Budget

Budget Path: How Feds Can Avert the Fiscal Crisis

The Public Manager | June 24, 2011

In the wake of the recent financial meltdown from which we are still recovering, the United States faces the prospect of yet another crisis—a federal debt crisis. Averting crisis will require tough choices and painful sacrifice, including those from federal workers. This crisis can be averted, however. And the sooner we act, the better. The National Commission on Fiscal Responsibility and Reform (“Fiscal Commission”), on which I served as associate director, has shown a way forward.

Most Predictable Crisis in History

The United States currently faces what commentators have referred to as “the most predictable crisis in history. As we have seen in a growing number of European countries, this sort of crisis can be every bit as harmful as a financial crisis, except that we’ll have to respond by sharply cutting spending and increasing taxes, instead of the reverse. And no one will be able to offer the U.S. government a bailout.

Make no mistake: the United States is not immune from a debt crisis. We are already in debt to the tune of 65 percent of our economy, a level higher than any time since the Truman Administration. On our current path, that level will exceed 90 percent—a level many economists consider as the danger zone—by the end of this decade. In fact, if you account for state and local debt, we are nearly there already. At some point, our creditors will lose faith in our ability to repay our debt. No one can know for sure when we will reach this tipping point. But we do know that the bond markets are fickle and can turn on us fast.

And turn on us they will. Without a plan to control the growth of entitlement spending and make other tax and spending changes, our national debt will reach levels that no country could possibly sustain. The choice before us isn’t whether (or not) to cut spending or whether (or not) to increase taxes. The choice is whether to act now on our own terms, or later when a crisis forces such action upon us.

Many experts have suggested that the political system will not be able to act before an actual crisis occurs. I don’t accept this as an inevitability—not if our leaders can come together and support a bold but balanced plan of spending cuts, entitlement changes, and tax reforms. An ambitious plan to stabilize the debt can be enacted, and it can be done in a way that is comprehensive, progrowth, and protects those truly in need.

The Fiscal Commission proved that such a plan is possible, and its recommendations garnered the support of 11 out of 18 commissioners. This bipartisan supermajority included five Democrats, five Republicans, and one Independent, ranging from Senator Dick Durbin on the left to Senator Tom Coburn on the right.

The commission’s recommendations are now at the center of the deficit discussion in Washington. Whether or not these deliberations and negotiations lead somewhere could literally be the difference between prosperity and ruin.

Fiscal Commission Recommendations

The recommendations reported by the Fiscal Commission in December 2010 would reduce the deficit by nearly $4 trillion through 2020, and put the debt on a stable and declining path through at least 2035. The recommendations were quite comprehensive, hitting nearly every area of the budget. This approach was necessary not only to match the magnitude of the problem, but also to build a bipartisan coalition. No member of Congress would put his or her sacred cow on the chopping block without knowing that others would as well. And few members of the public are willing to accept higher taxes, lower benefits, or fewer government services unless it is in the spirit of shared sacrifice in which their fellow Americans are doing the same.

The commission’s recommendations included five major parts:

#1| Discretionary Spending Caps

The commission called for discretionary spending caps, which would eventually bring spending back to real (inflation-adjusted) 2008 levels. Last election, the American people sent a clear message to Washington: cut spending. The commission agreed with this view, but felt that the cuts should not occur until 2013 to give the economy more time to recover. Now that the President has signed into law a portion of these cuts—the nonsecurity portion—much of what these caps would do would enforce the continuation of those cuts.

But the commission also recommended that spending cuts be applied equally to both domestic and security spending. Defense cuts should be made in a way that does not threaten national security, but as Chairman of the Joint Chiefs’ of Staff Admiral Mullen has argued, “The National Debt is the single biggest threat to national security.” There is no reason we should cut low-priority domestic spending, but leave wasteful defense spending untouched.

#2| Healthcare Reform

The commission recommended healthcare reform that reduced federal health spending by more than $400 billion through 2020 and capped spending growth over the long run. Rather than refight the battle over the Affordable Care Act, the commission decided to focus on what it agreed would cut cost. This meant expanding some parts of the legislation that will save money, such as provider payment reforms and prescription drug rebates, while focusing mainly on proposing new cost-saving measures not included in the legislation, such as improving Medicare cost-sharing rules and reforming the medical malpractice liability system.

#3| Mandatory Savings

The commission proposed more than $200 billion in other mandatory savings, which came largely from changes to military and civilian pension rules, cuts to agricultural subsidies, and reforms to student loan programs. It also proposed switching to a more accurate measure of inflation known as “chained CPI” for all inflation-indexed programs, as well as inflation-indexed features of the tax code. The commission did not recommend cutting programs designed to protect the most vulnerable, such as food stamps and unemployment.

#4| Tax Reform

The commission proposed comprehensive tax reform, which lowered tax rates and produced $800 billion in new revenue at the same time. The Fiscal Commission found that this was possible by going after the various tax breaks in the code. Most of these so-called tax expenditures look very much like spending programs, except that they are more expensive, cause substantial economic distortions, and are targeted heavily toward higher earners.

Eliminating these deductions, exclusions, and credits would enable us to reduce the top rate to 23 percent (from 35 percent today and 39.6 percent scheduled under current law). The top rate could still be cut to 28 percent after retaining the tax credits for low-income families and adding back certain provisions for mortgage interest, charitable giving, health, and retirement. Such reform would not only reduce rates and promote economic growth, but also would make the tax code far more progressive than it is today.

#5| Social Security Reform

The commission recommended reforming Social Security to make the system solvent for the next 75 years—and beyond. Under current law, the Social Security program will run out of money in 2037, resulting in a 22 percent across-the-board cut. The commission recommended preventing this cut by slowing benefit growth for higher earners, gradually increasing the retirement age, increasing the amount of income subject to the payroll tax, and indexing cost of living adjustments (COLAs) to a more accurate measure of inflation. It also offered some protections to lower earners by calling for a generous minimum benefit and benefit bump-up for the very old and longterm disabled.

All told, the commission’s recommendations would reduce the deficit by $3.9 trillion. They would bring deficits down from 10 percent of GDP today to 1.5 percent by 2020 and stabilize (then reduce) the debt as a share of the economy. This is the type of plan the country must enact to avoid fiscal calamity.

Washington Must Lead the Way

The Fiscal Commission’s plan—or something at least as ambitious—is necessary to put the United States back on sound financial footing. Ten former chairs of the Council of Economic Advisors recently made the case for consideration of the commission recommendations, warning that “further stalemate and inaction would be irresponsible.”

Top economists from across the political spectrum have echoed this call, and “deficit-deniers” who believe the U. S. government can continue business as usual are becoming few and far between. Despite growing support from the expert community, though, enacting this sort of reform will not be easy.

As the commission co-chairs frequently explain, “The problem is real. The solutions are painful. There is no easy way out. Everything must be on the table. Washington must lead!” For a comprehensive deficit reduction plan to succeed, there must be shared sacrifice—that includes sacrifice from federal employees. As federal managers have heard, the commission recommended a number of changes that affect federal civilian employees, including

• a three-year freeze in federal employee cost of living increases

• reforms to federal employee health and retirement programs

• a reduction in the size of the federal workforce.

Although these measures affecting federal civilian employees may be unpopular—as are parallel changes for enlisted military and officers—they are warranted on policy grounds. More important, they are absolutely vital for keeping the deficit reduction package together.

The recommended three-year pay freeze (two years of which are already enacted) will not prohibit pay increases resulting from promotions or steps-in-grade. Instead, it temporarily freezes the automatic cost-of-living increase offered to federal employees. Since the recession began, many private-sector workers have seen their wages frozen or reduced; federal workers, meanwhile, received a 3.9 percent raise in 2009 and a 2 percent raise in 2010. While by no means painless, temporarily freezing cost-of-living increases would bring the public sector back in line with the rest of the economy—and save the federal government $15 billion per year in the process.

In addition to the pay freeze, the commission recommended reforming the federal retirement program (mainly by increasing worker pension contributions) and transforming the Federal Employee Health Benefits (FEHB) plan into a premium support system where benefits grow 1 percent faster than the economy each year. These changes would allow federal compensation to more closely reflect private-sector compensation, and would save more than $50 billion through 2020. Similar changes on the military side would save another $50 billion.

Finally, the commission recommended gradually reducing the size of the federal workforce—not by laying off federal workers, but through attrition. Under the commission plan, for every three workers who retire, only two new workers would be hired. Some of this workforce decline will occur naturally as spending caps require politicians to scale back or eliminate various government programs. At the same time, the government should work to increase its productivity so that as time goes on fewer workers are needed to accomplish the same set of tasks.

Beyond the policy rationale for these changes, there are important moral and political justifications. To ask the American people to make real sacrifices—paying higher taxes, accepting a higher Social Security retirement age, or providing for more of their own healthcare costs—we need to show that Washington is willing to go first. If we cannot put our own house in order, we have no right to ask for more from the public.

This means eliminating waste wherever we find it— be it earmarks, duplicative programs, or even unnecessary printing and travel costs. It means cutting White House and Congressional budgets, including the salaries of our elected officials. And lastly, it means federal employees must share in the pain.

If we’re not proactive in controlling our debt, the implication for federal employees will be far worse when the crisis does hit. As we’ve seen internationally and in our own states and municipalities, civil servants are often hit hard when steep and immediate deficit reduction becomes necessary. If we wait for a crisis, the results could be pay cuts, major pension benefit reductions, furloughs, and even layoffs.

Also keep in mind that every dollar spent on the federal workforce is a dollar we won’t be able to spend elsewhere. It’s a dollar we’ll have to cut from education, research, assistance to the poor, or other government services. This is more than just political calculation; we must do everything we can to protect those programs that citizens count on most.

How Federal Employees Can Help

Along with the rest of the public, federal workers will have to accept less than they expected to help the United States avert a crisis. But unlike most Americans, they can help directly to ensure we are successful in this endeavor.

There is no question that agency budgets will take a hit in the next couple of years. Although the commission did not recommend nominal cuts until 2013 (along with a freeze for 2012), our policymakers have already agreed to a series of cuts this year.

We must understand, though, it isn’t enough to simply cut spending. How we cut spending matters, as well. Our best hope for success is for managers and other federal workers to learn how to do more with less—or at least almost as much with less. Managers must look to cut out office redundancies, identify efficiencies, take advantage of new technologies, and most importantly, prioritize.

There is also an opportunity for the remainder of the workforce to contribute to this deficit reduction effort. A bottom-up approach often gives the best opportunity to find efficiencies and best practices, allowing an entire organization to benefit from the expertise of the individuals who have a hand in doing the real work. Federal workers— those actually implementing government policy—are the key to uncovering ways to make government more effective and more efficient.

Implementation of deficit-reduction policies enacted by Congress will also be key. It will take hard work to ensure various spending cuts and tax changes, particularly in healthcare, are put in place promptly and properly. A policy is only as good as the people who carry it out, and it is imperative that we succeed.

We Can Fix This

This country will put in place a comprehensive deficit reduction plan, not because we want to but because we have to. If we don’t alter our current trajectory today, the markets will force precipitous and painful changes upon us tomorrow. I’m confident, though, that our political leaders can act preemptively and come together to agree on a plan at least as ambitious as the one proposed by the Fiscal Commission.

No reform advocate will support every part of the final agreement—just as no one, including the co-chairs, supported every recommendation from the commission. But something must be done. As Senator Coburn has argued, “All Republics fail, and they all fail over fiscal issues…if we want to solve the problems we have, everyone has to sacrifice… [T]he way we cheat history is if all of us give up something.”

Event Recap: 2011 CRFB Annual Conference and Dinner

 

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.

Averting a Fiscal Crisis

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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.

Op-Ed: Debt Reduction--The Voters Are Ready. Is Washington?

CNN Money | April 11, 2011

They did it! They kept the government open! Tourists can still see the pandas. Hooray!

The White House is trying to spin this as another in a growing list of across-the-aisle joint successes. Like the budget busting tax deal in December, where policymakers of both stripes came together in agreeing to borrow close to $1 trillion from their kids to cut taxes for every taxpayer they could find.

Please. Heralding this as a success is like cheering me on at the office for handing in my taxi receipts. Late.

This was kabuki theater at its worst and it bodes poorly for the real issue at hand: getting a long-term budget deal in place.

Meanwhile, I spent Friday safely well outside the Beltway at a budget forum in Colorado that featured a group of concerned citizens and a long list of impressive budget experts such as Alice Rivlin, Alan Simpson and Gary Hart.

The state's two senators -- Michael Bennet and Mark Udall -- were scheduled to join us. Both are committed to working on a budget deal and wanted to engage their constituents in the process. Unfortunately, at the last minute, they got stuck in Washington dealing with the preposterous fight over the 2011 budget.

At least they were able to join us by Skype and BlackBerry. And, most importantly, the day provided a true "adult conversation" about the nation's fiscal crisis.

Congress needs to know these folks are ready for the real work to begin. Here are some lessons from the day.

Put everything on the table: There was a widespread understanding that a deal would have to include all parts of the budget -- from defense, to health care, to Social Security, to other spending, to taxes.

The problem is large enough that it will require changes in all parts of the budget and a comprehensive fix creates a sense of fairness that we are all in it together.

Pay for what you spend: The basic principle of "pay go" -- if something is worth doing, it is worth paying for -- struck participants as so clearly the right thing to do, it got a spontaneous round of applause.

People want tax reform: There was significant interest in how to reduce all the targeted tax breaks, exemptions, deductions and exclusions that clutter up the tax code and make April 15 one of the most angst ridden days of the year.

House GOP budget: There were a lot of questions about the new budget put out by Paul Ryan, the House Budget Committee chairman.

Ryan's budget aggressively reduces the deficit, transforms our health care system and reduces spending on programs for the poor.

My sense is that it is a bold and courageous budget and impressive for being so, but that by leaving some parts of the budget off the table -- notably any tax increases -- it has to cut other spending so aggressively that it's just not realistic. As such, it detracts from the pressing issue of what we can do this year to get a long-term fix in place.

We need budget fail-safes: Interest is growing -- as faith in the political system is declining -- in finding ways to build into the budget automatic triggers to make sure that promises about future changes are enacted and that budget reform stay on track.

I think this is an important idea that will help be the glue that makes any budget deal stick.

Voters are ahead of many politicians: While I wouldn't say there was universal agreement on anything, the day's discussion made clear that voters are really ready to get something done.

The people are willing to make sacrifices as long as they are part of a budget that truly fixes the problem and in which they believe they are treated fairly. If only politicians would follow the lead of the general population instead of the extremes of their parties.

What next? Can we take those lessons and apply them to the immediate challenge of getting a long-term budget deal done?

Congress has to pass a budget fix this year. If we wait until next year, the risk is too great that either markets run out of patience, or the election season turns into a terrible battle where promises over more tax cuts, and what programs never to cut, cement all the candidates into impossible positions.

President Obama is expected to make a big speech on the topic later this week. He should explain that this must be one of the top national priorities and create a forum where he and Congress come up with a plan. Frankly, they should not move on to other issues until it has passed.

Judging from Friday's forum, the people of Colorado are ready. Are the nation's politicians?

Op-Ed: We Avoided a Shutdown, But We Still Need a Goldilocks Budget That's Just Right

Washington Post | April 8, 2011

There’s nothing like watching Washington debate ideology on a deadline. In the end, the battle over the federal budget came down to frantic negotiations — and thousands of lawmaker hours spent — on some final reductions: Do we cut $60 billion from this year’s budget (roughly 2 percent of the total), or do we cut $30 billion (about 1 percent)? Or somewhere in between?

The real focus, of course, should be on forging a multi-year budget deal, not a short-term accord that averts a government shutdown but still marches the country toward a fiscal crisis. Unfortunately, neither President Obama’s budget (too tepid) nor the plan put forward by House Budget Committee Chairman Paul Ryan of Wisconsin (too lopsided) would do the trick. What we need is a Goldilocks budget — one that is just right.

It won’t be easy, but there is a way to get there, if we’re willing to borrow a little from all the ideas to shape a single, workable plan.

Late last year, the bipartisan deficit commission chaired by Erskine Bowles and Alan Simpsonoffered one path in that direction, making a series of proposals to back us away from the precipice toward a sustainable fiscal course. But when the new budget cycle began, our politicians responded with a fizzle, then a bang.

First, the White House budget blueprint, released in February, was, to put it mildly, a dud. Deficits over the next decade would average a whopping $950 billion per year. What kind of fix is that? White House officials didn’t even fully embrace it, describing it as a “down payment” on reform and arguing that if they had put forth a serious proposal, Republicans would have skewered it so badly that all its recommendations would have been even harder to pass. Maybe true, but the president has to lead, and so far he hasn’t.

Enter Ryan, who is never scared to be bold, and who for years has brought a megaphone to the risks of deficits and debt. The Republican’s proposal, issued this past week, would bring spending down to 15 percent of gross domestic product by mid-century, the lowest level since the 1950s. Getting there would require incredibly aggressive cuts, and sure enough, Ryan’s budget would drastically scale back Medicare, Medicaid, food stamps and several other federal programs. However, by leaving some parts of the budget off the table — he would cut defense by only a symbolic amount and not increase revenues at all — he has to make severe cuts, including to a number of programs for the poor. Thus, back in the real world, the budget is a nonstarter.

Of course, these budget plans may merely constitute opening bids, with the president preparing his party and the country for deficit reduction and Ryan laying the foundation for larger structural reforms to health care down the road. But if this is all part of a delicate dance between the different players, tick, tick, tick . . . time is running out.

Some hedge fund managers are speculating that the markets could run out of patience for our dithering ways, not in the next three to five years, as we used to worry, but as soon as six to 18 months from now. We would then see a spike in interest rates as creditors look for safer bets, a choking off of credit for families and businesses, and a run-up in the government’s borrowing costs. The ensuing recession would make the one we recently exited feel like a dress rehearsal.

The beginnings of a solution can be found, believe it or not, in the Senate — yes, in that dysfunctional upper chamber paralyzed by bickering, filibusters and secret holds.

There, a small group of senators — a new Gang of Six that includes Republicans Tom Coburn (Okla.), Mike Crapo (Idaho) and Saxby Chambliss (Ga.), and Democrats Kent Conrad (N.D.), Dick Durbin (Ill.) and Mark Warner (Va.) — is working to develop a compromise. Meanwhile, 64 senators, including these six, recently wrote to the president, urging him to develop a comprehensive plan to rein in America’s debt and to build upon the deficit commission’s vision. “While we may not agree with every aspect of the Commission’s recommendations,” they wrote, “we believe that its work represents an important foundation to achieve meaningful progress on our debt.”

The six senators are basing their work on the commission’s bold yet realistic prescriptions. Aggressive cuts to both domestic discretionary and defense spending? Check. A plan to fix Social Security? Check. Reductions in health-care spending, agriculture subsidies and public-sector compensation? Check, check, check. And finally, a proposal to significantly simplify the tax system, dramatically lower rates and reduce the deficit? Yes, an actual tax three-fer!

No one in Washington will like this plan, because it is filled with the tough choices that politicians so assiduously try to avoid. (Then again, no one ever said that cutting $4 trillion from the budget would be fun.) But it could eventually be embraced by both sides of the aisle and could even benefit from some additions from the Obama and Ryan playbooks.

Even though Obama’s budget punted on some of the hard long-term choices, it did put forward an important description of how to proceed in the near term: An aggressive plan that brings down the debt over the coming decade should not come at the cost of disrupting the still-fragile economic recovery. Protecting public investment, facilitating private investment and overhauling the tax code, including corporate taxes, are all part of increasing our competitiveness and expanding the economy. We must cut spending aggressively, as Republicans have pushed for, but wisely, as the White House has argued, in order to achieve the right balance.

If there is one Achilles’ heel in the Simpson-Bowles plan, it is in the need to control health-care costs over the longer term. While the commission suggested creating a budget to limit those costs, it didn’t provide details about how that would be achieved.

This is where Ryan’s ideas can come in. Whether you love or despise last year’s health-care overhaul, there is no question that further fundamental and structural reforms to the system will be needed. And Ryan proposes some intriguing changes, including shifting more responsibility to states and individuals for covering their costs, thereby creating greater sensitivity to prices and helping cut overall costs.

It’s hard to see how changes as large as those he proposes could be put in place this year; they need and deserve more thought, research and comparison to other approaches for cost control. But if I were betting, I’d say we’ll see a Ryan-like structure of creating block grants for Medicaid and making Medicare a more individually based system by the end of the decade. Former senator Pete Domenici (R-N.M.) and budget guru Alice Rivlin have a similar proposal that would retain the traditional Medicare program (with the new premium support system) and allow for more generous federal funding; such modifications could make Ryan’s ideas more appealing.

We face a critical moment to chart a new fiscal course for the country. If the bipartisan efforts in the Senate are overtaken by the polarized extremes, it becomes immensely difficult to see how we can fix the problem in time. But it doesn’t have to take a fiscal crisis to force needed changes, and the momentum behind the six senators makes it less improbable that we could reach a compromise. As contentious as the political environment seems today, remember that the last government shutdown was followed by an eventual budget deal between President Bill Clinton and the GOP. If we replace denial with reality and posturing with cooperation, we might just pull it off again.

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