CNN Money | February 28, 2011
President Obama's budget was such a tremendous letdown and a massive punt, I have to wonder if part of the White House's calculation was: "Don't worry, people will forget about the budget in no time." It makes me want to start every column for the rest of the year with: "The president's budget was such a tremendous letdown and a massive punt ... "
However, the details are out there. So I will spend my energy focusing on Republican spending proposals and what they might -- and might not -- lead to. (Please note that I reserve the right to return to the topic of how Obama's budget was such a tremendous letdown and a massive punt.)
The House Republicans' effort to cut $60 billion from the non-security discretionary portion of the budget is helpful for reasons they would and would not have anticipated. It is also mistargeted and likely to backfire.
First, the good: For years, there's been plenty of talk about the need for fiscal responsibility. But that's all it has been: Talk.
The talk has gone like this: Deficits = bad. Responsible budgeting = good. Yes, yes, yes and then ... a flurry of new spending increases and tax cuts. So much for fiscal responsibility.
Now, it is pretty much certain that Congress, after a bloody fight and maybe even a government shutdown, will make some real cuts in the non-security piece of the budget.
I would have delayed these cuts for another year and made some different choices. The policy challenge the past few years has been about the delicate dance between stimulating the economy and starting to bring the debt down without derailing the recovery. My preference would have been to wait another year to start slowly phasing in real cuts.
Still, in the grand scheme of things, the Republicans are doing something important here. They are actually cutting spending, not just talking about it or slowing the growth of it. This will turn out to be a defining moment in starting to move the budget back in the black.
But when it comes to fixing the budget, the GOP effort won't work. The best this approach can achieve -- the best -- is probably a quarter of the savings we need to bring the national debt back down to a manageable level. Forget balancing the budget. You can't fix a massive multi-trillion dollar problem by focusing on one-eighth of the budget. You just can't.
So that brings us to entitlement reform. No one has been willing to go first. The president's budget (did I mention it was a tremendous letdown and a massive punt?) is virtually silent on any meaningful reforms to Medicare, Medicaid and Social Security. Without addressing those, the budget will never be fixed.
Last year, Republicans left entitlement reform out of their Pledge to America and stooped to an absurd low when promising not to cut Medicare. But Medicare will have to be cut. Politicians will have to get real and offer up significant structural reforms to the major entitlement programs; otherwise they will have to decimate the domestic discretionary portion of the budget and still run us into a fiscal wall.
Maybe this exercise will make it absolutely clear that all the hard work of budget cutting will be for naught unless politicians turn their attention to reforming our unsustainable entitlement programs. That would be a productive outcome of what is currently a frustratingly mistargeted discussion about cutting a very small sliver of the budget.
But if we don't make that change soon, I predict these aggressive cuts will backfire on the House Republicans. The cuts will only make voters realize that they actually like some of the programs the government funds. It will be bitter medicine for voters to swallow if Congress cuts those programs and still doesn't fix the budget.
Fixing the budget will be tough policy, tough politics and tough negotiations. The only way to make the heavy lift worth it is if we actually succeed -- if we actually fix the budget.
Maybe, just maybe, the lesson of this exercise will be the recognition that we have to expand the reforms to all areas of the budget. It's not enough to make really tough choices without getting a healthy budget in return.
Think of it this way: It's the reward of losing weight that makes dieting worth it. Those failed diets? Not so fun.
CNN Money | February 14, 2011
President Obama is right when he says that public investments need to be a central part of the nation's economic growth and innovation strategy. Perennial short-termism has left the investment area of the budget dangerously under funded.
Unless we change course with well-targeted investments in human capital, infrastructure and basic R&D, our economy will be left at a severe disadvantage down the (crumbling) road.
Republicans are also right that keeping taxes low and creating a business-friendly environment is necessary to avoid harming competitiveness. In a world of global competition and mobility, ratcheting up tax rates is a losing strategy.
Well, that was easy. All we have to do is spend more on investments and keep taxes low.
But there's one big problem: We deficit hawks are also right that the mammoth debt levels we face will certainly cause a slow burn on the U.S. economy and standard of living -- if not lead to an outright fiscal crisis, if we don't change course.
In order for these three objectives -- investment, low taxes and fiscal responsibility -- to coexist, we need a major restructuring of the nation's budget.
Unfortunately, we did not see that in the president's budget on Monday.
In recent years, we have layered on major new spending programs -- think health care reform, homeland security or the prescription drug program. But we continue to counterbalance them with tepid fiscal planning.
The temporary freezes in mostly the smallest parts of the budget, as President Obama is proposing, and the lip-service to the need for "reforms" do not meet the standard of dramatic anything. Sorry to say, they meet the standard of a punt.
The country needs a fiscal turnaround plan.
The good news is that the fiscal pressures facing the country are starting to force the national discussion away from policies that would enlarge the deficit. I predict, for example, that the $850 billion budget busting tax "compromise" hatched in December will be the last of its kind for some time.
Republicans are starting to suggest specific spending cuts and a bipartisan group in the Senate is poised to introduce the full set of recommendations from the fiscal commission. Adding to the deficit finally seems to be going out of style.
But a turnaround plan doesn't just mean getting the numbers in the budget to add up -- which is hard enough in itself. It requires a fundamental rethinking of national priorities and how we raise and spend our money.
Can we rip away some of our entrenched budget habits in order to create the space for a more appropriate budget for this century's economic challenges and opportunities? Certainly it would require touching many of the budgetary third rails, but the payoff would make it well worth it.
The main change needs to be rethinking entitlements, the programs that operate without a budget and basically on auto-pilot. They are the fiscal elephant in the room.
In a time of limited resources, why spend money on Social Security providing larger benefits for the well-off than for those who depend on the program, or more for retired ladies who lunch than the single working moms?
A true means test for Social Security benefits would free up hundreds of billions of dollars for more investment and deficit reduction. In health care, we need a real budget -- vouchers or another form of rationing and a strict means test.
Bottom line: treating social insurance more like real insurance would free up a tremendous amount of resources to close the fiscal gap, keep taxes low and spend more on needed investments. Oh, and about the purely outdated entitlements like agriculture subsidies? Just end them already!
On the tax side, while it is important how much we tax, it is also important how we tax. The income tax punishes work; the payroll tax is regressive; the corporate tax harms our ability to compete; and the $1 trillion-plus in tax expenditures allow politicians to create a mammoth budget mess by using the tax code to "spend." One could hardly create a worse starting point.
An entirely new tax system, such as a progressive consumption tax, would meet many of the needs of our new fiscal and economic realities.
Such a tax would levy progressive rates on what you spend instead of what you earn and could reward work and savings.
But it could also ask more of the well-off, who, given the tremendous and disturbing growth in income inequality, need to be asked to shoulder more without dampening their incentives to work, build business and provide jobs. Again though, this will require a lot more than just tinkering at the margins.
This isn't the type of thinking you get in the normal budget process. We certainly didn't see it from President Obama's budget on Monday.
But it is true that out of every crisis comes an opportunity. Well, we are on the verge of a fiscal crisis if changes are not made. It is indeed the moment to turn this into an opportunity for a major rethinking of our national priorities and how we budget for them.
CNN Money | February 8, 2011
Anyone looking for serious fiscal leadership from President Obama in his State of the Union Address could have been nothing but disappointed.
He had the right narrative: jobs, investment, competitiveness and fiscal responsibility. But when it came to leadership on actually fixing the fiscal situation -- the hard part, as opposed to soft and fluffy wordsmithing -- there was none to be found.
The president failed to lay out specifics for how to tackle the country's massive debt overload. He even failed to embrace the proposal by his own fiscal commission -- even as a first step to jumpstart the conversation.
I don't want to be too hard on the president. In my heart of hearts, I believe he cares deeply about this issue. I believe he is worried about the damaging effects to the economy and our standard of living of large deficits and debt.
And I believe he has picked serious, thoughtful people to lead his economic team. They have had to take on a series of thankless tasks: navigating an imploding banking system, creating jobs in a jobless recovery and, now, fixing the massive budget disaster not of their own making.
Furthermore, I will grant you that he probably would not have gotten a standing ovation from Congress if he had displayed the kind of leadership I was hoping for.
Imagine ... "Yes, we will fix Social Security by reducing benefits and raising the retirement age; yes, we will bring down health care costs through greater cost-sharing, rationing, and a real health care budget; yes, defense and other discretionary spending will have to not just be frozen but cut; and, yes, revenues will have to go up. Yes we can!"
Right. We all know what kind of reaction that would have gotten.
But enough with the excuses.
Last year, the White House argued it couldn't get specific in its 2011 budget because the political climate wouldn't allow it. Any real proposals, such as entitlement cuts or broad-based tax increases, would have been attacked so viciously that they would have actually set back the cause. That was the argument.
Now a year has gone by, and the debt has increased by nearly $2 trillion. That's $2,000,000,000,000 or, in layman's terms, a whole helluva lot of money. The December tax deal just added another $850 billion to the tab.
Yet, I fear that we are heading to the same old warmed-over excuses for why this year's budget won't be a serious one: "We can't set forth a serious plan if House Republicans won't work with us." Or "The voters aren't ready."
I don't know whether administration officials will use another magic asterisk, budget gimmicks galore or rosy economic assumptions, but I doubt they will be offering a serious budget that improves the fiscal path.
So what then?
President Obama is still the only one who can use the bully pulpit to set the stage for these tough policy choices and bring all the parties to the table. Here is what he should do.
Set a fiscal target: The first step should be setting a target, such as bringing the debt down to 60% of GDP by 2020, or balancing the budget by 2025.
The president should make it a national objective. It's not as sexy as going to the moon, but certainly, it's no less important. Republicans can hardly object, owing to their support for the recent flurry of proposals for a balanced budget amendment. They may even want to balance the budget sooner.
Make the target law: The next step should be to write the fiscal target into law.
The law should include a "budget hammer" -- triggers to make sure the target is met. Then, if Congress didn't meet the target, across-the-board spending cuts and an automatic surtax would kick in. That should get Congress moving.
Get into the details: Yes, the president will have to offer specifics sooner or later. But so too will Congress, a process that will get started with their upcoming budgets.
If Obama doesn't want to use his commission report as a starting point (note, however, that he should) he can draw up his own plan. But realistically, he will have to let go of his "no new taxes on people making less than $250,000" mantra. He'll also have to find more savings in health care, make changes to Social Security other than just raising the payroll tax on the rich and look for real cuts in discretionary spending.
Hold a budget retreat: Finally, the president should host an honest negotiating session to work out the needed compromises between the various approaches. One former member of Congress suggests they work seven days a week, with no breaks for fundraising, to come up with a plan.
If the president doesn't use his upcoming budget to get specific, at the very least he needs to find a way to force the discussion with everyone at the table.
CNN Money | December 13, 2010
What happened!? Just two weeks ago we were celebrating the willingness of the political class -- or at least an influential subset of it -- to finally get realistic and confront the nation's fiscal challenges.
The remarkable success of President Obama's fiscal commission came as a welcome surprise. The panel came up with an outstanding budget reform proposal that could put the U.S. budget on track and reassure credit markets.
The starting point for this plan would be to identify a particular fiscal goal, such as bringing the debt back down to 60% of GDP by the end of the decade. Then, if Congress doesn't pass a plan to meet that goal, automatic spending caps and revenue increases would kick in.
From this point forward, policymakers should not add a single dollar to the debt without combining it with this kind of a responsible budget framework. It doesn't matter what the issue is -- the budget, the debt ceiling, or any new spending and tax bills. No more blind debt.
And then over the next year, lawmakers and the president must come up with the specific spending changes and tax reforms to fill in the plan.
If they choose instead to continue borrowing hand over fist and using the weak economy as an excuse not to offset any costs or enact a debt reduction plan, no one should be surprised when credit markets cry "enough!" And that would bring about a very unhappy ending to the borrowing binge that it appears we are still on.