The Bottom Line
February 27, 2013
Sen. Lindsey Graham (R-SC) put revenue on the table Monday night, in an interview on CNN's The Situation Room. Graham spoke out against sequestration and the damage that it would do to the Department of Defense, but also said that it brought an opportunity to agree upon a comprehensive plan.
Speaking on the sequester, Graham said:
To me this is a bipartisan problem. I voted against this deal because it is a lousy way to cut $1.2 trillion, which is imminently achievable. This is a chance to do the big deal. I'm willing to raise $600 billion in revenue if my Democratic friends are willing to reform entitlements and we can fix sequestration together.
We know the a comprehensive deal will require both tax and entitlement reform in order to reduce future deficits. It was good to see Graham call for both last night, but he has not been the only one. Sen. Mark Warner (D-VA) called for more revenues and spending cuts on CBS's This Morning. Sen. John McCain suggested that he would be willing to look at "revenue closers," or tax expenditures, in a interview on Fox News Sunday. And Rep. Scott Rigell (R-VA) recently said that he was willing to consider additional revenue in order to avoid sequestration.
Supporting both more revenue through tax reform and cutting spending through entitlement reform will be difficult for many lawmakers. But as we've said frequently here on The Bottom Line, the only way we are likely to solve our deficit problem is through bipartisan compromise that does both. Lawmakers need only to look at the recent framework from former Fiscal Commission co-chairs Erskine Bowles and Alan Simpson - it is difficult to come up with a plan that contains the needed $2.4 trillion in deficit reduction without taking a hard look at our tax code and growing health care spending.
February 27, 2013
A Bad Sequester Is Worlds Better Than No Budget Deal At All
We've talked a great deal about how sequestration is bad policy, but that the worst outcome would be to cancel the sequester without offsets. In the Fix the Debt Campaign's new sequester deal scoring system, that is the option that would receive their "F" grade. In a recent article at Forbes, CRFB board member and former Representative Bill Frenzel (R-MN) explains why lawmakers should not kick the can down the road, despite the sequester's drawbacks.
Frenzel agrees that the sequester is a less than ideal way to reduce the deficit: it doesn't address the drivers of the federal debt and doesn't distinguish between good cuts and bad cuts. But it does have value as a way to bring both parties to the table. Frenzel explains:
The worst feature of the sequester is that it is the wrong way to reduce spending. The cuts are mandated across-the-board in most discretionary spending areas. The good programs will be cut along with the bad. The most hard-hit casualty will be the Defense Department (DOD). It can stand cuts, but they need to be carefully selected. The sequester does not select. The sequester meat-axe slices muscle along with the fat.
It is hard to believe that allegedly smart people could have agreed to such a device. The President and the leaders of both houses signed off on the sequester in the belief that because it was so bad it would force them into a compromise deficit/debt reduction plan despite their philosophic disagreements.
As it seems to be turning out, our representatives’ philosophic disagreements are more precious to them than the health of the nation’s economy. Republicans want to protect tax rates and Democrats want to protect entitlement programs. They would prefer the sequester, admittedly smaller than the tax cliff, to any form of compromise.
The moment of truth is only a week away. Most odds-makers believe the Sequester will actually occur. However, the policymakers do have other choices: (1) they could postpone it, in hopes of making a later deal (2); they could trash the sequester, and sacrifice long-term growth for another short-term fling; (3) they could give the Executive Departments leeway to make the cuts where best tolerated; or (4) they could live with the sequester for a few weeks or months, and then holler “uncle” and opt for (1) , (2), or (3) above.
But Frenzel argues that despite sequestration's limitations, it will force lawmakers to do something about our unsustainable debt problem. Lawmakers have a clear incentive to replace the sequester with smart deficit reduction, but should they fail to compromise, it's better than nothing. Frenzel writes:
This writer believes that the sequester will happen. However, when airport security lines triple, the national parks open later and close earlier, and our military tours abroad are extended, there is a good chance that Congress will begin to rethink the problem, particularly with respect to DOD. If so, at that point, it is critical that Congress replace a dumb cut with a smart cut of equal value, rather than deferring or repealing the sequester.
Our debt is already high. CBO sees it going higher rather than stabilizing under the most likely budget scenarios over the next 10 years. The President’s budget drives the debt ratio up around 80% in 10 years. That’s one reason why cancelation, or deferral, of the sequester would be unwise. Over 10 years, the sequester would save well over $1 trillion. Another reason is that it makes no sense to swap short-term faster growth for long-term reduced growth.
If no comprehensive compromise (one with total 10-year reductions of Bowles-Simpson proportions) is in sight, it is better to accept the stupid cuts of the sequester than to postpone deficit/debt reduction plans again. The best plan would be smart cuts. The sequester is a distant second choice, but, clearly, it is better than nothing.
The full blog post can be found here.
"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.
February 26, 2013
We have been working our way through the "15 Ways to Rethink the Budget" report from the Brookings Institution's Hamilton Project, first covering their defense proposals and reforms to Medicare. In this post, we will examine four papers that take a look at the nation's tax code, particularly the many credits and deductions. These papers offer some good ideas about how to best reform or eliminate many tax expenditures, which will cost the federal government nearly $1.3 trillion in forgone revenues in 2013. Let's examine each paper in turn.
Broad-Based Limits to Tax Expenditures
The first proposal is from Diane Lim of The Pew Charitable Trusts entitled "Limiting Individual Income Tax Expenditures." In this paper, Lim argues that broad based reforms to limit the value of tax expenditures could be nearly as effective and politically easier than eliminating individual tax expenditures in the code.
Lim identifies two categories of ways to reduce income tax expenditures across the board, by either reducing the subsides at the margin or by capping or limiting the total value of tax provisions. Options that could reduce the value of tax provision at the margin include limiting tax deductions to a lower marginal rate, converting deductions into credits, or reducing tax expenditures by a set percentage. Options that could reduce the value of tax expenditures without changing incentive at the margin include capping the total dollar value of deductions, limiting tax provisions to a percentage of income, or phasing down tax expenditures at higher incomes. Lim argues that a comination of changes from the two approaches could be useful to avoid the drawbacks of each. Many of these ideas are similar to ones we discussed last year.
Reforming Savings Incentives
The second proposal comes from Karen Dynan of the Brooking Institution, "Better Ways to Promote Saving through the Tax System," and, as one would imagine, takes a look at many tax expenditures designed to promote saving, costing an estimated $136 billion. However, there is some evidence that some of these tax provisions provide windfalls, promoting retirement savings among those who would have done so anyways. As the chart below shows, personal saving has continued to fall in the U.S., despite these provisions in the tax code.
Source: Dynan (Data from Bureau of Economic Analysis)
With that in mind, Dynam recommend the following changes, which together would save $40 billion in net deficit reduction:
- Capping the rate at which deductions and exclusions related to retirement saving reduce a taxpayer’s income tax liability at 28 percent (Saves $75 billion).
- Taking steps to ensure that more workers are covered by some type of retirement savings plan by increasing the small employer pension startup tax credit and establishing an automatic IRA program (Saves $3 billion-$6 billion).
- Making the Saver’s credit refundable and easier to understand (Costs $30 billion).
- Removing obstacles to firms establishing expanded savings platforms that would allow employees to save for both retirement and non-retirement purposes (Negligible Savings).
Eliminating Fossil Fuel Subsidies
The third paper, "Eliminating Fossil Fuel Subsidies," comes from Joesph Aldy of Harvard University. Aldy argues that the nearly $4 billion of revenue annually forgone in tax provisions for oil and gas companies is no longer justified given the economic rewards and advances in technology. The proposal calls for the elimination of 12 tax provisions that promote oil, gas, and coal production, saving over $41 billion over ten years.
The largest include allowing expensing of intangible drilling costs (like labor and fluid) instead of depreciating them over the life of the well ($13.9 billion), the portion of the domestic production activities deduction that goes to oil and gas ($11.6 billion), and percentage depletion for wells, which allows companies to deduct a percentage of their revenues of a well ($11.5 billion). These subsides, according to Aldy, are doing little to stimulate additional production and should be looked at given our fiscal realities.
Reforming the Mortgage Interest Deduction
The final paper on tax expenditures, "Replacing the Home Mortage Interest Deduction" is authored by Alan Viard of the American Enterprise Institute. As Viard explains, if homes were taxed in the same manner as business capital, imputed rent (the return from owning and occupying a home) would be taxed while mortgage interest payments would be deductible. Our current tax system does not tax imputed rent, but still provides a mortage interest deduction, serving mostly as an inefficient subsidy for more expensive homes.
Viard proposes converting the current mortage interest deduction into a 15 percent refundable credit, a change included in the Domenici-Rivlin tax plan. The credit limited to interest on a $300,000 mortgage (the current limit is $1.1 million) and would not be allowed on second homes. The current deduction would be reduced by 10 percent each year, with an option to switch to the new credit at any time. Overall, this change could result in $300 billion in savings over ten years, a substantial amount of deficit reduction.
We've mentioned frequently on this blog that tax expenditures deserve a thorough look. Not only do they represent a significant amount of forgone revenue, in some cases they may not be fulfilling their policy goals effectively. A simpler, pro-growth tax code could be less economically distortionary and raise revenue without raising tax rates. Our tax code needs to be reformed, and many of the ideas above should be considered in the conversation.
February 26, 2013
As promised, the Brookings Institution's Hamilton Project has released the remaining papers in its series "15 Ways to Rethink the Budget." We will be discussing the papers a series of blog posts. We covered two defense proposals on Friday, and next we focus on their Medicare proposals which affect both beneficiaries and providers in the program.
The first proposal comes from MIT economist Jonathan Gruber in a paper on "Restructuring Cost Sharing and Supplemental Insurance for Medicare." Gruber describes the value of his proposal as follows:
Traditionally, efforts to control the costs of the Medicare program have focused on the “supply side,” changing the method and amount that Medicare pays its providers. There has been much less focus on the “demand side,” using financial incentives to encourage less medical spending by enrollees....Yet efforts both to improve the value of the Medicare program for beneficiaries and to lower its costs to the government would benefit from some focus on the demand side.
Gruber describes the current cost-sharing system in Medicare as "both variable and uncapped, with an overall structure that is hard to rationalize." The confusing nature of Medicare's cost-sharing and the potential for unlimited costs to beneficiaries has led the majority of beneficiaries to seek supplemental insurance, which has been shown to increase over utilization and consequently Medicare spending.
Thus, this proposal seeks to improve cost-sharing through changes to Medicare and supplemental insurance, somewhat similar to what the Simpson-Bowles proposal did. First, Gruber builds upon a 2008 CBO option that would replace current cost-sharing rules with a single combined deductible of $525, a 20 percent coinsurance rate, and a $5,250 out-of-pocket (OOP) maximum. Instead of a $5,250 OOP maximum, Gruber proposes instituting a progressive out-of-pocket limit on payments. The limit would be a sliding scale fraction of the Health Savings Account limit based on the beneficiary's income, going from one-third of the HSA limit ($1,983) for people making between 100 and 200 percent of the poverty line to the full HSA limit ($5,950) for people making over 400 percent. In addition, he proposes reducing the deductible to $250 for seniors below 200 percent of poverty. Second, to address the supplemental insurance issue, he proposes an excise tax of up to 45 percent on premiums for Medigap plans and employer-sponsored retiree coverage (for those over 65). Gruber roughly estimates the proposal would save about $125 billion over ten years, although he acknowledges this depends on the exact level of the excise tax and other uncertainties.
The second Medicare proposal, "Transitioning to Bundled Payments in Medicare," from Harvard Medical School's Michael Chernew and USC's Dana Goldman focuses, as you would expect, on the provider side of the equation. The paper proposes reforming Medicare's payment system to align provider incentives with efficiency and quality of care. They describe the problems with the current system as follows:
The existing FFS portion of Medicare, which enrolls almost 75 percent of Medicare beneficiaries, relies on a byzantine system of fee schedules. There are thousands of codes for different services; setting the appropriate fee is enormously complex. Mispriced fees create incentives leading to the overuse (or underuse) of medical services. As a result, resources flow to overpriced activities and infrastructure. Importantly, the FFS system reduces incentives for providers to be efficient over the entire episode of care (Chernew, Frank, and Parente 2012; Landon 2012).
To address these issues, Chernew and Goldman would create a global payment model within Medicare, which would involve paying provider systems or Medicare Advantage plans a fixed per beneficiary payment to cover all medical services. While the level of these payments can be dialed, they recommend as a default setting them equal to current law Medicare spending (which would be $100 billion lower than current policy spending). In addition, they suggest creating as much regulatory neutrality as possible between Medicare Advantage (MA) plans and Accountable Care Organizations (ACOs). Such neutrality would involve allowing ACOs to act like MA plans in controlling benefit design and charging above benchmarks for higher quality plans (to attract beneficiaries). Finally, they would drop various fee-for-service regulations (i.e. self-referral rules) for providers who accept global payments, since efficiency gains under a global payment model would eliminate the need for them.
Both proposals are welcome ideas that not only have potential for savings, but could modernize Medicare to operate more efficiently. Success in containing federal health care spending depends on making Medicare more efficient to encourage higher value.
February 26, 2013
One of the lesser known provisions of the American Taxpayer Relief Act is the extension of the refundable American Opportunity Tax Credit (AOTC) through 2017. The AOTC was created in the 2009 stimulus to replace the non-refundable Hope Credit, and provides a tax credit equal to spending on tuition, up to $2,500. A recent post by Elaine Maag on TaxVox shows the growth of education-based tax expenditures over ten years, a trend that has accelerated with the creation of the AOTC.
Tax expenditures for higher education aid have grown significantly in value since the Hope and Lifetime Learning Credits were created in 1997, quadrupling in value between 2000 and 2010. Tax expenditures for higher education totaled $34.2 billion in 2012, compared to the $35.6 billion in spending on Pell grants.
Maag also shows that the AOTC may be less effective in reaching low-income students. For one, the AOTC is not received until a tax return is filed, meaning the benefits often don't reach filers until well after tuition is paid. Also, the Tax Policy Center estimates that half of the benefits from the tuition and fees deduction and a quarter of the AOTC's benefits will go to families making over $100,000. This is a significant amount of forgone revenue to subsidize those who likely would have attended college without the AOTC. Many lawmakers may want to promote higher education, but it may be worth questioning if these resources can be directed in a better way.
Tax expenditures may get less scrutiny than direct government spending does, and it is worth examining some of these credits and deductions to see if they are achieving their policy goals in a cost-effective way. A report from the GAO discussed things to think about when evaluating tax expenditures. In doing so, the report suggested that there were many ways to improve or eliminate many deductions and credits, paving the way for a simpler and more efficient tax code. The GAO especially highlights the prevalence of tax windfalls, where much of a tax expenditure's value is going towards promoting behavior that would have taken place anyway. Tax-based student aid may be one of those areas the way many credits are currently designed.
About a month ago, we highlighted a report from the New America Foundation's Education Policy Program on reforming federal financial aid. Not surprisingly, tax expenditures were targeted in recommendations, and the report recommended eliminating higher education tax benefits (i.e. the American Opportunity Tax Credit) and tax advantaged education savings plans (i.e. 529 plans) and redirecting the savings to the Pell Grant program.
Lawmakers may chose to keep some tax expenditures around to achieve worthwhile policy goals, such as promoting education, homeownership, and donations to charity. But tax expenditures will also total nearly $1.3 trillion in forgone revenues, and given unsustainable debt projections, lawmakers will need to find additional revenues in addition to controlling spending growth in entitlement programs. Not all deductions and credits need be eliminated, but many will have to be reformed. Tax reform could create a more efficient and effective tax code, and that will require taking a serious look at tax expenditures.
February 26, 2013
Weekly Update on Budget and Fiscal Policy Developments and a Look Ahead
Sequester Week – It’s all about sequestration this week as the March 1 deadline for the $85 billion in across-the-board cuts looms (read all about the sequester here). The deadline at the end of the week is the culmination of a chain of events begun a year and a half ago with the Budget Control Act (BCA). The BCA avoided a national default by raising the debt ceiling in exchange for some spending cuts and mechanisms to ensure further deficit savings, including sequestration. The reasoning was that the sequester would be so unpalatable to both parties, with abrupt spending cuts equally divided between domestic and defense spending, that lawmakers would seek a deal on a more thoughtful and comprehensive approach. That logic failed both when the Super Committee was unable to come up with a plan to replace the sequester and at the beginning of the year when the deadline for the sequester was delayed for two months. The sequester is a symbol of the failure of our leaders to compromise and work together in the best interests of the country. The Fix the Debt Campaign has a handy report card you can use to grade the performance of our policymakers.
All Quiet on the Sequestration Front – Congress is back is in session this week, but policymakers are by no means exhausting themselves in trying to avoid the cuts from taking effect. While Washington has become quite adept at averting disaster at the last minute, every indication at the moment is that sequestration will take effect on Friday even though everyone wants it replaced. With no deal in sight, there are plans to vote on Democratic legislation that will replace the sequester with an even mix of spending cuts and additional revenue and a Republican bill to give agencies more flexibility in carrying out the sequester. Neither measure is expected to garner support from the opposite party. Alan Simpson and Erskine Bowles also put forth a plan for $2.4 trillion in deficit savings that could replace the sequester last week.
On to the Next Deadline – Though they don’t realistically plan to solve the sequester by Friday, policymakers are already looking ahead to the next fiscal deadline. On March 27 the stopgap measure funding federal operations will expire and the federal government will shut down unless agreement is reached. Lawmakers have all but given up on enacting a comprehensive budget blueprint for the rest of the fiscal year, but they will want to agree on another stopgap measure to prevent a shutdown. The battle will be over spending levels, as in if the sequester is reflected or not, and what kind of flexibility federal agencies will have in making cuts to meet the sequester. Currently, agencies have little flexibility in deciding what gets cut and what doesn’t, but a new continuing resolution could re-assign those cuts. There are lots more fiscal speed bumps down the road, as illustrated by our infographic.
Stating the Case – President Obama is on the road making the case for his approach to replace the sequester with a mix of spending cuts and revenue increases, with a White House spokesman saying the spending cuts to revenues ratio for a sequester replacement could be 2 to 1. To make the case that sequestration will be harmful to Americans, the White House released fact sheets on how sequestration would affect each state and the District of Columbia. The Administration is also urging state governors to pressure lawmakers to avert the sequester.
No Hiding Fact the Debt Must Be Addressed – A new academic paper indicates that the U.S. may soon reach a point where the national debt seriously impairs the economy. The research implies that debt at 80 percent of the economy could result in a "debt trap" of spiraling interest rates and interest payments to service growing debt. At the same time, a recent survey of economists suggests that a comprehensive debt plan that involves all parts of the budget could boost the economy in 2014.
Lew Committee Vote This Week – The Senate Finance Committee will vote on the nomination of former Office of Management and Budget director Jacob Lew to be treasury secretary on Tuesday. The nomination is expected to go through and Lew will be a key player in the upcoming budget battles.
Key Upcoming Dates (all times are ET)
February 26
- Senate Finance Committee hearing on the CBO 2013 Budget & Economic Outlook at 10 am as well as an organizational meeting and vote on Jacob Lew to be Treasury Secretary.
- Senate Budget Committee hearing on the impact of federal investment on people, communities and long-ter meconomic growth at 10:30 am.
February 27
- House Armed Services subcommittee hearing on the impact of budget constraints on military end strength at 2 pm.
- Senate Aging Committee hearing on streghtening Medicare for today and the future at 3 pm.
February 28
- Bureau of Economic Analysis releases second estimate of 2012 4th quarter and annual GDP.
March 1
- Across-the-board cuts to defense and non-defense discretionary spending prescribed in the Budget Control Act, known as "sequestration," will take effect.
March 8
- Dept. of Labor's Bureau of Labor Statistics releases February 2013 employment data.
March 15
- Dept. of Labor's Bureau of Labor Statistics releases February 2013 Consumer Price Index data.
March 27
- Current continuing resolution (CR) funding the federal government expires.
March 28
- Bureau of Economic Analysis releases third estimate of 2012 4th quarter and annual GDP.
April 5
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.
April 15
- Congress must pass a budget resolution as specified in the Congressional Budget Act. Also, due to the debt ceiling suspension bill, lawmakers will have their pay withheld after this date until their respective chamber passes a resolution.
April 16
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 Consumer Price Index data.
April 26
- Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP.
February 25, 2013
Most everyone – from President Obama, Speaker Boehner, and lawmakers from both sides of the aisle, to renowned economists – agrees that allowing sequestration to occur would be a less than ideal way to tackle our debt problem. The across-the-board spending cuts on domestic and defense budgets will lead to furloughs and layoffs, and don't address inefficiencies in entitlement programs and the tax code, the major drivers of the debt in the future. However, we need to do something to reduce the deficits, and the worst outcome would be to cancel the sequester without offsetting it.
These spending cuts need to be replaced with a comprehensive debt deal containing critical reforms that put our national debt on a downward path as a share of our economy. On Friday, the Fix the Debt campaign released a grading scale that shows how to score our national leaders on the deal they reach (or not). The fate of our economy in both the short and long term depends on what lawmakers do.
To get an A, lawmakers would have to replace the sequester with a plan that would put debt on a clear downward path as a share of the economy, which our recent analysis found would require $2.4 trillion in additional savings over ten years compared to current policy. The grades fall as the sequester solution gets less comprehensive. Lawmakers earn a B if they offset a permanent repeal of the sequester, a C if they offset a one-year repeal, and an F if they delay the sequester without offsets. Allowing the sequester to happen gets an incomplete grade due to its insufficient amount of long-term deficit reduction.
Hopefully, lawmakers go for the highest grade and make additional reforms to health care and Social Security that would make those programs sustainable over the long term. Given the strong support from American citizens, we hope our national leaders step up to the plate and reach a bipartisan deal to solve our budget problem.
Click here for the full-scale report card.
February 25, 2013
There has been a lot of talk about the sequester in recent weeks as the latest in a long line of fiscal stand-offs ensues in Washington. In FY 2013, the sequester will hit defense budget authority by $43 billion, non-defense discretionary budget authority by $26 billion, Medicare spending by $11 billion, and other mandatory spending by $5 billion.
The chart below from the New York Times shows that while the cuts themselves are significant, a good deal of spending is excluded from sequestration, especially spending on entitlement programs. We need to do something about our unsustainable budget and the sequester is better than nothing, but almost everyone agrees that the sequester is a dumb way to reduce the deficit. It includes severe cuts up front that would harm the economy, hinders the federal government's ability to provide basic services through across-the-board cuts, and does not address the drivers of our long-term debt.
Source: New York Times
Scott Lilly of the Center for American Progress points out another way in which the sequester cuts are not smart: in some cases, the cuts may increase the deficit. For one, the sequester's hit to the economy would depress revenue and increase spending on countercyclical programs (although the effect would most likely not wipe out the initial savings fully over ten years). Lilly further points out that the economic contraction may actually be bigger than anticipated, since the sequester may have further ripple effects beyond what a simple multiplier analysis would indicate. For example, cuts to the Federal Aviation Administration (FAA) could lead not just to fewer jobs at the agency and related effects, but it also could hurt the airline industry by reducing the number of flights that they can operate. This kind of disruption is not typically experienced with other kinds of cuts.
Also, because of the way some of the affected spending works, some cuts may actually have no impact or even a negative impact on the deficit. To use the FAA as an example again, since the sequester cuts could reduce the number of flights and the FAA is largely funded by user fees collected on a per flight basis, the agency's savings from the budget cuts would mostly be erased by losses in revenue. This would be a worst of both worlds result -- disrupted service with little or no savings to show for it.
Other examples of counterproductive cuts include the IRS and the Center for Medicare and Medicaid Services (CMS). The IRS, of course, is responsible for collecting revenue, so cuts to their budget would result in less revenue collection, likely an amount that is greater than the initial cuts. We've seen that the reverse is true with the Senate version of the Budget Control Act, which increased funding for the IRS by $14 billion over ten years and was scored as increasing revenue by $44 billion (a net $30 billion gain). In the case of CMS, they preside over an enormous budget that will shrink only a little -- Medicare will be cut by 2 percent and Medicaid is exempt -- while their own budget will shrink by 9 percent, according to Lilly. And even if the size of Medicare payments is smaller, the number of payments CMS must process will not shrink. As a result, it is quite possible that the increase in improper payments would swamp the initial savings from cutting CMS's budget. As you can imagine, there are plenty of other examples of sequester cuts which would hamper agencies' abilities to maintain budgetary discipline.
Clearly, the sequester is not a smart way to reduce the deficit, but that does not mean it should be repealed without offsets--that would be a clear step back in the effort to get our budget on a sustainable path. Instead, lawmakers should make much smarter choices by working to get our debt under control with more gradual changes. This plan should also go much further than the sequester and tackle the long-term drivers of our debt so that, unlike the sequester, it can make our long-term fiscal future much brighter. Lawmakers should take advantage of this moment and enact a smart deficit reduction plan as a replacement, as described in Fix the Debt's report card. The sequester debate is an opportunity as much as it is a problem.
February 22, 2013
CRFB's Maya MacGuineas joined former Sen. Alan Simpson (R-WY), Sen. Mark Warner (D-VA), Sen. Mike Crapo (R-ID) and Rep. Mike Simpson (R-ID) at the University Of Idaho for the McClure Center Symposium on Federal Fiscal Issues on February 19 for a program that was produced by Idaho Public Television.
Much of the discussion focused on the upcoming sequestration and how it is not the best way to address the national debt. There was also a frank discussion on the need for compromise on a comprehensive approach that deals with all parts of the budget.
Watch the program for a better understanding of the sequester and what needs to be done to put the U.S. on a better budget path.
February 22, 2013
Today, a new paper was presented at the U.S. Monetary Policy Forum by David Greenlaw, James Hamilton, Peter Hooper and Frederic Mishkin on a possible tipping point for government debt as a share of the economy, past which a country may be vulnerable to a self-reinforcing cycle.
The paper examines 20 industrialized countries and analyzes how borrowing costs change based on certain levels of debt. Beyond net public debt levels of 80 percent of GDP, borrowing costs begin to rise exponentially to the point that countries may fall into "a debt trap" that is difficult to escape. This happens because lenders demand higher interest rates, leading to higher interest payments and debt. Based on the authors' calculations of net public debt (which appear to be a slightly different meaure than used by OMB and CBO) the U.S. was at the 80 percent threshold in 2011. The effects of rising borrowing costs on debt can be seen in the graph below, where CBO projections are compared to a simulation that doesn't assume constant interest rates as CBO does in its model.
Many papers have studied tipping point or thresholds beyond which a fiscal crisis could take place or economic performance would languish. A paper from Carmen Reinhart and Kenneth Rogoff found that gross debt levels above 90 percent, which the U.S. has already reached, could reduce growth. Other reports from CBO, the IMF, Cecchetti, and others have found similiar effect of debt on growth. The thresholds found in these papers range and may not be exact, but our current debt levels are close enough that we should be paying serious attention, especially given our long-term budget outlook driven by aging and health care cost growth.
As we explained in our report on the topic, fiscal crises can happen and be responded to in different ways. We detail several scenarios about how a fiscal crisis might play out, including:
- A Gradual Crisis: We muddle along with inadequate high value government investments and slower growth.
- A Catastrophic Budget Failure: An abrupt crisis occurs.
- An Inflation Crisis: Higher debt is managed through inflation.
- An External Crisis: A dollar or trade crisis leads to a fiscal crisis.
- A Default Crisis: A series of events leads to a default.
We may not be in a fiscal crisis yet, but that is no reason to be complacent. As Federal Reserve Governor Jerome Powell said in a response to the paper, we are getting closer and closer to a point where the debt could do serious damage:
We may have more room than other economies around the globe, but I do not intend to project any sense of complacency around this topic. The authors' basic message seems just right to me: We don't know where the tipping point is; wherever it is, we are clearly getting closer to it, and the costs of misestimating its location are enormous and one-sided. The benefits to long-term fiscal consolidation--conducted at the right pace, and without jeopardizing the near-term economic recovery--would be substantial.
We don't know exactly at what levels of debt would trigger a fiscal crisis for the U.S., but it would be best if we never found out. There are disastrous risks associated with doing nothing and economic benefits to enacting a comprehensive plan as a solution. We know we will have to solve this problem, so it's time for lawmakers to come together and work toward a compromise.
The full paper can be found here.
February 22, 2013
Today, the Hamilton Project at the Brookings Institution will be kicking off its "15 Ways to Rethink the Federal Budget" project with an event on two different proposals to reduce defense spending. Brookings also released a paper on reforming temporary work visas and will release the remaining proposals at an event next Tuesday. The specific papers will be:
- Transitioning to Bundled Payments in Medicare ($100 billion)
- Reforming Federal Support for Risky Development ($40 billion)
- Restructuring Cost Sharing and Supplemental Insurance for Medicare ($125 billion)
- An Evidence-Based Path to Disability Insurance Reform ($10-20 billion)
- Eliminating Fossil Fuel Subsidies ($41 billion)
- Better Ways to Promote Saving through the Tax System ($40 billion)
- Limiting Individual Income Tax Expenditures ($1 trillion)
- Replacing the Home Mortgage Interest Deduction ($300 billion)
- Funding Transportation Infrastructure with User Fees ($312 billion)
- Creating an American Value-Added Tax ($1.6 trillion)
- The Many Benefits of a Carbon Tax ($199 billion)
- Overhauling the Temporary Work Visa System ($7-12 billion)
- Increasing the Role of the Private Sector in Housing Finance ($134 billion)
- National Defense in a Time of Change ($500 billion)
- Making Defense Affordable ($540-770 billion)
The first defense proposal by Admiral Gary Roughead and Kori Schake of the Hoover Institution includes enough specific savings to meet the total called for in the President's budget. They would redesign the force structure and related infrastructure to better meet the strategy laid out by the Pentagon last year, shifting focus away from fighting sustained ground wars and more towards providing quick response times in Asia. This approach would involve an additional 200,000 active duty troop reduction in the Army (down from its planned 490,000) -- combined with a 100,000 person increase in reservists -- and a slight reduction in the Marine Corps, while leaving the Navy and Air Force at their currently planned levels. They would also reduce civilian personnel by a greater proportion than the uniformed personnel reductions.
In terms of acquisitions, they prefer to see not only a better evaluation of our needs, but a more efficient delivery of what the Pentagon does want. This involves reorienting the process to more closely connect process requirements to cost and holding Service Chiefs more accountable for failures to meet cost or time deadlines. In terms of personnel costs, they said they would save $20 billion annually by phasing out TRICARE for Life, increasing copays for medical and pharmaceutical costs, and allowing service members to design their own benefit package.
The second defense proposal comes from MIT's Cindy Williams. The paper looks at a number of different options for reducing the Pentagon's "internal cost growth" (cost growth within the Pentagon that puts pressure on the rest of the defense budget) and ways to meet two different spending reduction strategies: reducing defense spending by 10 percent in real terms through proportional reductions in military departments and reducing it by 16 percent in real terms by 2015 while rebalancing forces towards Asia. She starts off by noting the budget situation and the fact that defense spending has often played an important role in deficit reduction, especially during drawdowns from wars.
Source: Williams (Data from OMB)
To reduce internal cost growth, Williams recommends using the Pentagon's recommended health care reductions, limiting pay raises to inflation for four years, reducing the number of personnel who serve until retirement, reducing housing allowances for off-base housing, cancelling systems whose excess costs exceed 10 percent over five years, and ramping up enforcement of acquisition procedures.
Meeting the broader goals would require those policies and additional changes in force structure. Williams looks at what the first option -- reducing departments proportionately, resulting in a 10 percent real cut -- might entail. The Army would see five additional brigades eliminated and a reduction of 60,000 additional active duty troops, the Navy's fleet would be reduced from the 295 ships they plan to have in 20 years to 250 proportionally, the Marine Corps would be reduced by another 14,000, and the Air Force would shed 7 squadrons and 39,000 airmen. The second option is intended to more closely reflect the Pentagon's strategy and is compared to the first option to see how priorities differ. The cuts are more focused on the Army, which would see 13 brigades eliminated and a reduction of 120,000 active duty troops, mostly coming from Europe. The Navy would shift its resources away from carriers and littoral combat ships to submarines. The Air Force would reduce its airmen by 62,000 and shift resources away from fighters and more towards support and long-range bombers. Intelligence budgets would be reduced by 16 percent. Overall, the second option makes deeper cuts than the first, but does so in a more targeted way.
The Hamilton Project's re-thinking of the federal budget should be very interesting, producing detailed analyses of policy proposals across the budget. We look forward to seeing the rest of the papers on Tuesday, and will report back on The Bottom Line when they come out.
February 21, 2013
On Tuesday, former Fiscal Commission co-chairs Erskine Bowles and Alan Simpson released a framework that calls for an additional $2.4 trillion in deficit reduction over the next ten years. The proposal has been met with much support from commentators and media, and should further the conversation on debt and deficits as lawmakers move into the next round of budget negotiations. Bowles and Simpson will release more details about the framework in the coming weeks, but in the meantime they have addressed many questions and concerns that people might have about the proposal.
One point raised by some commentators was that Al Simpson and Erskine Bowles called for more deficit reduction than the original Fiscal Commission recommendations. But this isn't true. We addressed similiar claims in the past about the total savings called for by the Fiscal Commission plan; it depends on the budget window and baseline.
The baseline the Commission originally used has changed since 2010, most notably the 2001/2003/2010 tax cuts they assumed to expire for those making above $250,000/$200,000 (household/individual); by contrast, most budget negotiations used a full extension of the tax cuts as their baseline. In addition the budget window has shifted from 2011-2020 to 2014-2023 and due to dropping low savings years and replacing high savings years, the amount of deficit reduction is greater. While the plan was originally estimated to save $4 trillion through 2020 relative to the original baseline, it would now save about $6.5 trillion through 2023. The chart below from our recent report on a $2.4 trillion plan shows about $1.6 trillion less in savings than the original Fiscal Commission approach, with debt at a higher level in 2023.
Source: CRFB
Another common question was why this framework contained less revenue than the original Fiscal Commssion recommendations, asked by Derek Thompson and Ezra Klein among others. It's important note that the framework was not considered to be Simpson-Bowles 2.0, instead starting from where the fiscal cliff negotiations left off. Bowles explained further in an interview with Ezra Klein:
Ezra Klein: Your original plan asked for more than $2.5 trillion in taxes over the next decade. This plan asks for about half that. Why did your tax ask fall so far?
Erskine Bowles: A couple of reasons. The point was to start where the two sides were at the end and try to beef it up so that it would actually get debt down below 70 percent of GDP and keep it on a downward path. I think it is fair to say if you go back and look at what was said after we came out with the original Simpson-Bowles plan, the White House and the president hit us up pretty hard for two things. They said we had too much revenue and too much defense cuts. Remember that? If you wanted to do at that point in time at least $4 trillion in deficit reduction, that didn’t leave you many places to go.
We weren’t going to go after income support programs. In addition, as I look at the president’s final offer — it looked to me like if you dressed it up, it was around $1.4 trillion in revenue — if you look at what we’re doing here, and you look at our proposal for revenues in transportation, which you left out, then it’s not too different a number. And being far out front of the president on revenues wasn’t something I wanted to do again. And since I’d already been called back on defense, that only left the other areas.
The President of the AFL-CIO Richard Trumka issued a statement against the plan, saying that it "cuts tax rates for the richest Americans and corporations and pays for these lower tax rates by cutting Social Security COLAs, taxing health benefits, and cutting federal employees’ health and retirement benefits." But the new proposal from Simpson and Bowles says nothing of cutting the tax liability for the richest Americans. In fact, it calls for $600 billion in revenue from tax reform and specifically states that it should be done in a way that at least maintains, if not increases, the progressivity of the tax code. Tax expenditures are skewed toward the wealthy, and there are many proposals that could raise revenue from limiting the value of tax expenditures for wealthier taxpayers or otherwise reform the tax code in a progressive way. Trumka's statement also mischaracterizes the framework goals in its health care reforms. From the Moment of Truth Project:
On the health side, we’re calling for reductions in provider payments, reforms to cost-sharing rules, increases in premiums for higher earners, savings from lower drug costs, and adjustments to account for an aging population. Most importantly, we will be focused on the type of cost-bending reforms that realign incentives so that quality – no quantity – drives health care decision making.
The Heritage Foundation questions the need for additional revenue, given the revenue raised in the American Taxpayer Relief Act. But the negotiations to avert the fiscal cliff show that more revenue will be needed in a bipartisan compromise. Even Speaker Boehner was willing to put more revenue on the table in December than was raised by ATRA. From MOT's Q&A:
Speaker Boehner’s opening offer had more revenue than what we ultimately enacted on a bipartisan basis on New Years. We agree that the primary focus needs to be on entitlement reforms, and our proposal recommends aggressive entitlement reforms along with additional spending cuts. But we do not believe it will be possible to achieve the amount of savings necessary to put the debt on a downward path entirely on the spending side without jeopardizing our goals of protecting vulnerable populations and preserving funding for key investments.
Including additional revenues will also be necessary to reach bipartisan agreement on a plan to reform entitlements, and it represents the best chance for comprehensive tax reform. We have no interest in raising tax rates again; we want to lower them. There is so much wasteful spending in the tax code that there is room to lower those rates and reduce the deficit at the same time.
Of course, many other questions can also be answered by looking at the full report on the framework. The details may change in the coming weeks, as Simpson and Bowles recieve feedback from various policymakers, but it is a good step in shifting the conversation toward what we need to do next. Lawmakers need to go back to what was on the table in December, and then go a bit further if we are going to be able to put the debt on a sustainable path.
Click here to read answers to FAQ's from the Moment of Truth Project and here for the full interview from Ezra Klein.
February 21, 2013
Yesterday, we highlighted the consensus between economists and leaders in both parties on the need to replace the sequester. Today, a USA Today poll of top economists shows strong support for a "Grand Bargain" that could help economic growth. The poll of 46 economists found that "64% say a deal that would close tax loopholes, change policies such as the way Social Security benefits are adjusted for inflation, and curtail Medicare and Medicaid spending growth would help the economy 'some' or 'a lot' in 2014." If lawmakers enact pro-growth reforms to the tax code and spending programs, the economic benefit would be particularly pronounced.
Source: USA Today
Other reports have shown long term benefits to a significant deficit reduction plan. Most recently, a study from CBO showed a $2 trillion deficit reduction plan could raise output (GNP) by nearly 1 percent by 2023. But this new survey suggests many economists believe the benefits to deficit reduction could come even earlier, perhaps due to the increased confidence and certainty boosting investment.
As mentioned above, the economic benefits of deficit reduction could also come as a result of pro-growth tax reform. Our current tax code is outdated, overly complex, and inefficient. Reforming it presents an opportunity to simplify the code and raise revenue. For example, former Chairman of the Council of Economic Advisers Martin Feldstein proposes raising revenue from tax expenditures in an op-ed in today's Wall Street Journal. Feldstein argues that a cap on expenditures coupled with entitlement reforms would generate significant savings and reduce the deficit. He believes the move to limit tax expenditures could forge common ground among national leaders and reduce partisanship that surrounds discussions geared towards a bipartisan deal. He enumerates two principal approaches towards limiting tax expenditures:
- Limiting the tax savings from all deductions and two major tax exclusions to 2% of an individual's adjusted gross income: Feldstein projects such a move would reduce the deficit by $220 billion in 2013. This approach is further discussed here.
- Modifying the 2% cap to retain the existing deduction for all charitable contributions and allow employees to exclude the first $8000 of employer-paid health-insurance premiums for the cap: This approach is expected to reduce the deficit by $141 billion in 2013 and by $2.1 trillion over the next decade.
But it's not just economists who are advocating the benefits of smart deficit reduction, many Americans outside of Washington see getting our budget under control as an important priority for the country. In another USA Today poll, 7 out of 10 Americans believed that the administration and Congress need to push through legislation that would significantly reduce our deficit. Those polled saw deficit reduction as a more urgent priority than other high profile issues, including gun control, climate change, and immigration.
Source: USA Today
With many benefits to deficit reduction, we hope lawmakers are listening to economists and citizens. We strongly urge lawmakers to seize the opportunity being presented by the March 1 deadline of sequestration -- only eight days away -- and come together on a bipartisan comprehensive plan that would reduce our debt as a share of our economy and avoid harm to the economic recovery.
February 21, 2013
Education Presidents And Governors: Ain't Gonna Happen
Yesterday, Urban Institute Fellow and CRFB Board Member Gene Steuerle tied the ability of federal and state governments to control health care costs to the ability of governments to provide quality education. According to Steuerle, the growing costs of health care in budgets across the country is crowding out value spending in other sectors, and particularly in education, since it is another major spending line in state budgets. He writes:
Federal spending policies only reinforce the longer-term anti-education trend. An annual Urban Institute study on the children’s budget suggests future continual declines in total federal support for education as long as current policies and laws hold up.
Education spending will continue to decline as long as health costs keep rising rapidly and eating up so much of the additional government revenues that accompany economic growth.
Within states, health costs show up primarily in the Medicaid budget. As the NGA numbers demonstrate, recent federal health reform did little and is expected to do little to control these state costs, despite large, mainly federally financed subsidies for expanding the number of people eligible for benefits.
With populations aging, state and federal governments now also face demographic pressures to increase their health budgets. Large shares of the Medicaid budget go for long-term and similar support for the elderly and the disabled. This budgetary threat also extends to revenues as larger shares of the population retire, earn less, and pay fewer taxes.
The next time someone tells you that we should wait another ten years to control health costs because we’ll be so much smarter and less partisan then, remind him or her that this procrastinating implicitly advocates further zeroing out state and federal spending on education—and the children’s budget more generally. Presidents and governors will never succeed with their education initiatives until they stop the health cost juggernaut in its tracks.
This is the same point that Erskine Bowles made in an interview in Forbes on the future of American innovation. Rising interest payments will likely force the federal government to cut other spending in order to keep the budget deficit from getting out of control. Some of those spending cuts will likely fall on non-defense discretionary spending, spending on areas like education and high value-added research. Controlling spending on entitlement programs will require phased-in changes that will take time, if we don't take action to address our spending on health care soon, we could be forced to make unwanted cuts to new investments in the future.
The full blog post can be found here.
"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.
February 20, 2013
But It Must Be Replaced By A Plan To Reduce The Deficit
With the March 1 deadline of sequestration only nine days away, lawmakers should work toward developing a plan that would replace the across-the-board spending cuts with smarter and more gradual policies that would put the debt on a downward path as a share of the economy. The worst possible outcome would be to punt on our debt problem and waive the sequester without offsets, as the country can no longer continue down this unsustainable fiscal path. In addition to not allowing lawmakers to direct cuts to areas where they would do the least harm (at least until they enact another continuing resolution), the sequester fails to address the drivers of our long term debt problem, population aging and growing health care costs. As a result, many are calling for the sequester to replaced with an alternative deficit reduction plan.
The Pentagon today issued a furlough notice to its 800,000 employees, as it attempts to deal with the across-the-board cuts in sequestration. According to the Washington Post, "the Pentagon's tentative plan is to put civilian employees on leave one day per week for 22 weeks." This would clearly restrict the Defense Department's ability to operate, but it is not alone in being hurt by the blunt cuts, as many economists have said that the sequester would have negative effects on the economy as a whole as well.
Just yesterday in a blog post, Macroeconomic Advisers further quantified how a failure to avoid the sequester could impact economic growth. After running a simulation of the sequestration scenario, it can be clearly seen how much the sequester would affect economic performance in the next few years:
Source: Macroeconomic Advisers, LLC
Macroeconomic Advisors concludes by saying that while sequestration would not be a huge disaster, it is a damaging way to implement deficit reduction, especially compared to the alternative of a phased-in comprehensive plan.
The impact of the sequestration would not be a macroeconomic catastrophe. Nevertheless, the indiscriminate fiscal restraint would occur on the heels of tax increases that total nearly $200 billion in the first quarter, with the economy still struggling to overcome the legacy of the Great Recession, and when the FOMC is constrained in its ability to offset the additional fiscal restraint. Furthermore, spending cuts that are so arbitrary in their allocation and timing can’t possibly be optimal from a public policy perspective. The preferable policy is a credible long-term plan to shrink the deficit more slowly through some combination of tax increases within broad tax reform, more carefully considered cuts in discretionary spending, and fundamental reform of entitlement programs.
Economists are not the only ones to speak out against sequestration, as political leaders on both sides of the aisle have warned of the damage that sequestration could do. In remarks yesterday, President Obama reiterated that the sequester was not good policy:
So these cuts are not smart. They are not fair. They will hurt our economy. They will add hundreds of thousands of Americans to the unemployment rolls. This is not an abstraction -- people will lose their jobs. The unemployment rate might tick up again.
Earlier that day, the Wall Street Journal ran a piece from Speaker Boehner (R-OH), in which he argued that sequestration would create many problems and that there we better ways to reduce the deficit.
The sequester is a wave of deep spending cuts scheduled to hit on March 1. Unless Congress acts, $85 billion in across-the-board cuts will occur this year, with another $1.1 trillion coming over the next decade. There is nothing wrong with cutting spending that much—we should be cutting even more—but the sequester is an ugly and dangerous way to do it.
But it is important to note that just as they signed the sequester into law, Congress and the President obviously can get rid of it. Rather than play the blame game, we need to replace and thoroughly address our debt problem. We cannot continue to kick the can down the road, and repealing the sequester without replacing the savings would be a large step back.
But a well-designed deficit reduction plan could even boost the economy and lead to greater economic growth. A CBO report earlier this month showed that a $2 trillion deficit reduction plan would lead to nearly 1 percent greater output (GNP) by 2023. Deficit reduction that is targeted and phased-in can protect the fragile economy in the short term while leaving the economy and federal finances in a better position in the long term. Deficit reduction in the longer-term will increase growth by lessening the "crowding out" effect of debt on private investment, and the benefits will only increase as time goes on.
The new framework put forward by former Fiscal Commission co-chairs Erskine Bowles and Alan Simpson, among other proposals, shows that replacing the sequester with a comprehensive plan is doable. Everyone agrees we need a solution, so lawmakers need to work toward a compromise that meets our short-term and long-term economic challenges.
February 20, 2013
Yesterday at a Politico Playbook Breakfast, former Fiscal Commission Co-Chairs Erskine Bowles and Senator Alan Simpson put forward a new proposal, calling for an additional $2.4 trillion in deficit reduction that would replace the sequester. We discussed the framework here, and a full outline of the proposal can be found at the Moment of Truth Project.
Since their initial presentation, the proposal has received great media attention, with mentions in editorials and news stories ranging from the Wall Street Journal, CNN, and many others. The full Politico interview can be seen below:
The following editorial boards praised the new plan from Simpson and Bowles:
Simpson-Bowles' Greatest Service: Our View - USA Today
Please, would someone give Alan Simpson and Erskine Bowles an award already! The co-chairmen of President Obama's deficit-reduction panel achieved the near impossible for a Washington commission in 2011, when their plan for cutting more than $4 trillion in red ink over 10 years gained widespread and sustained credibility.
Now the bipartisan duo is at it again. Their commission disbanded two years ago, yet they are out with a new version — call it Simpson-Bowles 2.0 — that would add $1 trillion in deficit reduction
Bowles-Simpson’s Less-Grand Bargain - Bloomberg
Erskine Bowles and Alan Simpson, the indefatigable odd couple of U.S. fiscal policy, are at it again, offering their third deficit-cutting plan in four years. You’ve got to admire their effort, if not their success rate.
Clearly, Simpson and Bowles have learned some hard lessons on the state of American politics: Their latest iteration, a $2.4 trillion package of 10-year spending cuts and tax increases, is less ambitious and more politically feasible than the $4 trillion grand bargain of 2010, the last big Simpson- Bowles blueprint.
Obama, Sequestered - Chicago Tribune
Tuesday wasn't a total washout. Erskine Bowles, former chief of staff to President Bill Clinton, and Alan Simpson, former Republican senator from Wyoming, floated a new framework for cutting deficits by $2.4 trillion over 10 years — just enough, probably, to finally put our national debt on a downward trajectory. The former co-chairs of the president's 2010 debt commission keep urging official Washington to stop bickering — and stop letting party politics block reforms.
The Blame Game Over Sequestration - Washington Post
This new Simpson-Bowles outline seeks $2.4 trillion in ten-year savings, on top of the $2.7 trillion already achieved — thus potentially bringing the ratio of debt-to-gross domestic product below 70 percent by early next decade and putting it on a downward path thereafter.
This is $900 billion more debt reduction than President Obama advocated in his State of the Union address. Good: Mr. Obama’s goal is not ambitious enough. It would leave debt-to-GDP at a dangerously high 73 percent by 2023, with no plan to prevent it from rising after that. Simpson-Bowles 2.0 would take some steps Mr. Obama has already contemplated — such as adjusting federal tax brackets and benefits by a more realistic inflation measure — as well as some he would not — such as going above $400 billion in health-program savings over 10 years.
Simpson and Bowles also conducted many interviews, most notably with:
- Ezra Klein of the Washington Post
- Chuck Todd on MSNBC
- CNBC's Squawk on the Street
- Fox News' Happening Now
- ABC News' Politics Now with Jonathon Karl
With sequestration less than two weeks away, hopefully lawmakers will be able to move toward a compromise. Ideally, the sequester will be replaced with more sensible reforms that do not indiscriminately cut programs conducive to growth and responsible for our national security. Reform must address the biggest drivers of our debt in a way that protects the economic recovery and the most vulnerable. Whether it is the new framework proposed by Erskine Bowles and Al Simpson or another bipartisan plan, a smart, gradual, and sizeable deficit reduction plan would be much better for our economy than the sequester.
February 20, 2013
Responding to a U.S. News and World Report "Debate Club" question on the new framework from former Fiscal Commission co-chairs Alan Simpson and Erskine Bowles, Simpson writes that the new proposal is needed, as we cannot afford another year of fiscal brinkmanship without making substantial progress on our debt problem.
Their new proposal is not meant to be a replacement to the original recommendations of the Fiscal Commission, rather a framework to achieve the next $2.4 trillion of deficit reduction and replace the sequester. Simpson writes:
This country needs to act—and soon—to put in place a plan which will truly deal with our destructive debt problem and put that debt on a clear downward path relative to the economy. And we shouldn't do that with stupid, mindless, across-the-board cuts (sequester) to important investments; we should replace these cuts with targeted spending cuts, structural entitlement reforms, and comprehensive tax reform.
We simply can not afford another year of fiscal brinksmanship with no real solutions being offered by either side. There is no way around it: Democrats and Republicans are going to have to come together to find common ground if they have any hope of hauling the country back on a fiscally sustainable path.
Our present activity is to remind both sides how close they were last December before negotiations broke down. And we wanted to push both sides to go outside of their comfort zones in the spirit of principled compromise.
We said that Democrats are going to have to go further in reforming entitlements, particularly healthcare—than they would want, but we can and must do it in a way that protects the most vulnerable in our society. We said Republicans are going to have to accept more revenues, not through tax increases but through tax reform which repeals or reforms various deductions, exclusions, loopholes, and credits—which are really just spending by another name and most of which go mainly to the wealthy—in order to reduce the deficit and lower rates.
There is no one solution to the problem, and the proposal we put forward is not perfect and is not even our ideal plan. It is the minimum that needs to be done to bring our debt under control. It is going to take real guts and political courage on both sides to come together to find common ground for the good of the country. We hope this plan can serve as a mark for those discussions to move forward.
Click here to read the op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
February 19, 2013
Weekly Update on Budget and Fiscal Policy Developments and a Look Ahead
Honoring Leaders – We celebrated President’s Day on Monday, the day we recognize those who have led this great nation. The House and Senate are honoring such leadership by taking the week off while a couple of key fiscal deadlines approach. While names like Washington and Lincoln often come to mind when thinking of presidents, we’ve had many other men occupy the office that we can learn something from, for better or for worse, even the ones we may not remember.
Still Polk-ing Around for a Deal – James K. Polk was a dark horse victor for the White House in 1844. He is remembered by many historians for his ability to set an agenda and accomplish his goals in office. Achieving a comprehensive debt deal seems like a dark horse nowadays with some pundits declaring it hopeless because extreme partisanship is in the way, but Americans are demanding action. A Quinnipiac Poll taken just before last week’s State of the Union address showed that the federal budget deficit was a top issue that voters wanted addressed in the speech, coming in second only to the economy. President Obama dedicated a good deal of his speech to the deficit, which was welcomed by CRFB, but our president Maya MacGuineas also called for more leadership and specifics from the President. Erskine Bowles and Alan Simpson entered the discussion on Tuesday by releasing a new framework that seeks to find middle ground to replace the sequester with a more comprehensive, longer term approach.
No Nixon the Sequester? – Policymakers continue to joust over the sequester, with the March 1 deadline now less than two weeks away. While both parties acknowledge that sequestration is not the optimal way to reduce the deficit and there is no lack of ideas for replacing it, finding an approach that both sides can agree on is looking less likely and many are resigning themselves to the disgrace of the sequester taking effect. President Obama reiterated his call to replace the sequester on Tuesday in a White House event. The Senate plans to vote on a Democratic alternative to the sequester next week that would replace this year’s sequestration with $120 billion in deficit savings featuring an even mix of spending cuts and tax increases. The revenue would be produced by implementing the so-called “Buffett Rule” by requiring millionaires to pay a 30 percent effective tax rate. Spending cuts would come from eliminating agriculture subsidies and defense reductions not as severe as scheduled under the sequester. The White House has signaled another possible approach in an economic plan released in conjunction with the State of the Union address, which calls for $1.5 billion in deficit reduction over the next decade through $900 billion in spending cuts and $600 billion in revenue through tax reform that closes loopholes known as tax expenditures. Republicans still are not showing support for any additional revenues. Richard Nixon is one of the most infamous presidents, but he had some noteworthy accomplishments, such as easing tensions with China. This required Nixon to go against his anti-communist ideology, but it paid dividends. Of course, he put politics above the best interests of the nation in the Watergate scandal and ultimately resigned in disgrace. Will anyone from either party go against their entrenched positions to facilitate a solution, or will they continue to put politics above country?
Looking to Fillmore Time – Anticipating no deal before the March 1 sequestration deadline, some lawmakers are looking at the next deadline (see the full list of fiscal speed bumps), the March 27 expiration of the stopgap measure funding the federal government. The reasoning is that agencies can make adjustments to deal with sequester cuts initially and then a new government funding bill could reduce the cuts or at least give agencies more flexibility in how to implement them. Reports are that House Speaker John Boehner (R-OH) has promised conservatives in his caucus that a continuing resolution will be advanced with spending set at $974 billion, below the current level of $1.043 trillion. However, House Appropriations Committee Chair Harold Rogers (R-KY) is saying his committee will consider a stopgap measure maintaining the $1.043 trillion level with instructions to follow the sequester. Millard Fillmore is not looked upon favorably by most historians, as he was unable to prevent the growing rift between North and South. The Compromise of 1850 he championed resolved nothing, paving the way to the Civil War. After his presidency, he further sullied his reputation by joining the nativist Know Nothing movement. Lawmakers are not resolving anything with deals that simply kick the can down the road. The Know Nothings and Do Nothings of the present will not be looked kindly upon by history.
Keeping their Coolidge on Tax Reform – Despite dire predictions earlier this year that tax reform was dead, lawmakers are pushing on. Last week the House Ways and Means Committee announced 11 bipartisan working groups that will look at various parts of the tax code. The White House is also signaling it is serious about tax reform. Treasury Secretary Designee Jack Lew said at his Senate confirmation hearing that tax reform is a top priority. Calvin Coolidge was known as a man of few words, but decisive action. Washington could use more of those qualities.
Key Upcoming Dates (all times are ET)
February 21
- Dept. of Labor's Bureau of Labor Statistics releases January 2013 Consumer Price Index data.
February 28
- Bureau of Economic Analysis releases second estimate of 2012 4th quarter and annual GDP.
March 1
- Across-the-board cuts to defense and non-defense discretionary spending prescribed in the Budget Control Act, known as "sequestration," will take effect.
March 8
- Dept. of Labor's Bureau of Labor Statistics releases February 2013 employment data.
March 15
- Dept. of Labor's Bureau of Labor Statistics releases February 2013 Consumer Price Index data.
March 27
- Current continuing resolution (CR) funding the federal government expires.
March 28
- Bureau of Economic Analysis releases third estimate of 2012 4th quarter and annual GDP.
April 5
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.
April 15
- Congress must pass a budget resolution as specified in the Congressional Budget Act. Also, due to the debt ceiling suspension bill, lawmakers will have their pay withheld after this date until their respective chamber passes a resolution.
April 16
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 Consumer Price Index data.
April 26
- Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP.
February 19, 2013
Today, former Fiscal Commission co-chairs and Moment of Truth Project co-founders Erskine Bowles and Alan Simpson have released a new framework, calling for $2.4 trillion in deficit reduction over the next ten years as well as additional long-term reforms. The proposal builds upon where the President and Congressional leaders were in the fiscal cliff negotiations but pushes both sides to do more. In their statement from the Moment of Truth Project, they call for an agreement based on a number of principles, including putting debt on a downward path as a share of the economy, enacting smart, pro-growth reforms to the tax code and entitlement programs while protecting the disadvantaged and not hindering the economic recovery.
They clarified that their proposal is not intended to be a replacement of the original Fiscal Commission plan, but rather a guide for where lawmakers should aim given the deficit reduction that has been enacted so far and recent offers from Congress and the President.
The outline from Simpson and Bowles is what they call "Step 3" in a four step process. As CRFB has laid out in a recent analysis, lawmakers have already enacted nearly $2.7 trillion in savings, with the first two steps being discretionary spending cuts and upper-income tax increases. In Step 3, Simpson and Bowles call for another $2.4 trillion, enough to put the debt on a clear downward path relative to the economy to below 70 percent by early next decade. Roughly one-quarter of the savings would come from health reforms and another one-quarter would come from tax reform. Additional deficit reduction would come from other mandatory and discretionary spending cuts, cross-cutting reforms such as moving to the chained CPI, and net interest savings.
Even if Members of Congress and the President were to agree to such a plan, Simpson and Bowles also call for an additional "Step 4" which would require making Social Security sustainably solvent, bringing the Highway Trust Fund into balance, and limiting the long-term growth of federal health care obligations.
In Step 3, they call lawmakers to:
- Reduce Medicare and Medicaid spending by improving provider and beneficiary incentives throughout the health care system, reducing provider payments, reforming cost-sharing, increasing premiums for higher earners, adjusting benefits to account for population aging, reducing drug costs, and getting better value for our health care dollars
- Enact comprehensive, pro-growth tax reform that eliminates or scales back most tax expenditures, with a portion of savings from tax expenditures dedicated to deficit reduction and the additional savings used to reduce rates and simplify the tax code
- Strengthen limits on discretionary spending
- Reduce non-health mandatory spending by reforming farm subsidies, modernizing civilian and military health and retirement programs, imposing various user fees, reforming higher education spending, and making other changes
- Adopt the chained CPI for indexing various programs and tax provisions, and achieve savings from program integrity efforts
In our paper updated last week on how much further lawmakers have to go, we found that $2.4 trillion was the minimum amount of deficit reduction necessary to put debt on a clear downward path as a share of the economy. In the coming weeks, we hope that plans will emerge from Congress, drawing from principles laid out in this new proposal along with elements from many other budget proposals, that are up to the challenge of truly controlling our rising debt.
The full release from the Moment of Truth Project can be found here.
February 15, 2013
There is a new internet sensation called the "Harlem Shake" and The Can Kicks Back millennial campaign has followed up with their own video to promote fiscal responsibility for the younger generation. Of course, the other versions of the "Harlem Shake" have not featured former U.S. Comptroller General David Walker or former OMB and CBO director Alice Rivlin, who besides being experts on the federal budget can break out some dance moves. Job well done.
