The Atlantic | October 22, 2011
We've spent a quarter-century undoing the smart, simple tax reforms of 1986. Here's to hoping Washington can act like its old self before it's too late.
Today marks the 25th anniversary of the Tax Reform Act of 1986, the last major overhaul of the federal tax code. Signed into law by Republican President Ronald Reagan and championed by Democrats such as Bill Bradley and Richard Gephardt, the enactment of the law was a remarkable bipartisan achievement. It dramatically lowered marginal rates with a top rate of 28 percent, removed millions of working poor off the tax rolls, and simplified the tax code by closing a myriad of tax loopholes.
Unfortunately, many of the loopholes that the 1986 reform eliminated have returned, with a few extra ones slipped in for added measure. Since the law's enactment, more than 15,000 changes have been made resulting in a tax code that is several volumes longer than The Bible and requires 71,684 pages to spell out the rules. Because of this complexity, 80 percent of American households use a tax preparer or tax software to help them prepare and file their taxes.
But complexity is only part of the problem. The other is cost. Year-after-year, elected officials in Washington shovel more tax breaks into the trough (tax breaks now account for $1.1 trillion) causing both deficits and marginal tax rates to be higher than is necessary or optimal for the economy.
Despite the obvious need for tax reform, some in Washington are advocating that congressional Super Committee charged with finding a balanced deficit reduction package not tackle tax reform. They claim it's too complicated, too hard, or too long-term.
They're wrong. Delaying tax reform will only make implementing the solution harder and more painful. There has never been a better time in which to enact tax reform. The Super Committee was created as part of last summer's debt ceiling agreement to require Congress to vote up or down, without amendment, on tax reform as part of its plan to address the federal government's medium and long-term fiscal imbalance. This BRAC-like power is designed to limit the influence of special interests whose work in the past has littered the tax code with loopholes. This opportunity is not likely recur anytime soon. It is, therefore, in the Super Committee's interest to act now rather than wait.
Tax policy is complicated. But lawmakers on the Super Committee don't have to start from scratch. There are already a number of plans that would dramatically lower marginal rates for individuals and businesses, eliminate tax expenditures, and grow revenues for deficit reduction. For example, the Zero Plan put forward by the Bowles-Simpson Fiscal Commission (what some refer to as 1986-style tax reform on steroids), would lower marginal rates and simplify the tax code from six to three tax rates, tax capital gains and dividends as ordinary income, eliminate the burdensome Alternative Minimum Tax, align the corporate and the top individual rate, move our corporate tax code to a territorial system, and eliminate all or most of the $1.1 trillion in tax expenditures.
Furthermore, the Super Committee does not to choose between writing a full tax reform bill in two months or agreeing to an open ended process for tax reform in the future. The Bowles-Simpson Fiscal Commission, Gang of Six, and others have proposed setting up a procedure for expedited consideration of tax reform that sets out parameters and criteria for what tax reform must include in addition to the revenue target while leaving details to the Senate Finance and House Ways & Means committees. Such an approach ensures true tax reform will be voted on while leaving the details to those who have the expertise to get the job done.
In addition, fundamental reform, which broadens the base by reducing deductions, credits, exemptions, and other tax expenditures; simplifies the code; and lowers individual and corporate tax rates, has the potential to substantially improve economic growth. The Joint Committee on Taxation has estimated that income tax reform that wipes out most tax expenditures in order to lower marginal rates, could increase the size of the economy by 1.2 to 1.9 percent of GDP over the medium-term, and even more over the long-term.
Finally, the new revenues generated by fundamental tax reform would help the Select Committee to achieve substantial deficit reduction. The Super Committee is charged to identify $1.5 trillion over ten years in deficit reduction, though $1.2 trillion over ten years would be enough to avoid an automatic sequester. While this would represent significant savings, members should be shooting t at least double, or triple this target in order to put the debt on a sustainable course. Relative to a realistic budget baseline, it would take about $3 trillion in deficit reduction just to reduce the debt to below 70 percent of GDP by 2021 and put it on a modestly downward path. Identifying an amount of deficit reduction significant enough to put the debt on a downward path will almost certainly require looking beyond discretionary spending to major entitlements, other mandatory programs, and ways to produce more revenue.
No doubt taking up tax reform will be a difficult challenge for the Super Committee. But the benefits of enacting fundamental reform are worthy of the effort. Besides, enacting tax reform is a whole lot better for the economy, and for politicians of both parties, than continuing the on-going fight over extending the Bush and Obama tax cuts for another year.
Maya MacGuineas Testimony Before Senate Committee on Aging on Finding Consensus in the Medicare Reform Debate
The Hill | September 7, 2011
With the president’s highly touted jobs speech this week, national attention is about to pivot from deficits and debt — where the focus has been for much of the summer — to jobs and how to boost the struggling economic recovery.
You can almost hear the sighs of relief coming from the halls of Congress and the White House, because even though there is vehement disagreement over what should be done to fix the economy, the types of measures that will be floated are ever so much more fun from a political perspective. What politician doesn’t prefer to talk about tax cuts and government spending that doesn’t have to be paid for, as opposed to the spending cuts and tax increases required to close that gaping deficit hole?
The reality, however, is that these two issues can’t be separated. Any further measures to stimulate the economy are unlikely to move other than as part of broader debt reduction. More importantly, done right, a smart debt-reduction plan is absolutely central to an economic-growth agenda.
In the short term, due to expiring tax and spending provisions, between $250 billion and $300 billion will be removed from the economy at the end of the year, if policies such as the payroll tax holiday and unemployment benefits are not extended or replaced. The principle here should be “Do no harm.” Now is not the time to be pulling resources from the economy. At a minimum, stimulative measures of at least the same amount should be extended for another year.
Given the spate of discouraging economic news, probably much more should be done. But there is no more room in the budget to treat these measures as fiscal freebies.
Instead, they need to be paid for over a reasonable period of time, say, five to 10 years. Not only will covering the cost of stimulus help the deficit, it will help keep at bay the tons of bad ideas that regularly get thrown into stimulus packages, if they actually have to be paid for.
But policymakers also need to understand that putting in place a multiyear plan to fix the budget is not at odds with fixing the economy, but a central piece of doing so.
The reality is that reducing debt levels may well decrease growth in the very short run as we turn from stimulus to debt reduction, but it will lead to higher growth levels in subsequent years. And if we wait too long to make these changes — and time is quickly running out — we will be hit with a full-blown fiscal crisis, which would be the worst scenario imaginable for helping the economy.
The newly formed supercommittee has been charged with finding savings of $1.5 trillion. Difficult as that may be, the amount is not nearly enough. Given the size of our current borrowing path, this would fail to stabilize the debt as a share of the economy, and it would fail to reassure market- and credit-rating agencies.
Instead, the supercommittee members should “go big” and find savings of two to three times that much, in a credible multiyear plan. One benefit of a medium-term plan is that it can leave room upfront for the economic recovery to continue to take hold.
Moreover, businesses are unlikely to start spending the trillions in cash on their balance sheets until a budget plan is in place. At the moment, businesses know changes will be made, but with no idea what they will look like, making it nearly impossible to plan, invest and create jobs.
Given that both consumers and the government are tapped out, the best hope we have for strong economic recovery is one that is business-led, and an understanding of what the future holds in terms of the budget, taxes and regulations would do wonders in fueling the recovery.
Finally, it is only through a larger plan that real reforms to the tax code and entitlements will come into the picture. If we overhaul the tax system by dramatically broadening the base — by cutting the breaks that litter the tax code — and lowering rates, it would do wonders for economic growth and raise revenues.
Likewise, reforming health and retirement entitlements so they are sustainable, and transforming the budget from one that focuses excessively on consumption to one that favors investment, would transform our nation’s potential for long-term growth.
Neither major tax nor entitlement reform is likely to enter the picture, if we continue to play small ball with budget reforms. The way to focus on the real drivers of the budget problem and the real keys to growth is for the supercommittee to choose to go big and tackle all these issues in one large deal.
The Atlantic | August 11, 2011
The country's most critical structural problem isn't employment or entitlements. It's Washington. And its window to govern by leadership rather than crisis is getting narrower every day.
The S&P downgrade late Friday afternoon in Washington kicked off the most anxious and frenetic week in world markets since the Great Recession ended. The rating agency's observation that U.S. politics was broken might have seemed like old news to voters, but to outsiders it was a stunning confirmation that the recovery is all but over and Washington has no clue how to get it back on track. But the panic over the downgrade and subsequent sell-off has glossed over what exactly our AA+ means for the economy, our prospects, and the road back to a sterling rating. With a little help from a report published yesterday by the Committee for a Responsible Federal Budget, here is your guide to the downgrade.
Don't Panic ...
The first thing to understand about this downgrade is that it is not, in itself, a reason to panic. U.S. long-term Treasury bonds have been downgraded from AAA to AA+, which according to S&P means that instead of an "extremely strong capacity to meet" our financial commitments, we now have a "very strong capacity" to do so - not much of a difference.
In addition, at least for now, the other two major rating agencies - as well two of the other three minor certified agencies that rate US debt - still rate U.S. Treasuries as AAA, also denoted "Aaa."
Those concerned that everyone will start dumping our debt en masse as a result of this downgrade shouldn't be. In the case of domestic money market funds, recent regulations basically deem U.S. Treasuries as safe assets no matter what happens to them; and frankly there aren't many other assets to flock to right now. As former CBO Director Rudy Penner would say, "we're still the finest looking horse in the glue factory." This second point also rings true with respect to our international investors. We are the world's reserve currency and have more bonds in the global market than all AAA-rated countries combined.
Rather than going up, interest rates have actually fallen a bit since the rating downgrade. This is not inconsistent with what has happened to other AAA-downgraded countries, where interest rate effects have generally been quite small.
... Okay, Panic a Little
If rating downgrades don't augur immediate crises, they tend to indicate trouble on the horizon. Of the 10 other countries that have been downgraded from AAA, eight experienced further downgrades and five have still never recovered their AAA rating. Deeper downgrades have been associated with interest rate spikes, and the fact that both S&P and Moody's have us on a negative outlook suggests that more downgrades could be in our future.
What are the consequences of further downgrades? The most direct one could be higher interest rates, as investors insist on a risk premium. Even a 0.1 percent increase in interest rates would mean an additional $130 billion in government spending on interest over the next 10 years that we would have to offset in hiring taxes or fewer investments to meet the same debt goal. A 0.7% increase in interest rates would be enough to erase all of the gains from the recent debt deal.
In addition, higher interest rates could reverberate throughout the market, impacting everything from mortgages to small business loans - and ultimately leading to something economists call "crowd out," where fewer dollars go into growth-driving investments.
The biggest concern, though, should be that these rating downgrades could advance the day of a fiscal crisis. At some point, if we don't make some changes, investors will lose confidence in our nation's ability to make good on its debt. When that occurs, it is possible we could experience a global economic crisis akin to the financial crisis of 2009, except with no one available to bail out the U.S. government.
It's Not About the Money
The United States has a higher burden of gross debt than any other AAA-rated country in the world. We're also the only country besides Finland to expect our debt share to grow through 2016. Our entitlement programs are growing uncontrollably as a result of an aging population and rapid health care cost growth - structural problems that make it difficult to deal with our debt. But despite all this, the downgrade was not fundamentally about money. It was about politics.
The country's most critical structural problem isn't employment or entitlements. It's Washington. There is, outside the wide halls and narrow minds of Congress, an emerging consensus on how to fix our problems: Cut future spending and raise future revenue. Enact stimulus today and reform taxes tomorrow. Encourage people to work longer and take more responsibility for their own retirement. Do everything we know how to do to slow health care costs now, and keep looking for solutions.
But the political system hasn't yet been able to reach these solutions and address the inherent tradeoffs between them. As S&P wrote:
"The difficulties in bridging the gulf between the political parties over fiscal policy... makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon."
If Washington can't fix itself, the opinion of S&P should be the least of our worries.
As Leon Panetta used to say, "we govern by leadership or crisis." We need to do the former. Our time is running out.
On June 14, the Committee for a Responsible Federal Budget held its 2011 Annual Conference and Dinner on Capitol Hill. This year’s roundtable conference, entitled “The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go from Here?” featured a keynote address from chairman of the Federal Reserve, Ben Bernanke, and a roundtable with 40 of the nation’s leading fiscal and economic experts. The evening reception and dinner featured keynotes from Office of Management and Budget director Jacob Lew and Fiscal Commission co-chairs Erskine Bowles and Sen. Alan Simpson. The events combined for a day and evening of interesting yet sobering discussion and debate on the nation’s fiscal challenges.
At the roundtable discussion, moderated by CNBC senior economics reporter Steve Liesman, a star-studded cast of budget experts discussed the breadth and scope of the nation’s debt and deficit troubles, the perilous economic situation our country faces if we fail to act on the issues, and the state of play in Washington and prospects for compromise among politicians. Participants included the chairman of the Federal Reserve Board, three current Senators and two current Congressmen, the sitting director of the National Economic Council (NEC), former directors of CBO, OMB, and NEC, former Members of Congress, and numerous representatives from both Wall Street and the economic policy community in Washington, D.C. As CRFB President Maya MacGuineas recounted in an interview this week with PBS's Nightly Business Report, the discussion covered a wide range of topics, but focused mostly on the debt ceiling debate, the various fiscal consolidation plans released in recent months, the necessity for deals both on the debt limit increase and on long-term debt reduction, and the potential for a fiscal and financial crisis. Above all, the resounding theme of the day was political dysfunction.
The conference opened with remarks from chairman of the Federal Reserve Ben Bernanke, who gave his strongest remarks yet about the nation’s budget policy and fiscal outlook, what can be done about it, and how to go about enacting a solution. In perhaps the biggest sound-byte of the day, Bernanke voiced his disagreement with the sentiment that the debt ceiling should be used as a tool for forcing action on the deficit. He said that even a short-term disruption of payments made by the U.S. government would have severe impacts on the U.S. and the global economy. But beyond urging action on raising the debt ceiling, he also urged Congress to take quick action on our debt and enact a fiscal plan. While the task is certainly daunting, he said, it is necessary to avoid fiscal and economic calamity in the future.
When talking about what needs to get done, Bernanke joined CRFB's Announcement Effect Club, saying that enacting a long-term fiscal consolidation plan now will help instill confidence in the markets. He argued that sharp, immediate cuts would likely hurt what is a fragile economic recovery, but that we should put in place a plan as soon as possible which phases in changes, giving the economy time to fully recover.
House Budget Committee Chairman Paul Ryan (R-WI) started off by taking pride in the fact that the House, unlike the Senate, had fulfilled its obligations so far in the budget process by passing a budget. Ryan noted that the House budget would dramatically improve the long-term fiscal outlook and lamented the politicization of the specifics he put on the table, perhaps most notably in the House Budget making Medicare a premium support program as opposed to fee-for-service – a policy that has seen much pushback from liberals. Ryan expressed disappointment that the other side had not instead responded with their own equally specific plan.
Senator Michael Bennet (D-CO) also expressed disappointment about how the fiscal conversation has been progressing in Washington. He cited the near government shutdown in early April as an example of the political problems that have been going on and said the same has happened with the debt ceiling. Bennet called for less partisan bickering and stated that his constituents wanted a bipartisan solution to the growing debt – saying he would like to see a plan with the kind of balance seen in the Fiscal Commission’s plan.
It just so happened former Senator and Fiscal Commission co-chair Alan Simpson was next to speak. Simpson, who is also a new member of the CRFB board, opened by talking about how he came to be co-chair on the Commission and said that the purpose of the Commission was not to make things better for their grand-children, but for everyone. There is no way, he explained, that the country can continue to borrow 41 cents for every dollar spent, and there is no way to fix the problem if we fence off a number of parts of the budget, referring to sentiments on the left that mandatory programs such as Medicare and Social Security should be off the table and sentiments on the right that new revenues should be off the table. He concluded, by saying that “if the American public and the Congress remain in thrall to Grover Norquist and the AARP, you haven’t got a prayer.”
Former NEC director Larry Lindsey spoke next, making the case that baseline projections of future deficits and debt understate the magnitude of the problem. First, he said that if interest rates normalized from their record low to their 20-year average in 2013, it would add $400 billion to the deficit (and $5.4 trillion over ten years) unless the Federal Reserve prints money and doesn’t allow interest rates to rise (which he finds problematic). His second point was that the OMB economic projections are too optimistic, and if the economy grew at its trend rate, it would add $2 trillion to the deficit over ten years. His final point was that CBO’s scoring of the health care legislation likely underestimated the cost by a significant amount, due to an underestimation of the number of people that would get insurance coverage through the health care exchanges.
Next, a few experts talked about the behavior of the markets. PIMCO’s Neel Kashkari fielded a question about why markets would continue to lend the government money at record low interest rates. He responded by saying that in the context of European struggles, we are the “strongest weakling,” but this doesn’t mean we are strong. Waiting for a crisis, he argued, would permanently undermine the view of U.S. Treasuries as risk-free. Michael Pond at Barclay’s also expressed concern that the markets could turn quickly on Treasuries, a sentiment that was generally echoed by many participants throughout the day. Passport Capital founder John Burbank said that the markets may not be responding to the potential technical default in a few months because their mind is focused more on the near-term and the expiration of QE2. IMF Fiscal Affairs director Carlo Cottarelli attributed the U.S.’s low interest rates to their credibility relative to European debt and due to QE2, but warned that even if markets react late, “they react pretty sharply.” He also warned that U.S. gross national debt was higher than that of many European countries that were experiencing problems.
On the topic of the debt ceiling, a number of people were asked to weigh in. Former counselor to the Treasury Secretary and car czar Steve Rattner said that it seemed markets viewed a default as an unthinkable scenario, so they were not panicking about the possibility of a default – a statement that Sen. Bennet attested to. AEI’s Norm Ornstein, however, expressed concern over the likelihood of Congress agreeing to a budget deal in conjunction with raising the ceiling in time, especially considering the hard positions that some lawmakers have taken. Former CBO director and CRFB board member Rudy Penner felt that a deal will be made that centers around a budget enforcement mechanism, perhaps like the targets and triggers recommended by the Peterson-Pew Commission on Budget Reform, on which Penner (and most CRFB board members) served. Marne Obernauer, chairman of the Beverage Distributors Company and also a member of the CRFB board, argued that uncertainty about the debt ceiling and fiscal policy in general made it harder on businesses.
The topic then shifted more towards the politics of fiscal policy. Washington Post columnist Matt Miller said that the fight over the debt ceiling is not about debt since both the House Budget and the President’s Budget Framework would add trillions to the debt; he said that the debt ceiling fight is a result of politicians’ frustration with divided government and using the threat of default as a mechanism to get what they want. Former Senator and CRFB board member George Voinovich talked from experience about how the partisan pressure on lawmakers may make them stubborn on raising the debt ceiling. Touching once again on the topic of markets, former CRFB president Carol Cox Wait underscored the point that the fiscal problem is merely a political one; markets may not be reacting so sharply because they realize the choices to be made are not particularly difficult from an economic perspective.
Steve Liesman took a moment to poll the conference participants on whether or not they felt a deal on the debt ceiling would get done by the August 2 deadline. A majority of participants (roughly two-thirds) signaled they believe the country would avoid default, but also believe the increase would not last through the 2012 election. CRFB president Maya MacGuineas humorously explained that her vote saying that the ceiling would be raised in time was a hedge against a similar vote she made at a previous event in which she leaned the other way. While it brought a laugh, the sense that the politics around increasing the debt ceiling could drive this issue either way is a sobering prospect for all. Urban Institute fellow and CRFB board member Gene Steuerle said he is betting on August 9 as the date Congress raises the ceiling, explaining that he believes they will go to the brink and go just barely over before pulling back. As conference participants discussed, the August 2 deadline seems somewhat fungible (at least to politicians), so others signaled they agreed on the likelihood of a deal being reached just after the deadline has passed.
Two members of the Gang of Six then had a chance to speak with the group. Sen. Mark Warner (D-VA) came up first, making an aggressive call to action. He claimed that one of the best things the government could do for the economy is get the large amount of cash that corporations are sitting on “the sidelines,” and solving our fiscal issues could be a way to do that. He said that the problem was too big to be solved on just one side of the budget, which is a principle the Gang of Six is using in developing its deficit reduction plan. He wondered why the political system would try to wait to deal with the problem until 2013 when it would be risking the health of the economy, saying that the debt ceiling presented a great opportunity for a politically acceptable deal to get done.
Sen. Mike Crapo (R-ID) said that he expected a deal to get done in time, but was skeptical that it would be sufficient to drastically alter the U.S.’s fiscal path. He called for a major “paradigm shift” in fiscal policy with a comprehensive fiscal plan along the lines of the recommendations of the Fiscal Commission, which he served on. He voiced his support for a comprehensive tax reform approach that lowers rates, broadens the tax base, and raises revenue and criticized the “old approach” of simply fighting over rates. He concluded by saying that while any bipartisan fiscal plan will have something for everyone to hate, enacting a plan would be better than the status quo.
Other participants were brought in to comment. Former Congressman and CRFB board member Jim Kolbe said that any fiscal plan would have to include changes to both sides of the ledger and that both parties needed to be less stubborn in the areas they were generally unwilling to accept changes – specifically on entitlements. Former acting CBO director and CRFB board member Barry Anderson said that the August 2 debt ceiling date is not the most important one; there are a few important ones coming up before then. One of those dats is June 15, when some tax payments are due; the amount of revenue that comes in could affect when the deadline date for raising the debt ceiling will be. The other important one is obviously the date in the summer around the August 2 deadline when Congress adjourns.
New York Times columnist David Brooks made the argument that most citizens and most of the Congress did not care about the budget and said that it was “a sociological problem more than anything else” or a problem of “too much democracy.” Both Sen. Voinovich and Sen. Warner disagreed with this assertion. Rep. Peter Welch (D-VT) lamented that the House had been polarized, so it was hard for them to solve any problem without trying to score political points. He also made a point that not solving the problem would hurt public confidence in the institution of Congress.
Former OMB director Franklin Raines agreed with Rep. Welch’s assessment and said that more often today members of Congress are making absolute promises to their constituents, which makes it harder to come to agreement. He admitted he felt that it was unlikely an agreement would be made before August 2. Washington Post writer Ruth Marcus expressed disappointment about the lack of a ringing endorsement of the Fiscal Commission plan after its release last December. She also echoed the concerns about the polarization of Congress (especially in the House) and the lack of public understanding and awareness of the magnitude of changes needed to solve the problem. Many in the public still believe that a large portion of the budget is made up of earmarks and foreign aid, when in reality that accounts for merely a small fraction of the nation's $3.7 trillion budget.
George W. Bush Institute founder James Glassman then attempted to shift the conversation towards focusing on deficit reduction in the context of encouraging economic growth. Specifically, he talked about tax reform, immigration reform, greater investment in education and R&D, and free trade. He noted the CBO projection of long-term growth and said that not only could we do better, but it was essential that we do better. However, Urban Institute president and CRFB board member Robert Reischauer disagreed, saying that while growth is certainly important, just hoping that we grow significantly faster than projected is no substitute for real tax increases and spending cuts. The Urban Institute’s Gene Steuerle talked about how to “minimize the political losses.” A couple strategies he mentioned are to either go big with deficit reduction so that everyone is affected in ways that are fair and even, or to set up targets and triggers so that the pain of doing nothing is greater than the pain of enacting a plan.
Norm Ornstein argued that bipartisanship has become less attractive to policymakers because the last time there was a bipartisan consensus on a difficult decision – according to him, the TARP vote – politicians got burned for it. With an already toxic political environment, the result is a level of dysfunction that he has not seen in Washington.
CRFB president Maya MacGuineas took a more optimistic tone, saying that she was encouraged by the number of fiscal plans that had come out recently and the greater level of specificity in the budget debate. She also said that the Fiscal Commission and the Gang of Six represented a model for how a deal would get done. With the debt ceiling, she expected a deal in the neighborhood of $1-2 trillion dealing with low hanging fruit, but worried it would not include any structural reforms to the major entitlement programs, and that delaying would politicize the issues and risk failing to reassure markets. On the topic of growth, she said that both the right and the left had good ideas on how to be conducive to growth including protecting public investments and sensible tax reforms, but it should be viewed as icing on the cake, rather than counted on as a major component of deficit reduction.
With that, the event segued into a speech by current NEC director Gene Sperling. He started by saying that even beyond the economics of the situation, deficit reduction is important for preventing the further erosion of confidence in the political system. However, he decried the threat of U.S. default to accomplish an objective. He praised the willingness of everyone in the Biden Group to come together and take their responsibility in the negotiations with a sense of seriousness, and he hoped to find a way to forge bipartisan consensus and get people off their hard positions.
Sperling said that the purpose of deficit reduction for the Administration is in keeping with the values of the Administration – specifically the promotion of a strong middle class and the promotion of a strong recovery. Consistent with those values, he warned against cutting investments in education, infrastructure, and R&D and implored that lawmakers make smart and targeted reductions in spending, not blanket cuts. On revenues, he noted that it was historical precedent – in 1982, 1983, 1990, and 1993 – that revenue be part of any bipartisan agreement. He pointed out that relying solely on spending cuts would require too-harsh cuts to programs and would undermine the principle of shared sacrifice that he thought made budget deals less unpopular.
Sperling also pointed out that the Administration is willing to compromise, and recognizes that, while they will ask Republicans to put revenues on the table, that they too must put cuts on the table that they don't like. As an example, Sperling pointed out the Medicaid changes suggested in the President's Budget Framework, saying the Administration doesn't recommend finding savings from Medicaid because it is somehow politically popular, but because they recognize that tough choices will have to be made.
After Sperling concluded his remarks, a number of participants were given the chance to make a few final statements. Former SEIU president Andy Stern spoke of the need for revenue measures to fulfill the goal of shared sacrifice. He said that he would like to raise taxes on corporations and would like to allow all of the Bush tax cuts to expire as scheduled in 2012. Carlo Cottarelli gave a few lessons from other fiscal consolidations, saying that growth is paramount for a successful fiscal adjustment. Former Congressman and CRFB board member John Tanner, in closing remarks, echoed a common theme of the day – the polarization of Congress, which he attributes to the rise of primaries in the House. Tough primary battles, he said, cause those taking office on both sides to be more polarized. This leads to the difficulty of reaching a budget deal.
To conclude, Maya MacGuineas thanked all of the panelists for coming and for a productive, albeit depressing, discussion.
After the conference concluded, participants and audience members crossed New Jersey Ave. to attend a cocktail reception on the picturesque rooftop pool deck of the Liaison Hotel. At the reception, CRFB co-chair and former ranking member of the House Budget Committee Bill Frenzel gave an introduction and salutation to the newest members of the CRFB board. Those new members in attendance were Erskine Bowles, Sen. Charles Robb, Sen. Alan Simpson, Rep. John Tanner, and Sen. George Voinovich. Other new board members who were not able to make it include Paul O’Neill, Rep. John Spratt, and Laura Tyson.
After introducing the new board members, Frenzel introduced the reception’s keynote speaker: OMB director Jacob Lew. Lew tried to lay out the state of play in Washington over the debt limit and fiscal policy, trying to answer the question of “What can we get done?” In an optimistic note, Lew pointed out that there is a clearer call for action now than ever before. Even still, Lew noted that credit agencies have made a distinction between their economic assessment and their political assessment of whether or not we can get our fiscal house in order.
After the reception, guests went to the ballroom at the Liaison to enjoy a dinner event. The dinner included a Q&A session with Fiscal Commission co-chairs Erskine Bowles and Alan Simpson, moderated by Judy Woodruff of PBS’s NewsHour. She started off by asking Bowles about the prospects of a budget deal.
Bowles, who, like Simpson, is a recent addition to the CRFB board, pointed to the growing momentum in Washington toward the idea that the nation needs a comprehensive fiscal plan, and he mentioned the Gang of Six and the prospect for its expansion into a larger group of potentially 25 or more Senators seeking a bipartisan compromise. Sen. Simpson expressed confidence that the Biden Group would produce something to be attached to a debt ceiling increase, but asserted that if no plan was produced with a debt ceiling increase, the rating agencies would turn on U.S. debt.
Despite the stubbornness of both parties on certain parts of the budget, Sen. Simpson also believed that a plan that deals with deficits would be comprehensive, because the cost of excluding entitlements and revenue would cause too much of the burden to fall on the other parts of the budget. Bowles concurred, saying that reforming entitlements had to be done, while raising revenue could be done by reforming the tax code in a pro-growth manner, such as the tax reform recommended by the Fiscal Commission.
When asked about the risk of cutting spending enough to harm the economic recovery, Bowles noted that the recovery was fragile and so the Commission plan agreed with the idea that cutting too quickly was too risky for the economy. Still, Simpson argued that the “tipping point” when the markets would turn on the debt was soon, so reducing the deficit was not just for future generations, but for current generations as well.
In a particularly sobering turn, Bowles compared our current situation to the Weimar Republic after World War I, with parallels in both deficits and loose monetary policy. Ideally, he hoped that a deficit reduction plan of $4 trillion is agreed upon in enough advance of the debt ceiling. Sen. Simpson stated his belief that any plan would have to “go big” because “small ideas have no power to inspire."
The 2011 CRFB Annual Conference and Dinner turned out to be both an informative and entertaining day filled with some very interesting discussion and interplay between budget experts from across the political spectrum. We only hope next year's event can be just as engaging.
CRFB has compiled a brief background on the scope of our nation's fiscal challenges and the drivers of our debt and deficits, while outlining some of the types of solutions available to address the problems. This Powerpoint is meant to offer an objective, non-partisan view of our country's fiscal situation as an educational tool meant to help foster open and honest debate about these issues.
Washington Post | April 29, 2011
In his recent it’s-time-to-get-serious-on-the-budget speech, President Obama introduced his idea for a debt fail-safe to, in his own words, “hold Washington — and to hold me — accountable and make sure that the debt burden continues to decline.” While budget trigger mechanisms haven’t worked particularly well in the past, there is reason to believe this time — if done right — they could be part of the solution.
The president’s debt fail-safe would mandate cuts to government spending and tax breaks if by 2014 — notably, not until after the election — deficits were not projected to be declining as a share of the economy. To be workable, debt targets and triggers, which the Peterson-Pew Commission on Budget Reform spent the past two years working on, need to be well structured and politically realistic, and they need to come with enforcement mechanisms that are strong enough to push lawmakers to act. A number of ideas could improve the president’s fail-safe proposal:
Start right away. Deficit reduction cannot be delayed until after the election. A budget framework should be put in place this year, with real savings targets starting next year. We have no idea when our creditors will lose faith in the United States, but we should not push this to beyond the election and risk finding out.
Set annual targets. The purpose of a budget target is to lay out a clear fiscal objective, such as balancing the budget, or (as is now more realistic given our debt-swollen starting point) bringing the debt down to a more reasonable share of the economy by the end of the decade. But there also should be yearly measures for getting there, to avoid politicians loading all their promised savings far in the future. Politicians’ promises to make tough choices years from now ring hollow.
Exempt nothing. To be taken seriously, a budgetary target needs to be coupled with triggers, which are basically the teeth that make the target more than an empty political promise. Obama’s proposed trigger would levy cuts on spending and on the credits, deductions and exclusions that clutter the tax code. But it exempts Social Security and Medicare benefits — which is like punishing your kids by denying them dessert, except for candy and ice cream. All programs need to be part of the trigger, which is what will get policymakers to develop a savings proposal on their own terms rather than waiting for the trigger to force their hand.
Shoot high. The president proposed stabilizing the debt by the end of the decade. Not good enough. Obama’s commission on fiscal responsibility proposed saving $4 trillion over the decade; the president countered with proposals to save $2.5 trillion. He should match what his own commission proposed, which would lead to the debt shrinking relative to the economy after 2013.
How should a budget trigger fit into the unfolding debate? An obvious fit is as part of the debt ceiling discussion. The debt ceiling has to be lifted — failing to do so would be catastrophic. Yet, not making changes to the budget situation would be disastrous as well — only the consequences would not be as immediate.
Ideally, we would attach a full budget reform framework, as the Gang of Six (a bipartisan group of senators pushing a comprehensive plan) is working on, to the debt ceiling increase. But time is short; we bump up against the debt ceiling in the coming weeks. Targets and triggers may work as a perfect bridge to the larger plan. However, they will only work if they reflect the political will to make changes, rather than a political punt, and even the best debt fail-safe mechanism needs to include some specific spending cuts upfront to help pave the way.
The Gramm-Rudman budget act failed because the targets became too stringent to be realistic; the Medicare solvency trigger failed because there was never really any intent to fix the program. So while the debt fail-safe may be the perfect starting point to help buy some time, only real policy changes will get the job done.