Brookings | July 8, 2013
Barring a miracle, budget bargains, either grand or petty, are not in the cards this year. The Congress would prefer to fight. It is happily at war with itself over immigration, student loan interest rates, the farm bill, energy policy and the like. The president has abandoned his charm offensive, and is chasing other butterflies.
With no other candidates in sight, it is not surprising that tax reform has re-emerged as the major economic issue in Washington.
In the Senate, Finance Chairman Baucus and his Republican counterpart, Sen. Hatch, announced that they would soon begin work on a tax bill. The Senators intend to start clean, with a bill stripped bare of all tax preferences. Senate Finance Committee members were warned that they would have to amend that bill with any preferences they wished to restore or add.
Ways & Means Chairman Camp is still working assiduously to build consensus in his Committee. The members are well prepared, and thoroughly briefed, but there is no bill yet. Camp’s start may well be quite like that of Baucus and Hatch.
The “fresh start” approach is a splendid idea, one that was suggested in the Simpson-Bowles report. Both Bowles and Simpson have come out strongly in support the Senate process. Other tax reform advocates have similarly blessed the announced process.
However, huge obstacles remain. No process, however inspired, can overcome the fact that tax reform is still an essential part of a budget bargain. Each party’s sharply conflicting budget visions are dependent on tax reform. The Democrats need tax reform to fund their “investments” and control their deficits. The Republicans need it for tax cuts to stimulate growth.
Those differences mean that a stand-alone tax reform bill is almost impossible. Tax reform is too big a part of the budget to move by itself. It must be a part of the budget bargain. A good start is welcome because, at best, tax reform is a difficult and time-consuming effort. But, it will remain inextricably linked to a budget agreement. If there is no budget agreement, there will be no tax reform.
Therefore, it is folly for tax reformers to get over-enthusiastic now. Sens. Baucus and Hatch, and Rep. Camp, ought to be commended for bravery, and encouraged. They have a couple of years of hard work ahead of them with a high risk of failure.
A budget bargain requires negotiation and compromise on macro-accounts. Thereafter, the details can be thrashed out by the various committees. Tax reform has the same negotiation requirements, but, in addition, each petty little micro-detail has to be worked out in advance of passage. The devil is said to lurk in the details, and tax reform is the epitome of detail.
Perhaps an even greater problem is timing. A budget agreement and tax reform need to march together. If a tax bill is perfected long before a budget agreement is made, it will be subjected to a furious attack from all the losers in the preference game. No bill, however cleverly constructed, can withstand the full fury of a strong lobby scorned.
Tax reform’s last lap around the track was in 1986. Then, legislative leaders of both parties were guilty of conspicuous cooperation in the quest for tax reform. They, and the president, perceived that the bill was good for the country and for both political parties. That attitude won’t appear again at either end of Pennsylvania Avenue until there is some budget agreement.
There is none now. Funding the government for FY ‘14 will be by Continuing Resolution(s). The debt ceiling, which has to be settled this fall, could be a major crisis and another train wreck for the economy. House Republicans, who lost that debate in 2011, still see value in the debt ceiling even though the President has declared it “non-negotiable.” Even budget “hawks” are beginning to despair that this is not the year for budget compromise.
So let the Finance and Ways and Means Committees begin the tax reform process with the good wishes of tax reform advocates. Just don’t expect the exercise to be crowned with success until Congress is ready to deal with the larger budget issue.
Correction: This paper originally stated that S. 744 targeted a 90% "apprehension" rate for border security. It actually targets a 90% effectiveness rate, which also includes people who were turned back at the border but not apprehended.
Brookings | June 12, 2013
Federal policy makers always seem to be looking for reasons to dodge the difficult choices necessary to avoid the fiscal crisis. This month, they got some new excuses.
First, in mid-May, CBO updated its fiscal outlook, predicting the Fiscal Year 2013 deficit would be $200 billion less than earlier forecast. That’s delightful, but the 10-year forecast remains substantially unchanged. It also remains dismal.
Later in May, the Trustees of Social Security and Medicare made their annual report. It again showed the Social Security Trust Fund going into the red in 2033, at which time, recipients, by law, will take a 23 percent cut in benefits. It also showed the Social Security Disability Trust fund going broke in 2016, with a similar benefit cut of 20 percent. But, Medicare looked a bit better. It does not tank until 2026, two years later than previously forecast. That small improvement was another excuse.
And when the debt ceiling extension ran out on May 19, nobody cared because the Treasury has a little wiggle room. The moment of default has been pushed back until after Labor Day – an eternity in Washington. The later default date was hailed as a positive sign of economic improvement.
Despite these tiny rays of sunshine, all the long-term forecasts remain dismal. The long-term deficit and debt problems have not changed. But, small reasons to refrain from hard choices are never wasted in Washington. Inaction marches on. Neither Congress, nor the President, is conducting any observable negotiations. Nobody wants to fix the debt.
Fiscal fatigue and political recalcitrance have smothered budget negotiations. Even tax reform, an essential element of a comprehensive budget solution, seems now to have been drained of its vitality. Hopes for a “grand bargain” in 2013 have faded. Now the best outcome is to successfully avoid the debt ceiling default.
Having side-stepped the long term problem, both branches and both parties are content to wait until the last moment before worrying about defaulting on the full faith and credit of the United States. For now, political practitioners are giving their attention to assessing their bargaining clout, and predicting election victories, rather than in solving either the long, or short-term fiscal crisis.
The three budgets (House, Senate and the president’s) are still dueling. There is no apparent negotiation for budget reconciliation in process. The Chairs of the House and Senate Budget Committees meet from time to time, but there is no formal conference committee, and the administration has not expressed concern.
In FY 2013, which closes at the end of September, there was no Congressional budget. Nor has there been one in 5 years. There will certainly be none again this year. Without a budget, the Appropriations Committees of the House and Senate, each following its own budget, will determine federal spending for FY 2014. That will be exciting because the Senate budget assumes away sequestration, while the House budget etches it in stone.
We are thus doomed again to another series of short-term Continuing Resolutions (CRs) to fund federal government operations in FY 2014. Long-term solutions are politically impossible. Our representatives have other priorities. In Washington, politics are more fun, and core constituencies more important, than solutions.
Another debt ceiling mini-crisis will probably be avoided in the fall, but long-term debt will continue to cloud our future. The easy stuff has been done. The sequester made some small progress in limiting discretionary expenses.
On the hard stuff, entitlements and taxes, we are no better off than we were five years ago. The size of the problem, and its dire consequences, have long been common knowledge. The most predictable crisis in history has, as yet, not even generated a good discussion.
Every minute of delay in doing the hard stuff will make its ultimate cost more painful, both for the taxpayers, and for the recipients of federal spending.
So the answer to the question of what ever happened to our fiscal crisis is: little or nothing. The threat has not subsided. It has merely been ignored. The economic albatross of deficit and debt continues to threaten our future.
The Government We Deserve | June 11, 2013
Nothing better exemplifies our gridlock over the future of 21st century government, as well as how to recover from the Great Recession, than the false dichotomy of austerity versus stimulus.
The austerity thesis, reduced to its simplest form, suggests that government has been living beyond its means for some time, only exacerbated by the actions that accompanied the recent economic downturn. Sequesters, tax increases, and spending cuts become the order of the day.
The stimulus hypothesis, reduced also to simplest form, suggests that more government spending and lower taxes puts money in people’s pockets and helps cure a country’s economic doldrums. Once the economy is doing better, government spending will naturally fall and taxes rise.
The debate then plays out largely over deficits: do you want larger or smaller ones?
But reduced to this form, the debate is a fallacy, for several reasons.
First, one must define larger or smaller relative to something. Last year’s spending or taxes or deficits? What’s scheduled automatically in the law? The public debate often glosses over these issues. Which is more expansionary when keeping taxes at the same level: an economy whose growth in spending is cut from 6 to 4 percent or one whose growth is increased from 1 to 3 percent?
Second, a country’s ability to run deficits depends on its level of debt. A recent debate over whether at some point higher debt starts to slow economic growth doesn’t change the fact that lenders want to be repaid. People won’t loan to Greece now, but they still find the U.S. Treasury securities a safe haven for their money.
Third, and by far the most important, what timeframe is involved? Is the Congressional Budget Office pro-austerity or pro-stimulus when it concludes that sequestration hurts the economy in the short run, but is better in the long run than doing nothing about deficits? No one on either side suggests that debt can grow forever faster than the economy. Everyone implicitly or explicitly believes that to accommodate recessions when debt grows faster there are times when debt must grow slower.
So where’s the rub? Here you must understand the emotional systems, usually veiled, that lie behind those on both sides trying to force the problem to an either/or solution.
Start with hardline austerity advocates. Many of them don’t just want smaller deficits. They want smaller government—or, at the very least, they want to prevent the government from taking ever larger shares of the economy, even given changing demographics. Essentially, austerity advocates don’t trust their pro-stimulus adversaries, some of whom can almost always find an economy going into a recession, in a recession, coming out of a recession, or attaining a lower-than-average growth rate and, therefore, needing some form of stimulus. Austerity advocates have learned from long experience that once government spending is increased, it’s hard to reduce. So they feel they have to get what deficit reduction they can now that the public’s attention to recent large debt accumulations is creating pressure to act.
Now for many the hardline stimulus advocates, their support for additional temporary government intervention cannot be entirely disentangled from their sympathy for a larger future government. Else why not agree to cut back now on the scheduled acceleration of entitlement programs, particularly fast-growing health and retirement programs? That would bring the long-run budget, at least as currently scheduled, back toward balance. It would simultaneously please many of their austerity opponents and allow for more current stimulus.
The hidden agendas are complicated further by inconsistencies on both sides. Many hardline austerity advocates, at least in the United States, don’t want cuts to apply to defense spending. For their part, many hardline stimulus advocates would be glad to pare growth in tax subsidies.
Regardless, the dichotomy falls apart once one realizes that a solution can involve a slowdown in scheduled growth rates in spending and a higher rate of growth of taxes, accompanied by less short-run deficit reduction and an abandonment of poorly targeted mechanisms such as sequesters.
Consider the buildup of debt during World War II, the last time we saw U.S. levels above where they are today. Debt-to-GDP fell fairly rapidly after the war all the way until the mid-1970s. While the growing economy certainly helped, tax rates that were raised substantially during the war were largely maintained afterward, and spending had essentially no built-in growth (actually huge declines when the troops came home). Just the opposite holds now even with recovery: there are limited tax increases to pay for past accumulations of debt or wartime spending, and spending is scheduled to grow long-term, even after temporary recession-led spending and defense spending on Afghanistan declines.
Both sides—pro-austerity and pro-stimulus—want desperately to control an unknown future, either by not paying our current bills with adequate taxes or by maintaining built-in growth rates in various programs, mainly in health and retirement. The false dichotomy between austerity versus stimulus has fallen by the wayside, and what we see through the veil are two sides in mutual embrace trying to control our future, whatever the cost to the present.
Arizona Capitol Times | June 10, 2013
Our federal budget is on a destructive and dangerous path. It is vital for our leaders to find a solution to our $17 trillion national debt, or the next generation of Americans will inherit a country in a deeply dysfunctional state.
If we continue down this path, America will be unable to act on promises made in the past or to invest in our future, and those in the millennial generation will be stuck with more debt, higher taxes, fewer jobs and a lower standard of living. Lawmakers need to muster political courage and begin to rebuild our fiscal house.
A comprehensive approach will be necessary to lower our federal deficit, and our leaders in Washington should take note. Such an approach means tackling the real drivers of the debt, protecting high-value investments, and asking for shared sacrifice from every American.
Non-defense discretionary spending — a category that includes funding for education, infrastructure and research — has taken the brunt of the cuts so far through measures like the sequester. All the while, programs like Medicare and Social Security — which account for nearly all the growth in future federal spending — remain untouched. Any meaningful measure will tackle both the spending and revenue sides of the equation, but we all must accept that everything will have to be on the table for broad, bipartisan compromise to take place.
We need to achieve, at the minimum, $2.4 trillion in additional deficit reduction over the next decade to ensure our debt is on a downward path relative to the economy, and this can only be done by reforming our tax system and entitlement programs.
The first step is to understand the actual size and future impact of our fiscal imbalance and how policy changes distribute the benefits and burdens not only on one generation but among all generations. Congress can do this by passing a proposal put forth by The Can Kicks Back to instate generational accounting analysis, which would show the effect of policy changes to members of different age groups.
Many of the proposals that come out of Washington do not affect middle-aged Americans since reforms are phased in. Although such proposals are politically more favorable to an influential voting bloc, lawmakers cannot ignore the burden facing the next generation. Indeed, they must not only consider this constituency’s concerns, but also invite its leaders to testify before relevant committees. Young people deserve to have their voices heard on this critical issue, as they truly have the most to lose.
If we wait much longer to address these problems, the solutions we’ll be forced to enact will only be more disruptive and more visible, as the damage will have already been done. According to the Congressional Budget Office, over the next decade, the United States will spend $5.4 trillion on interest payments on the national debt, and $847 billion in 2023 alone.
Republicans and Democrats alike share the responsibility of addressing our fiscal problems now to ensure future generations of Americans do not inherit them. Kicking the can down the road for the next generation shows that our political leaders are unwilling to take political responsibility, and we urge Arizona Sens. John McCain and Jeff Flake to lead on this critical issue.
Both of us — a member of the Arizona chapter of The Can Kicks Back and a former member of Congress from Arizona and member of the Congressional Fiscal Leadership Council at the Campaign to Fix the Debt — want to leave a legacy of prosperous fiscal stewardship for the next generation. We strive to ensure that today’s leaders seriously understand the consequences of their fiscal decisions and that tomorrow’s leaders are given a chance to weigh in on issues that will affect them in the decades to come. We urge you to learn more about The Can Kicks Back (www.thecankicksback.org) and the Campaign to Fix the Debt (www.fixthedebt.org).
Note: The FY 2013 post-sequester numbers in Figure 1 have been corrected from the original version of this paper.
Politico | May 13, 2013
It seems the debt deniers are back.
If recent news reports are any indication, there is a growing sentiment that after enacting the nearly across-the-board “sequestration” spending cuts, Washington has already done enough to reduce the deficit and should avoid further deficit reduction that could disrupt the fragile recovery.
However, this rhetoric is based on the false notion that deficit reduction and economic growth are mutually exclusive. While we definitely should avoid immediate austerity, starting by reversing the austerity now in effect via the sequester, we must replace these less-than-intelligent, across-the-board cuts with a long-term fiscal plan — one that protects the recovery and promotes economic growth.
The austerity we currently face is precisely the result of our inability to deal with long-term deficits. Instead of reforming our Tax Code and entitlement programs, we’ve slashed important investments in the worst possible way.
Supporters of the status quo accuse those of us who want to fix the debt of supporting sharp austerity. Yet the civic leaders, small-business owners, current and former public officials and hundreds of thousands of average Americans who have joined me in supporting the Campaign to Fix the Debt believe exactly the opposite: We believe in ridding ourselves from the austerity already in effect. More important, we believe in growth. The key to unlocking this country’s economic potential isn’t to give up on smart deficit reduction; it is to enact a responsible plan to replace the mindless cuts that are currently the law of the land. Simply put, the only way out of this foolish austerity is to enact comprehensive deficit reduction.
Policymakers may pretend the current situation is sustainable, but in reality everyone loses.
By resisting continuing efforts to reach a responsible deficit-reduction deal that could replace the sequester, those in my party concerned about protecting programs that provide support for low-income people, enhancing public investments and ensuring the economic recovery is the tide that lifts all boats may very well be, unintentionally, thwarting all three goals. Indeed, by taking the view that we’ve done enough to control the debt, they may be condemning us to the sequester’s continued austerity and to the foolish across-the-board cuts they correctly deplore.
Our current situation is the worst of both worlds. Excessive, mindless deficit reduction in the short term when it will harm the economy, and rapidly growing debt over the long term when that debt will start slowing down economic growth. What’s more, the recent political maneuvering in which Congress acted swiftly to eliminate the sequester’s furloughs of air traffic controllers — while efforts to cancel the sequester as a whole went nowhere — underscores the political reality that the mindless cuts may be here to stay. Unless Congress replaces the sequester with a comprehensive deficit-reduction plan, 4 million meals for seniors will be eliminated, 70,000 children will be kicked out of of Head Start, and 125,000 American families will be at immediate risk of losing rental assistance and, along with it, their homes. The only way to avoid allowing a few powerful interest groups to get their own carve-outs from the budget cuts while leaving everyone else in the cold is to come to an agreement on a responsible deficit-reduction plan to replace the sequester.
Fortunately, there is a better way forward. The recent deficit-reduction plan put forward by Erskine Bowles and Alan Simpson, for example, would replace immediate austerity with a comprehensive plan that is smarter, larger and more gradual. Such a plan would help restore this country’s economic credibility. The markets must be reassured that the government is willing to control its debt over the long term. Enacting a plan now allows us to gradually phase in changes , allowing Americans time to adjust. Moreover, gradual changes would help the economy avoid the kind disruptions that are sure to occur if our elected leaders wait until market forces leave them with no choice other than through dramatic, sudden policy changes.
Rep. Chris Van Hollen (D-Md.) made this point at a recent Bloomberg forum when emphasizing the need to “take actions today that kick in over a phased period of time in the long term to address the out-year deficit and debt” in order to avoid a “‘squeezing out’ effect … that will put the brakes on the economy.”
Only by reducing our overly heavy debt burden can we be sure we’re putting our economy in an environment most conducive to sustained growth. Designed properly, a comprehensive deficit-reduction framework can promote short- and long-term economic growth. Such a deal would avoid the effects of the sequestration and reduce uncertainty; improve confidence in future economic growth; promote work, savings and investment over the long term; and reduce the likelihood of a debt-fueled fiscal crisis in the future. Only a comprehensive approach, one that reverses today’s austerity but enacts intelligent deficit reduction over time, will truly fix our debt.
Washington Post | April 29, 2013
In the 2½ years since the National Commission on Fiscal Responsibility and Reform that we co-chaired released its final recommendations on charting a path toward meaningful and bipartisan debt reduction, we have traveled the country, speaking to hundreds of thousands of Americans of all ages, incomes, backgrounds and ideologies about our debt challenge. No matter our audience, those we spoke with shared two things: a thirst for the truth about what it will take to right our fiscal ship and a willingness to be part of the solution so long as everyone is in it together.
Unfortunately, in Washington, the past two years have been defined by fiscal brinksmanship. Policymakers have lurched from crisis to crisis, waiting until the last moment to do the bare minimum to avoid catastrophe without addressing the fundamental drivers of our long-term debt.
To be sure, some progress has been made the past two years. Policymakers have enacted about $2.7 trillion in deficit reduction, primarily through cuts in discretionary spending and higher taxes on wealthy individuals. Yet what we have achieved so far is insufficient. Nothing has been done to make our entitlement programs sustainable for future generations, make our tax code more globally competitive and pro-growth, or put our debt on a downward path. Instead, we have allowed a “sequestration” to mindlessly cut spending across the board — except in those areas that contribute the most to spending growth.
But there are seeds of hope that a bipartisan agreement might be achievable.
In December, the two parties were as close as they’ve ever been on a plan to put our fiscal house in order. Although they did not reach agreement, we continue to believe that broader compromise is possible. In particular, President Obama deserves a lot of credit for his budget, which lays the foundation for constructive bipartisan discussions by incorporating the tough choices and politically difficult compromises contained in the last offer he made during negotiations with House Speaker John Boehner in December.
While the president’s budget represents a significant step forward, it does not go as far as necessary to keep our debt declining as a percent of our economy. There are significant, substantive differences between the parties on key issues. But we hope that instead of retreating to their respective partisan corners, leaders in both parties will work to bridge the divide.
That’s why we released a new plan this month that builds on the most recent negotiations between the president and the speaker. In crafting it, we drew on the conversations we have had with policymakers from both parties in the past two years, and we worked to address concerns raised about the plan we put forward in 2010. This new plan represents what we believe is both necessary and politically possible, highlighting areas where there is bipartisan agreement and outlining ways to bridge differences on other areas.
The plan we propose would achieve $2.5 trillion in deficit reduction through 2023, replacing the immediate, mindless cuts of the sequester with smarter, more gradual deficit reduction that would avoid disrupting a fragile economic recovery while putting the debt on a clear downward path relative to the economy over the next 10 years and beyond. Importantly, the plan would achieve this deficit reduction while respecting the principles and priorities of both parties.
Our proposal contains concrete steps to reduce the growth of entitlement programs and make structural changes to federal health programs, such as reforming the health-care delivery system to move away from the fee-for-service model and gradually increasing the eligibility age for Medicare. At the same time, it would provide important protections and benefit enhancements for low-income and vulnerable Americans, such as an income-related Medicare buy-in for seniors affected by the increase in Medicare’s eligibility age and greater protections against catastrophic health-care costs for low-income seniors.
Our proposal recognizes that additional revenue must be part of a comprehensive deficit-reduction plan for both substantive and political reasons. Our plan raises revenue through comprehensive tax reform that lowers rates, improves fairness and promotes more vibrant economic growth.
These structural reforms are accompanied by spending cuts in all parts of the budgets put forward by both parties, including cuts to defense and non-defense programs. The plan also includes a shift to the chained consumer price index to provide more accurate indexation of provisions throughout the budget, with a portion of the savings devoted to benefit enhancements for low-income populations. Together, these policies would put the debt on a downward trajectory as a share of gross domestic product — and would keep it declining for the long term.
Our proposal is not our ideal plan, and it is certainly not the only plan. It is an effort to show that a deal is possible in which neither side compromises its principles but instead relies on principled compromise. Such a deal would invigorate our economy, demonstrate to the public that Washington can solve problems and leave a better future for our grandchildren.
The Hill | April 26, 2013
Second presidential terms build legacies, and this president’s will be tied solidly to the decisions he makes about the national debt and the budget. He cannot leave the office with the debt approaching $20 trillion and expect history will look kindly upon his fiscal management of the nation.
So how is he doing in the first 100 days on this front? He is off to a good start, and it is certainly a lot better than he did in his last four years.
The budget President Obama offered was more serious than many of his other recent proposals. By including the chained CPI — a technical improvement to how we measure inflation that would help to extend the life of Social Security and increase revenue for the federal government — he sent a real signal that he is willing to discuss the kinds of more serious entitlement reforms that will have to be part of any deal.
And his so-called “charm offensive” seems to be going well. It is nothing short of absurd how little the president has interacted with members of Congress — including those from his own party — on these issues in the past. And the dinner series he initiated seems to be helping to start a real discussion. It’s hard to solve problems when no one is even talking.
But the real question is where this goes in the next 100 days. There isn’t much time; we need to get a deal hammered out before the country hits the debt ceiling late this summer or early fall.
This will take a lot more than raising tax rates on the rich, or even grudgingly dipping his toe in entitlement reform, as the president has talked about so far. While it is laudable that we have reduced the deficit in the past two years from where it otherwise would have been, we have only done the relatively easy policies thus far. Putting in place spending caps where you don’t have to specify what programs will change (and you have to count on Congress to make the promised savings stick — not a great track record here) and raising tax rates on the very well off are a start.
Next up: the tough stuff.
All told, we have achieved about half of the savings we need to reach a minimum target. Now in the next tranche, we have to tackle the much harder parts: entitlement and tax reform. The good news is that the tax committees are making impressive progress on moving forward with tax reform, which would broaden the base; lower rates; simplify the system; make it far more equitable and competitive; and raise revenue for the federal government in a much better way.
Where the president is going to have to really use his leadership is to help make the case for entitlement reform and why we have to make the needed changes to control healthcare costs and adjust the nation’s retirement system for growing life expectancies. He should make the case to Democrats on why they should prefer Social Security and Medicare reform under his presidency, and he needs to make the case to the nation as a whole about why putting a fiscal deal in place is so important and how the economic recovery will not take off without one.
And that will be part of the test. The president’s style has been to put an issue on the agenda and then take a huge step back right out of the room. That’s not going to work on this one.
The specifics are difficult and come with political risks. He will have to own the tough policy choices right along with the Democrats and Republicans in Congress.
And in order to make this work, he will have to use the bully pulpit as only the president can. He must make the case to the country for why a reformed tax code will make us more competitive, why we need to address the problems with entitlements in order to strengthen those programs, why a smart budget deal is part of an economic recovery strategy, why fixing the budget now will help us to preserve a strong safety net, and why we have to make the necessary investments we have been shortchanging for so long.
A few major speeches around the country laying these issues out would make a world of difference.
President Obama made a small down payment on his legacy in his first 100 days. Now he must invest a lot more political capital to make sure it pays off.