The Bottom Line
Fed’s latest Beige Book, released yesterday, pointed to slowing growth (but still positive growth) across many economic sectors and regions. On a region by region basis, the Fed found that Fed districts nearest the Atlantic seaboard were most affected by the economic slowdown while other districts such as the Atlanta District and the Dallas District felt their growth less impeded.
The report did find a recent boost in manufacturing activity, lending, and commercial real estate. However, other industries experienced a flattening effect. Although falling gasoline prices have encouraged more shopping trips and an overall pickup in consumption, price pressure from supplier inputs such as energy, cotton, and food has continued to reduce retail margins. Auto sales have shown little improvement, residential real estate sales remain stagnant, and labor market conditions have stayed soft.
The weather patterns of the last month have also adversely affected agricultural sectors. Drought has lowered crop yields in the Atlanta, Dallas, San Francisco, and Kansas City Districts while flooding has forced millions of acres to go unplanted in the Minneapolis and Chicago Districts.
While the economy continues to grow, this past month has seen that growth abated. While most factors are out of the control of policymakers, one of the hindrances of growth certainly is not: uncertainty over the debt ceiling and our fiscal future. One way to jump start investment and continue our path to a full economic recovery is for Washington’s leaders to raise the debt ceiling and adopt a credible comprehensive fiscal plan that reduces debt as a share of the economy. Such a plan would boost global confidence in our nation’s economic health and vibrancy, and would create substantial budgetary and economic benefits down the road. With the August 2nd deadline getting nearer by the hour, and with markets paying close attention to it, the time for a deal is now. With an economy that is already experiencing a slowdown, defaulting or delaying a debt deal merely exacerbates the problem.
Speaker of the House John Boehner has released an updated version of his debt ceiling proposal which, according to a new CBO score, achieves an extra $66 billion in deficit reduction, totaling $917 billion in savings. The difference comes from $46 billion more savings from his discretionary caps -- achieved by removing the outlay caps originally included in the plan for FY 2012 and 2013 -- and from $20 billion more in interest savings as a result of the increased discretionary savings.
As we pointed out in our blog earlier today, the outlay levels projected by CBO for FY 2012 and 2013 in its scoring of the Boehner plan were equal to the outlay caps included in the plan. However, CBO's score of the plan produced by Senate Majority Leader Harry Reid -- which includes nearly identical budget authority caps in FY 2012 and 2013 as those in the Boehner plan but which did not include outlay caps for those years as Boehner did -- included lower outlay levels for FY 2012 and 2013 (and therefore higher savings) than those scored for the Boehner plan, seemingly as a result of not having outlay caps. This may seem counter intuitive, since one would assume outlay caps on top of budget authority caps would only reinforce savings -- not decrease savings. As we suggested earlier, CBO seems to have assumed that appropriators would likely hit the outlay cap even if it meant having a different mix of appropriations than they otherwise would have under a no-outlay-cap scenario.
So to increase his savings total, Boehner simply removed the outlay caps in his plan, increasing discretionary savings by $46 billion and his interest savings by $20 billion (a high amount, since the discretionary savings are in the early years of the ten-year period).
Here is an updated version of the chart we posted earlier, including the scores for the updated Boehner plan:
|Ten Year Savings Under Updated Boehner and Reid Plans (billions)|
|Provision||Updated Boehner Savings
|Discretionary Spending Caps||-$756||-$752|
|Cap Adjustments for Program Integrity||$15||$51|
|Subtotal, Discretionary Caps||-$741||-$701|
|Program Integrity Savings||-$16||-$18|
|Revenues (Program Integrity)*||$0||$43|
|Total Including War||-$917||-$2,194|
*Reid program integrity includes $14 billion above the baseline for IRS efforts aimed at increasing tax compliance. Savings from this score as increased revenues of $43 billion.
Note: This blog has been updated to reflect CBO's comparison table of the two plans, which has slightly differen interest projections for war and non-war under Reid's plan.
As the debt-ceiling proposals from Rep. Boehner and Sen. Reid continue to be debated, support for the comprehensive, balanced proposal offered by the Senate's Gang of Six early last week continues to build.
In a letter to the editor of Illinois' State-Journal Register, fiscal commission co-chair Erskine Bowles praised Gang of Six member Dick Durbin (D-IL) for his willingness to compromise for the good of the country while at the same time sticking to his principles of protecting the truly disadvantaged. He writes:
I, for one, am encouraged that instead of playing politics with our economy, Durbin has been working hard with the Gang of Six and in meetings at the White House to come up with a serious, bipartisan deficit reduction proposal that reflects the principles of fairness and balance that were in the Fiscal Commission. He understands that in order to move our country forward, both political parties have to be willing to find a middle ground. It takes a lot of guts to put your name on a compromise proposal that your traditional supporters may not love. But that’s what principled compromise is, and that’s what America needs right now.
Another piece, an op-ed in the Idaho Statesman written by former Rep. Walt Minnick (D-ID), urges lawmakers not to further delay needed comprehensive fiscal reforms by enacting "a weak smoke-and-mirrors solution to the debt ceiling impasse, like those fallback plans now being discussed, which kowtow to the extremes but once again fail to solve the growing deficit problem." He continues:
Instead, let’s use the crisis to adopt a tough-minded debt control compromise like that hammered out by “The Gang of Six,” a group of three Republican and three Democratic senators led by our own Mike Crapo, after nearly a year of difficult give-and-take negotiation between senators representing every part of the political spectrum.
...Yes, we must raise the debt ceiling so we can pay our existing bills, but let’s do so by enacting fundamental reform like that advocated by the Gang of Six, which sets the nation on a fiscally responsible course for less federal government debt and renewed private sector growth. Demand all of our members in Congress agree to compromise their differences, work with the president and stop acting like children.
A recent report from the Associated Press Global Economy Tracker found that the U.S. national debt (as a percentage of GDP) is the fifth largest among the world's major economies. According to the Tracker, which analyzes financial and economic data from thirty of the world's largest economies, U.S. debt in the first three months of the year equaled 95 percent of GDP. The only countries listed as having a higher debt as a percentage of GDP were Japan, Greece, Thailand, and Italy**.
As if we needed another indicator or reason to get our fiscal house in order, the AP just gave us another.
**India is also ranked above the U.S., but ranking is based on data from the fourth quarter of 2010 rather than the first quarter of 2011.
Earlier this week, the International Monetary Fund (IMF) released its annual report The United States: 2011 Article IV Consultation, highlighting the need for the United States to enact a comprehensive fiscal reform plan that would stabilize and reduce our debt. The report states that “fiscal consolidation needs to proceed as debt dynamics are unsustainable and losing fiscal credibility would be extremely damaging for the United States and for the rest of the world,” while offering thoughts on what the United States' fiscal, financial, and monetary policies should look like going forward.
More specifically, the report offers many recommendations on how the U.S. should look to craft a framework for fiscal reform. Among the broader points:
- The most important priority of fiscal policy should be to stabilize the debt by mid-decade and then gradually reduce it
- Congress should explicitly endorse the medium-term fiscal objectives of any deficit-reduction framework
- Any deficit-reduction plan should include spending cuts, entitlement reforms and revenue increases
- More savings than what President Obama proposed in his February budget and April deficit-reduction framework will be necessary
- A debt “failsafe” mechanism could help keep fiscal consolidation on track, but should not be overly relied on (see here and here for more about debt enforcement mechanisms)
- Fiscal consolidation would have long-term benefits for the US and global economy, but should be carefully balanced to avoid disrupting a fragile recovery
The IMF is the latest group to voice support for a comprehensive approach: "A politically-backed medium-term framework that raises revenues and addresses long-term expenditure pressures should be the cornerstone of fiscal stabilization." As leaders in Washington debate raising the debt ceiling and reducing deficits, they must look to find a plan that would stabilize and then reduce our debt.
In a new op-ed published in Investor's Business Daily, CRFB co-chairs Tim Penny and Bill Frenzel offer insight into how Democrats and Republicans in Washington can come together in the debt negotiations to avoid economic disaster, suggesting that the way out is by coming to "the type of principled compromise in which both parties are willing to accept things they don't like for the good of the nation."
"Much is at stake with a fiscal cliff fast approaching. Our nation's leaders need to find a way to compromise without compromising their principles, just as President Reagan and Democrats did in the 1980s."
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
If you take a look at House Speaker John Boehner's proposal and Senate Majority Leader Harry Reid's proposal -- both of which increase the debt limit and enact deficit reduction in a two-part process -- you'll see that they are more similar than they are different (see below for a comparison table of elements within the proposals). Boehner has been promoting his proposal as one that would reduce deficits by $3 trillion, with $1.2 trillion in discretionary cuts upfront and $1.8 trillion to come out of a special process this fall. Reid's proposal would enact roughly the same $1.2 trillion in discretionary cuts upfront (more on that here), $70 billion in other mandatory savings, limit war spending to a total of $450 billion over 2013-2021, and put in place a similar special process to recommend additional savings by year's end.
You can see the similarities. A two-step process isn't perfect (read our release from last night on ways to make the process and enforcement as credible as possible), but it could help us raise the debt ceiling and start to set us on the right course.
Assuming that a two-part process seems to be where the consensus is, let's focus on the second part -- the joint committee, which would achieve real deficit reduction. As CRFB president Maya MacGuineas said yesterday:
"Promises of future savings are only as good as the intentions behind them, but if policymakers are serious in their understanding of the need to tackle entitlement reform and tax reform, these frameworks could do the trick.”
The proposals differ in how the promise of future savings from the joint committee would be enforced. The Boehner proposal would make the President's ability to request (subject to Congressional disapproval) a further increase in the debt limit contingent on enactment of committee recommendations under an expedited process. The Reid proposal would also require a vote on the committee recommendations under an expedited process, but does not provide enforcement to ensure that the savings are achieved. A strong enforcement mechanism to ensure savings materialize should be considered a necessity. Enforcement levers from the Gang of Six could be used to strenghten either framework. In addition, the Peterson-Pew Commission's paper on how to construct targets and triggers provides several ideas for strengthening enforcement rules, as well as PPC's fiscal toolbox which outlines some of the enforcement mechanisms present in other plans.
There is also a difference in the goals for the Committee.
Rather than offering a savings target, the Reid proposal sets a goal of reducing the deficit to 3 percent of GDP -- but does not specify when that goal should be achieved. It could be a year-in goal -- perhaps 2015, as with the President's Fiscal Commission. It could be a 10-year average deficit. No one knows.
The Boehner proposal instead calls for $1.8 trillion in deficit reduction -- but does not define what baseline that would be scored off of. It's difficult to evaluate the savings if the baseline is not specified. By remaining silent on the baseline but requiring the plans be scored by CBO under existing procedures, the Boehner proposal appears to require the Committee recommendations be scored against CBO's current law baseline, which assumes expiration of all the 2001/2003/2010 tax cuts as well as no AMT patch or “doc fix.”
In order to get beyond the baseline confusion and potential for gimmicks to artificially inflate savings, CRFB has recommended using specific debt-to-GDP levels and corresponding savings targets to ensure that legislation actually achieves the goal of stabilizing and reducing our debt.
As they currently stand, there is a lot of uncertainty with both the Reid and Boehner proposals. Perhaps that is by design, with the intent being to reconcile the two plans and find a consensus. Let's hope -- the debt limit must be raised as soon as possible, and it is time policymakers find common ground in order to make a deal. While these proposals have their differences, as can be seen below, there is much overlap.
| Reid Proposal
|Debt Ceiling Increases
|Specified Other Mandatory Savings
|Special Committee to Identify Additional Savings
|Balanced Budget Amendment (BBA)
Note: This blog has been updated since its original posting.
Update: CBO has scored Boehner's legislation, showing it to reduce deficits by a total of $850 billion from 2012-2021. The discretionary caps are $1.1 trillion below CBO's March baseline over ten years, but only $840 billion below a baseline that incorporates the final CR.
House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV) both released "dueling" debt plans yesterday, which actually have a lot of similarities (more on that later). We will compare the broader provisions of the two proposals later here on The Bottom Line, but first, we will look at the discretionary spending caps that each proposal calls for.
Just like other parts of their plan, these caps are very similar, reflecting a supposed agreement that was made in this area. Both plans have around $1.045 trillion in budget authority for 2012, about a $20 billion drop from this year's spending levels. After remaining roughly frozen for 2013, the caps grow with inflation thereafter. Overall, by their estimates, the caps would save $1.2 trillion over ten years. The numbers are not exactly the same, because it appears Boehner could be relying on the CPI while Reid uses the GDP deflator to adjust the caps after 2014 (the CPI is estimated to grow slightly faster during those years).
The graph below compares Boehner and Reid's caps, along with the Fiscal Commission's discretionary caps and the CBO March baseline.
While the discretionary caps are overall quite similar in their amounts, there are a few technical differences between the two sets of caps. In Boehner's caps, separate limits for defense and nondefense spending apply for 2012 and 2013, although they are given as ranges--$535-$569 billion for defense in 2012, $537-$571 billion in 2013--not exact numbers. Reid's caps provide these limits, but for security and nonsecurity spending (defense plus veterans spending) and he gives exact numbers instead of ranges.
Still, the technical differences are vastly overshadowed by the great similarities. It seems that there is agreement on the level of discretionary spending cuts. That's a start to getting an overall deficit reduction agreement tied to a debt ceiling increase.
The state of play in the debt negotiations has been an ever-evolving spectacle over the last several weeks. First the Biden group negotiations, then talks between Congressional leaders and the White House, then negotiations between the President and Speaker of the House John Boehner, then the Reid-McConnell proposal, then the Gang of Six proposal, then additional negotiations between the President and the Speaker--just to mention a few. Well, there's been another twist in all this ever since talks broke down again on Friday evening.
Speaker Boehner and Senate Majority Leader Harry Reid are now advancing proposals on their own on how to raise the debt ceiling and begin tackling future debt. First, some details on the specifics of what each plan calls for:
- $1.2 trillion in savings from 10-year discretionary caps
- $1 trillion increase in the debt ceiling now
- Requirement that Congress votes on a balanced budget amendment after Oct. 1 but before the end of the year
- Create a 12-member commitee of lawmakers to report legislation by Nov. 23 on how to reduce deficits by another $1.8 trillion
- If the $1.8 trillion in savings is enacted, authorize the President to increase the debt ceiling by another $1.6 trillion
- Raises debt ceiling through 2012 now
- $1.2 trillion in savings from 10-year discretionary caps
- $100 billion in other mandatory savings (excluding Medicare, Medicaid, and Social Security)
- $40 billion from waste, fraud, and abuse
- $30 billion from Fannie Mae/Freddie Mac reforms
- $15 billion in spectrum sales
- $10-$15 billion in agricultural reforms
- Higher education reforms to strengthen Pell Grants
- $1 trillion in savings from winding down wars in Iraq and Afghanistan
- $400 billion from interest savings
- Establish 12-member committee of lawmakers to find additional savings
CRFB is happy to see both plans rely on upfront savings in a down payment on future debt reduction, as well as kicking off a special process to identify additional deficit reduction. These approaches correctly recognize the need to raise the debt ceiling as soon as possible, but also that the type of structural reforms that will be necessary to stabilize and reduce our debt take time and that forcing lawmakers to continue working on bipartisan solutions can keep the ball moving forward.
These proposals aren't perfect, though. But they're much much better than the status quo and could provide a framework for a responsible path forward. As the process unfolds in the coming days lawmakers should push for the largest possible down payment without resorting to phony savings and work to ensure that there is a credible process for achieving additional savings with all parts of the budget on the table and an enforcement mechanisms to ensure the savings materialize.
Lawmakers have a real opportunity here to begin tackling our fiscal challenges. Let's hope they take it.
Tonight, President Obama will address the nation at 9 PM EST about the current negotiations going on between him and Congress over how to raise the debt ceiling and begin to control rising federal debt. Let us hope this speech furthers the current impasse currently strangling Washington and helps lead towards a comprehensive and bipartisan deal. You can watch the address live at www.whitehouse.gov/live.
Although this idea isn't brand new, CBO director Doug Elmendorf has a blog post that concisely illustrates the trade-offs that must be made in order to get our fiscal policy back in line. In other words, we're going to have to make some choices about the size of government and the allocation of resources within that constraint.
Given the aging of the population and the rising cost of health care, attaining a sustainable budget for the federal government will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:
- Raise federal revenues significantly above their average share of GDP;
- Make major changes to the sorts of benefits we provide for older Americans;
- Substantially reduce the role of the rest of the federal government—that is, defense (the largest single piece), Food Stamps, unemployment compensation, other income-security programs, veterans’ benefits, federal civilian and military retirement benefits, transportation, health research, education and training, and other programs—in our economy and society.
Any serious bipartisan deficit reduction plan would likely do a combination of all three that looks at each area of the budget for savings. Elmendorf presents three different scenarios for how we would get to fiscal sustainability. Scenario 1 involves keeping revenue at its historical average and reducing all non-interest spending. Scenario 2 maintains current law benefits for Social Security and health programs, but allows revenue to rise above its historical average and allows other spending to fall well below its historical average. Scenario 3 maintains "other spending" while cutting the major entitlements and allowing revenue to increase.
An illustrative example of these trade-offs in the graph below that originally appeared in the post. It shows primary (non-interest) spending and current law revenue levels for the House Republican budget (Scenario 1), current law projections (Scenario 2), and an illustrative option where the "other spending" category is maintained at its historical average, but Social Security and health programs are cut to get to primary balance (Scenario 3).
In CBO's long-term outlook, the default path is basically Scenario 2, or current law. Under that scenario, Social Security and health programs are projected to grow as under current law, rising with the growth in the economy, health care costs, and population aging. However, revenues rise way past its historical average--partially due to the expiration of the tax cuts and the AMT patch--and other spending falls well below its historical average. If we keep the government essentially on auto-pilot, the choice is already made. So, if lawmakers want to prevent discretionary and other mandatory spending from falling as it is scheduled to do, or prevent real bracket creep from pushing revenue way up, they will have to deviate from the current law path and prioritize accordingly.
However, current law isn't exactly a great path to follow. Debt still remains elevated throughout the entire 75-year period, and would not stabilize until the 2040s. We need a true deficit reduction plan now that will get our debt onto a sustainable path this decade. Let's hope lawmakers can forge a bipartisan solution.
Elmer B. Staats, a Senior Advisor of the Committee for a Responsible Federal Budget and former comptroller general of the United States, died peacefully on July 23 in Washington, DC. Mr. Staats was 97 years old and died as a result of congestive heart failure. During the Truman, Eisenhower, Kennedy, and Johnson administrations, Mr. Staats served as deputy director of the budget before becoming the comptroller general, where he served from 1966 through 1981. From 1984 to 1990, he was a member of the Governmental Accounting Standards Board and from 1990 to 1997, he was the first chairmen of the Federal Accounting Standards Advisory Board.
Most recently, Mr. Staats has been a trustee of the Committee for Economic Development and member and councilor of The Conference Board.
From everyone at CRFB, we would like to offer our condolences to the Staats family.
Beat the Heat…and the Clock – Washington is dealing with stifling heat, but that isn’t the only thing making policymakers sweat. As thermometers reach their limit, so is the debt. But unlike the temperature, the debt won’t go down by itself. They say that you should avoid black when it’s this hot, and the politicians seem to be heeding the advice, staying away from any deal that could get the U.S. budget back in the black. Instead, the preferred color is red, with red ink accompanying the red hot temps. Will there be any relief soon?
Washington on the Hot Seat This Week – Staring down an August 2 debt limit deadline, leaders in Washington seem no closer to a deal to raise it after countless meetings and statements. The latest attempt at a “grand bargain” between President Obama and House Speaker Boehner coupling a debt ceiling increase with significant deficit reduction fell apart late Friday. Even more troubling is that there is no agreement on a Plan B, with House Republicans and Democrats who control the Senate going separate ways on fallback options. The House GOP wants a two-step process to raise the debt limit that includes about $1 trillion in immediate spending cuts and a debt limit increase that would last until around the end of the year, with a legislative commission to recommend further cuts of at least $1.6 trillion to trigger another debt ceiling increase. On the other hand, Senate Majority Leader Harry Reid is pushing an increase that will last past the 2012 election and include $2.7 trillion in deficit reduction that does not include revenue or mandatory spending cuts. The lack of agreement and action on the debt limit and federal budget deficit is apparently affecting the already battered image of Washington as a recent poll finds voter dissatisfaction with the federal government rising to levels not seen in about twenty years.
Balanced Budget Amendment Moves to the Front Burner – House Republicans are considering a balanced budget amendment to the Constitution as a part of their new debt limit plan. A balanced budget amendment vote on the House floor is scheduled for this week and a new proposal was added to the mix last week. See our one-stop budget process resource for more on balanced budget amendments and other fiscal tools that could potentially help reduce the national debt.
Gang of Six Fired Up – Meanwhile, the Gang of Six continues to promote their proposal unveiled last week as the best chance for a comprehensive solution with broad bipartisan support. CRFB has provided a simple explanation of the Gang of Six plan and a look at how the Gang’s approach could be implemented and enforced.
House Funds Itself – The House found time last week to approve its own budget for next year as it passed the FY 2012 Legislative Branch appropriations bill. Lawmakers sought to show that they will not immunize themselves from the budget-cutting trend as the measure sliced Congress’ budget by 6.4%, reducing funding for all congressional offices and agencies except for the Capitol Police. Even though the Senate did pass a Military Construction-Veterans Affairs spending bill, there is still no fire on that side of the Capitol to move spending legislation as no further appropriations action is planned until the fall.
Key Upcoming Dates
- Senate Finance Committee hearing on “Perspectives on Deficit Reduction: A Review of Key Issues” at 10 am.
- House Ways and Means Committee hearing on "Tax Reform and Consumption-Based Tax Systems” at 10 am.
- Consumer Confidence Index for July released by The Conference Board.
- Joint Economic Committee hearing on “Maximizing America’s Prosperity: How Fiscal Rules Can Restrain Federal Overspending” at 10 am.
- Federal Reserve Board releases its Beige Book on regional economic conditions.
- Second quarter GDP released by the U.S. Commerce Department.
- Treasury Secretary Geithner says that the U.S. will default on its obligations by August 2 if the statutory debt ceiling is not increased before then.
The focus in Washington on deficit reduction has produced a slew of balanced budget amendment proposals this year. Many lawmakers see a balanced budget amendment (BBA) to the U.S. Constitution as critical to reducing the national debt and have pushed to pair it with a debt ceiling increase. For instance, the “Cut, Cap and Balance” bill that passed the House earlier this week but was defeated in the Senate Friday morning included a provision that Congress approve of a BBA before a debt limit increase would go through.
Generally there’s no magic to what a BBA seeks to accomplish, and most of the proposals are roughly similar. Above all, the aim is to bring spending and revenues in line with each other. Some also seek to constrain Congress’s ability to raise taxes, while others seek to attach similar conditions to raising the debt limit. But all in all the basics of a BBA are the same.
But a recent addition to the pool of amendments, introduced by Rep. Justin Amash (R-MI), includes a unique twist. On Thursday, Rep. Amash, along with 20 co-sponsors (one of which is a Democrat), introduced H.J. Res. 73. This BBA has the same goal of the others – to require a balanced budget in the Constitution, but what sets this apart from the others is Section 1, which reads:
Total outlays for a year shall not exceed the average annual revenue collected in the three prior years, adjusted in proportion to changes in population and inflation. Total outlays shall include all outlays of the United States except those for payment of debt, and revenue shall include all revenue of the United States except that derived from borrowing.
Rep. Amash refers to his amendment as the Business Cycle Balanced Budget Amendment (BCBBA). A frequent criticism of BBAs is that they prevent counter-cyclical policies from kicking in. BCBBA attempts to resolve this issue by using a three-year average. This component is designed to better account for the business cycle by allowing deficits during recessions and savings during growth, as opposed to being a rigid, inflexible constraint in any one year.
The concept is a little complicated to explain (26 page presentation), but basically spending would be gradually reduced over 10 years (Section 5 of Rep. Amash’s BBA) to come in line with the average revenue calculation mechanism. The spending limit calculation would also factor in inflation and population growth. The measure also includes an emergency exemption if agreed to by a ¾ majority in Congress.
While reforming the budget process can help to push policymakers in the right direction to get our debt under control, it is not a substitute for the specific spending and tax policies required. The Peterson-Pew Commission on Budget Reform, a project of CRFB, has offered a framework for reforming the budget process that includes annual budget targets and triggers to enforce those targets towards meeting medium- and long-term fiscal goals to reduce the national debt. The framework is designed to facilitate and enforce a comprehensive fiscal plan with specific deficit reduction policies. In our view, a fiscal plan (and budget targets) should aim to stabilize and then gradually reduce the debt as a share of GDP.
Once our debt has been reduced and is on a manageable path, we may be in a better position to balance the budget and put in place a process (Constitutional or otherwise) to ensure it doesn't fall out of balance -- see our Fiscal Toolbox and one-stop resource for analysis of the various budget process tools available. We applaud Rep. Amash for his thoughtful attempt to address some of the criticisms of the typical balanced budget amendment.
Pew's Center on the States has an interesting new report with a different angle on how breaking through the debt ceiling and defaulting would affect our economy. Most accounts of the disastrous effects of a technical default focus on interest rates and on the private sector; however Pew's report focuses on the potential effects on state and local budgets and their ability to borrow.
Nearly all state and local governments are required to balance their budgets, so the purpose of municipal bonds is to finance capital projects like building schools and fixing roads, rather than to cover shortfalls. Since interest rates on these bonds are closely tied to Treasury securities, a federal default that increases federal interest rates would affect municipal bonds as well. Federal default would make investors more jittery about all government debt, including municipal debt. As the report says:
Moody’s Investors Service recently announced that if the federal government loses its AAA grade, the agency would downgrade at least 7,000 top-rated municipal credits and $130 billion in municipal debt directly linked to the United States—including mortgage-backed bonds secured by the federal government or by agencies such as Fannie Mae and Freddie Mac.
Obviously, downgrades at any level would make it more difficult to borrow and would force states and localities to hold off needed infrastructure projects. Right now, Moody's has threatened five states with downgrades--Maryland, New Mexico, South Carolina, Tennessee and Virginia--so they would certainly be vulnerable.
But, the effects are not limited to the municipal bond markets. As one can imagine, interruption of the numerous transfers that the federal government makes to states and localities would be a logistical and budgetary nightmare. Payments for Medicaid, unemployment insurance, and a whole host of block grants could potentially be reduced or delayed if Treasury is forced to prioritize payments. For example:
Take tuition aid: The academic year begins in August, and the federal government owes $10.4 billion in tuition assistance for that month. States have slashed higher education budgets four years in a row, and colleges could have a hard time accommodating students whose federally subsidized loans are late.
These delayed payments might also make it hard for governments to operate, since they have figured federal payments into their budgets for this fiscal year. States with cash flow issues might have to seek loans from banks in order to cover their expenses. Certainly, states would have to scramble to keep their finances in order and to try to provide services in as even a manner as possible.
Other effects from default would hurt the budget and open up new deficits for the current fiscal year. If checks to federal government employees or other benefits are delayed or not made, it would hurt state revenue from income and sales taxes. Also, more broadly, a default's impact on economic growth and unemployment would also contribute to new deficits in the current fiscal year. The combination of these effects would force state lawmakers to revisit their current year budgets. Considering the acrimony that has accompanied many state budget debates already, this is not an attractive prospect.
Clearly, a federal default would be a nightmare for the whole country, whether you're talking about the private or the public sector. We have to avoid a technical default on the federal debt. Hopefully, the Gang of Six plan or other negotiations will provide a path out of this potential scenario.
As a former GOP Senator, you've seen your share of debt-ceiling votes and deficit talks. Is this round any different?
This is different because of what's happening in the real world. We were never globally connected like we are now. You can't play games.
How bad is it? Could the U.S. become the next Greece?
As my pal Erskine [Bowles, co-chairman of the deficit-reduction commission] says, "We're the healthiest horse in the glue factory."
What's the biggest obstacle to cutting the deficit?
The absolute rigidity of the parties. I've never seen that before. Somebody said they're as rigid as a fireplace poker but without the occasional warmth.
What do you think when you hear these words: Social Security?
Nobody's trying to balance the budget on the backs of poor old seniors. We're trying to make the damn system solvent! Unless you do something, in the year 2036 you're going to waddle up to the window and get a check for 23% less, and if that's smart, the drinks are on me.
We found enough fat in the Defense Department to send a truck of potato chips to the obese. Take one example, Tricare, a health care plan for 2.2 million military retirees, separate from the VA. The premium is $470 a year, and there's no co-pay, and the cost is $53 billion a year. Try to change even that, and you get "You're not a patriot."
It doesn't matter if you call it "Obamacare" or "Elvis Presley care" or "I-don't-care care." It cannot sustain itself in its present form. You've got to do things that are very irritating. You've got to reduce providers' and physicians' compensation, start charging co-pays and affluence-testing beneficiaries. You've got to make hospitals keep one set of books, not three. Impossible.
If you were in office today, would you sign Grover Norquist's no-tax pledge?
Hell, no! Why would you sign anything before you went into office or before you had the debate and listened to it?
Well, obviously, to get elected?
I never signed it, and I never got defeated for re-election. The revenue coming into the U.S. [government] is 15% of GDP, which is the lowest since the Korean War. In the past 20 years, it has been 19% to 20%. If you can't move that a half-inch, then you're never going to get anywhere.
Would you run for office now?
Oh, hell, no. Now it's just sharp elbows, and instead of having a caucus where you sit down and say, "What are you going to do for your country?" you sit figuring out how to screw the other side.
According to a new biography, your grandfather had money troubles. Is that what made you so fiscally responsible?
I never thought about that at all. My grandfather gambled and drank and twice came home and said to my grandmother, "Pack it up, Maggie. We don't own this house anymore." He shot a banker's ear off because the banker kept bouncing a check even though there were funds. My grandfather was a Democrat, and the banker said, "We don't like Democrats here." He also killed a man in the middle of Main Street and was charged with first-degree murder. But the jury came in eight for acquittal. He was a pretty volatile guy.
Alan Simpson, former Senator from Wyoming, is a member of the board of directors of the Committee for a Responsible Federal Budget. He is also co-chair of CRFB's Moment of Truth project and was co-chair of the President's bipartisan National Commission on Fiscal Responsibility and Reform.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Note: This article was originally published as an interview in TIME.
With momentum building toward a 'grand bargain' in negotiations on raising the debt limit and enacting deficit reduction, politicians in both parties have been voicing their support for a large deal. To add to the momentum, today President Obama has an op-ed in USA Today calling for politicians to go 'big,' writing:
There will be plenty of haggling over the details of all these plans in the days ahead. But right now, we have the opportunity to do something big and meaningful. This debate shouldn't just be about avoiding the catastrophe of not paying our bills and defaulting on our debt. That's the least we should do. This debate offers the chance to put our economy on stronger footing, restore a sense of fairness in our country, and secure a better future for our children. I want to seize that opportunity, and ask Americans of both parties and no party to join me in that effort.
Read the full op-ed here.
One of the criticisms of the plan put forward by the Gang of Six is that it relies on Congressional Committees to report legislation achieving savings without an effective enforcement mechanism requiring the Committees to act. In fact, the process contains innovative enforcement mechanisms which are stronger than existing mechanisms used successfully to implement savings from previous budget agreements.
The process for achieving the savings from reforming entitlement programs and the tax code outlined by the Gang of Six is similar to the budget reconciliation instructions in the existing budget process. The reconciliation process has been used to implement comprehensive budget deals in the past, including the 1990 budget agreement, the 1993 deficit reduction plan and the Balanced Budget Act of 1997. As CRFB board member Barry Anderson notes, it is not unusual to reach agreement on an overall framework first followed by work on legislation implementing the details. That is the process that was followed in each of those examples, and is the approach at the core of the Gang of Six plan.
However, the process established in the Gang of Six proposal contains several innovations which would make it stronger than the reconciliation process in current law:
- First, the instructions would be set in statute as opposed to an internal Congressional resolution as occurs with yearly budget resolutions.
- Second, the proposal would provide more detailed instructions for several of the Committees than simple savings targets. For example, the Finance Committee is directed to report a permanent “doc fix,” offset by health savings, with additional savings for deficit reduction. The Budget Committee is given detailed instructions to report legislation regarding discretionary spending limits, review for federal health spending, and a debt stabilization process.
- Third, the proposal would provide that if a Committee failed to report legislation achieving the required savings, an across-the-board cut in spending in all programs (except those for lower-income families) within that Committee’s jurisdiction would be imposed. This would give Committees a strong incentive to act on legislation which achieves savings through thoughtful policy reforms that set priorities in order to avoid the meat ax approach of an across-the-board cut. In addition, the proposal would give any bipartisan group with at least five Senators from each party the power to introduce a resolution achieving the required savings if either the Finance or Budget Committee fails to act (click here to see what those Committees would be responsible for).
Of course, we’d support making their enforcement mechanisms even stronger. The Peterson-Pew Commission recommended a sequestration approach where spending and tax expenditures would be cut across-the-board if fiscal targets are not met. The most important thing, though, is for policymakers to agree to the policies which will put the debt on a sustainable path. Process reforms can lead our elected officials to water, but only they can agree to drink.
Without the political will it will be impossible to follow through on the savings targets. But this is exactly where the Gang's proposal derives its strength. The Gang's plan reflects a broad consensus with strong bipartisan support of lawmakers who are committed to following through to achieve the savings.
To continue shedding light on the details of the Gang of Six proposal, below we provide a clear and concise overview of how the Gang of Six's proposal would wrestle control of future debt from its current course.
The Gang's plan is a two part process: enact $500 billion in savings now as a downpayment on future deficit reduction, and then instruct the relevant committees in Congress to recommend additional savings, with, at times, clear instructions and conditions for those additional savings.
The downpayment would enact discretionary caps through 2015, saving about $500 billion over that period with a firewall between security and non-security spending to ensure that savings come from all areas of the discretionary budget. Although the specific levels have not been made public, the levels are presumably similar to the Fiscal Commission's updated estimates given that the security savings over ten years directly match those from the Fiscal Commission (see the Gang's charts here). The caps only go through 2015, but the Budget Committee is charged with extending the caps and enforcement mechanisms through 2021.
The Gang's discretionary caps appear lower than the Fiscal Commission's because, as we have noted before, many of the discretionary cuts have already been put in motion--from downward economic projections and enacted discretionary cuts--and are now part of the baseline. The Gang's plan would lock these savings in with enforceable caps.
Also included in the downpayment are a minimum benefit for Social Security, using the more accurate chained CPI for all inflation-indexed programs, and repealing the CLASS Act, among other smaller changes.
Getting the Rest of the Savings
To make the process of finding savings for deficit reduction more open and transparent--recognizing the reality that big reforms take time and deserve expert attention--the proposal would instruct several committees within Congress to find specified savings levels. Presumably over a few months, these committees would then report back to the Budget Committee where all the recommendations would be assembled into a larger package for lawmakers to vote on. Following this vote, lawmakers would then be required to enact Social Security reform that ensures 75-year solvency for the program.
Some critics have commented that there is a dearth of specificity in the Gang's proposal, and that it is unclear how lawmakers could achieve these targets. However, the Committee targets are based largely on the recommendations of the Fiscal Commission. Of course, this doesn't mean that lawmakers need to agree to the same policies as were proposed by the Fiscal Commission -- though some Committees do have specific instructions, there is a fair amount of wiggle room in terms of which policies to propose.
That said, the Fiscal Commission plan shows that all the targets are fully achievable. As you can see below, enacting the Fiscal Commission recommendations would do enough to achieve the targets in every area except for health care -- where there are plenty of other options out there to strengthen the Commission's proposal. Additional health savings ideas from Senators Lieberman and Coburn, proposals from MedPAC, among many others could be used to achieve the Gang's target.
The table below shows some of the Committee targets in bold, with the Commission recommendations that would fall under those targets. Note that in addition to what is below, the Gang's proposal calls for the Budget Committee to extend discretionary caps through 2021, the Finance Committee to enact Social Security reform, and the implementation of a number of procedural changes.
|Committee||Targets and Illustrative Savings
|Finance (Taxes)||$1,133 billion|
|Comprehensive reform (Eliminate and reduce tax expenditures and marginal rates)||$1,000 billion|
|Revenues for Highway Trust Fund||$133 billion|
|Finance (Health)||$500 billion|
|Reform SGR||$36 billion|
|Require Medicare drug rebates for dual eligibles in Part D||$57 billion|
|Reduce spending on graduate medical education||$70 billion|
Expand Medicare cost-sharing, restrict Medigap coverage, and crate catastrophic coverage
|Restrict Medicaid state gaming||$51 billion|
|Other health savings||$51 billion|
|Health savings beyond the Commission recommendations||$108 billion|
|Health, Education, Labor, and Pensions (HELP)||$70 billion|
|Eliminate in-school interest subsidies for student loans||$64 billion|
|Reform the Pension Benefit Guaranty Corporation (PBGC)||$10 billion|
|Armed Services||$80 billion|
|Reform TRICARE for Life||$43 billion|
|Reform military retirement||$0 to $93 billion*|
|Homeland Security & Government Affairs||$65 billion|
|Reform federal civilian retirement||$0 to $93 billion*|
|Pilot Premium Support through Federal Employee Health Benefit (FEHB)||$22 billion|
|Reduce farm subsidies||$12 billion|
|Enact tort reform||$20 billion|
|Extend/expand auction authority, enact spectrum fees, and other savings||>$10 billion|
|Sell or impose fees on SEPA and TVA, end certain abandoned mine payments, restructure power marketing administration, and other savings||>$10 billion|
*The Fiscal Commission called for $93 billion in total federal civilian and military retirement system savings but was not specific on how the money would be allocated.
As part of an initiative called Do We Have a Deal Yet?, 115 college student body presidents from over 40 states have sent a letter to President Obama and Congressional leaders, calling for a balanced and bipartisan solution to the debt ceiling and our longer-term debt problem.
The non-partisan initiative started just last week in reaction to the gridlock that has gripped Washington (though we hope that has been lifted some by the Gang of Six plan). In addition, they support the Gang's plan as a "realistic framework from which to work."
Getting college students involved on this issue is important, since ultimately they will be the ones most affected by our action or inaction on the debt. We especially like the quote from Kaveh Sadeghian of the College of William and Mary, who appeared on CNN: "Our leaders are used to kicking the can down the road. Well, we’re that can, and we’re here to kick back."