Budget

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.

Op-Ed: Government Shutdown? A Leap of Trust Can Seal a Budget Deal

Christian Science Monitor | September 16, 2012

Budget talk in Washington is again dominated by nonnegotiable demands and a potential government shutdown – or even an unprecedented default on US debt in October. Despite the heated rhetoric, we believe that a bipartisan agreement is still possible on a meaningful budget deal that puts America on the path to fiscal responsibility.

We believed this in 2010, when we co-chaired a bipartisan national commission to fix the debt, and we still believe it. The country simply can’t afford to keep lurching from one fiscal crisis to the next. True, some fiscal progress has been made, but the underlying problem remains: In just a decade, the debt will be equal to 77 percent of our economy – draining resources to pay interest on the debt, and negatively affecting American jobs, consumer credit, and the country’s competitiveness.

Still, we’re hopeful about a fiscal deal, in part because of our experience in revising a deficit-reduction plan based on last winter’s negotiations between President Obama and House Speaker John Boehner. In the process of splicing that plan together, it became clear to us that the two sides had been quite close to reaching an agreement and that the remaining policy differences could be bridged if both sides were willing to go a little further and come to a principled compromise without compromising their principles.

Our revised plan, The Bipartisan Path Forward, would go further than many Democrats have been willing in reforming costly entitlement programs that are driving long-term debt, particularly health care. It would, for instance, move away from Medicare’s fee-for-service delivery system and gradually increase the eligibility age. Our plan would also require Republicans to accept more revenues beyond the expiration of the 2001 upper-income tax cuts agreed to in January.

Our plan would implement entitlement reform in a way that provides important protections for the most vulnerable. And it would raise revenue through tax reform that repeals or reforms various deductions, exclusions, and credits; lowers rates; and ultimately reduces the deficit. Both sides would have to go beyond their political comfort zones to reach a real budget deal. But the end result would put the debt on a downward trajectory for the long term.

The sad lack of trust between the two parties in negotiating on fiscal policy has been perhaps an even greater obstacle to an agreement than the deficit details themselves. However, the dinners that the president hosted with Republican senators earlier this year were an important and long overdue effort at building the understanding that will be critical to getting that kind of a bipartisan agreement.

These social events have led to discussions between senior White House staff and Republican senators about the budget and replacing the mindless, across-the-board cuts in defense and domestic programs (known as sequestration) with smart, selective cuts.

President Obama also deserves credit for the budget that he proposed earlier this year. It took a significant step toward a possible bipartisan agreement by incorporating the tough choices and politically difficult compromises contained in the last offer he made during negotiations with Mr. Boehner in December – including reduced cost-of-living increases for seniors and expanding means-testing for Medicare.

For their part, a growing number of Republican senators have indicated they are willing to accept new revenues as part of a deficit reduction plan that also contains meaningful entitlement reforms. To be sure, significant differences remain between the parties on important details, but there has been a mutual willingness – at least between some GOP senators and the White House – to make politically difficult compromises if the other side is doing so as well.

Budget negotiators should also take heart in bipartisan Senate agreements on the politically difficult issues of immigration and student loans. They have led to renewed interest in bipartisan discussions on the budget. They show what can be accomplished when both sides talk to each other instead of past each other.

We are also encouraged by timely proposals on tax reform emerging from Congress – from the yeoman’s work of House Ways and Means Chairman Dave Camp (R) of Michigan and from Senate Finance Committee Chairman Max Baucus (D) of Montana and ranking member Orrin Hatch (R) of Utah. A bipartisan deal on tax reform could unlock one for the budget.

The senators’ “blank slate” approach would eliminate every tax preference and require advocates to justify adding each one back. This approach will hopefully result in many tax breaks being eliminated or scaled back, even beloved deductions such as for mortgage interest. Such a strategy could accomplish the Republican goal of substantially reducing rates and the Democratic goal of raising new revenue.

It is going to take political courage on both sides to come together on fiscal common ground. The problem is real, the solutions are painful, and there is no easy way out. But there is room for a solution. We must find it for the sake of our grandchildren, ourselves, and our country.

Op-Ed: Nation Does Not Need Another Government Shutdown

The Hill | September 6, 2013

The last real government shutdowns occurred in the winter of 1995.  Two funding gaps that winter resulted in a total of 26 days of hiatus when President Clinton battled it out with Speaker Gingrich and Majority Leader Dole over spending and taxes. While threats of government shutdown raised their head in 2011, 18 years have passed since anyone has really experienced a shutdown.

I had a ring side seat during the last shutdowns. I would advise against a repeat of the winter of 1995.
 
Surely members who were present in 1995 would agree. But how many current members have actually experienced a real government shutdown? The answer is only 1 in 5 current members of the 113th Congress were also members of the 104th Congress when the shutdowns occurred.  Specifically, only 88 members of the House of Representatives and 19 sitting senators were present for the last shutdown. Overall, only 107 of the 535 members might remember the challenge and heartaches of a real government shutdown.   That sad experience was generally shared between the parties, slightly more than half of these current members are Democrats, with only 45 current Republicans.
 
Fortunately, the four current leaders, Speaker Boehner (R-Ohio) and Minority Leader Pelosi (D-Calif.), as well as Senate Majority and Minority Leaders Reid (D-Nev.) and McConnell (R-Ky.) were on the scene in 1995. They should know no one benefited, neither political party, from the experience.  In the presidential and congressional elections that followed, Republicans lost 4 House seats, President Clinton won reelection over Senator Dole, and the Senate remained unchanged. The public’s respect for Congress was the real loss to our system of governance. The unfavorable rating of Congress increased over 5 points to 60 percent shortly after the 1995 shutdowns -- an unfavorable rating the current Congress would enjoy since today that metric tops 80 percent.
 
Besides the politics, the implementation of the shutdown was a major negative. One current Republican member, then chairman of the Subcommittee on Civil Service of the House Oversight and Government Reform Rep. John Mica (R-Fl.), reviewed the 1995 shutdown in detail. Mica concluded that the execution of the shutdown by the agencies and the President’s Office of Management and Budget, was “disorganized and illogical, at best, and oftentimes chaotic.”  
 
Today, talk of shutting down government this fall (or worse defaulting on our public debt) has once again entered the political lexicon unless certain “demands” are met.  A key demand by some conservative Republicans is that President Obama’s signature health care legislation should be “defunded.” 
 
While I agree with many of those who have concerns about provisions of the Affordable Care Act (ACA) , and wish health care reform could have been done with a more bipartisan approach that might have lessened the extreme divisions that exist today, to “defund” the law in any funding or debt limit bill or suffer the consequences of a government shutdown makes little sense to me.
 
First, most of the funding for the health care program is “entitlement” funding -- subsidies for families and individuals who purchase insurance on the exchanges, expansion of Medicaid and various Medicare benefits.  A continuing resolution (CR) deals with annually appropriated accounts, and even if some limited ACA authorized programs are subject to appropriations, eliminating their funding would not end the ACA at all. Congressional estimates of the programs subject to appropriations in the ACA total $100 billion over the next decade and $85 billion of that was simply to reauthorize programs that existed prior to the ACA.
 
While some appropriations will fund salaries of government employees who must administer the ACA, the 1995 government shut down illustrates that not funding government salaries does not guarantee employees will be furloughed.  In 1995, initially the Social Security Administration furloughed over 61,000 employees due to lack of government funding.  However, within a short time, nearly 5,000 were recalled to administer the processing and payment of social security benefits.  The basis for this decision lay in a 1981 Civiletti opinion that ruled that benefit payments (entitlements)  continue to be made and therefore the authority to administer those payments must also continue. 
 
Second, even if “defunding” on a House-passed CR could make it out of the Senate, which is extremely unlikely, it would be vetoed by the president and the veto would not be overridden. Then the government would shutdown.  But even more disconcerting for “defunding” proponents, if magically the president were to sign such legislation, because most of the funding for the law is not subject to annual appropriations, a government shutdown would be avoided but the key provisions of the ACA would continue. It would be a futile exercise; accomplishing nothing that advocates for defunding the law have sought.
 
The ACA should be amended if it is to achieve the goals of reducing health care costs, improving the quality of care delivered and ensuring coverage to those who are without health insurance. No legislation of this magnitude, impacting 20 percent of our economy could possibly be without fault. Had the legislation been considered under normal legislative procedures it is possible that some of the controversy surrounding it today would not exist.  Would of, should of, could of is in the past.  But “defunding” the program today will not accomplish the goal of those opposed to the law and it would further add chaos to implementing an already imperfect law this coming year.
 

Op-Ed: Neither The President Nor Congress Earned A Vacation This Summer

Forbes | August 21, 2013

Congress has left for its summer recess vacation at home. The President took his at Martha’s Vineyard. Based on legislative achievement, neither can be said to have earned time off. Nevertheless, it’s a good idea for both to depart the wearying, unproductive Washington battleground and rest up for the fall budget challenge.

Both need some relief from the intense frustration and animosity that have become Washington’s hallmarks. Congress, in particular, needs to hear from its constituents at home. The President always looks cool on TV, but in the toughest job on earth, he, too, needs occasional rest and family time.

While they rest and ponder the challenges of the rest of 2013, they will find that none of the problems which they have failed to solve in the first half of the year have not become any easier. Kicking the can down the road, as they have doing, buys some time, but it also makes solutions ultimately more costly and painful.

Because there weren’t many, adding up the successes of the first half of 2013 is easy. After the McConnell-Biden tax compromise that got us past the 2012’s fiscal cliff, our policy makers have done very little. For them it was 7 months of name-calling and blaming their opposition.

Their best effort was a reasonable college loan compromise. A responsible start to tax reform was begun by the chairmen of the Ways and Means and Finance Committees. And, after a confirmation dust-up, the Senate managed a filibuster compromise. For the people, that was pretty thin gruel for 7 months of work.

Just like in the stables, when the job is not done, work begins to pile up. The debt ceiling which reached its limit in May, has been postponed by clever manipulations at Treasury, but it will bite us sometime in the 4th quarter. No progress has been made there. Indeed, other than public statements of no concessions, the matter has hardly been discussed.

September 30 is the deadline for financing the government for Fiscal Year 2014. In its budget, the Senate dismissed the sequester. The House budget etched it in stone. There have been no real efforts to negotiate the differences yet.

No appropriations bills have been enacted, so another set of continuing resolutions will have to suffice, but the same budget differences  must be negotiated there. Perhaps the appropriators will be better negotiators than the budgeteers, but there is no evidence of that yet.

The sequester poses a similar, but slightly different, problem. Both parties, and nearly all the policy makers, believe it is a thoughtless way to cut expenses. There is general agreement that it must be modified, but no agreement as to how. The Senate insists on wishing it away. The House demands that the total spending reductions be maintained and that other cuts be substituted for the unwise “meat-axe” approach.

Tax reform activity, bravely started, has little chance of success this year, or even next year for that matter. It is highly desirable, but it probably can’t stand on its own feet. Democrats want revenue for “investments.” Republicans want lower tax rates, both corporate and individual.

Even if agreement can be reached on the thorny problems of what preferences to repeal, the question of investments versus rates can only be negotiated in a grand bargain of spending controls and tax reforms. Aware of the problem for many years, the policy makers have repeatedly proved they are unwilling to negotiate that “grand bargain.”

They prefer the “grand delusion” that their team will win the next election. Then they can do the budget their way. Observers with the best prediction records believe that divided government will continue after the 2014 elections. Nevertheless, the grand delusion continues to dominate both parties’ strategic thinking.

So, when the stalwarts at the Capitol and the White House return, fully rested, to face this fall’s version of the fiscal cliff, there is no indication that they are interested in negotiating a long term arrangement. They may be more relaxed after their vacation, but both sides remain adamant as they face a fiscal cliff as difficult as 2012.

The best possible outcome is almost certain be a “small deal” that solves none of the long-term problems. That will keep the can rattling down the road. Perhaps they all need a longer rest. We who must watch the exercise, need one too.

Op-Ed: Credible Debt Plan Would Boost the US Economy

Financial Times | July 23, 2013

Sir, Edward Luce says that “Simpson and Bowles are wrong about the US debt” (July 15) but he gets it wrong describing their position. In reality, Alan Simpson and Erskine Bowles are not as far off from Mr Luce as he implies. 

Mr Luce describes the debt as a “medium-term threat”, which is the position of Mr Simpson and Mr Bowles and Fix the Debt as well. Our contention is that the US should put in place now a plan addressing the debt that can be phased in over time. Such an approach would be preferable to the steep sequestration cuts that rightly concern Mr Luce. A long-term, comprehensive approach would also include tax reform and curbing healthcare and retirement costs as Mr Luce admits would be ideal.

The threat to Social Security’s solvency is not as hypothetical or as far off as Mr Luce argues. The trustees who oversee the vital programme have been warning for years that the retirement of the baby boomers will put a strain on the programme as more workers receive benefits and fewer contribute to it. As the saying goes, “demography is destiny”. The choices facing policy makers will become increasingly unpleasant the longer action is delayed. Waiting until a crisis is imminent will require harsh solutions such as across-the-board cuts for all beneficiaries, including the poorest seniors. In addition, Social Security’s Disability Insurance Program Trust Fund will be exhausted in just three years, underscoring the fact that this is not a distant concern.

Furthermore, Mr Luce’s implication that addressing the debt versus the economy is a zero-sum game is false. There’s no reason why we can’t do both. In the commission report and the plan they recently put forward, Mr Simpson and Mr Bowles stress the importance of phasing in deficit reduction gradually to avoid harming the economic recovery. Indeed, that is the reason to act now to replace the immediate austerity from sequestration with policies that will reduce the deficit over time. In fact, putting in place a smart, credible debt plan would likely boost the economy by showing markets we are serious about dealing with the long-term debt.

Ultimately, Mr Luce’s condemnation is more geared towards a US political system that is seemingly capable of dealing only with immediate crises as opposed to Mr Simpson and Mr Bowles, who are challenging the system.

Judd Gregg, Former US Senator and Co-Chair, Campaign to Fix the Debt

Op-Ed: Grand Budget Bargain? No, Congress Would Prefer To Fight

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.

Report: Understanding CBO's Analysis of the Senate Immigration Bill

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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.

Op-Ed: Hey, Where Did Our Economy-Threatening Fiscal Crisis Run Off To?

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.

Op-Ed: Austerity, Stimulus, and Hidden Agendas

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.

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