As Policymakers Search for the Right Fiscal Tool, Peterson-Pew Commission’s New Fiscal Toolbox Can Help
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.
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?
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.
TIME | March 17, 2011
It's rare that those of us concerned about the nation's fiscal course come bearing good news. The federal debt, after all, is as high as it has ever been in the post-1945 period and is growing uncontrollably. Under our best projections, the debt will grow from nearly 65% of gross domestic product today to over 90% by the end of the decade — a level that experts have warned could have dangerous economic consequences.
Yet while our fiscal challenges are large and growing, they are not insurmountable. The National Commission on Fiscal Responsibility and Reform, on which I served as associate director, has shown a way forward. Its recommendations offer proof that broad bipartisan support for deficit reduction — based on the principle of shared sacrifice — is possible. Yes, the population is aging, which means Social Security and Medicare costs will rise. And yes, health care costs continue to grow faster than the economy, putting upward pressure on federal health spending. But we can address these challenges. Our problems are not fundamentally economic; they are political.
See how collaborative consumption will change the world.) The politics of pain makes deficit reduction a difficult task, of course. More worried about the next election than about the next generation, politicians prefer to avoid or defer decisions that increase people's taxes or cut their benefits and services.
Making things worse, pledges of what not to do — raise taxes, meddle with Social Security, cut defense spending — are pervasive in Washington. The more pieces of the budget that policymakers take off the table, the harder it is to bring debt under control.
And yet the fiscal commission overcame these odds. The plan would cut $1.7 trillion in discretionary spending — both defense and nondefense — while protecting, and in some cases increasing, spending on education, infrastructure and high-value R&D. It would cut $600 billion in mandatory spending, especially by reducing health care costs and reforming federal pensions, while protecting programs for the poor and disadvantaged. It would reform the tax code in a way that reduces or eliminates various tax breaks in order to drastically cut tax rates while helping generate nearly $1 trillion in new revenue. And it would make the Social Security system solvent for the next 75 years and beyond through a combination of progressive changes to the benefit formula, a gradual increase in the retirement age and an increase in the amount of income subject to the payroll tax, among other measures.
In total, the fiscal commission's recommendations would reduce the deficit by $3.9 trillion through 2020, bring annual deficits to manageable levels of 1% to 2% of GDP (compared with 10% this year) and put the debt on a downward path after 2013.
The recommendations prove that we can enact policies to bring the debt under control and do so without cutting spending or increasing taxes in a way that hurts low-income individuals or stifles investment and growth. Far more important, the commission showed that such a plan can garner support from across the political spectrum. The plan received the support of 11 out of 18 commissioners, a bipartisan super majority that comprised five Democrats, five Republicans and one independent. The fiscal commission demonstrated emphatically that the parties can work together, in the spirit of principled compromise, to get our fiscal house in order.
Unfortunately, the President's budget this year failed to include most of the commission's recommendations, and House Republicans have thus far focused too narrowly on cuts in domestic discretionary spending. But neither party has ruled out the adoption of the recommendations. As tough votes on this year's budget and a debt-ceiling increase come up, a comprehensive deficit-reduction plan may be the only way to avoid stalemate.
On our commission, we actually found that the "go big" approach helped garner more votes, not fewer. Republicans were willing to cut defense spending, but only if nondefense spending (including entitlements) was also cut. Democrats were willing to accept substantial spending cuts, but only if accompanied by significant new revenues. If President Obama and the leadership of both chambers of Congress — and both parties — are willing to enter into serious negotiations to solve our fiscal problems, there is no doubt that they can reach agreement. Everyone will have to give up something. After all, the solutions are painful. But in the process, everyone can get something in return: a better future.
CNN Money | March 21, 2011
I think we a can find a way to get a large-scale budget agreement that tackles our insane multi-trillion dollar debt in time to avert a fiscal crisis. I am not saying we will definitely get it done. But I do think, even in the current hostile partisan environment, that it's becoming increasingly possible.
And as a long-time pessimist and deficit worrier, this new feeling -- this glimmer-of-hope-feeling -- is a whole new sensation. I kind of like it.
Here is how it could happen.
Cut, cut and cut: First, we have to cut domestic discretionary spending. A lot. More than I ever dreamed. And far more than my comfort zone would have ever allowed.
While the discussion in the House right now is not nearly broad enough to get the job done, it is a serious effort and a necessary first step. Congress must stop assuming that just because something has been in the budget for years, it should never be reconsidered.
We are going to spend more on the elderly and health care (more on this below) and, thus, we will have to spend less on other things. The House freshmen have broadened the nation's mind about how much we can actually cut.
This is not about crafting a plan that tinkers here and there, and cuts out some of the waste. No. We will have to pick a goal that once seemed ridiculous: cut $800 billion from this part of the budget over the next decade. Programs will have to be ended. Government workers will have to find different jobs.
Defense can't be spared: Next, we have to cut defense. A lot. If you want to look for waste, look in the defense budget.
"Defense entitlements," such as extremely generous health and retirement benefits, are eating up the security budget and need to be trimmed. And real decisions have to be made about our role in the world.
Yes, entitlements too: The big money will come from entitlements. Both parties remain too cautious.
In order to preserve important priorities in the budget, we have to let go of the old-fashioned model of universal benefits that provide more for the well off than those who need benefits the most. This is a particularly tough sell for Democrats who believe universality is the key to ongoing support for programs like Social Security and Medicare.
But without structural changes, we won't get the budget under control. And for those who think we can address the entitlement programs by gradually raising taxes to European levels, the voters have spoken: It's not going to happen.
We need revenue: While Scandinavian tax rates are not in our future, revenue has to go up. Here's why: You could make all of the above changes, and we will not be anywhere near to closing the budget gap.
The president's fiscal commission, which saved $4 trillion over a decade, should be seen as the bare minimum of what needs to be done. I can promise you that no policymaker will put forth a credible budget to save that much without new revenues. So we have to get real.
The question is not if taxes will go up; it is how. The answer should be in ways that are smart and good for the economy. Ending tax breaks and switching to a consumption or carbon tax would be the right way to go.
How to make it happen: The politics are hard, but not insurmountable. Each side will need something. The trick is to find "sweeteners" that won't blow up the rest of the deal.
On the left, the public investments agenda needs to be incorporated into these reforms. Public investments have been shortchanged for decades. A multi-billion dollar fund that directed capital investments for economic (not political) reasons into R&D and infrastructure makes sense.
Secondly, we should recognize that the disturbing trends in income inequality are a national problem. While we can't fix the nation's massive fiscal problems by only taxing the rich, millionaire and billionaire surtaxes make sense as one piece of more fundamental tax reforms.
On the right, we need to find more ways to get out of the way of businesses. Reducing corporate tax rates, pulling back on excessive regulations and understanding that business is the centerpiece of the American economy are essential to driving growth.
Secondly, many on the right have a valid concern that revenue increases will be used to fund new government spending and not to bring down the debt. As a fix, the budget deal could be paired with a legal spending cap.
Run, don't walk: Oh, by the way, did I forget to say that we need to pass this deal this year? Well, we do.
Hey, no one ever promised this would be easy, but things are happening. The country cares about these problems and policymakers are taking them seriously. Something tells me, we just might succeed.