Public Finance International | October 1, 2013
The US government, and large parts of American society, have strayed from the principles and values on which the country was founded and that helped to make it great. The federal government has also grown too big; both it and many state and local governments have overpromised in relation to what they can actually deliver. The recent budgetary problems besetting Detroit, Chicago and other US cities are a stark reminder of what is at stake.
It is time for transformational reform at all levels of government, or else the US’s financial troubles will continue to worsen, and the economy will never achieve its potential. The past 12 years have seen a dramatic increase in the US’s fiscal challenges, and it is important to understand the key events that have shaped its current situation and future path.
For most of the initial 200 years of American history, spending was largely balanced with revenues – with the exception of times of war and major national emergencies, after which steps were taken to reduce debt burdens relative to GDP. But more recently, consistent peacetime deficits emerged, and then deficits became unsustainable and debt burdens mounted.
During the 1990s, several legislative agreements were reached by Congress and the president, many of which demonstrated political courage and fiscal responsibility. The Budget Enforcement Act of 1990 was part of a $500bn deficit-reduction plan over five years that established discretionary spending caps and ‘pay as you go’ (Paygo) rules for both taxes and spending. Paygo rules mean that any new spending or tax proposals must not add to the federal deficit.
Another major legislative agreement was the Omnibus Budget Reconciliation Act of 1993. Obra was designed to reduce the deficit by a projected estimate of almost $500bn over five years by increasing taxes on high earners. It also extended the Paygo rules from he BEA and the discretionary spending caps through 1998. In 1997, the Balanced Budget Act and Taxpayer Relief Act were passed. These acts sought $130bn in deficit reduction over five years, and extended Paygo and discretionary spending caps through the 2002 fiscal year.
Deficit reduction was clearly a priority throughout the 1990s, in part because of the visibility and related debates resulting from Ross Perot’s run for president in 1992. The resulting focus on fiscal responsibility, combined with an unanticipated economic boom in the late 1990s, resulted in actual economic growth and unemployment being much more positive than forecast at the start of the decade. Consequently, towards the end of the decade, the US government experienced surpluses; public debt as a percentage of GDP declined; and the country’s fiscal outlook appeared to be very positive.
But the fiscal course for the next decade shifted suddenly with the tragic events of September 11, 2001. In the aftermath of 9/11, there was a brief period of bipartisanship in Congress, but the terrorist events had a significantly negative impact on the economy.
These events were followed by several imprudent decisions in 2003 – arguably the most fiscally irresponsible year in US history – when Congress and the president passed additional tax cuts, despite the fact that deficits had returned; enacted extra and largely unfunded Medicare entitlements; and began a new, yet undeclared ‘war’ in Iraq that was charged to the nation’s credit card.
The economy continued to decline and, in 2008, the world entered the ‘Great Recession’. The housing bubble burst, in part due to irresponsible lending policies. Deregulation and low capital requirements caused the government to bail out financial institutions and take on private and corporate debts.
These bailouts were accomplished either by directly purchasing toxic assets through the Troubled Asset Relief Program and/or via short-term loans through a Term Asset-Backed Securities Loan Facility.
Shortly after President Obama assumed office, the American Recovery and Reinvestment Act of 2009 was passed. According to many independent and non-partisan observers, ARRA ensured the recession was not deeper, created jobs and helped to sustain the social safety net during the economic downturn. The bill included public works projects on infrastructure, social welfare provisions, short-term tax cuts, investments in education and renewable energy, and extended unemployment benefits. Even though the legislation was deemed to be necessary, it was projected to add $787bn to the deficit over 10 years.
Then, in 2010, the Patient Protection and Affordable Care Act was passed into law. Although health care reform was needed, the ACA served to increase federal health care promises when the US already had an estimated $37trn in unfunded Medicare promises. While the intention of the ACA was not to add to the deficit, there is significant uncertainty regarding whether many of the anticipated savings will be realised. As an example, the Office of the Chief Actuary of Medicare’s alternative cost estimate was $10 trillion higher in discounted present value than the Medicare Trustees’ following the passage of the bill.
In the past two years, the main fiscal events have been the 2011 debt ceiling, the ‘fiscal cliff’ and the sequester debates. As Congress is expected to enter yet another long, tenuous debate over raising the debt-ceiling limit this autumn, it does not seem likely that policymakers will achieve a specific and comprehensive fiscal ‘grand bargain’ in the near future.
Elected officials in government have so far failed to effectively address the four common challenges that all levels of government face: unfunded retirement obligations, escalating health care costs, outdated tax systems and spending more on consumption than investment. Policymakers should be attempting to achieve a grand bargain that tackles these four key issues, which collectively represent the disease that must be addressed to beat our fiscal cancer. It will take great political courage and leadership to address these in a coordinated and integrated fashion.
By far, the largest deficit the US faces is a leadership deficit. Presidents and the Congress, especially in the past 10 years, have not stepped up to the plate to address the structural deficits in a timely manner. The president has the greatest impact on whether or not progress is made at the federal level, but governors, mayors and other chief executives have just as much opportunity and obligation to lead in connection with the finances of their states and municipalities. These officials should step up to the plate and take action, or run the risk of following in Detroit’s footsteps.
Detroit recently declared bankruptcy, which serves as an example for other cities and even states that face similar challenges. These cities and states need to restructure their finances, and must act quickly because, unlike the federal government, they cannot print money. The largest single problem for many state and local governments is their unfunded retirement obligations (such as pensions and retiree health care).
Historically, there have been situations where politicians and union leaders have worked together to create very generous retirement benefits that are not funded properly. Irresponsible benefit commitments that are not properly funded represent false promises. Elected officials have gotten away with these promises because they are accounted for on a cash-flow basis in the budget. As a result, accounting and disclosure are needed at all levels of government, but most importantly at the state and local level, and in regard to retirement benefits and inter-governmental dependencies.
Often, pension plans are only partially funded. States and cities must restructure their pensions and create different plans for new employees. They also need to curb abuses attributable to existing employees, and possibly cap indexing formulas for retirees. Steps should be taken to eliminate pension padding through adding overtime, vacation or sick time, and to curb double-dipping, where workers draw more than one pension from related employers.
More dramatic restructuring is required of retiree health care obligations. Most of these obligations are entirely unfunded. First, states should consider moving retirees onto the ACA exchanges to reduce some of the burden that would otherwise be felt by state taxpayers. Specifically, eligible pre-Medicare early retirees should be enrolled in the ACA exchanges with a defined contribution-type premium-support subsidy. Furthermore, state and local leaders need to ensure that individuals collecting retirement health care benefits are actually retired. In this regard, individuals and their spouses should not be eligible for taxpayer-funded health care if they have access to health care at their place of employment.
Government employees should be provided with retirement benefits that are competitive and equitable. However, these benefits must also be affordable and sustainable. In addition, equity is a two-way street. These plans must be equitable to employees and retirees, as well as to current and future taxpayers. Achieving these objectives will require elected officials to restructure the current systems – hopefully sooner rather than later.
It’s time for America’s elected officials to demonstrate more leadership at all levels of government. Ultimately, we will need political reforms to help make our government more representative of and responsive to the public. This will take time, but by making them a reality, we will be able to address a whole range of key sustainability challenges in a more timely and responsible manner. And by doing so, our future will be better than our past.
This paper has since been updated. Click here to read the 2015 version.
It’s déjà vu all over again – Congress seems deadlocked in the face of several looming fiscal crises. The first obstacle is just around the corner: if lawmakers fail to pass legislation to fund federal programs before September 30, the government will shut down. Below, we offer a brief primer to describe what that would mean.
What is a government shutdown?
Many federal government agencies and programs rely on annual funding appropriations made by Congress. Since the government’s fiscal year starts on October 1, a government shutdown will occur if Congress has not passed appropriations bills for next fiscal year by September 30. In a “shutdown,” federal agencies must discontinue all non-essential discretionary functions until new funding legislation is passed and signed into law. Essential services continue to function, as do mandatory spending programs.
What services are affected in a shutdown and how?
Each federal agency develops its own shutdown plan, following guidance from previous cases and coordinated by the Office of Management and Budget (OMB). The plan identifies which government activities may not continue until appropriations are restored, requiring furloughs and the halting of many agency activities. However, “essential services” – mainly those related to public safety – continue to receive funding. In prior shutdowns, border protection, medical care of inpatients, air traffic control, law enforcement, and power grid maintenance have been among the services classified as essential, while legislative and judicial staff have also been largely protected. Mandatory spending on programs like Social Security, Medicare and Medicaid also continue.
Although a number of programs are exempt, the public is still likely to feel the impact of a shutdown in a number of ways. For example:
- Social Security and Medicare: Checks are sent out, but new applicants likely will not have their applications processed until funding resumes. In 1996, over 10,000 Medicare applicants were turned away every day of shutdown.
- Law Enforcement: Although public safety generally continues to be funded, some functions are delayed. In 1996, applications to the Bureau of Alcohol, Tobacco, and Firearms were not processed, bankruptcy cases were suspended, hiring of law enforcement officers was postponed, and delinquent child support cases were delayed.
- National Parks: In 1995, the National Parks Service turned away 9 million visitors to more than 350 parks and dozens of national monuments.
- Passport Processing: Passport processing employees will be sent home during the shutdown. In 1995, 200,000 U.S. applications for passports went unprocessed. More than 20,000 applications by foreigners for visas went unprocessed each day; airlines and the tourist industry lost millions.
- Federal Housing Administration: In the event of a shutdown, the FHA, which guarantees many mortgages, would not be able to guarantee housing loans. In 2011, a senior administration official said that "would have significant impact on the housing market."
Is the government preparing for a shutdown?
On September 17, the Office of Management and Budget told federal departments and agencies to begin making plans for the government shutdown. In the memo, OMB Director Sylvia Burwell said that although there was enough time for Congress to prevent a shutdown, “prudent management requires that agencies be prepared for the possibility of a lapse.” Federal departments and agencies are now updating their contingency plans in case the government does shut down, including the determination of which functions will and will not operate, consistent with existing law and past legal opinions.
How would federal employees be affected?
If agency shutdown plans are similar to those in place in 2011, the last time there was a possibility of a shutdown, approximately 800,000 of 2.1 million federal employees would be furloughed. These employees would not be allowed to work, and would not receive paychecks. Although Congress has historically granted back pay, it is not guaranteed.
How and why do mandatory programs continue during a shutdown?
Whereas discretionary spending must be appropriated every year, mandatory spending is authorized either for multi-year periods or permanently. Thus mandatory spending generally continues during a shutdown. However, some services associated with mandatory programs may be diminished if there is a discretionary component. For instance, in the 1996 shutdowns, Social Security checks continued to go out, but staff who handled new enrollments and other services, such as changing addresses or handling requests for a new Social Security card, were initially furloughed – though this decision was ultimately reversed when they were deemed necessary to administer the mandatory program.
How many times has the government shutdown?
Since Congress introduced the modern budget process in 1976, there have been 17 “funding gaps,” where funds had not been appropriated for at least one day. However, before 1980 government did not shut down, but continued normal operations through six funding gaps. Between 1981 and 1994, all nine funding gaps occurred over a weekend, and government operations were only minimally affected. The only “true” shutdowns happened in the winter of 1995-1996, when President Bill Clinton and the Republican Congress were unable to agree on spending levels and shut down the government twice for a total of 26 days.
Does a government shutdown save money?
While estimates vary widely, evidence suggests that shutdowns tend to cost, not save, money. For one, putting contingency plans in place has a real cost. In addition, a number of user fees and other charges are not collected during a shutdown. Contractors sometimes include premiums in their bids to account for uncertainty in being paid. And although many federal employees are forced to be idle during a shutdown, they have historically received back pay, negating much of the potential savings on that front. OMB official estimates of the 1996 government shutdown found that it cost the taxpayer $1.4 billion (over $2 billion in 2013 dollars), and some estimates have put an even greater price tag on a shutdown.
How can Congress avoid a shutdown?
There are essentially two ways to avoid a government shutdown – by passing appropriations or through a continuing resolution (see below question on “What is a Continuing Resolution”). Theoretically, the House and Senate Appropriations committees are supposed to consider 12 different appropriations bills, broken up by subject area, and based on funding levels allocated in a budget resolution. Often these bills are combined into a larger “omnibus” or “minibus” set of appropriations. And sometimes, when the House and Senate fail to agree to a concurrent budget resolution, the levels in these measures must be “deemed” by each house.
This year, a budget resolution has not been passed and neither chamber of Congress has had success getting appropriations bills passed by the full body, even as they have been moving through committees. The House Appropriations Committee has passed ten out of twelve bills, but only four – Defense, Military Construction-VA, Energy-Water, and Homeland Security – have made it through the full House. Meanwhile, the Senate Appropriations Committee has passed eleven bills (all but Interior-Environment), but the full Senate has not passed any of them.
What is a Continuing Resolution (CR)?
A continuing resolution temporarily funds the government in the absence of full appropriations bills, often by continuing funding levels from the prior year. Traditionally, CRs have been used to give lawmakers a short period of time to complete their work on remaining appropriations bills while keeping the government operating. CRs sometimes apply to only a few categories of spending, but can also be used to fund all discretionary functions.
CRs differ from normal appropriations bills in that they often “continue” the funding allocations from previous bills. Even when overall funding levels have differed, lawmakers have often simply scaled up all accounts by a percent change in spending rather than making individual decisions on spending accounts. However, CRs often do include certain “anomalies” where select accounts are increased or decreased or “policy riders,” specifying certain statements of policy.
How often does Congress pass CRs?
Congress frequently passes CRs during periods of political turmoil, and occasionally, many CRs are necessary to fund the government for an entire fiscal year. They have also sometimes been relied on during Presidential transition years. In FY 2001, for instance, a series of intense congressional negotiations leading up to the 2000 elections led to a series of ten one-day CRs. In total, Congress funded the first three months of that fiscal year with 21 continuing resolutions. Not surprisingly, they have been quite prevalent in the past few years, being used to fund the government entirely in FY 2011, when 8 CRs were passed, and FY 2013, when 2 CRs were passed. The most recent year when a full-year appropriations bill passed and no CRs were necessary was 1997.
What are the disadvantages of using CRs?
Continuing Resolutions have several negative implications on the budget’s overall efficiency. CRs usually continue funding at the past year’s level without any regard for changing policy needs or the value of each program within an agency. Using a continuing resolution wastes hundreds of hours of careful consideration and program evaluation incorporated into each agency’s budget submission. For instance, the President’s Budget annually proposes a list of eliminations and reductions of programs which are duplicative or ineffective. A continuing resolution will continue to fund these unwanted programs. Finally, the use of continuing resolutions disrupts activities within agencies, makes it difficult to plan future projects, and costs staff time to revise work plans every time the budget changes
What would the recently passed House CR do?
The House passed a CR on September 20, which would avert a government shutdown and appropriate funds through December 15. The House CR sets appropriations at an annual level of $986 billion, approximately equal to last year’s post-sequester level with minor adjustments. This level is $19 billion dollars higher than allowed under the sequester—with all of the additional funding going to the defense department. In other words, if this CR became law and were extended into next year, a $19 billion across-the-board defense cut would be implemented in mid-January.
Importantly, the House CR, in addition to setting spending levels, includes language to “defund Obamacare,” preventing any discretionary funding from being used to implement the Affordable Care Act. However, many of the law’s functions are funded with mandatory funds and would continue.
What is the Senate’s plan to avoid a shutdown?
The Senate-passed budget resolution would reverse the discretionary reductions called for under sequestration and fund government at $1,058 billion, compared to $988 billion last year.
Given the temporary nature of a CR, however, Senate Majority Leader Harry Reid has said the Senate will consider the House-passed CR, though it will strip out the language relating to the Affordable Care Act. The Senate would have to make it over several procedural hurdles to pass such a bill, and then the House would have to pass that piece of legislation.
How does a shutdown differ from “sequestration”?
A government shutdown closes down non-essential government operations due to lack of funding, whereas sequestration keeps agencies open, but automatically reduces funding levels to enforce budgetary targets. The first example of sequestration was included in the Gramm–Rudman–Hollings Balanced Budget and Emergency Deficit Control Act of 1985. The current version of sequestration is a product of the Budget Control Act (BCA) that resolved the 2011 debt ceiling negotiations. The BCA called on a Joint Select Committee on Deficit Reduction (the “Super Committee”) to identify at least $1.5 trillion in deficit reduction over ten years, and set in motion a “sequestration” if it did not identify at least $1.2 trillion. After a two-month delay, this sequestration went into effect on March 1, cutting discretionary programs and certain non-exempt mandatory programs across-the-board. Under sequestration, government remains “open,” but must operate at lower funding levels.
How does a shutdown differ from a default?
In a shutdown, government temporarily stops paying employees and contractors who perform government services, whereas the list of parties not paid in a default is much broader. In a default, the government exceeds the statutory debt limit and is unable to pay its creditors (or other obligations). Without enough money to pay its bills, any of its payments are at risk—including all government spending, mandatory payments, interest on our debts, and payments to U.S. bondholders. Whereas a government shutdown would be disruptive, a government default could be disastrous.
For more information, see the following:
- Congressional Research Service – Shutdown of the Federal Government: Causes, Processes, and Effects
- Committee for a Responsible Federal Budget – What We Hope To See From Government Funding Negotiations
- Roy T. Meyers – Late Appropriations and Government Shutdowns: Frequencies, Causes, Consequences, and Remedies
- Office of Management and Budget – Planning for Agency Operations During a Lapse in Government Funding [FAQ for how a shutdown would have proceeded in April 2011]
- Congressional Research Service – Shutdown of the Federal Government: Effects on the Federal Workforce And Other Sectors
- Congressional Research Service – Federal Funding Gaps: A Brief Overview
- Government Accountability Office – Uncertainty Limited Management Options and Increased Workload in Selected Agencies
- Committee for a Responsible Federal Budget - Appropriations Update: Sequester Looms Large in the Process
- Committee for a Responsible Federal Budget - Appropriations Update: Progress Beginning to Slow
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.
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.
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.
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.
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
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.