The Bottom Line
Safe haven worries that had dominated trading last week have eased so far this week – and investor appetite for greater risk rose a little. The yield on the benchmark 10 year Treasury bond rose from just above 3.25 percent on Monday to over 3.40 percent by close of business Thursday. A greater appetite for risk was indicated by record sales of corporate debt, including high yield debt (sometimes known as "junk bonds").
Still, plenty of concerns linger in the background: to what extent Treasury holdings will need to be liquidated to cover losses and reconstruction costs from Japan’s nuclear crisis (Japanese insurance companies have been the focus); what spillover there will be from the nuclear crisis to the U.S. and global economies; if oil prices will continue to rise as a result of Middle East turmoil, with the most recent focus on Libya; and if there will be effects on the U.S. from a possible new phase of the Eurozone debt crisis, with the Portuguese government falling over its austerity program and Moody’s downgrading many smaller Spanish banks.
The strength and direction of the U.S. economy has taken a back seat to these headline global risk issues, but recent data so far suggests that 1st quarter U.S. growth will be pretty solid, but not stellar. At the same time, some data and global developments have raised concerns about the inflation outlook, although price pressures are expected to be dampened by considerable excess operating capacity in the U.S. economy. The Fed has launched a new round of reverse repurchase operations (known as "reverse repos"), which is a key Fed tool for draining liquidity from the system and is seen as advanced preparation for monetary policy tightening – at some point.
Markets were surprised by the Treasury Department’s announcement that it would start selling its portfolio of agency-guaranteed (i.e. guaranteed by Fannie Mae and Freddie Mac) mortgage-backed securities. Treasury purchased these securities to stabilize the mortgage market at the height of the financial crisis and the value of the portfolio is estimated at around $142 billion. Treasury stated that it would sell around $10 billion a month over the next year, depending on actual market conditions. While there could be effects on the intermediate government securities market from an increase in supply, many expect that the impact will be small.
Meet John, a 56-year-old fictional Baby Boomer "profiled" in the fourth installment of our "Meet the Generations" blog series, inspired by our latest paper "America's Fiscal Choices at a Crossroad: The Human Side of the Fiscal Crisis.
Because he will continue to work longer, John’s life will still be shaped by issues related to his job and income prospects. The older he gets, however, the more important macro-fiscal issues relating to his savings, pension, and health care will become. As he approaches retirement, he will increasingly struggle to maintain his standard of living while trying to build his savings. (John didn’t save enough earlier.) He is also supporting his elderly parents. (They did not save enough either.) With all of these financial pressures, John will have to work much longer than he thought in order to build the kind of future he had envisioned.
How will our leaders' fiscal choices affect John?
Fiscal Gridlock (Scenario One). If our political leaders do not change course, John will suffer through a fiscal crisis or a crisis with fiscal dimensions sometime in his life. While the timing or tipping point cannot be predicted with certainty, experts agree that at some point our creditors will refuse to finance national borrowing that is growing a lot faster than our national income. It is very possible that the crisis will occur at a time when John is quite vulnerable – when he is approaching retirement but has not quite saved enough to retire. (Experts think that the risk of a crisis has already risen.) John may be laid off suddenly as businesses go bankrupt or try to survive by shedding highly paid senior employees like him to reduce costs. This probably means he will have to draw on public safety nets more than he expected and will not be able to save what he needs to support himself and his parents in retirement.
Even if a full-blown crisis does not occur, pressures from our massive borrowing on interest rates as the economy strengthens will slow growth and investment. John’s income and savings attempts will be hurt in a weaker job market with lower growth. John’s living standards – and those of his parents - will be sharply reduced. Rising poverty for John and other Boomers as they become senior citizens will be a serious concern.
Fiscal Recovery Plan (Scenario Two). John will have higher living standards if our policymakers take sensible fiscal action sooner rather than later. Importantly, putting a fiscal recovery plan in place soon will mean that John and other Baby Boomers will likely avoid the sharp disruption and immediate economic devastation to jobs and income that usually accompany a fiscal crisis.
But, more basically, John will also be better off over time as policymakers reduce national borrowing pressures on the economy. Once initial belt-tightening effects from a fiscal recovery plan recede (probably tough on some of the oldest non-retiree Boomers), improved fundamental economic conditions will increase John’s well-being (and his family’s). If our fiscal house is put in order, interest rates will be lower than otherwise, which will mean faster growth, stronger employment and greater income prospects for John and his fellow Baby Boomers. Then, as he looks to retire, he will be able to plan more effectively if adjustments to programs like Social Security and Medicare have been made before he is in his 70s or early 80s.
John and his family (and everyone else) will also benefit from increased fiscal space, one of the key by-products of fiscal adjustment: if U.S. fiscal imbalances are reduced enough, we will have the fiscal flexibility to respond to emergencies (including natural disasters, and economic, financial or national security shocks from elsewhere) without increasing creditor risk from having too much debt.
In light of the recent debates over Social Security, CRFB's latest paper attempts to clarify how the program relates to the federal budget and budget deficits. Some say that Social Security is a completely independent program and contributes nothing to the budget deficit, while others argue that it is in fact the largest government program and adds to overall deficits since it spends more than it takes in. So who's correct?
We argue that both of these perspectives are correct, depending on how you view the program. Viewed as a stand alone program, dedicated revenues and trust fund assets will keep the program solvent for another 25 years, but will increase the borrowing needs going forward since Social Security essentially lent its holdings to the rest of the federal government. Viewed as part of the overall budget, Social Security can be seen as already adding to deficits today since yearly benefits already exceed dedicated revenues.
As we find in our analysis:
"No matter how you look at it, Social Security is in dire need of reform. The program’s trustees continue to warn us that changes need to be implemented as soon as possible. By acting now, we can implement changes in thoughtful ways and protect those who depend on the program the most. We can also institute tax and benefit changes gradually, giving current workers plenty of time to adjust their retirement planning decisions. Whether for the health of the budget or for its own sake, it’s time to reform Social Security."
Below, CRFB President Maya MacGuineas explains the two different perspectives on the Nightly Business Report:
A bipartisan group of ten former chairs of the President's Council of Economic Advisors (CEA) published an op-ed in Politico today stating that the federal budget deficit "is a severe threat that calls for serious and prompt attention". In what should serve as a wake-up call to some in Washington about the seriousness of our nation's fiscal problems, the former chairs argue that continued inaction would be "irresponsible", urging lawmakers to look beyond the debate over the 2011 budget to the far bigger problem of long-run budget deficits.
The former chairs--including Martin Baily (Clinton), Martin Feldstein (Reagan), R. Glenn Hubbard (George W. Bush), Edward Lazear (George W. Bush), N. Gregory Mankiw (George W. Bush), Christina Romer (Obama), Harvey Rosen (George W. Bush), Charles Schultze (Carter), Laura Tyson (Clinton), and Murray Weidenbaum (Reagan)--call for the final report of the President's Fiscal Commission to serve as the framework for a bipartisan effort to reduce the deficit, citing the bipartisan majority of 11 out of 18 possible votes the final report received and stating:
"As former chairmen and chairwomen of the Council of Economic Advisers, who have served in Republican and Democratic administrations, we urge that the Bowles-Simpson report, “The Moment of Truth,” be the starting point of an active legislative process that involves intense negotiations between both parties."
"There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention."
Without action soon to address long-term deficits, population aging and health care costs will push deficits to unsustainable heights. They argue that:
"These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008."
With a letter last week from 64 Senators calling on the President to address comprehensive deficit reduction and now an op-ed from some of the most well known and respected economists in the country, momentum and pressure are certainly growing for lawmakers to start talking about our long-term fiscal challenges. We said it last week in a release praising the 64 Senators and we'll say it again, "something big is happening, and those who don't confront our fiscal situation head-on are going to be left behind."
We commend these former CEA chairs for coming together to call attention to the urgency of this issue and hope that Washington will heed their excellent advice. Congress and the Administration can no longer ignore the critical need for a comprehensive deficit-reduction plan that addresses all areas of our budget.
Click here to read the full op-ed.
Once again, policy-watchers and policymakers are fired up over whether Social Security needs to be fixed anytime soon. Some resort to pretty arcane debates over the trust fund to make their point. Won't it take years to exhaust the trust fund? Are the bonds in the trust fund real? Is the trust fund a fiction? Was the trust fund raided? You know, it scarcely matters. All these debates are over a tiny sliver of the Social Security System—not over where the real action is.
What does matter is that Social Security expenses are expected to rise by about 50 percent—from about 4.3 to 6.3 percentage points of GDP—from 2008 to 2030, and taxes aren't. As the baby boomers retire, higher expenses and less tax revenue mean that the national deficit will rise year after year.
Let's take a quick look at the history of Social Security expenses and income. As the figure readily shows, Social Security has always been roughly a pay-as-you-go system. There was a tiny buildup of the trust funds at the beginning when people paid into the system but beneficiaries had not become eligible. In most years, the trust fund's purpose was simply to cover potential cash flow problems if a recession or other major economic event hit. Then, in the mid-1980s, there was a slight buildup again as the large cohort of baby boomers swelled the ranks of the working population. But never have these trust funds held enough money to cover more than a tiny fraction of Social Security's obligations.
Those who say we can wait 20 years to address Social Security's solvency even though the system will soon be spending over 30 percent more than it collects in taxes have turned a blind eye to current and growing deficits. They seem to think that (1) we can count on income tax payers to raise more taxes, or we can cut other spending, or we can borrow more and pay interest to the trust funds as they move toward decline; or that (2) we can draw down assets (say, by borrowing more from China to pay off bonds in the Social Security trust fund) without consequences.
This is the mindset of a household that has saved $50,000 for retirement but has $300,000 in credit card debt and keeps charging more every year without paying down the balance. The parents in such a household plan on retiring for decades, earning less, and spending down their meager retirement savings in a few years, so they're counting on their kids to bail them out. The parents keep insisting that the assets in their "fund" were real. The kids think the retirement fund is an accounting fiction. The parents remind the kids that they'd be in a worse pickle if it weren't for the parents' retirement fund. You can see how fruitless this conversation is when the operative fact is that the household is in a big financial hole that the decline in income and increase in expenses will only deepen.
How about raiding the trust fund? Those railing against this financial sin say that the country would have been better off without running a lot of non-Social Security debt even while it was accruing a tiny pot of money temporarily in its trust fund. That's true, but then whose taxes were lower and other government benefits higher as a result? Often, the same people who cry foul that the (tiny) trust fund was raided. By that bizarre logic, the parents in our hypothetical household could claim that the kids should support them in retirement because the parents had raided their retirement fund by running up credit card debt.
So where did all the Social Security tax dollars go? Basically, to previous generations of retirees. Money in, money out. Did people get something out of their tax dollars? Yes, they did—support for their parents. Having already received that benefit, they can't really lay claim to the same money twice. They can make a case that their kids should support them, just as they supported their parents. But it's not that simple: newly retiring generations have fewer kids to support them and live many more years as retirees—21 years on average— than their parents did.
Those who would put off this debate may not have time on their side either: the Social Security problem will be fully ripe by about 2030—not 75 years from now. That's well within the lifespan of people retiring today, not to mention most workers. If only politicians could see that far ahead!
Gene Steuerle is a member of the board of directors of the Committee for a Responsible Federal Budget. He also is a senior fellow at The Urban Institute, co-director of the Urban-Brookings Tax Policy Center, and a columnist for Tax Notes Magazine.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Note: This article was originally published as a Government We Deserve column at the Urban Institute.
The recent introduction of the BUILD Act to create a national infrastructure bank to help finance infrastructure improvements has started a needed debate over how to pay for such investments. Our New America Foundation colleague Jason Delisle today sheds some light on the new proposal in a commentary at e21.
The BUILD Act would create a new entity, the American Infrastructure Financing Authority (AIFA), which would issue direct loans and loan guarantees to finance projects. The purpose is to create a process that is immune from the "pork-barreling" tendencies of lawmakers and also fiscally sustainable in an era of mounting federal budget deficits and national debt. The website of Sen. John Kerry (D-MA), lead sponsor of the bill, states:
"AIFA is independent of the political process. It would fund the most important and most economically viable projects across the country, our states, and our communities. AIFA is also fiscally responsible. While AIFA will receive initial funding from the government, after that it must become self-sustaining."
Whether such an institution could truly be apolitical should be debated in another forum. The "fiscally responsible" argument is important to us and Delisle examines it in his commentary. The rationale behind the bank would be to reduce the costs of borrowing for infrastructure projects, make the loans and guarantees "self-sustaining," and leverage private money--allowing infrastructure projects to take advantage of the federal government's incredibly low interest rates. However, the bank would require all projects to compensate the government for the full cost of this subsidy from lower interest rates. As Delisle argues, this begs the question why states and municipalities would go through all this? The interest on municipal bonds is already subsidized by taxpayers since it is not subject to federal income tax.
The bank's supporters argue that even after paying for this subsidy, infrastructure projects would still be better off. Delisle questions this claim and points to federal budgeting rules that make it look like taxpayers are better off too. He explains that we really can't have it both ways--taxpayers would still bear some credit risk that they are not reimbursed for due to a loophole in federal budgeting rules.
"The Federal Credit Reform Act, which details how the federal government must calculate the costs and risks that federal loan programs impose on taxpayers (including loans made under the BUILD Act), systematically excludes a full measure of the riskiness of these loans. That is, by discounting expected loan payments at risk-free U.S. Treasury interest rates, the rules ignore the fact that loan performance is unpredictable over time and that defaults will be more frequent and costly in bad economic climates. Private lenders charge borrowers a premium to take on that kind of risk and uncertainty, called “market risk,” but government budget rules do not."
Delisle concludes, “In short, the program isn’t self-sustaining because taxpayers are bearing a risk for which they have not been compensated.” We need to have a serious debate about how to modernize our aging infrastructure in a fiscally responsible way. In having that discussion we must recognize that there will be no free lunch, and budget accordingly.
Meet Edna, a 75-year-old fictitious senior citizen. In the third installment of our "Meet the Generations" series, we take a look how policymakers' action (or inaction) could affect her life, as outlined in CRFB's March 10 paper "America's Fiscal Choices at a Crossroad: The Human Side of the Fiscal Crisis".
Edna is retired and relies on the fixed income from her savings and pensions. She is very vulnerable to deteriorating economic conditions (including inflation) and reductions in income. Services (especially health-related) and personal security issues have become increasingly important. The well-being of her children and grandchildren and her legacy to them are crucial to her.
How will our leaders' fiscal choices affect Edna?
Fiscal Gridlock (Scenario One). Two programs are essential to Edna’s life: Social Security and Medicare. While she will probably be able to continue drawing on their resources into the future, these programs are not fully sustainable for seniors down the road without major changes. If the difficult decisions are delayed, Edna’s children and grandchildren will be worse off as a result of the amount of adjustment required (which could include reducing benefits sharply, raising taxes on the working age population and/or shifting funds from other government programs). The burden of the adjustment that will be passed on to Edna’s family (the successor generations) only increases the longer policymakers delay putting in place a plan to gradually phase in any policy changes.
Fiscal gridlock will also have immediate costs for Edna. National debt-related pressures on the economy will reduce the value of assets she relies on for her income, particularly if they contribute to a fiscal crisis. Plus, if our policymakers are tempted to inflate their way out of our debt problems (i.e. put pressure on the Federal Reserve to accommodate higher inflation, which lowers the inflation-adjusted value of the debt we are repaying), Edna will see the value of her savings eroded. (Inflation is Enemy No. 1 for anyone on a fixed income.) In the end, any fiscal crisis - whether gradual or sudden - will probably require austerity measures which could significantly affect programs Edna relies on (including programs related to pandemics, food borne illness, crime prevention, and public transportation).
Adopt a Fiscal Recovery Plan (Scenario Two). Edna and her family will be better off with a stronger economy - which is what we’ll see when the upward pressure on interest rates from fiscal gridlock subsides. In a stronger economy, Edna’s children will not be as likely to ask her for financial help (or move her in with them), and the value of her assets will probably be higher. Another plus is that if our policymakers better manage our fiscal future, the likelihood of a fiscal crisis will be diminished. For Edna, her children and her grandchildren, it is always better to avoid a crisis and to manage change gradually. Most importantly however, fixing our fiscal problems gradually but comprehensively could help ease the massive income transfer from the younger generations to senior citizens that would otherwise take place. By putting in place a gradual and balanced plan to fix the Social Security and Medicare trust fund financing problems, Edna’s family and seniors that come after her will be able to plan for retirement well in advance and on balance will be better off. For Edna and her family, it’s a matter of living standards - and her legacy.
In her recent column, Ruth Marcus, of The Washington Post declared:
“Don’t call me a deficit hawk. Call me a deficit panda.”
Seeking a cuddlier image for the mantle of fiscal responsibility, she continues:
“I would argue that it is possible to be a deficit panda: to simultaneously worry about the debt and believe in an active and compassionate role for government. In fact, I would argue that worrying about the debt is required of those who believe in such a government role."
Ruth points out that failing to address our national debt will eventually hurt everyone – but especially the most vulnerable:
"This point would seem obvious, except that too often the fiscal policy debate seems to be divided between grinch-like deficit hawks and caring big spenders. The progressive case for worrying about the debt too often goes unmade, and the players forget: Fiscal responsibility is, at bottom, moral responsibility. Fiscal crises are ultimately human crises."
But she does not forget the average American. Ruth looks at how “John”, a 56 year old Baby Boomer, and Nick, a 24 year old recent college graduate and Millennial, will be worse off if our debt problems are not fixed.
Nick and John are some of the fictitious characters we created in our recent paper, America's Fiscal Choices at a Crossroad: the Human Side of the Fiscal Crisis, to illustrate the benefits from tackling our fiscal problems for people – and the high costs for them if we do not. (For more details on Nick, John, Edna, Keisha and Kate, see our “Meet the Generation” blog series continuing through this week.)
Ruth moderated CRFB's Human Side of the Fiscal Crisis event earlier this month. The event featured conversations among top fiscal experts and people representing many of the major voices involved in our budget battles. View the event and the many presentations here.
Students at Stanford University, under the guidance of Comeback America Initiative (CAI) CEO and CRFB board member David Walker, have developed a Sovereign Fiscal Responsibility Index (SFRI) in an attempt to compare the quality of fiscal policy across different countries. The study, unsurpringly, does not contain good news for the US.
The SFRI uses three broad categories of criteria: fiscal space, fiscal path, and fiscal governance. In other words, how much room a country has to borrow, where the debt is heading, and how well the country can manage its debt. The first two criteria are relatively straightforward, but their assessment of fiscal governance includes a huge variety of measures, such as the presence of an independent forecasting body, the enforceability of fiscal rules, and the transparency of a country's budget.
The study compares 34 countries, consisting of mostly OECD countries and the BRICs (Brazil, Russia, India, and China). On the total measure of fiscal responsibility, the U.S. comes in 28th. Ouch.
We have serious problems in all three areas. Most alarmingly, they predict that the U.S. would reach its capacity to borrow in sixteen years--in the year 2027, based on an IMF estimation of how much debt the U.S. can borrow before the markets make the debt unsustainable. Obviously, reasonable people will disagree as to exactly what this number is. Nevertheless, on all three measures, we rank in the neighborhood of some of the most fiscally troubled countries in the study--including Italy, Portugal, and Ireland.
The U.S. is almost at the "danger" line of about 50 percent fiscal space discussed in the report. They chose this line based on the fact that many countries that are below it are under the most "fiscal scrutiny." About six countries are below this point--including Japan, Belgium, Ireland, Portugal, Italy, Iceland, and Greece. This line is more an observation about where the countries in the most serious trouble are.
One interesting note they include is that if the U.S. enacts a fiscal plan as ambitious as the Fiscal Commission's proposal, the U.S. would jump to eighth in the rankings--since it would not reach its debt capacity anytime in the foreseeable future and process reforms in the proposal would significantly improve fiscal governance.
The SFRI is just one way to measure the quality of a country's fiscal responsibility and people may disagree on the metrics used, but it is an indication of where we are compared to other advanced and emerging countries. If we can develop a fiscal plan, our outlook would look a lot brighter.
One year ago on Wednesday, the health care reform legislation (or PPACA, the Patient Protection and Affordable Care Act) was passed by Congress. Technically, the President didn't sign the legislation into law until March 30 last year, but tomorrow is close enough. We just couldn't wait to update our charts.
CRFB (and many others) spent the better part of a year tracking and commenting on the health care reform discussions and legislative proposals, arguing that bending the health care cost curve should be one of the central pillars of reform. We released tables of proposed policies, papers comparing all the plans (see here and here), tons of other releases and op-eds, and an analysis of health care reform's impact on the long-term fiscal outlook for the U.S.
In light of continuing to update readers on the budgetary impact of health reform, we've updated our featured health charts to incorporate the latest CBO estimates of repealing PPACA--which should serve as a proxy for the budgetary impact of the legislation.
In a new paper released by The Pew Charitable Trusts, George Mason University Professor (and Peterson-Pew Commission consultant) Paul Posner addresses the question "Will It Take a Crisis?".
The fiscal challenges over the medium and long-term for the U.S. have heightened the importance of early action on controlling future deficits. However, making difficult fiscal decisions in a heavily polarized climate presents many risks to politicians when they would be of great benefit to the broader public. So are policymakers up to the task of tackling these challenges, or will it take a crisis?
The Barriers to Action
After clearly presenting the magnitude of our fiscal woes, Posner discusses the incentives and bottlenecks than can thwart thoughtful action and foresight to control rising debt. Some argue that government has the incentives and abilities to increase budgets (known as public choice theory) and that elections force politicians to be near-sighted, putting off difficult decisions until a crisis forces changes. But key stakeholders in society can and do mobilize against policy changes that would affect them (interest group bias)--and have a greater interest in mobilizing than society at large who would stand to benefit.
Our political process can also work to stymie major change, with the system of checks and balances instituting many "veto points" throughout the policymaking process. Additionally, members of Congress and presidents spend an increasing amount of time focusing on fundraising, elections, and things that are urgent but potentially not most important--and perhaps less time crafting policy solutions to future problems.
As Posner states:
"Notwithstanding the overwhelming advantages of early action on fiscal challenges, the conventional view of many of our most sophisticated commentators is that it will take a crisis before we collectively come to grips with the hard choices that need to be made on the spending and tax sides of the budget. In this view, foresight is a politically unnatural act by elected officials who primarily focus on their next election far more than they do the fiscal prospects facing the nation 20 years from now."
"As contrasted with conventional wisdom and certain academic literatures, democratic nations are not doomed to be reactive to market pressures alone. Rather, the record shows that policy makers and publics alike can be summoned to fiscal sacrifice and longer-term vision by compelling ideas presented in ways designed to mobilize broader publics traditionally unengaged in budget decision-making. Elected leaders at times are rewarded by publics that are persuaded to view sacrifices as necessary for the broader public good."
How Action in Advance Can Happen
Political history in both the U.S. and abroad shows that politicians can use the "language of a crisis to create a compelling case for action now." There have been 14 episodes in advanced economies over the past 30 years (and 26 emerging economies) where countries achieved fiscal improvements of over seven percent points of GDP, many of which without relying on a fiscal crisis to force change.
Overall, Posner argues that there are three forces that promote agreement:
- Political opportunities - Leaders can be anxious to claim credit for fiscal progress.
- Economic goals and risks - Policymakers are held accountable for the state of the economy and future outlook.
- Broader policy goals - Whether for reducing the size of government or creating the fiscal space for future priorities, deficit reduction can serve several goals.
Interestingly, over periods of fiscal progress in the 1980s and 1990s, a divided government prevailed. This gets to the key to Posner's argument that bipartisan agreement can offer the best chance of success in both enacting and sustaining fiscal reforms, and that bipartisan cooperation offers the political cover needed for each side to embrace reform.
With policymakers increasingly focusing on solutions to rising deficits and debt, there is no better time than the present to start work on a comprehensive fiscal plan. Paul's analysis certainly presents the reasons to be optimistic about our ability to change course, but it's up to lawmakers to show the leadership we need.
Last week, CBO showed that the President's Budget was way too optimistic about its projections of deficits and debt. But CBO's findings would not have surprised readers of The Bottom Line, who saw us try to predict what the budget would look like using the parameters of CBO's January baseline and getting rid of the unspecified offsets for increased transportation spending and the doc fix.
Since CBO did not update their economic assumptions from January, adding the difference between CBO and OMB's current law estimates and the unspecified offsets in the budget got us very close to the numbers that they put out last Friday. We projected $9.5 trillion of deficits from 2012-2021 and a debt of 87.5 percent of GDP in 2021. On the other hand (well, maybe not the "other hand"), CBO projected $9.5 trillion of deficits and 87.4 percent.
Cumulative deficits between 2012-2021 total $7.2 trillion in the President's budget but only $9.47 trillion in CBO's analysis--a difference of almost $2.3 trillion. The different economic and technical assumptions between CBO and OMB account for roughly $1.3 trillion of this while the unspecified savings account for about $777 billion (including interest).
|Comparing Debt Projections for the President's Budget (Percent of GDP)|
CBO's analysis of the President's budget confirmed what we (and probably many others) had suspected all along--that the budget would in fact not meet its goals of balancing the non-interest budget by 2015 and stabilizing debt as a percentage of the economy. Lawmakers must go further in embracing deficit-reducing policies. The President's budget may have been a start, but CBO shows that it won't be enough.
In her latest commentary for CNN Money, CRFB president Maya MacGuineas expresses increasing - but still cautious - optimism about the possibility of a comprehensive bipartisan fiscal reform package in Washington. She talks about some of the difficult reforms that will have to be made - including to entitlement programs, the tax code, and defense spending - and says that while it certainly won't be easy, "the country cares about these problems and policymakers are taking them seriously".
"My Views" are works published by members of the
Along with CBO's preliminary analysis of the President's Budget on Friday came an update in CBO's baseline, which actually shows a $234 billion reduction in deficits over the 2012-2021 period compared to its January baseline. It also shows an $81 billion reduction in the deficit this year, meaning that they project the 2011 deficit to not be an all-time high. Instead, it's "only" $1.4 trillion, compared to the nearly $1.5 trillion it was projected to be two months ago. Click here to read our review of CBO's analysis.
Average deficits under the March baseline are now projected to be 0.2 percent of GDP lower than in January. Debt levels would also be slightly lower, reaching 75.6 percent of GDP instead of 76.7 percent in 2021.
|Comparison of January and March Baselines (Percent of GDP)|
Of the $240 billion in changes, about $50 billion result from new discretionary projections based on the previous continuing resolution (CR), which cut $4 billion off of current levels (CBO has not yet incorporated the most recent CR into the baseline).
Reestimates of the coverage provisions from health reform have actually increased the deficit projections by about $90 billion in total (exchange subsidies would cost about $100 billion more but this would be partially offset by other changes). Decreasing the deficit projections, CBO expects about $340 billion in lower Medicare and Medicaid spending mainly as a result of slower projected growth in Medicare Part D and Medicaid long-term care spending.
|2012-16 (Billions)||2012-2021 (Billions)|
|Medicare and Medicaid||$86||$339|
* Estimated by CRFB to include revenue effects.
Madness in Washington – The down-to-the-wire finishes, Hail Marys and upsets in DC weren’t confined to the Verizon Center. Capitol Hill is experiencing its own madness. On Friday President Obama signed the sixth continuing resolution (CR) to keep the federal government operating just as the previous stopgap measure was about to expire. With the clock now reset to April 8, will the two sides change their strategy of lobbing shots from half court and mix it up in the paint to score an agreement on funding the government for the rest of the year? Meanwhile, Senators Michael Bennet (D-CO) and Mike Johanns (R-NE) pulled off a surprise with a bipartisan letter from over 60 senators asking President Obama to lead on a discussion of a comprehensive deficit reduction package that puts spending cuts, entitlement changes and tax reform in play. Lawmakers are back home this week huddling with constituents.
CBO Blows the Whistle on President’s Budget – The Congressional Budget Office (CBO) on Friday released its analysis of the President’s FY 2012 budget. According to CBO, the White House budget will fall short of balancing the primary (non-interest) budget by 2015 and stabilizing debt as a share of the economy. The Administration claimed success in February on both fronts, but CBO projects larger deficits and rising debt, reaching 87 percent of the economy in 2021. Last month, CRFB argued that the budget likely understated deficit and debt numbers because its projections of economic growth were quite rosy and from unspecified savings in the budget. The new CBO report bears this out, as we highlight in a paper of our own that examined CBO’s analysis.
Fans Don’t Go Wild over the Play on Capitol Hill – The partisan bickering over the budget and lack of action so far to address mounting deficits and debt has contributed to low public approval ratings all around. According to a Washington Post-ABC News poll last week, only 26 percent of respondents were positive about “our system of government and how well it works.” Washington needs to pick up its game.
Small Ball in Small Business Bill – With few games in town when it comes to moving legislation in the closely-divided Senate, a measure reauthorizing the Small Business Innovation Research program and Small Business Technology Transfer program has attracted several riders. Many amendments involve smaller-scale attempts to reduce spending and instill fiscal discipline. The chamber approved on a 98-1 vote a resolution from Sen. Ben Nelson (D-NE) expressing the sense of the Senate that it should cut its own budget by at least 5 percent. It is not clear what measures will get votes, but other amendments include one from Sen. John McCain (R-AZ) to end the printing of hard copies of the federal budget and another from Sen. David Vitter (R-LA) to sell unused federal property. Larger-scale proposals include an amendment from Sen. John Cornyn (R-TX) to establish a U.S. Authorization and Sunset Commission to review agencies and programs and terminate unauthorized and duplicative ones. Sen. Tom Coburn (R-OK) also sponsored an amendment to eliminate duplicative and overlapping federal programs. Sen. Rand Paul (R-KY) went big with an amendment to cut spending by $200 billion this year by reducing most discretionary spending to FY 2008 levels and cutting defense spending by 5 percent.
Senators Ask President to Suit Up – On Friday, a bipartisan group of 64 senators signed a letter asking President Obama to support comprehensive deficit reduction. The letter states that the work of the White House Fiscal Commission “represents an important foundation to achieve meaningful progress on our debt” and cites the work of the bipartisan group of senators developing a plan based on the commission’s recommendations. The letter was organized by Senators Michael Bennet (D-CO) and Mike Johanns (R-NE). In a conference call explaining the letter, Sen. Johanns said “the ball is in the President’s court.”
Social Security Still a Tough Bracket? – More lawmakers are finding the courage to talk about Social Security reform. Senators Joe Lieberman (ID-CT) and John McCain (R-AZ) are working on legislation to strengthen the long-term finances of the vital program that may include a mix of benefit reductions and tax increases and Senator Lindsey Graham (R-SC) is working on a reform proposal of his own. Entitlement reform, including changes to Social Security, is expected to be included in the budget blueprint to be released by House leaders next month and several Senate Republicans last week asked President Obama to lead in addressing entitlements. Meanwhile, Senate Democrats are split; some moved to make it harder to reform Social Security by introducing legislation that would require a 2/3 vote of both houses of Congress to make changes that reduce benefits, while some like Sen. Mark Warner (D-VA) want Social Security reform included in comprehensive debt reduction efforts. White House advisers reportedly are divided in how to handle the issue.
Rand Paul Takes the Point – Senator Rand Paul (R-KY) introduced his own multi-year budget proposal that aims to balance the budget in five years. Hopefully this will encourage more of his colleagues to support comprehensive, multi-year plans.
Momentum Continues to Build for Budget Process Reform – Last week saw more ideas for improving the budget process. Congressmen Gary Peters (D-MI) and Cory Gardner (R-CO) teamed together on a bill that would require Congress to vote on the “Terminations, Reductions, and Savings” recommended in the President’s budget each year. A subcommittee of the Senate Homeland Security and Governmental Affairs Committee held a hearing on Tuesday that addressed ways to enhance presidential authority to eliminate wasteful spending and reduce the deficit. CRFB President Maya MacGuineas was one of the witnesses and discussed making it easier for the President to rescind spending in bills that he signs. Senator John McCain (R-AZ) introduced a bill that will allow taxpayers to designate up to ten percent of their tax liability to be dedicate to paying down the debt. Representative Jeff Flake (R-AZ) introduced the House version of the legislation. (See here for what we said of the same legislation last year.) Republicans are also looking for broader support for a Balanced Budget Amendment that would also cap annual spending at a certain percent of GDP. And House Majority Leader Eric Cantor (R-VA) is working with House Minority Whip Steny Hoyer (D-MD) and their colleagues in the Senate on a bipartisan, bicameral effort to implement recommendations in a recent Government Accountability Office (GAO) report on ways to reduce waste and duplication in government.
Panda-ering on the Deficit – Washington Post columnist Ruth Marcus is calling for “deficit pandas” to take up cuddly arms in addressing our fiscal problems. Marcus argues that the deficit reduction mantle should not be left solely to those who want to limit the responsibilities of government. Those who see an active role for government should also want to address the debt because the consequences of not doing so will primarily affect the most vulnerable. Marcus was inspired by a new CRFB paper, “America’s Fiscal Choices at a Crossroad: The Human Side of the Fiscal Crisis.” The paper examines how various groups will be impacted by two scenarios: addressing the debt head-on or continued gridlock that prevents a change in course.
CRFB Budget Simulator Wins Award – CRFB’s “Stabilize the Debt” online budget simulator won a DC Addy Silver Award on Tuesday in the interactive media/online gaming category. Experience the award-winning simulator at http://crfb.org/stabilizethedebt.
Infrastructure Debate Builds Up – Senator John Kerry (D-MA) introduced the BUILD Act last week, which would create a national infrastructure bank to facilitate investments in infrastructure. This should promote debate on how the nation prioritizes and finances needed investments in infrastructure.
Key Upcoming Dates
• Department of Commerce releases durable goods orders data for February.
• Weekly unemployment claims data released by the Department of Labor BLS.
• Department of Commerce releases final estimate of GDP for the fourth quarter of 2010.
• University of Michigan releases final consumer sentiment index for March.
• The current continuing resolution (CR) funding government operations expires. Congress must adopt spending bills funding the federal government for the rest of FY 2011 by then or pass another stopgap measure.
• Statutory deadline for Congress to enact a Fiscal Year 2012 Budget Resolution.
April 15 - May 31
• Period in which Treasury Secretary Geithner says the U.S. will likely reach the debt ceiling (revised).
Earlier today, the Congressional Budget Office (CBO) released its preliminary analysis of President Obama’s FY2012 budget request. In conjunction with CBO’s release, we have published a paper that looks at the President’s budget in the context of CBO’s most recent analysis. In it, we explore the differences between CBO and OMB estimates, the factors contributing to these differences, and what all of this means for our fiscal outlook.
CBO estimates that the President’s budget will fail to reach the Administration’s fiscal goals: balancing the primary budget by 2015 and stabilizing the debt-to-GDP ratio. In fact, whereas OMB assumes the debt would stabilize around 77 percent of GDP through the decade, CBO finds that it would rise above 87 percent by 2021. We voiced concerns about this earlier this year in our own analysis of the President’s budget.
Our analysis finds a $2.3 trillion difference between CBO and OMB's estimates of the President's budget, stemming primarily from different economic assumptions and whether or not to count unspecified savings.
|Deficits in the President's Budget (OMB)||$7,202|
|Difference in Economic and Technical Assumptions in Baseline||$1,272|
|Exclusions of Unspecified Offsets in Budget||$777|
|Different Cost Estimates of Policy Proposals||$219|
|Deficits in President's Budget (CBO)||$9,470|
The paper concludes:
CBO's estimate of the President's budget shows that we are on a dangerous fiscal path, even if we enact the deficit-reducing policies proposed in the President's budget. This demonstrates, quite clearly, that the debt cannot be stabilized by simply freezing non-security discretionary spending and identifying a few opportunities to raise revenue and reduce spending in a relatively painless way.
Today, a bipartisan group of 64 Senators sent a letter to President Obama urging him to show leadership on reducing the federal deficit and to take a broader approach in addressing our nation's fiscal problems.
The letter, which was organized by Senators Michael Bennet (D-CO) and Mike Johanns (R-NE), says that "comprehensive deficit reduction measures are imperative" and require looking beyond just FY2011 funding. It calls for spending cuts, entitlement reform, and tax reform to be part of the discussion and cites the work of the President's Fiscal Commission as a framework for making important progress on these fiscal issues.
We at CRFB are thrilled with the progress that this letter represents on addressing our fiscal imbalances and commend the leadership shown by all senators who signed it. We join them in calling for a comprehensive appoach to reducing our budget deficit and hope that the President will take the opportunity to lead on this issue and make important progress on improving our fiscal outlook.
Rep. Gary Peters (D-MI) and Rep. Cory Gardner (R-CO) have introduced bipartisan legislation that would force Congress to hold an up-or-down vote on the President's proposed terminations and reductions each year. The President submits recommendations for program cuts in each annual budget proposal, but Congress rarely acts on them. This initiative would allow the White House to send a yearly package of proposed terminations and reductions to Congress that would be voted on without amendment. This year's proposal would save approximately $20 billion annually.
In his press release, Rep. Peters states:
“There’s a lot of talk in Washington about cutting the deficit and it’s time for action. If the Administration identifies federal programs that can be cut, then Congress shouldn’t be allowed to keep ignoring them. Even if the bill doesn’t pass, forcing Congress to take an up-or-down vote will lead to debate on wasteful programs and spending that Congress has ignored for years.
"The potential for savings is very real. The most recent list of cuts included $228 million in savings by reducing subsidy payments to wealthy farmers, $138 million in savings by eliminating payments to states for mine-reclamation projects that have already concluded, and $75 million in annual cuts to election reform grants – a program that already has approximately $1 billion in unspent money in reserve."
We applaud Rep. Peter's leadership in support of fiscally responsible initiatives. CRFB President Maya MacGuineas has publicly supported the idea, saying:
“The ‘Terminations, Reductions and Savings’ recommended by OMB represent the lowest of the low-hanging fruit in tackling the national debt, yet all too often Congress ignores them. While this bill alone won’t solve our fiscal problems, it will help Washington get serious about deficit reduction and fiscal responsibility.”
Representatives Peters and Gardner have already worked together to introduce a different bill to force Congress to cut wasteful and duplicative spending by requiring Congressional committees to hold hearings on the issue. The recent report from GAO has useful suggestions in that vein. As Maya said, these proposals will not be the cure-all for our ailing fiscal outlook, but they are important steps to promote fiscally responsible decisions. These proposals are a necessary first step and are critical for promoting effective government and public trust.
This article was originally published by TIME Magazine.
It's rare that those of us concerned about the nation's fiscal course come bearing good news. The federal debt, after all, is as high as it has ever been in the post-1945 period and is growing uncontrollably. Under our best projections, the debt will grow from nearly 65% of gross domestic product today to over 90% by the end of the decade — a level that experts have warned could have dangerous economic consequences.
Yet while our fiscal challenges are large and growing, they are not insurmountable. The National Commission on Fiscal Responsibility and Reform, on which I served as associate director, has shown a way forward. Its recommendations offer proof that broad bipartisan support for deficit reduction — based on the principle of shared sacrifice — is possible. Yes, the population is aging, which means Social Security and Medicare costs will rise. And yes, health care costs continue to grow faster than the economy, putting upward pressure on federal health spending. But we can address these challenges. Our problems are not fundamentally economic; they are political.
The politics of pain makes deficit reduction a difficult task, of course. More worried about the next election than about the next generation, politicians prefer to avoid or defer decisions that increase people's taxes or cut their benefits and services.
Making things worse, pledges of what not to do — raise taxes, meddle with Social Security, cut defense spending — are pervasive in
And yet the fiscal commission overcame these odds. The plan would cut $1.7 trillion in discretionary spending — both defense and nondefense — while protecting, and in some cases increasing, spending on education, infrastructure and high-value R&D. It would cut $600 billion in mandatory spending, especially by reducing health care costs and reforming federal pensions, while protecting programs for the poor and disadvantaged. It would reform the tax code in a way that reduces or eliminates various tax breaks in order to drastically cut tax rates while helping generate nearly $1 trillion in new revenue. And it would make the Social Security system solvent for the next 75 years and beyond through a combination of progressive changes to the benefit formula, a gradual increase in the retirement age and an increase in the amount of income subject to the payroll tax, among other measures.
In total, the fiscal commission's recommendations would reduce the deficit by $3.9 trillion through 2020, bring annual deficits to manageable levels of 1% to 2% of GDP (compared with 10% this year) and put the debt on a downward path after 2013.
The recommendations prove that we can enact policies to bring the debt under control and do so without cutting spending or increasing taxes in a way that hurts low-income individuals or stifles investment and growth. Far more important, the commission showed that such a plan can garner support from across the political spectrum. The plan received the support of 11 out of 18 commissioners, a bipartisan super majority that comprised five Democrats, five Republicans and one independent. The fiscal commission demonstrated emphatically that the parties can work together, in the spirit of principled compromise, to get our fiscal house in order.
Unfortunately, the President's budget this year failed to include most of the commission's recommendations, and House Republicans have thus far focused too narrowly on cuts in domestic discretionary spending. But neither party has ruled out the adoption of the recommendations. As tough votes on this year's budget and a debt-ceiling increase come up, a comprehensive deficit-reduction plan may be the only way to avoid stalemate.
On our commission, we actually found that the "go big" approach helped garner more votes, not fewer. Republicans were willing to cut defense spending, but only if nondefense spending (including entitlements) was also cut. Democrats were willing to accept substantial spending cuts, but only if accompanied by significant new revenues.
If President Obama and the leadership of both chambers of Congress — and both parties — are willing to enter into serious negotiations to solve our fiscal problems, there is no doubt that they can reach agreement. Everyone will have to give up something. After all, the solutions are painful. But in the process, everyone can get something in return: a better future.
Marc Goldwein is the policy director of the Committee for a Responsible Federal Budget and served as Associate Director of the National Commission on Fiscal Responsibility and Reform.
"My Views" are works published by members of the
"My Views" are works published by members of the