have a long-term problem. The more important, and still unanswered, questions are: If not now, when and how do we address our fiscal challenges?

Mr. Krugman’s assertion that America followed a course of austerity while the economy was still in a deep slump due to the influence of “Bowles-Simpsonism” ignores the fact that one of the key principles set out in the National Commission on Fiscal Responsibility and Reform report was that deficit reduction must not disrupt the fragile economic recovery.

Indeed, it is largely due to the failure of our elected leaders to reach agreement on long-term deficit reduction along the lines of our recommendations that we ended up with the mindless austerity of sequestration. In our report we recommended delaying significant budget cuts until the economy recovered, and implementing reforms gradually.

February 11, 2015
WSJ's Greg Ip on the President's failure to address the debt

In a commentary published on Monday, the Wall Street Journal’s Greg Ip wrote about President Obama’s budget and the declaration that it is moving away from “mindless austerity.” He approached the question of when, if ever, is a good time to implement austerity measures when deficits get too large.

Ip explains that there are two aspects of deficit spending – “structural” and “cyclical” – with the former referring to long-term differences between revenues and outlays and the latter to weak economic conditions that push up spending and lower revenue automatically.

The President's budget predicts the economy to be back at full capacity by 2017, meaning the cyclical portion of the deficit should be at or near zero. Ip points out this would be the best time to address the structural portion and put debt on a declining path. Although the President’s FY 2016 budget stabilizes debt as a share of GDP,  the debt is barely declining under its projections.

February 10, 2015

The President's FY 2016 Budget last week proposed dealing with the upcoming fiscal speedbump of the exhaustion of the Social Security Disability Insurance (DI) fund by shifting existing sources of money. The budget would shift payroll tax income from the Old-Age and Survivors Insurance (OASI) Fund to the Disability Insurance (DI) Fund. This proposal comes amidst the ongoing debate of whether this strategy, commonly known as a reallocation, is the right way to tackle the impending exhaustion of the DI fund next year.

This debate, recently fueled by a change in House rules, has been full of myths and misunderstandings. Supporters of a “clean reallocation” – unaccompanied by other program reforms – argue that it is a routine, technical step to move money between Social Security’s old-age program and its disability program. Opponents claim that we should not compromise the financial position of the OASI fund and oppose taking money from OASI unless we take steps to improve OASDI overall. This posts attempts to dispel some of the myths around the DI Trust Fund and reallocation debate.

Myth: We can prevent SSDI from running out of money by reducing fraud instead of reallocation

Fact: Reducing fraud will not provide enough, or timely, savings to avoid Trust Fund exhaustion.

Although it is always a good idea to reduce fraud, doing so will not provide enough savings to secure SSDI, and it will certainly not provide savings soon enough to avoid Trust Fund exhaustion. While several recent prominent cases show that SSDI fraud costs the program both money and support, estimates from the Social Security's Office of the Inspector General put the total fraud rate in the program at less than 1 percent of beneficiaries. To put this in context, if spending on SSDI benefits was reduced by 1 percent, only 6 percent of the program’s shortfall would be closed – and of course, no policy could completely eliminate fraud.

Moreover, no benefit change could occur quickly enough to avoid the need for some reallocation, inter-fund borrowing, or transfer. With little time left until the trust fund runs out, program costs would need to be reduced immediately by nearly one-fifth to prevent such exhaustion. That would mean essentially kicking off one-fifth of current beneficiaries or reducing current benefits by that same amount, neither of which is a plausible option. More thoughtful reforms could reduce program costs, but savings would accrue gradually over time, not all at once.

February 10, 2015

In addition to showing estimates over the next ten years, the President's budget includes in its lengthy Analytical Perspectives section a 25-year estimate of the important budget metrics. This long-term outlook shows the budget stabilizing debt between 73-74 percent of GDP over the entire period, compared to an increase to over 100 percent by 2040 in their "adjusted baseline." This stabilization is a clear improvement from the sharp upward path of debt in current law, but it would still leave debt at a high level, and the estimate relies on some assumptions that may be optimistic.

At the end of the first ten years, spending and revenue sit at 22.2 percent and 19.7 percent of GDP, respectively, for a 2.5 percent of GDP deficit. Over the following 15 years, both spending and revenue increase gradually by similar amounts, ending up at 22.7 percent and 20.4 percent, respectively, in 2040. Deficits, like debt, remain stable in the 2-3 percent range throughout this period.


The relative stability of the budget between 2025 and 2040 over time masks the change in its composition over time. Population aging and health care cost growth push up spending on Social Security and health care, particularly the latter, by nearly 2 percentage points of GDP while other categories of spending gradually fall over time. Revenue increases come from the individual income tax as increases in income push people into higher tax brackets.

February 5, 2015

The President's budget follows the important budget principle of PAYGO, responsibly identifying tax and spending offsets sufficient to pay for new spending and tax cuts, and setting aside additional savings for deficit reduction. While we have refuted the President's claim of $1.8 trillion in deficit reduction, the true figure of $930 billion is nothing to sneeze at.

Some parts of the President's budget tie initiatives to specific offsets – an increase in the cigarette tax to fund universal prekindergarten, a one-time tax on foreign income as part of business tax reform to pay for transportation spending, increases in capital gains taxes and a bank tax to pay for middle-class tax cuts.

Proposals Paired With Corresponding Savings
Paired Policy
Ten-Year Savings/Costs (-)
Provide universal prekindergarten, other children's initiatives - $90 billion
Increase tobacco taxes and index to inflation  $95 billion
Paired Policy  
Create a second-earner tax credit, increase child care credit, and other individual tax cuts - $275 billion
Increase and reform the taxation of capital gains and impose a tax on large financial institutions $320 billion
Paired Policy  
Additional highway spending - $270 billion
Impose one-time tax on untaxed foreign earnings of U.S. corporations $270 billion
Policies That Are Offset, But Not By Specific Items  
Partially eliminate the sequester  - $590 billion
Extend refundable credits for college, children, and work that expire in 2017 -$165 billion
Replace the Sustainable Growth Rate (SGR) - $155 billion
Net Deficit Reduction, after Paying for New Policies* $930 billion

*Total line includes all other policies in the President's Budget, which both increase and decrease deficits, not listed here.
Source: CRFB calculations based on OMB documents. Savings are costs are measured against a "PAYGO Baseline", which assumes continuation of current law.

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