The Government We Deserve | February 20, 2013
In last week’s State of the Union speech, President Obama put great emphasis on expanding early childhood education. He’s not alone in recognizing the vital role of education as the launching pad for 21st century growth. George W. Bush wanted to be known as the “education president,” and so did his father, George H.W. Bush.
Many governors have similar aspirations. Jerry Brown, for instance, has gotten headlines for his efforts to restore the California university system to its former high status. State support for higher education has fallen dramatically there, particularly as a share of the budget and of Californians’ incomes but also in real terms. Brown even supported a tax increase to try to reverse this trend.
While I strongly support these types of effort, right now pro-education governors and the president are fighting a losing battle. Their new initiatives merely slow down their retreat against a health cost juggernaut.
California isn’t much different from many other states. The college bound and their parents witness this declining state support in the form of ever-rising costs and student debt. Less recognized is the fall in academic rankings of the nation’s leading public universities, such as many of the formerly extolled California universities and my own alma mater, the University of Wisconsin–Madison.
State support of education hasn’t just declined at postsecondary schools. In recent years, legislators have assigned K–12 education smaller shares of state budgets as well. During the recession, teachers were laid off and not replaced in many states. Efforts to expand early childhood education have also stalled, although the president’s initiative may give it some temporary momentum.
Federal spending policies only reinforce the longer-term anti-education trend. An annual Urban Institute study on the children’s budget suggests future continual declines in total federal support for education as long as current policies and laws hold up.
Education spending will continue to decline as long as health costs keep rising rapidly and eating up so much of the additional government revenues that accompany economic growth. The figure below, prepared by National Governors Association (NGA) Executive Director Dan Crippen and presented by his deputy, Barry Anderson, at a recent National Academy of Social Insurance conference, tells much of the state story: health costs essentially squeeze out almost everything else.
These rising health costs don’t just place a squeeze on government budgets; they also are one source of the paltry growth in median household cash income over recent decades.
Within states, health costs show up primarily in the Medicaid budget. As the NGA numbers demonstrate, recent federal health reform did little and is expected to do little to control these state costs, despite large, mainly federally financed subsidies for expanding the number of people eligible for benefits.
With populations aging, state and federal governments now also face demographic pressures to increase their health budgets. Large shares of the Medicaid budget go for long-term and similar support for the elderly and the disabled. This budgetary threat also extends to revenues as larger shares of the population retire, earn less, and pay fewer taxes.
The next time someone tells you that we should wait another ten years to control health costs because we’ll be so much smarter and less partisan then, remind him or her that this procrastinating implicitly advocates further zeroing out state and federal spending on education—and the children’s budget more generally. Presidents and governors will never succeed with their education initiatives until they stop the health cost juggernaut in its tracks.
CNN | February 16, 2013
This week the president faced the American people to talk about, among other things, the budget. He said the right things. During his State of the Union address on Tuesday night, he drew a link between responsible fiscal policy and the important issues of jobs, the middle class and economic growth. He emphasized the need for fiscal responsibility.
He pointed out that while some savings have been accomplished, there's still much to be done. But his objective of saving another $1.5 trillion falls well short of what is needed to put the debt on a sustainable path. A recent analysis by the Committee for a Responsible Federal Budget found that a minimum of $2.4 trillion in additional savings is needed to achieve that basic goal.
He acknowledged that compromise will have to drive negotiations and that no one will see a deal come together exactly as they would choose. But when it comes to specifics, the president continues to take the easy way out, instead of using the platform that he alone has to help the country understand both what's at stake and what it will take. It's relatively easy to talk about things like scaling back tax loopholes for corporations and the well-off, asking the rich to pay more as part of Medicare, and providing fewer subsidies to drug companies. But it will take more than that.
Instead of just replacing or retooling the blunt sequester, we do need to find savings from defense. We also need to put Social Security on a path toward solvency and the sooner we do it the better. We should protect those who depend on the program, and running from the financial imbalances it faces does just the opposite.
Tax reform also will require tackling popular, yet expensive and inefficient, tax breaks -- from the health care exclusion to the home mortgage deduction -- if we truly want to overhaul our outdated and anti-growth tax code. Reforming the tax breaks for the rich and well-connected is a must, but it's not enough to really fix a tax code that hemorrhages more than $1 trillion in forgone revenues a year.
The bottom line is deficit reduction is difficult, the president knows that, and he should start an honest dialogue with the American public about what it will take to help move the issue forward.
The emphasis he put on the issue this week was encouraging, but the proof will be in how he leads going forward. In recent fiscal negotiations, we have been locked in a game of you go first, no you go first between the two parties when it comes to how they would get specific on entitlement and tax reform. The risk is that both will find it too politically convenient to hide behind the easy pieces of taxing the rich and discretionary spending caps--both of which have been enacted, and neither of which are sufficient to fix the problem—instead of focusing on the real issues of entitlement and tax reform.
Only the president can start this honest dialogue. If he steps forward and starts putting real specifics on the table for some of the hard choices and uses his platform to explain to the country why it is so important not to duck from these issues as we work to get the economy back on track, his speech will have been a great start to a serious effort. Otherwise, it will be just a lot of empty words.
Politico | February 15, 2013
The continual fiscal brinkmanship of the past two years — in which policymakers go from crisis to crisis, avoiding catastrophe at the last moment and providing nothing more than usual “small ball” solutions that fail to address our underlying structural problems — has ground all progress to a halt.
The failure to get our debt under control, reform our Tax Code and put our entitlement programs on a fiscally sustainable course is robbing us of the ability to invest in our future and will leave us without the resources we need to meet other challenges facing our nation. And moving forward will be out of our reach as long as we continue to “pass the buck” on the debt crisis. It is critical that leaders in both parties come together in an honest and meaningful way to put our fiscal house in order if they have any hope of addressing the other challenges and opportunities that we face as a nation.
Congress could barely come to agreement on a last-minute, short-term compromise on the fiscal cliff at year’s end. All Washington has managed to do since our commission submitted its report is the easy stuff. Through a combination of the work done in the continuing resolution, the Budget Control Act and the pitiful revenue deal at year end, Washington has capped discretionary spending without being specific on what it will actually cut, and it has raised taxes on the rich. It has done nothing to reform the Tax Code or reduce the rate of growth of health care spending to no more than 1 percent above the rate of growth in the economy. Nor has it done anything to make Social Security sustainably solvent. This is the hard stuff that must be done to finally put our nation’s fiscal house in order.
An agreement large enough to complete the job may seem out of reach. However, looking at where the parties were in the negotiations last year, it seems clear that it is possible to reach agreement on a plan if both sides are willing to go beyond their comfort zones and come to a principled compromise.
President Barack Obama and Speaker John Boehner originally made substantial progress toward a comprehensive deficit reduction plan that could have gotten us most of the way. Importantly, these negotiations focused beyond the near-term crisis, with real discussions on structural entitlement reforms as well as comprehensive tax reforms. Both sides identified potential areas of agreement: using chained CPI to index both spending programs and the Tax Code with protections for low vulnerable populations; identifying additional savings from defense and domestic discretionary programs and unjustified subsidies; and finding savings in mandatory programs that can and should be included in a comprehensive deficit reduction plan.
That last round of negotiations should be the starting point for the next round — however, both sides will have to go further.
The president deserves credit for putting forward Medicare savings in his budget and offering further entitlement savings in the negotiations, but he and his fellow Democrats must be willing to do more to reform our entitlement programs. Reaching an agreement to achieve the amount of savings necessary to slow the rate of growth in health care to no more than 1 percent above the rate of growth in the economy will require a combination of Republicans and Democratic ideas for achieving savings from those programs.
For health savings, we’ll have to look at everything from increasing premiums for well-off beneficiaries to reducing reimbursements to providers and drug companies to modernizing cost-sharing rules to tort reform. We will also need to reorient incentives to change the delivery of care and make adjustments to reflect the aging of society. In short, it will require taking on favored and well-entrenched constituencies across the health care system. Remember, health care is the largest single driver of our future debt.
On the tax side, Republicans must be willing to acknowledge that more revenue will be needed as part of an agreement to meet our deficit-reduction goals, but those revenues need not be generated by “tax increases” but through comprehensive tax reform that broadens the base and lowers rates. The Tax Code is riddled with more than $1 trillion of annual tax breaks — most of which are just government spending in disguise. By reforming them, we can reduce individual and corporate tax rates in a way that keeps the Tax Code progressive while promoting economic growth and reducing the deficit at the same time.
If both sides move as one beyond their comfort zone on health and tax reform, those changes could be combined with the other spending cuts discussed in the negotiations last December to produce a package large enough to stabilize and begin to reduce our debt as a share of the economy.
Even with such a package, however, further steps would be needed to ensure long-term fiscal sustainability in light of the major demographic and health care pressures expected in the coming decades. Social Security will still need to be reformed to achieve sustainable solvency over 75 years; though these reforms could be gradual and designed to protect the most vulnerable. We will also need to continue implementing reforms of the health care system as we learn more about which policies are effective in controlling costs. We need to keep the pressure on to take further action to reduce health care spending if the policies we enact now are not sufficient to limit the growth to a sustainable level that grows no faster than GDP plus 1 percent.
The events over the past few weeks have demonstrated that neither party will be able to deal with this problem on its own and that any solution will require a bipartisan agreement based on principled compromise. Our generation created this mess, and it’s our generation’s responsibility to clean it up together. We do not have the time or the luxury of leaving this problem for the next generation to solve. If America is to compete successfully in this global economy, the time for responsible action is now. One thing is certain, if our generation does not solve this problem we created, the brute force of the markets will, and that will not be a pretty sight.
The Hill | February 2, 2013
The president says he is going to spend the first few months of his second term traveling the country attacking Republicans.
The Republican members of Congress had said they were going to spend the beginning of the new Congress taking a hostage they could not shoot, the debt ceiling, and thus continue on their now well-worn path of self-immolation. A confrontation on that issue still looms.
All this leads one to ask: Isn’t there a better way? The answer, of course, is yes.
What is causing all this dysfunctionality in Washington? Is there a way forward that does not involve the chaos theory our government is functioning under?
The core problem is that we are trying to learn how to deal with a government that arose in a time of plenty — when our nation had its largest generation in history, the baby boom generation, engaged in the work force. Now, that generation is moving out of the workforce and into the role of the recipient.
We are taking 70 million people who made up the most productive and wealth-generating group in the nation’s history, and moving them from pulling the wagon to being in the wagon. This transfer, coupled with the massive explosion in the possibilities and costs of healthcare, has created an untenable fiscal situation.
The president seems to have concluded that he does not need to come up with substantive policies to address this looming crisis so long as he just creates an atmosphere of class warfare, claims all things can be cured by raising taxes on a small percentage of Americans and blames the Republicans for failing to agree to abdicate to this policy.
The Republicans have responded by claiming that spending is the sole villain causing our fiscal crisis. They seek to force reductions in spending by threatening actions that in the end they cannot take, such as going over the fiscal cliff or defaulting on the nation’s debt obligations. Actually taking such actions would — quite rightly — destroy the party’s credibility in the eyes of most Americans by doing fundamental harm to the future of the country they claim to want to protect.
There is a path forward. It is just not either of the ones that the primary players have identified. It is a path that does not require brinkmanship governance; nor does it require either side to sacrifice its core beliefs.
The president wants to push forward with his signature program on healthcare, and raise revenues to fund it. He also wants to aggressively use government to seek redress for what he and his cadre of Harvard reformers believe to be the inherently unjust nature of many aspects of our nation.
Republicans want to bring down the cost of government and put us on a path to fiscal solvency by restraining spending. They also want government to be much less intrusive in the day-to-day lives of Americans.
The latter goals of the two parties rather aggressively diverge. They can and will continue to be points of great contention. But they are not at the core of our deficit and debt problem.
It is the first part of the goals of the two parties that can be made to overlap. We can get this debt and deficit down through an agreed path that both parties should be able to live with.
In its simplest terms it involves an agreement to adjust entitlements through changes that do not result in near-term impacts of great significance — but which lead to dramatic long-term changes that make them affordable for the country and the next generation which has to pay for them.
Taking this long-view approach would allow the parties to leap over the short-term fights regarding Obamacare and lock in place policies that will ultimately lead to a fundamental correction in course.
The second part of the agreement is an all-out commitment to produce fundamental tax reform. The template for this is already in place, via the Simpson-Bowles Commission. It gives both sides what they need in a dramatic and effective way: Much lower rates for Republicans and progressivity for Democrats. Such an approach would, in all likelihood, also produce a lot more revenue through growth and the elimination of special deductions and exemptions.
Both sides could back this approach. Instead of the president hitting the campaign trail and the Republicans picking procedural battles, the two sides could actually work together and make the country work too.
TaxVox | February 1, 2013
In one of the more dangerous fiscal developments of recent months, some on the left are defining successful deficit reduction as merely stabilizing the federal debt at about 70 percent of Gross Domestic Product by 2022. While there is no magic target, this one is far too modest and threatens to leave future fiscal policy perilously constrained.
Under current assumptions this goal can be achieved with combined reductions in spending growth and/or increases in taxes of $1.4 trillion over the 2014-2022 period, far less than the total deficit reduction provided by the 2011 Budget Control Act (BCA), which resolved the 2011 debt ceiling debate, and the American Taxpayer Relief Act of 2013 (ATRA), which recently avoided the fiscal cliff.
Richard Kogan of the Center on Budget and Policy Priorities, supported by Martin Wolf of the Financial Times makes the case for more modest deficit reduction. The editorial page of the Washington Post shares my concern that their goals are dangerously modest.
Imagine facing the next recession with a debt-GDP ratio already above 70 percent. It is almost certain that we shall have another slump before 2022. If not, it will be the longest period without a decline in the recorded history of U. S. business cycles. Add a modest stimulus to the recession-driven reduction in tax revenues and increases in social spending and the debt-GDP ratio would top 100 percent in the blink of an eye. But it is harder to argue for a stimulus with the debt already soaring, and without one, a future recession would be more severe than necessary.
However, let us say that for some period before or after 2022 the economy is cruising along a full-employment path at a steady rate of growth. The deficit associated with stabilizing the debt-GDP ratio at 70 percent of GDP is more than 10 percent higher than that consistent with a 60 percent ratio – the limit chosen by the drafters of the Maastricht treaty that created the Euro. That is a significant increase in the rate at which we are depleting our nation’s wealth. The damage to the standard of living cumulates over time and that does no favor to our children and grandchildren.
Kogan and Wolf assume that the discretionary spending caps imposed by the BCA through 2021 will be enforced successfully (Kogan assumes that the BCA’s spending sequester will be cancelled.) The caps imply that discretionary spending will fall to the lowest level relative to GDP since World War II. They would also require both defense and nondefense outlays to grow less than the rate of inflation from 2014 to 2021, after already falling considerably from the levels inflated by the stimulus and the recession.
The biggest risk is that it will be impossible to maintain defense at such low levels. Mali shows that the war on terror is far from over. While the Chinese defense budget is now only about one-quarter of ours, it is growing explosively. Is it reasonable to expect ours to continue to decline in real terms, even if theirs approaches ours by 2021?
In nondefense, population growth will be putting upward pressure on spending for programs like education, infrastructure, national parks, etc, etc. Although nothing is irreversible in the budget, true reforms in Social Security, Medicare, and Medicaid have a better chance of lasting than arbitrary caps on discretionary spending that do not specify individual program cuts. The BCA, however, excludes Social Security and Medicaid from cuts and includes only modest reduction in payments to Medicare providers.
I would think the left would back more aggressive deficit reduction, if only to lower the risk of a sovereign debt crisis. It is, after all, the poor who are being most devastated by high unemployment in Ireland, Portugal, Spain and Greece and by arbitrary cuts in public pensions and social programs.
Sovereign debt crises occur at all manner of debt-GDP ratios and are impossible to predict, but it is hard to believe that a higher ratio does not increase the risk to some degree. It is sobering to note that in 2008, just before their crises, the net debt to GDP ratio in Spain was less than 31 percent and in Ireland less than 25 percent.
Patriot News | January 29, 2013
We are in a state of stupor over the federal budget.
No, it’s not we citizens. But, rather, it’s our federal elected officials who are responsible for clear-sighted and resolute leadership on taxes and spending.
Nothing much was achieved by the “successful” juke to avoid the fiscal cliff.
Poor leadership is taking a toll on the businesses and individuals who participate in our economy. Inaction is not an option. And the recent legislation averting the fiscal cliff, while not inaction, was wholly inadequate to address the immediate challenge and associated tasks we face. We long for the bipartisan days of House Speaker Tip O’Neil and President Reagan.
For months leading up to the Jan. 1 deadline, the private sector, particularly small businesses, voiced concerns over economic and political uncertainty; they sidelined investment and delayed plans to hire. Gridlock in Washington prevented any real progress. And the ultimate last-minute deal punted on the tough decisions to rein in the federal debt.
Though Congress and the Obama administration managed to eke out a deal to avert the fiscal cliff, the agreement does little to boost confidence in the short-term. And it does nothing to seriously slow down the unsustainable trajectory of our national debt.
Simply put, the future cost of our entitlement programs far outstrips our tax code’s ability to fund them. And we’ll need major reforms on both sides of the ledger in order to close the yawning gap between revenues and outlays.
If Congressional Democrats and Republicans really want to help economic growth and job generation, they need to stop focusing on outmaneuvering each other and start focusing on bipartisan solutions to our long-term fiscal problems.
Businesses rely on policy and economic certainty, and a comprehensive plan to that bends down the trajectory of our long-term debt and ends the status quo of lurching from one crisis-induced mini-deal to another would help immeasurably.
Such a plan must address the problem from all sides. This includes smarter spending as well as entitlement and tax reform. Additionally, these changes need to be implemented gradually to avoid creating shocks in the economy.
The parties need to return to the negotiating table now and show the courage to work together on a deal that does not simply represent the lowest common denominator, but is big enough to stabilize the debt and put it on a downward path.
They have a chance to demonstrate Washington can still compromise to help restore confidence. Most importantly, it would reassure the country’s businesses, large and small, and help stimulate growth and investment.
We need to let our elected representatives know that we support them in making the hard decisions. But we also expect them to do what’s right. For that reason, more than 2,500 small businesses all over the country – at least 50 in every state – have joined the Campaign to Fix the Debt. The coalition is made up of budget experts, political leaders from both parties and more than 340,000 concerned citizens from every corner of the country. And we are asking lawmakers to work together and do it now.
We have a long way to go to get our fiscal house in order. And it will take time to iron out the specifics of a comprehensive deal. If we stay focused, it will provide the boost that our nation’s small businesses need to put America back to work.
The Government We Deserve | January 23, 2013
“We must act, knowing that our work will be imperfect,” Barack Obama proclaimed in his second inaugural address. Interestingly, the Washington Post blazoned its front page with the first three words without noting the succeeding dependent clause. Yet within this clause, I believe, lies the means by which the president—and Congress—and we—can move past so many of our conflicts and face up to the problems that confront us. The solution lies not in acting, but in recognizing the imperfection of what we do. If our budgets are to be vehicles for change, then we cannot enact so many laws as if the priorities of one time and place must endure forever.
More than ever before, our recent fights carry with them the implication that victory must be complete and total, setting in stone the institutions that will rule over our successors for decades and centuries to come. “We must act,” each political party seems to say, “as if our work will be perfect, else our opponents may someday slow down or even reverse our course.” Permanent monuments must be made to some liberal or conservative agenda, regardless of whether that monument rests upon unstable ground, employs an architecture glued together from incongruous designs, or fails to leave room for the improvements that only future knowledge may reveal.
Today, if we favor Social Security, it must be maintained permanently in its ancient design. For all generations of ever-expanding life expectancies, we must allow beneficiaries to retire as early as 65, or, when feeling temporarily richer, at 62. We must even accept its 1940s stereotype of the two-parent family, with abandoned mothers required to pay taxes to support spousal benefits for which they are ineligible. Similarly, if we favor less government, we can’t just work toward that goal by reducing spending. No, we have to create permanent tax cuts even if that means running economically disastrous deficits.
If we favor helping the poor, then we can never give up support for benefits like SNAP or food stamps. These programs must be etched in the law as superior to any alternative use of those funds, including ones that might provide better opportunities to people in need. If we subsidize an industry, whether oil or alternative fuel or agriculture or manufacturing, then we must enshrine that subsidy in the tax code.
Now, of course, there’s good reason for using legislation to try to provide some certainty or security. With perfect foreknowledge, we can plan for the future. But what if that future remains uncertain? Planning for it then requires creating a way to respond to its surprises, good and bad.
Unfortunately, we’ve gone long past the point where our federal budget could be flexible. A fiscal democracy index I developed with Tim Roeper shows that the combination of entitlement growth and low revenues means that today most revenues are already committed to permanent spending programs. Almost every congressional decision to adjust national priorities has to be paid for out of a deficit, or by overturning some past “permanent” enactment.
Earlier, before entitlements became so prevalent and dominant, spending was largely discretionary. Congress also felt that we should pay our bills on time, so it didn’t finance tax cuts for today’s generations by passing those liabilities onto future generations. Though many programs survived for decades, most still had to receive new votes of support. Even more important, almost none had any built-in growth. That made it easy to let some ideas languish as others came into prominence, leaving room for new choices or reconsideration over time.
Compromise is much easier when one side or the other isn’t forced into reneging on past promises to the public. It’s easier when it’s possible down the road to proceed on the same course, pursue the same objective via a different course, or decide on both a new objective and course. It’s easier when we’re not asking our opponents to keep funding some permanent monument we want erected to ourselves.
“But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new challenges…We understand that outworn programs are inadequate to the needs of our time…Let us answer the call of history, and carry into an uncertain future that precious light of freedom.” (Barack Obama, January 21, 2013; emphasis mine).
New York Times | January 14, 2013
The elbow room the government has given itself on the debt ceiling is quickly approaching, and there are a numbers of ways to deal with it. But only one would be both fiscally and economically responsible.
We can run out the extraordinary measures keeping the nation's credit card working, and once again threaten to default if policy makers can't agree to lift the ceiling to cover the bills we have already racked up. The mere threat is likely to create enough economic uncertainty to do real harm, and actually defaulting would be catastrophic.
Skip the gimmicks and reach an agreement for a long-term solution to the nation's growing debt.
We could use various money-minting gimmicks or legal maneuvers to avoid the ceiling, while avoiding the reality that the ceiling is a reminder that we are borrowing way too much. Rather than heeding all the warning signs, Congress and the president would prefer to find new and creative ways to kick the can down the road. At some point, this punting will cause tremendous damage.
Or, we could own up to the fact that we have to make changes to get our nation's finances under control.
Congress should lift the debt ceiling as quickly as possible - no more 11th hour nail-biters please! -- while putting in place a comprehensive plan to bring the debt back down to manageable level.
The focus of the plan should be reforming the nation's entitlement programs that their own trustees have declared to be unsustainable. The changes should be gradual and protect those who depend on them, but align our promises with our ability to pay. Other parts of the budget from outdated programs (for instance, farm subsidies) to defense should be cut, and there needs to be a major overhaul of the outdated and anti-competitive tax code.
Even with such an agreement, raising the debt ceiling will be necessary as our borrowing will continue for the foreseeable future. In fact we want to make sure we don't cut the deficit too much or too fast while the economy is still weak.
But the responsible way to do so is along with a plan to get the borrowing under control. Any of the other options will come with a serious economic price.