The Budget Crisis Is Over (Temporarily), But Another Is Coming Soon

Forbes | October 25, 2013
Each house passed a budget for FY 2014. Those budgets were miles apart but neither house showed any interest in negotiating a joint budget resolution. Negotiations are for sissies. Modern politicians prefer a fist fight.
As the new fiscal year approached, Tea Party House Republicans announced that they would not vote for a resolution to keep the government operating unless Obamacare was repealed. That Tea Party bloc was large enough to prevent the Republican leadership from passing a bill without its support.
Along with a major share of the blame for initiating the crisis, the group earned the title of “Suicide Caucus” because those members were willing to take down the government, and, later, to see it default. “Homicide Caucus” would have been more appropriate, because any sacrifices would have been made by their party and by the country, not by them.
Next, a small group of Republican senators, the senate counterpart of the Suicide Caucus, joined the anti-Obamacare crusade. The Cruz filibuster reignited the fury of the Tea Party base. Tea Party energy not only reinforced the Congressional Tea Partyers. It also intimidated other House and Senate Republicans who had viewed the abrupt switch from the debt strategy to the Obamacare strategy as a loser from the start.
As usually happens, this non-negotiable demand bred contrary non-negotiable demands on the other side. The President and the Democratic majority in the Senate demanded a “clean” Continuing Resolution to finance the government their way in FY 14, and a “clean” debt ceiling extension. Instead of negotiating, each side succeeded in painting itself into its own narrow corner.
At that point, everybody had joined the Suicide Caucus. Nobody had a Plan B. Nobody wanted a Plan B. Each side deemed the other’s position unworthy of discussion. Both sides appeared suicidally content to have a partially non-operating government which might have to default on its obligations.
And then, suddenly, the pictured changed. No more shut-down; no more default, at least for a couple of months. There was, of course, no solution. The warring parties had only managed to push all the problems ahead a few months. They simply agreed to go to Conference on the ’14 budget, something they should have done in June.
We have been watching this long-running soap opera since well before Republicans regained their majority in the House in 2010. The Bowles-Simpson Deficit Commission began its work in April that year. On their clearer-thinking days, both parties agree that the goal is supposed to be a reduction in the US debt ratio, something along the lines of Bowles-Simpson.  Unfortunately, there are few clear-thinking days.
Although it remains the gold standard of budget plans, Bowles-Simpson failed. In 2011, there was a debt ceiling fight. The Joint Super Committee was formed, and failed. The sequester was triggered. In 2012, the “fiscal cliff” was narrowly avoided by an agreement on extending tax cuts and increasing taxes on high earners.
At every stage of this running battle, the solutions have been temporary. Crises have been averted, but only for a few months. No solutions have been achieved. Increasing debt continues to loom. Each catastrophe temporarily avoided has set up another a few months ahead.
Republicans took a political hit on the debt ceiling dust-up in 2011. They are taking another one today. The public still believes that Republicans are more culpable than Democrats. But, with both parties frozen in place, the public is having increasing difficulty assigning blame. Nobody is, nor should be, very popular in Washington these days.
After giving our economy, and our world reputation, a kick in the pants, the parties have delivered another temporary postponement.  Time is too short now for the grand compromise. But the policy makers could salvage something in this otherwise dismal year.
They could modify the sequester cuts, but off-set changes with cuts elsewhere. They could also establish a budget path forward to a targeted debt ratio of 60% in 10 years, using growth-oriented tax reform and reductions in the long-term programs that are driving the deficit /debt.
At this point, the best that can be expected is a future target, a plan without details, and without enforcement. But that’s far better than we have achieved in the past five years. Congress is not very good at keeping its promises, but a 10-year target would be worth trying.

Op-Ed: A Fair Trade for Entitlement Reform Includes Increased Revenue

The Washington Post | October 25, 2013

The Post’s Oct. 20 editorial on the budget challenge [“A fiscal quid pro quo”] made important points but was way off-base on the issue of revenue. It suggested that a fair trade would be reductions to the “sequester” budget cuts in exchange for reforms to Medicare and Social Security and said that Democrats should not insist on additional revenue because that’s a non-starter with many Republicans. Democrats would make a serious mistake by following that advice.

Our country needs more revenue to help us get back on track. Citing Congressional Budget Office calculations, The Post said that “federal revenue as a share of [gross domestic product (GDP)] will hit 18.5 percent by 2023, near the upper-end of the postwar range.” That’s true, but the last five times our country had a balanced budget, revenue averaged 20 percent of GDP. The Bowles-Simpson plan, which The Post strongly endorsed, achieved revenue of 20.6 percent of GDP — not by raising tax rates but by broadening the tax base and lowering tax rates.

Tax reform should be part of any budget deal. Tax reform is necessary to unlock the full potential of our economy. The current tax system is not fair and damages U.S. competitiveness. A five-story building in the Cayman Islands claims to be home to more than 18,000 companies. Is it the most efficient building in the world? No! That and other tax scams cost our country more than $100 billion each year, the Senate Permanent Subcommittee on Investigations has found.

If we don’t fix the revenue side of the equation at the same time as we repair Social Security and Medicare, it will never happen. To suggest, as The Post does, that Democrats should trade adjustments to the sequester for reforms to these programs assumes that the sequester affects only Democratic priorities. More than half of the $1.2 trillion in sequester cuts are to defense, long a Republican priority.

A fair trade would be modest additions to revenue as part of a balanced plan. A revenue increase of $300 billion to $400 billion over 10 years would amount to only 1 percent of the $37 trillion the federal government is expected to collect over that time. We can’t do 1 percent? Of course we can. And by reforming the tax code, we could do it without raising tax rates on a single American.

A similar $300 billion to $400 billion in savings out of Medicare and Medicaid would amount to about 3 percent of the $11 trillion the federal government is expected to spend on health care over that time. We can’t do 3 percent? Of course we can. And we must: Health spending is the fastest-growing part of the federal budget, projected to increase from 1 percent of GDP in 1971 to more than 12 percent of GDP in 2050. And the trustees of the Medicare system say it will be insolvent by 2026.

The Post was correct that adoption of a “chained CPI,” or consumer price index, system of measuring inflation should be part of any agreement. Most economists say that chained CPI, which accounts for behavioral changes people make when faced with increasing prices, is a more accurate way of measuring inflation. Going to chained CPI would raise revenue because our tax system is indexed for inflation, and it would cut spending because many programs, including Social Security, are indexed for inflation.

Federal spending has been cut by $900 billion in the Budget Control Act, by $1.2 trillion in the sequester and by more than $500 billion in the 2010 continuing resolution. That is spending cuts of $2.6 trillion, while only $600 billion in revenue has been added. That is hardly balanced.

To suggest that Democrats should give up on revenue because it’s a non-starter with many Republicans is like telling Republicans they should give up on entitlement reform because it is a non-starter with many Democrats. The truth is, both sides need to give a little ground on their must-haves for real progress to be made.

A mini-“grand bargain” would require all of these elements: changes to Social Security and Medicare to ensure their solvency for future generations; a modest increase in revenue so all parts of society participate in getting our country back on track; and changes to the sequester cuts that force nearly all of the deficit savings on less than 30 percent of the budget.

We can do this, but everyone must be prepared to give a little so that our nation can gain a lot.

Op-Ed: Hey Congress: Use This Moment

zpolitics | October 17, 2013

As we finally emerge from what was simply the most recent in a long series of short-term fiscal crises, it is abundantly clear what our leaders in Washington should do to prevent themselves from governing on the edge of a cliff in the future: they must stop the madness of shutdowns and showdowns, start earnest bipartisan negotiations and solve the problem of our unsustainable national debt once and for all.

The just-concluded fiscal near-disaster proves that short-sighted political gamesmanship produces very few winners, and a whole bunch of losers. Worse still, such crises divert attention from the real issues that are driving our debt over the long term – namely our outdated tax code and our ever-more-costly entitlement programs.

The only thing our leaders in Washington won for themselves with this fiasco is more time – time that they must consider their last opportunity for finally confronting our national debt.

It’s undeniable that our debt is a huge – and growing – problem. Relative to the size of the economy, our debt is larger than it has been at any time since the immediate aftermath of World War II. And, even with shrinking deficits over the past couple of years, it is projected to start growing again, unchecked, to unprecedented levels. Such elevated debt levels have been associated with higher rates of interest, inflation and unemployment, not to mention slower economic growth and greater risk of a debt-fueled fiscal crisis.

Moreover, Americans understand that the national debt is problematic. In a recent poll we commissioned with prominent Democratic and Republican pollsters, a plurality of respondents said that the debt was the single most pressing issue Washington must tackle – more than jobs, immigration reform or health care.

The poll also showed that dealing with the debt in a comprehensive, gradual manner, Americans are willing to make personal sacrifices for the sake of long-term deficit reduction. When paired with cuts to wasteful and low-priority programs, enacting deficit-reducing reforms to our entitlement programs and revenue-enhancing reforms of our tax code are broadly popular. There are a variety of proposed common sense deficit-reducing provisions that could garner the political common ground.

That we must take on the true drivers of our debt – and that Americans understand this – is why the Campaign to Fix the Debt firmly believes that making tough choices to reduce the deficit is good politics in addition to good policy. Fix the Debt has enlisted hundreds of thousands of citizen-activists – including civic leaders, academic economists, small business leaders and corporate executives – to let Congress know that what their constituents want is the policy certainty and economic stability that a comprehensive deficit-reduction agreement would bring about.

The time for our elected leaders to be worrying about short-term political gains has long since passed – if it ever existed at all. Now, they must use this latest opportunity to stop all of the fruitless chicanery, start honest negotiations and solve our fiscal problems – before they get even worse than they were last week.

Op-Ed: Don’t Believe Myth That Debt Problem is a Myth

The Weekly Wonk | October 10, 2013

Last week, the government of the richest and most powerful nation in the world shut off its lights and closed its doors. As a result, 800,000 federal workers were immediately furloughed; new patients were turned away from NIH clinics; the national parks were closed to visitors; and economic growth is expected to slow by a quarter to a half percentage point in the fourth quarter of 2013.

This disruptive and completely unnecessary shutdown follows 7 months living under “sequestration,” an across-the-board cut to many of the important functions of government that followed the failure of the bipartisan Super Committee to reform the nation’s fiscal policy. And to make matters worse, we are only days away from reaching the nation’s legal debt limit which, if not raised, will require us to default on some of our obligations.

In the context of all this short-term turmoil, while officials are wrestling with whether the lights will be on and whether the nation’s bills will be paid next week, it may seem strange to want to talk about our long-term fiscal situation.  But we have to – immediate issues and long-term challenges are intertwined. Until policymakers recognize the importance of addressing our long-term debt situation, it is difficult to see how we avoid jumping from short-term crisis to short-term crisis.

There is a dangerous and pervasive myth in Washington that our debt problems have been solved – that we no longer need to worry about growing entitlement costs. This myth leads many Democrats on the left to falsely assume any call for deficit reduction is a call for job-killing austerity, Republicans on the right to shift their focus away from entitlement reform to oil pipelines and medical device taxes, and policymakers to opt for mindless sequestration over strategic spending cuts, and government shutdowns over commonsense budget agreement.

It is true that we have made substantial progress in addressing our short- and medium-term debt. In combination with the economic recovery, a number of spending cuts and tax increases enacted over the past three years have helped to stabilize debt levels as a share of the economy for the next five years. Yet temporary stability does not suggest a permanent solution. Though growth has slowed, our debt levels are the highest as a share of the economy they have been since the aftermath of World War II. At roughly twice the historical average, our extraordinarily high debt levels put us at substantial risk if interest rates rise and leave little flexibility if new needs or emergencies arise.

More frightening, our debt levels are likely to begin growing again sooner rather than later.  As health care costs continue to grow faster than the economy and the large baby-boom population enters retirement, the costs of Social Security, Medicare, and Medicaid will balloon and revenue simply won’t keep up.

The result: debt is projected to exceed the size of the economy by 2035, double the size of the economy in the 2060s, and triple it in the 2080s.

The myth that we no longer have a long-term debt problem is doing a disservice to the next generation of Americans who will ultimately pay the price in those coming decades for our inaction today.

A failure to address this growing debt will translate into stagnant wage growth, threaten the value of retirement accounts, raise interest rates on all types of loans, reduce the government’s ability to respond to new needs and emergencies, and increase the chance of an eventual crisis.

The progress we’ve made would reduce the chance of such a crisis, but not by nearly enough. As my old boss Erskine Bowles likes to explain, our leaders have done the easy stuff – raising taxes on the top 1 percent of Americans. They’ve done the sneaky stuff – capping defense and non-defense discretionary spending so future lawmakers can identify the specific cuts. They’ve even done the stupid stuff – allowing a deep, abrupt, across-the-board cut to all the programs not responsible for our growing debt through so-called “sequestration.”

But what our leaders haven’t done is the hard stuff – reform our tax code and entitlement programs. What our leaders haven’t done is worked together to reach principled compromise on a plan that neither side loves, but both know would be a win for the American people.

The solutions are relatively straightforward: bend the health care cost curve by improving the way we pay for medicine and changing incentives for providers and beneficiaries; make Social Security solvent by slowing the growth for wealthier beneficiaries, adjusting for growing life expectancy, and bringing in new revenue from those who can afford it; reform the tax code by cutting many of the $1.3 trillion of annual tax preferences and using the money to lower rates and deficits; and replacing the mindless cuts of sequestration with thoughtful cuts to wasteful and low-priority programs.

These solutions are not easy, to be sure. They require Democrats to take on their base and pursue entitlement reforms. They require Republicans to break their pledges and support new revenue. And they require both sides to put the next generation ahead of the next election.

But they are possible.

Despite the dysfunction in the halls of Congress, efforts to design and agree to these changes are already underway. The President’s budget took an important step by putting a number of entitlement changes into his budget, including the adopting of the chained CPI which would switch to a more accurate and slower inflation index for calculating Social Security COLAs, changes in the tax code, and various indexed provisions in the budget.. The relevant Committees in both Houses are taking another important step by looking at ways to reform and replace the so-called “sustainable growth rate” (SGR), which threated to cut Medicare physician payments by about 25 percent. And perhaps most encouragingly, Republican House Ways & Means Chairman Dave Camp and Democratic Senate Finance Chairman Max Baucus are working together to enact the first comprehensive overhaul of our tax code in over a quarter century.

The true test will be whether these efforts can be joined and ultimately enacted into law. Every bipartisan effort to reduce the deficit – the Simpson-Bowles Commission, the Domenici-Rivlin Commission, the Boehner-Obama discussion – found that the best way to get a budget deal was through shared sacrifice. Everyone has to be part of the solution, and all policymakers has to be willing to put their own sacred cow on the table. The retirement age must be on the table. The mortgage-interest deduction must be on the table. The defense budget must be on the table. And payments to Medicare providers and beneficiaries must be on the table.

Congress has an opportunity to do right by the American people. But they have to stop the madness, start talking, and solve the problem. And they need to begin now.

Op-Ed: A Way Out Possible

The Hill | October 9, 2013

We are on a collision course with financial calamity. A first-time-ever failure to extend the federal debt limit would lead to higher interest rates not only for the U.S. government, but also for every business, home, car, student and personal loan in America. The looming debt ceiling — and the ongoing government shutdown — is causing harmful uncertainty around the world and here at home.

But there is a way out.

It’s right in front of us. Bipartisan proposals have been advanced to get America back on track. Whether it is Simpson-Bowles, Domenici-Rivlin or even where President Obama and Speaker John Boehner (R-Ohio) left off their negotiations two years ago, there are common elements in all of these plans that could be implemented now to bring this crisis to a close.

Here are the common elements:

  • Extend the debt limit for at least one year, preferably two, without condition. That aligns with Obama’s position that we not negotiate on the debt limit.
  • Do the negotiating within the context of a continuing resolution to fund the government and end the shutdown.
  • Agree to the Republican funding level of $988 billion for this fiscal year.
  • Agree on a process for individual and corporate tax reform next year. The goal should be to reduce rates and raise additional revenue to go toward deficit reduction. A reasonable goal would be $300 billion to $400 billion in additional revenue over the next 10 years.
  • Agree to additional savings in Medicare and other healthcare accounts by better coordinating care, especially of the chronically ill. A reasonable target would be $300 billion to $400 billion over the next 10 years.
  • Take the savings from numbers 4 and 5 above and use them to cut in half the effects of the sequester.
  • Adopt “chained CPI” as a more accurate measure of inflation that both reduces spending and raises revenue. The combined effect is a savings of about $250 billion over the next 10 years
  • Repeal the medical device tax of 2.3 percent, about which no one seems enthusiastic.
  • Name a commission to reform Social Security to ensure its long-term solvency. The longer we wait, the more draconian the solutions will have to be.

Of course, neither party would be completely happy with all of these proposals. However, it’s not really a “bargain” if neither side has to give up things on its wish list.

We can do this. We can end the shutdown, resolve our debt crisis and put America back on a more sustainable course for the future. Let’s do it!

Op-Ed: If Congress Won't Lead, Others Must

Star Tribune | October 5, 2013

Here we are again, watching as our national leaders engage in another fiscal fistfight. Partisan rancor, sadly, is now hard-wired into our political system.

According to political analyst Charles Cook, out of 435 congressional districts, there are “only 17 Republicans sitting in districts Obama carried, and only nine Democrats sitting in districts Romney carried.” The number of so-called split-ticket districts was far higher when we served in Washington two decades ago. In the ensuing years, increasingly, “gerrymandered” districts created seats that are safe for one party. The result is a decreased likelihood that moderates will ever be elected — and that only exacerbates partisan behavior.

In this highly toxic environment, it is hard to see how any long-term consensus can be reached, especially on budget issues where the two parties are poles — and polls — apart. If we learned nothing else last week, it is that it’s no longer reasonable to expect members of Congress to be problem-solvers. The budget impasse is just act one in a drama that will be on stage for a long time to come.

A full-fledged debate over the appropriate role of government at the beginning of the 21st century is overdue. However, instead of a thoughtful discussion that explores legitimate ideological differences regarding the size and role of government, we hear only each side blaming the other. Republicans cry out for Obamacare’s demise (hint: Obama has a veto pen), while Democrats loudly decry every attempt by Republicans to cut spending (hint: there aren’t enough rich taxpayers to pay all our bills).

The need for balanced solutions is too important to leave to the partisans in Congress yet too urgent to ignore. One of the great strengths of our country is the balance of power shared by families, government, businesses and nonprofits, including the faith community. When one of these institutions is failing, we should look for leadership elsewhere. Business organizations can start by no longer echoing the Republicans’ no-new-taxes mantra. Instead, they can lead on comprehensive tax reform. Sen. Mike Lee, R-Utah, has proposed a tax overhaul that would promote investment and reward people for working. Among other features, Lee offers a $2,500-per-child tax credit against either income or payroll taxes (Medicare and Social Security) owed by a working family. The proposal recognizes that those in Mitt Romney’s 47 percent still pay significant federal taxes even if they owe no income taxes. More than that, it recognizes that we can no longer pay lip service to the importance of strong families. We need to invest in the ability of families to succeed.

Lee’s proposal is far from perfect, but it’s a good start. The revenue calculations still are being done, but it’s likely that some taxes will be increased in order to reduce others. Some business leaders (particularly those active in the Fix the Debt campaign) have embraced tax reform principles similar to those embodied in the Lee plan. We need their strong voices and the voices of other business­people to lead the discussion. Otherwise, we are left to the context created by Grover Norquist and other antitax crusaders.

Similarly, let’s ask organized labor to step forward to propose new ways to address the spending side of the federal budget, starting with health care. Obamacare on its own doesn’t solve the health care crisis. It promotes broader access but offers little cost control. However, throwing it out without an alternative — as Republicans have tried to do — is the wrong approach. And, asking for an exemption, as unions have done, is also wrongheaded.

The groundwork for a labor-inspired health care solution might be in a statement four years ago issued jointly by the leaders of the Service Employees International Union and Wal-Mart, Inc. Their 2009 letter to President Obama made the case for expanding access, including an employer mandate that doesn’t act as a barrier to hiring entry-level workers. Significantly, the letter also argues for the importance of controlling health costs, rightly asserting that “health care reform without controlling costs is no reform at all.”

The encouraging news is that innovative public policies are emerging to address America’s critical challenges. But these ideas are primarily being developed and implemented by grass-roots organizations, nonprofits, faith communities, business and labor groups. In other words, outside of government.

Eventually, Washington will find its way. But in our view, when politicians finally get serious, the path will have been paved by other foundational institutions that are offering true leadership.

Op-Ed: American Nightmare

Public Finance International | October 1, 2013

The US government, and large parts of American society, have strayed from the principles and values on which the country was founded and that helped to make it great. The federal government has also grown too big; both it and many state and local governments have overpromised in relation to what they can actually deliver. The recent budgetary problems besetting Detroit, Chicago and other US cities are a stark reminder of what is at stake.

It is time for transformational reform at all levels of government, or else the US’s financial troubles will continue to worsen, and the economy will never achieve its potential. The past 12 years have seen a dramatic increase in the US’s fiscal challenges, and it is important to understand the key events that have shaped its current situation and future path.

For most of the initial 200 years of American history, spending was largely balanced with revenues – with the exception of times of war and major national emergencies, after which steps were taken to reduce debt burdens relative to GDP. But more recently, consistent peacetime deficits emerged, and then deficits became unsustainable and debt burdens mounted.

During the 1990s, several legislative agreements were reached by Congress and the president, many of which demonstrated political courage and fiscal responsibility. The Budget Enforcement Act of 1990 was part of a $500bn deficit-reduction plan over five years that established discretionary spending caps and ‘pay as you go’ (Paygo) rules for both taxes and spending. Paygo rules mean that any new spending or tax proposals must not add to the federal deficit.

Another major legislative agreement was the Omnibus Budget Reconciliation Act of 1993. Obra was designed to reduce the deficit by a projected estimate of almost $500bn over five years by increasing taxes on high earners. It also extended the Paygo rules from he BEA and the discretionary spending caps through 1998. In 1997, the Balanced Budget Act and Taxpayer Relief Act were passed. These acts sought $130bn in deficit reduction over five years, and extended Paygo and discretionary spending caps through the 2002 fiscal year.

Deficit reduction was clearly a priority throughout the 1990s, in part because of the visibility and related debates resulting from Ross Perot’s run for president in 1992. The resulting focus on fiscal responsibility, combined with an unanticipated economic boom in the late 1990s, resulted in actual economic growth and unemployment being much more positive than forecast at the start of the decade. Consequently, towards the end of the decade, the US government experienced surpluses; public debt as a percentage of GDP declined; and the country’s fiscal outlook appeared to be very positive.

But the fiscal course for the next decade shifted suddenly with the tragic events of September 11, 2001. In the aftermath of 9/11, there was a brief period of bipartisanship in Congress, but the terrorist events had a significantly negative impact on the economy.

These events were followed by several imprudent decisions in 2003 – arguably the most fiscally irresponsible year in US history – when Congress and the president passed additional tax cuts, despite the fact that deficits had returned; enacted extra and largely unfunded Medicare entitlements; and began a new, yet undeclared ‘war’ in Iraq that was charged to the nation’s credit card.

The economy continued to decline and, in 2008, the world entered the ‘Great Recession’. The housing bubble burst, in part due to irresponsible lending policies. Deregulation and low capital requirements caused the government to bail out financial institutions and take on private and corporate debts.

These bailouts were accomplished either by directly purchasing toxic assets through the Troubled Asset Relief Program and/or via short-term loans through a Term Asset-Backed Securities Loan Facility.

Shortly after President Obama assumed office, the American Recovery and Reinvestment Act of 2009 was passed. According to many independent and non-partisan observers, ARRA ensured the recession was not deeper, created jobs and helped to sustain the social safety net during the economic downturn. The bill included public works projects on infrastructure, social welfare provisions, short-term tax cuts, investments in education and renewable energy, and extended unemployment benefits. Even though the legislation was deemed to be necessary, it was projected to add $787bn to the deficit over 10 years.

Then, in 2010, the Patient Protection and Affordable Care Act was passed into law. Although health care reform was needed, the ACA served to increase federal health care promises when the US already had an estimated $37trn in unfunded Medicare promises. While the intention of the ACA was not to add to the deficit, there is significant uncertainty regarding whether many of the anticipated savings will be realised. As an example, the Office of the Chief Actuary of Medicare’s alternative cost estimate was $10 trillion higher in discounted present value than the Medicare Trustees’ following the passage of the bill.

In the past two years, the main fiscal events have been the 2011 debt ceiling, the ‘fiscal cliff’ and the sequester debates. As Congress is expected to enter yet another long, tenuous debate over raising the debt-ceiling limit this autumn, it does not seem likely that policymakers will achieve a specific and comprehensive fiscal ‘grand bargain’ in the near future.

Elected officials in government have so far failed to effectively address the four common challenges that all levels of government face: unfunded retirement obligations, escalating health care costs, outdated tax systems and spending more on consumption than investment. Policymakers should be attempting to achieve a grand bargain that tackles these four key issues, which collectively represent the disease that must be addressed to beat our fiscal cancer. It will take great political courage and leadership to address these in a coordinated and integrated fashion.

By far, the largest deficit the US faces is a leadership deficit. Presidents and the Congress, especially in the past 10 years, have not stepped up to the plate to address the structural deficits in a timely manner.  The president has the greatest impact on whether or not progress is made at the federal level, but governors, mayors and other chief executives have just as much opportunity and obligation to lead in connection with the finances of their states and municipalities. These officials should step up to the plate and take action, or run the risk of following in Detroit’s footsteps.

Detroit recently declared bankruptcy, which serves as an example for other cities and even states that face similar challenges. These cities and states need to restructure their finances, and must act quickly because, unlike the federal government, they cannot print money. The largest single problem for many state and local governments is their unfunded retirement obligations (such as pensions and retiree health care).

Historically, there have been situations where politicians and union leaders have worked together to create very generous retirement benefits that are not funded properly. Irresponsible benefit commitments that are not properly funded represent false promises. Elected officials have gotten away with these promises because they are accounted for on a cash-flow basis in the budget. As a result, accounting and disclosure are needed at all levels of government, but most importantly at the state and local level, and in regard to retirement benefits and inter-governmental dependencies.

Often, pension plans are only partially funded. States and cities must restructure their pensions and create different plans for new employees. They also need to curb abuses attributable to existing employees, and possibly cap indexing formulas for retirees. Steps should be taken to eliminate pension padding through adding overtime, vacation or sick time, and to curb double-dipping, where workers draw more than one pension from related employers.

More dramatic restructuring is required of retiree health care obligations. Most of these obligations are entirely unfunded. First, states should consider moving retirees onto the ACA exchanges to reduce some of the burden that would otherwise be felt by state taxpayers. Specifically, eligible pre-Medicare early retirees should be enrolled in the ACA  exchanges with a defined contribution-type premium-support subsidy. Furthermore, state and local leaders need to ensure that individuals collecting retirement health care benefits are actually retired. In this regard, individuals and their spouses should not be eligible for taxpayer-funded health care if they have access to health care at their place of employment.

Government employees should be provided with retirement benefits that are competitive and equitable. However, these benefits must also be affordable and sustainable. In addition, equity is a two-way street. These plans must be equitable to employees and retirees, as well as to current and future taxpayers. Achieving these objectives will require elected officials to restructure the current systems – hopefully sooner rather than later.

It’s time for America’s elected officials to demonstrate more leadership at all levels of government. Ultimately, we will need political reforms to help make our government more representative of and responsive to the public. This will take time, but by making them a reality, we will be able to address a whole range of key sustainability challenges in a more timely and responsible manner. And by doing so, our future will be better than our past.

Q&A: Everything You Should Know About Government Shutdowns

This paper has since been updated. Click here to read the 2015 version.


It’s déjà vu all over again – Congress seems deadlocked in the face of several looming fiscal crises. The first obstacle is just around the corner: if lawmakers fail to pass legislation to fund federal programs before September 30, the government will shut down. Below, we offer a brief primer to describe what that would mean.

What is a government shutdown?

Many federal government agencies and programs rely on annual funding appropriations made by Congress. Since the government’s fiscal year starts on October 1, a government shutdown will occur if Congress has not passed appropriations bills for next fiscal year by September 30. In a “shutdown,” federal agencies must discontinue all non-essential discretionary functions until new funding legislation is passed and signed into law. Essential services continue to function, as do mandatory spending programs.

What services are affected in a shutdown and how?

Each federal agency develops its own shutdown plan, following guidance from previous cases and coordinated by the Office of Management and Budget (OMB). The plan identifies which government activities may not continue until appropriations are restored, requiring furloughs and the halting of many agency activities. However, “essential services” – mainly those related to public safety – continue to receive funding. In prior shutdowns, border protection, medical care of inpatients, air traffic control, law enforcement, and power grid maintenance have been among the services classified as essential, while legislative and judicial staff have also been largely protected. Mandatory spending on programs like Social Security, Medicare and Medicaid also continue.

Although a number of programs are exempt, the public is still likely to feel the impact of a shutdown in a number of ways. For example:

  • Social Security and Medicare: Checks are sent out, but new applicants likely will not have their applications processed until funding resumes. In 1996, over 10,000 Medicare applicants were turned away every day of shutdown.
  • Law Enforcement: Although public safety generally continues to be funded, some functions are delayed. In 1996, applications to the Bureau of Alcohol, Tobacco, and Firearms were not processed, bankruptcy cases were suspended, hiring of law enforcement officers was postponed, and delinquent child support cases were delayed.
  • National Parks: In 1995, the National Parks Service turned away 9 million visitors to more than 350 parks and dozens of national monuments.
  • Passport Processing: Passport processing employees will be sent home during the shutdown. In 1995, 200,000 U.S. applications for passports went unprocessed. More than 20,000 applications by foreigners for visas went unprocessed each day; airlines and the tourist industry lost millions.
  • Federal Housing Administration: In the event of a shutdown, the FHA, which guarantees many mortgages, would not be able to guarantee housing loans. In 2011, a senior administration official said that "would have significant impact on the housing market."

Is the government preparing for a shutdown?

On September 17, the Office of Management and Budget told federal departments and agencies to begin making plans for the government shutdown. In the memo, OMB Director Sylvia Burwell said that although there was enough time for Congress to prevent a shutdown, “prudent management requires that agencies be prepared for the possibility of a lapse.” Federal departments and agencies are now updating their contingency plans in case the government does shut down, including the determination of which functions will and will not operate, consistent with existing law and past legal opinions.

How would federal employees be affected?

If agency shutdown plans are similar to those in place in 2011, the last time there was a possibility of a shutdown, approximately 800,000 of 2.1 million federal employees would be furloughed. These employees would not be allowed to work, and would not receive paychecks. Although Congress has historically granted back pay, it is not guaranteed.

How and why do mandatory programs continue during a shutdown?

Whereas discretionary spending must be appropriated every year, mandatory spending is authorized either for multi-year periods or permanently. Thus mandatory spending generally continues during a shutdown. However, some services associated with mandatory programs may be diminished if there is a discretionary component. For instance, in the 1996 shutdowns, Social Security checks continued to go out, but staff who handled new enrollments and other services, such as changing addresses or handling requests for a new Social Security card, were initially furloughed – though this decision was ultimately reversed when they were deemed necessary to administer the mandatory program.

How many times has the government shutdown?

Since Congress introduced the modern budget process in 1976, there have been 17 “funding gaps,” where funds had not been appropriated for at least one day. However, before 1980 government did not shut down, but continued normal operations through six funding gaps. Between 1981 and 1994, all nine funding gaps occurred over a weekend, and government operations were only minimally affected. The only “true” shutdowns happened in the winter of 1995-1996, when President Bill Clinton and the Republican Congress were unable to agree on spending levels and shut down the government twice for a total of 26 days. 

Does a government shutdown save money?

While estimates vary widely, evidence suggests that shutdowns tend to cost, not save, money. For one, putting contingency plans in place has a real cost. In addition, a number of user fees and other charges are not collected during a shutdown. Contractors sometimes include premiums in their bids to account for uncertainty in being paid. And although many federal employees are forced to be idle during a shutdown, they have historically received back pay, negating much of the potential savings on that front. OMB official estimates of the 1996 government shutdown found that it cost the taxpayer $1.4 billion (over $2 billion in 2013 dollars), and some estimates have put an even greater price tag on a shutdown.

How can Congress avoid a shutdown?

There are essentially two ways to avoid a government shutdown – by passing appropriations or through a continuing resolution (see below question on “What is a Continuing Resolution”). Theoretically, the House and Senate Appropriations committees are supposed to consider 12 different appropriations bills, broken up by subject area, and based on funding levels allocated in a budget resolution. Often these bills are combined into a larger “omnibus” or “minibus” set of appropriations. And sometimes, when the House and Senate fail to agree to a concurrent budget resolution, the levels in these measures must be “deemed” by each house.

This year, a budget resolution has not been passed and neither chamber of Congress has had success getting appropriations bills passed by the full body, even as they have been moving through committees. The House Appropriations Committee has passed ten out of twelve bills, but only four – Defense, Military Construction-VA, Energy-Water, and Homeland Security – have made it through the full House. Meanwhile, the Senate Appropriations Committee has passed eleven bills (all but Interior-Environment), but the full Senate has not passed any of them.

What is a Continuing Resolution (CR)?

A continuing resolution temporarily funds the government in the absence of full appropriations bills, often by continuing funding levels from the prior year. Traditionally, CRs have been used to give lawmakers a short period of time to complete their work on remaining appropriations bills while keeping the government operating. CRs sometimes apply to only a few categories of spending, but can also be used to fund all discretionary functions.

CRs differ from normal appropriations bills in that they often “continue” the funding allocations from previous bills. Even when overall funding levels have differed, lawmakers have often simply scaled up all accounts by a percent change in spending rather than making individual decisions on spending accounts. However, CRs often do include certain “anomalies” where select accounts are increased or decreased or “policy riders,” specifying certain statements of policy.

How often does Congress pass CRs?

Congress frequently passes CRs during periods of political turmoil, and occasionally, many CRs are necessary to fund the government for an entire fiscal year. They have also sometimes been relied on during Presidential transition years. In FY 2001, for instance, a series of intense congressional negotiations leading up to the 2000 elections led to a series of ten one-day CRs. In total, Congress funded the first three months of that fiscal year with 21 continuing resolutions. Not surprisingly, they have been quite prevalent in the past few years, being used to fund the government entirely in FY 2011, when 8 CRs were passed, and FY 2013, when 2 CRs were passed. The most recent year when a full-year appropriations bill passed and no CRs were necessary was 1997.

What are the disadvantages of using CRs?

Continuing Resolutions have several negative implications on the budget’s overall efficiency. CRs usually continue funding at the past year’s level without any regard for changing policy needs or the value of each program within an agency. Using a continuing resolution wastes hundreds of hours of careful consideration and program evaluation incorporated into each agency’s budget submission. For instance, the President’s Budget annually proposes a list of eliminations and reductions of programs which are duplicative or ineffective. A continuing resolution will continue to fund these unwanted programs. Finally, the use of continuing resolutions disrupts activities within agencies, makes it difficult to plan future projects, and costs staff time to revise work plans every time the budget changes

What would the recently passed House CR do?

The House passed a CR on September 20, which would avert a government shutdown and appropriate funds through December 15. The House CR sets appropriations at an annual level of $986 billion, approximately equal to last year’s post-sequester level with minor adjustments. This level is $19 billion dollars higher than allowed under the sequester—with all of the additional funding going to the defense department. In other words, if this CR became law and were extended into next year, a $19 billion across-the-board defense cut would be implemented in mid-January.

Importantly, the House CR, in addition to setting spending levels, includes language to “defund Obamacare,” preventing any discretionary funding from being used to implement the Affordable Care Act. However, many of the law’s functions are funded with mandatory funds and would continue.

What is the Senate’s plan to avoid a shutdown?

The Senate-passed budget resolution would reverse the discretionary reductions called for under sequestration and fund government at $1,058 billion, compared to $988 billion last year.

Given the temporary nature of a CR, however, Senate Majority Leader Harry Reid has said the Senate will consider the House-passed CR, though it will strip out the language relating to the Affordable Care Act. The Senate would have to make it over several procedural hurdles to pass such a bill, and then the House would have to pass that piece of legislation.

How does a shutdown differ from “sequestration”?

A government shutdown closes down non-essential government operations due to lack of funding, whereas sequestration keeps agencies open, but automatically reduces funding levels to enforce budgetary targets. The first example of sequestration was included in the Gramm–Rudman–Hollings Balanced Budget and Emergency Deficit Control Act of 1985. The current version of sequestration is a product of the Budget Control Act (BCA) that resolved the 2011 debt ceiling negotiations. The BCA called on a Joint Select Committee on Deficit Reduction (the “Super Committee”) to identify at least $1.5 trillion in deficit reduction over ten years, and set in motion a “sequestration” if it did not identify at least $1.2 trillion. After a two-month delay, this sequestration went into effect on March 1, cutting discretionary programs and certain non-exempt mandatory programs across-the-board. Under sequestration, government remains “open,” but must operate at lower funding levels.

How does a shutdown differ from a default?

In a shutdown, government temporarily stops paying employees and contractors who perform government services, whereas the list of parties not paid in a default is much broader. In a default, the government exceeds the statutory debt limit and is unable to pay its creditors (or other obligations). Without enough money to pay its bills, any of its payments are at risk—including all government spending, mandatory payments, interest on our debts, and payments to U.S. bondholders. Whereas a government shutdown would be disruptive, a government default could be disastrous.

For more information, see the following:

Op-Ed: Weak Leaders Fumble the Public Purse

Washington Times | September 23, 2013

The past decade has been a disaster when it comes to fiscal stewardship and political leadership. Our official federal debt has tripled, and the best measure of our fiscal burden — the total of federal liabilities and unfunded obligations — has soared even more, to more than $70 trillion during the next 75 years. Washington is in partisan and ideological gridlock with prospects for a fiscal “grand bargain” this year being remote, and perhaps unlikely until 2017. For the first time in America’s history, we are on course to leave future generations with a country that is worse off than the one we inherited.

I have sounded this alarm throughout the past 10 years, stating bluntly that our situation is dire and that the solutions will require the public and our elected officials to put partisanship aside and act in the best interests of our nation. The good news is that most Americans understand we have a problem and want something done about it. In addition, we still have time to right the ship of state. As I see it, there are some steps that we need to take to preserve the American Dream for our children and grandchildren:

We need to set a realistic fiscal objective for 2013. A grand bargain is not in the cards, and Congress needs to pass a short-term continuing resolution to keep government funded. The House did so on Friday and sent the measure to the Senate. Still, a funding agreement for fiscal 2014 should include several fiscal actions in addition to raising the debt ceiling.

Congress and the president should work together to replace the senseless sequestration with alternative mandatory and discretionary spending cuts for at least the next two years. They should also set targets for additional spending reductions through social-insurance reforms and additional revenues through comprehensive tax reform. The relevant congressional committees should be charged with coming up with related legislation by a specified date.

To ensure more timely and informed actions moving forward, Congress should also enact biennial budgeting, a meaningful no-budget-no-pay bill, the recently introduced Inform Act, and a substantive Government Transformation Commission that can recommend cost-control measures. Finally, the individual mandate under Obamacare should be delayed, because the government is not ready to implement it effectively.

We must change the way the federal government keeps score. Right now, policymakers focus on annual deficits and 10-year baselines. A more comprehensive and credible approach should take into consideration all our unfunded promises and liabilities, including Social Security, Medicare and civilian and military retirement obligations, and a much longer time frame. Importantly, that figure can go down if we achieve a responsible grand bargain — unlike the amount shown on our National Debt Clock. We also need to focus our fiscal reform efforts on the ratio of debt to gross domestic product, and not the budget deficit. In fact, we should ultimately replace the debt ceiling with a debt-to-GDP limit.

We must broaden the fiscal message to include state and local governments. They share many of the fiscal woes of the federal government, including huge unfunded pension and retiree health obligations. They are more vulnerable than the federal government for several reasons. They can’t print money, and their credit ratings are at risk. In addition, “bad news flows downhill” — meaning that as the federal government restructures its finances, which will ultimately happen, it will cut back on the funding that state and local governments rely upon. Therefore, it is critical that cities and states act quickly to get their fiscal houses in order.

We need to fix our dysfunctional democracy. Unless we dramatically reform our political system, we will be unable to address the key fiscal challenges and other sustainability tasks that lie ahead. This will require redistricting reform (gerrymandering has made countless districts uncompetitive), revisions of our current primary system, more equitable and consistent requirements for ballot access, extensive campaign-finance reform and term limits. If Congress won’t act on these and other needed reforms, we should also consider a state-based effort to convene a “clean call” Constitutional Convention under Article V that would propose specific fiscal, political and states-rights amendments for ratification by three-fourths of the states.

We must build on successful public engagement models. President Obama can take a lesson from former President Bill Clinton, who promoted Social Security reforms by joining other public officials and public policy experts in town hall meetings across the country. By emulating this strategy of citizen education and engagement, the president can energize and activate the American public, providing the “cover” that many politicians need to support actions that carry political risk.

We must address our biggest deficit — the leadership deficit. Our elected officials have shown too little backbone when we need the courage and conviction that goes with true leadership. This will take both the emergence of nontraditional leaders and political reforms that will encourage more qualified people to seek office.

Ultimately, however, it is “We the People” who must take the lead. Independent-minded Americans of all political affiliations and diverse groups need to come together to focus on common concerns and goals. My travels across the country have convinced me that a significant majority of Americans would rally behind specific economic and political reforms, as long as they are deemed to be comprehensive and fair. In the end, the prescription we need is a consensus for action, and a voting public that says “enough” to politicians who refuse to be part of the solution.

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