Other CRFB Papers
Forbes | March 28, 2013
In a pleasantly surprising move, the normally moribund Congress passed a Continuing Resolution (CR) to fund the government for the last 6 months of FY 2013. The President obligingly signed it. What’s more, the usual nasty and dilatory process was completed on time without excessive name-calling.
That made the CR a multiple winner. It got the country past 2 more cliffs. One was the blunt and thoughtless cuts of the sequester. The other was the expiration of the current CR. While mitigating some of the worst effects of the sequester, it maintained the total savings of the sequester. That’s a double win for a Congress that rarely scores victories.
That’s fine for now, but the CR is just one more short term stand-off between the warring Democrats and Republicans. They proved they can, when pressured, keep the Ship of State moving past cliffs, sequesters, debt ceilings, and other crises. But their short term fixes only prevent a total disaster. They give no long term certainty or direction to the country.
CRs are, in fact, a clumsy way to conduct the people’s business. They include all functions of government in one ugly package. They include some reviews of some spending, but they lack the careful scrutiny that is applied when all 13 appropriations bills are passed separately. Lacking a common budget target, legislators are forced to bundle all spending in to a CR.
In the past few years, frequent budget crises have become the rule for Congress. This year we avoided the cliff, dodged the debt ceiling, and now have eased the effect of the sequester. We will face another debt ceiling expiration in August, and probably have another CR in September. All of these could have been avoided had our political leaders agreed on a long term budget plan to stabilize the debt ratio at a reasonable level.
This year both the Republican House and the Democratic Senate have passed budgets. The Senate budget was the 1st in 4 years, and was a cause for public celebration. The bad news is that the House and Senate versions are poles apart. A compromise is considered highly unlikely.
The Republican budget balances after 10 years, and stabilizes the debt ratio at 55%. It raises no new taxes, and makes drastic cuts in health care spending. The Democratic budget lowers debt slightly, but does stabilize it. It increases taxes by $1 trillion, and makes small spending cuts. These budgets are reconcilable, but only if the politicians regard each other as the opposition, instead of the enemy.
Without a reconciliation, our budget process will move the country backwards into more CRs and more cliffs in 2014. We will survive, but continue to lurch from crisis to crisis.
Our economy will be denied the certainty it requires for a faster recovery.
What is lacking here is the Grand Bargain, a 10-year program to tame the long term deficit-drivers, and stabilize the debt so we can deal effectively with future emergencies. Every budget observer has a personal favorite version of the big compromise. The well-known Bowles-Simpson Plan is just one of many possible models.
Republicans are determined to raise no more taxes, and to reduce entitlements that are the long term debt-drivers. Democrats are equally determined to defend entitlements, and to impose more taxes.
Neither side can get everything it seeks. Yet, both sides remain adamant. Each believes that it can ultimately defeat the other, despite contrary historical evidence. Meanwhile, our economy underperforms at sub-standard levels. Uncertainties caused by the stalemate continue to confound markets and business decisions.
There is still time for compromise, but, so far, the will has been absent. The political parties and their leaders have to make an agreement. Nobody can do it for them. One day the light will dawn. They will begin to understand that compromise is strength, not weakness. The sooner that day comes, the better.
The Cincinnati Enquirer | March 25, 2013
Ohio’s congressional delegation must get serious about fixing the debt. In this time of serial self-inflicted fiscal crises, our Ohio leaders are in a powerful position to move Congress toward enacting a comprehensive plan that puts our economy back on track. We must push through the current deadlock between the two parties and find a way to deal with our growing national debt.
The debt problems we face are gigantic. At over $11.8 trillion, the publicly held portion of our national debt is over 73 percent of the size of our economy – the highest share since the 1940s – and it is slated to grow over the coming decades, despite the recent “fiscal cliff” tax increases and “sequester” spending cuts. Even after all of this, the truth is that we just haven’t done enough to get our debt under control.
It’s time for our leaders in Washington to come together and agree on a plan to get our debt under control. Because of the pivotal place in Washington that our representatives from Ohio occupy, they can be instrumental in leading the way to a bipartisan agreement that puts our debt on a downward path as a share of the economy over the long term.
Such a plan must reduce spending through smart cuts to unnecessary and inefficient programs, promote growth through reform to our overly-complex tax code and preserve the integrity of our entitlement programs by passing reforms that make them financially sustainable over the long term.
These reforms will require compromise from both parties and from both ends of Pennsylvania Avenue, but we owe it to our children and to future generations to stop accumulating more debt to leave on their shoulders.
We Ohioans have an opportunity to play a vital role in this process by showing our senators and representatives we support them in coming together to build a comprehensive plan and in making the hard decisions for the good of our country. We need to let them know that continuing to patch together short-term fixes, like we’ve seen over the past few months, is no longer an option.
The Campaign to Fix the Debt is a nonpartisan organization that is pushing our leaders to do just that. With a coalition of former elected officials, small-business owners, academics and more than 350,000 grassroots members from all around the nation, the Campaign has been building a popular movement to let our leaders know it’s time to stop kicking the can down the road and to finally deal with this issue.
We Ohioans can help. If you haven’t already signed their petition, go to www.fixthedebt.org and add your name. Whether or not you’ve already signed the petition, call or write to your representatives in Congress and let them know that it’s time to use common sense and come together to solve these issues.
Let them know that we can’t afford to let the debt continue to pile up for our children.
Let them know that the Ohio delegation needs to step up and provide the leadership this country so desperately needs. Most importantly, let them know you care about these issues and that you support them in fixing the debt.
The two goals reinforce each other and neither can be achieved without the other. Weak economic growth—or worse, sliding back into recession—will reduce revenues and make it much harder to reduce or even stabilize the ratio of debt to GDP. But the prospect of debt growing faster than the economy for the foreseeable future reduces consumer and investor confidence, raises a serious threat of high future interest rates and unmanageable federal debt service, and reduces likely American prosperity and world influence.
Stabilizing and reducing future debt does not require immediate austerity—on the contrary, excessive budgetary austerity in a still-slow recovery undermines both goals—but it does require a firm plan enacted soon to halt the rising debt/GDP ratio and reduce it over coming decades. Financial markets will not provide advance warning of when such a plan is required to avert negative market reactions. At present the United States appears to have unlimited access to world markets at low interest rates But this market confidence could evaporate quickly, possibly because of developments elsewhere around the world and beyond our control. The sooner we enact such a plan, the better the prospects for our economy. There is no valid argument for delay.
Putting the budget on a sustainable path and reducing the debt/GDP ratio will require bipartisan agreement on entitlement reform that slows the growth of health care spending and puts Social Security on a firm foundation for future retirees. It will also require raising additional revenue through comprehensive tax reform. I have spent much of the last several years participating in two high-profile bipartisan groups that crafted plans to grow the economy and stabilize the debt—the Simpson-Bowles Commission and the Domenici-Rivlin Task Force. That experience convinced me that bipartisan problemsolving is possible when participants are willing to confront facts objectively, listen to each other, and seek common ground. An updated version of Domenici-Rivlin is attached (For the attachment, download the testimony. -Ed.).
Although detailed recommendations of the two groups differed, each involved three elements: (1) restraining discretionary spending; (2) reducing the growth of Medicare, Medicaid and stabilizing Social Security: and (3) comprehensive tax reform to cut spending in the tax code and raise additional revenue. Indeed, the arithmetic of the problem makes all three elements necessary. More than enough discretionary spending restraint has already been accomplished. The task remaining is to find agreement on an acceptable set of entitlement and tax reforms.
Why Sequestration is Bad Policy and Should be Replaced
Sequestration is a mindless across-the-board cut designed to be such bad policy that it would never happen, and they should not be continued. Cutting discretionary spending will add to the restraining effect that the declining federal deficit is already having on the still-slow recovery, will reduce job creation, and will possibly even trigger a new recession. Domestic discretionary spending has already been reduced by more than the two bipartisan groups recommended and is scheduled to fall to historic lows. Such low levels of domestic discretionary spending endanger the government's ability to perform essential functions that the public wants and needs. Indeed, higher investment in science, education, and modern infrastructure is needed to foster future productivity and job creation. While savings in defense can be made over time, they should result from serious planning, not meat-ax proportional cuts regardless of priorities. Since discretionary spending is not a driver of future deficits, cutting it contributes next to nothing to slowing the projected increases in spending that will push the debt/GDP ratio upward over the next several decades. Sequestration weakens both the economy and the government's ability to do its job. It should be replaced by gradually phased in tax and entitlement reforms that will stabilize the debt. I am concerned that Chairman Ryan's budget blueprint released on Tuesday continues to target nondefense discretionary spending, cutting it substantially more than the current sequester.
Why Entitlement Reforms are Necessary Now
Over the coming decades federal spending is projected to increase faster than the economy can grow, because a tsunami of older citizens are reaching retirement age and living longer than their predecessors, and spending for health care, disproportionately consumed by seniors, is likely to rise faster than other spending. This combination of demographics and health spending growth makes Medicare, Medicaid and Social Security drivers of unsustainable federal spending in future years. Social Security should be the easiest to reform, because it involves only money—without the complexity of health care delivery—and requires fairly minor, well understood tweaks in benefits and revenue to regain fully funded status. Social Security is an extremely successful program, which keeps millions of seniors from destitution in old age. Workers now in the labor force need to know that Social Security will be there for them when they retire or if they become disabled and that they can plan their retirement around it. The Domenici-Rivlin Task Force recommended indexing benefits to longevity (rather than further increasing the age of full retirement beyond 67); adding a bend point in computing initial benefits to reduce payments to high income people, switching to a chained CPI for indexing benefits, while protecting the lowest income and most aged recipients; and raising the cap on wages faster than under current law. Taken together, the Domenici-Rivlin Social Security recommendations increased benefits for low-income seniors while reducing those for affluent beneficiaries in order to achieve solvency.
Enactment of such a bipartisan package now would reassure current workers, demonstrate that our democracy works to solve problems before they reach crisis proportions, and contribute to stabilizing the debt. Fixing Social Security would send a strong signal to the financial markets that the nation was addressing its long-term budget problem, and, because its effects would be felt in future years, it would not threaten the current economic recovery.
Some have suggesting waiting until the Social Security Trust Fund runs out of money around 2033 before instituting reforms. This would be shortsighted and irresponsible. Workers who will be retiring in 2033 are already in their mid-forties. We owe it to them to fix Social Security now, so that they can plan their retirement with the confidence that their Social Security benefits will be there. This motivation for early action is even more important than the modest contribution that a Social Security fix will make to stabilizing the debt.
Medicare raises more complex issues than Social Security, but bipartisan compromise to slow Medicare growth without depriving seniors of needed health care is also possible. Indeed, sensible reforms of the Medicare reimbursement regime could lead the way to slowing the unsustainable growth of spending in the whole healthcare sector, relieving pressure on state, local, business, and family budgets¡Xnot just federal programs.
American health care is expensive compared to that in other developed nations and its quality is uneven. Part of the reason is that so much health care is compensated on a feefor- service basis, which encourages providers to deliver more services, but does not reward quality, efficiency, or positive health outcomes. Medicare is the most important payer of health providers. It should be possible to shift the Medicare reimbursement regime toward bundled payments for episodes of care, reimbursement of Accountable Care Organizations, and capitated payments to integrated health systems—all designed to reward delivery of effective care, meeting quality standards, and keeping beneficiaries healthy.
There are two possible approaches to improving the performance of health providers along these lines. One is to change incentives in traditional Medicare by regulation. The other is to foster competition among health plans on a regulated exchange or market place. In the original Domenici-Rivlin plan we recommended doing both¡Ximproving traditional Medicare by regulation, but also introducing the option of competition among integrated health plans in a premium support model. Subsequent analysis has suggested that it may be possible to introduce the competitive element more smoothly by ensuring that Medicare Advantage plans compete in a more transparent market place with effective incentives to improve health outcomes and lower costs. The recent slowing of healthcare spending suggests that it may be possible to keep the increase in spending close to the rate of growth of GDP without enforcing a cap.
Changing health care reimbursement and delivery practice will take time. That is why it must start soon if it is to make the necessary future contribution to stabilizing and eventually reducing the debt/GDP ratio.
Why Tax Reform Must Raise Additional Revenue
Even extremely successful efforts to deliver health care more efficiently and slow the growth of health spending will not make it possible to absorb the coming avalanche of seniors without additional revenues. Benefits for older people are already crowding out investment in knowledge and skills of young people and modernization of infrastructure needed to increase future productivity.
Our tax code contains enormous amounts of spending that is poorly designed for its ostensible purpose, disproportionately benefits upper-income people, and narrows the tax base. Reducing spending in the tax code could raise additional revenue at lower rates and make the tax system more progressive at the same time. Both Simpson-Bowles and Domenici-Rivlin recommended drastic comprehensive reform of both the individual and corporate income taxes to broaden the base and lower the rates.
The Domenici-Rivlin plan did away with almost all deductions, exclusions and other special provisions. It had two individual income tax rates—15 and 28 percent—gradually phased out the exclusion of employer-paid health insurance from taxable income, taxed capital and earned income at the same rates, converted the home mortgage and charitable deductions to credits at the 15 percent rate, and retained earned income and child credits. The result was a fairer, simpler, more pro-growth tax system that increased progressivity and raised more revenue. Such a drastic revamping of our current code would have multiple opponents, but might be easier to accomplish than a more incremental approach—which could have as many losers but no winners, without nearly as much of the potential benefit for the economy.
Importance of Both Growth and Debt Stabilization
Those of us who advocate near-term action to curb future debt increases have been called “debt scolds” and “deficit hawks.” We have been unfairly accused of favoring immediate austerity and not understanding the need for accelerating job growth and improving productivity. But pursuing the double goal of growth and debt stabilization is possible, provided we get the timing right. We should not have austerity now, but we should take immediate steps to slow the growth of entitlement spending in the future and raise more revenue through a more progressive and pro-growth tax system.
The Hill | March 18, 2013
Robert Zoellick, the past head of the World Bank, is fond of telling the story of how the Foreign Minister of Australia said to him a few months ago: “America is one debt deal away from leading the world out of its economic doldrums.”
He is right.
Dangerously, some observers believe the country has completed its work on deficit reduction. Despite some improvements, the debt will continue to rise as a share of our economy over the long-term. This fact continues to present a serious economic danger for the United States.
We know the problem. It is that our present rate of accumulating debt due to our historically large deficits will inevitably lead to a fiscal crisis.
Any debt reduction plan needs to primarily focus on changes to those programs that are driving the problem. These of course are the major entitlement accounts, Medicare, Medicaid and Social Security. There is also a need for comprehensive tax reform.
Rising healthcare costs and an aging population are the central drivers of our rising debt trajectory. We cannot continue to let healthcare costs rise faster than our national income.
Smart entitlement reforms need to involve adjustments that grab hold in five years, ten years and fifteen years so that they make these programs sustainable and affordable not only in the next few years, but in the long term.
Debt reduction done right can actually strengthen the economy down the road. A recent analysis from the Congressional Budget Office found that a $2 trillion reduction in primary deficits could boost GNP by nearly 1 percent over 10 years.
The deal that can avoid this crisis is apparent and very doable.
The goal of deficit reduction must be to put the debt on a clear downward path as a share of the economy, this decade and over the long-term. Achieving that goal will require reducing the debt to below 70 percent of the size of the economy by 2023.
The good news is that the president and Congress have accomplished a hard $2.5 trillion-plus of debt reduction already.
Our fiscal problems will self-correct if our government reduces our deficits and debt over the next 10 years by at least an additional $2.4 trillion. Those reforms should also increase in their effectiveness beyond this 10-year window.
A sum of $2.4 trillion may seem like a great deal of money. But when one considers that it is off a base of approximately $40 trillion of spending over the next 10 years, it is definitely manageable.
What is the deal we need? It should obviously start with an agreement to replace the sequester with targeted and effective changes to federal fiscal policy.
The president has proposed a specific and significant action: changing the manner in which the federal cost of living adjustment (COLA) is calculated to make it more accurate.
In their latest framework, former Sen. Alan Simpson and former chief of staff to President Clinton, Erskine Bowles, have put forward $600 billion as a credible and bipartisan target for health savings over 10 years.
Of course, there is also the proposal for approximately $200 to $300 billion in entitlement savings that was reportedly agreed to between the president and the Speaker in the summer of 2011.
Take any permutation of these proposals, add in the CPI change proposed by the president known as “chained CPI,” and throw in a long-term adjustment in the eligibility age for Medicare and Social Security. You immediately have the spending side of a very strong package.
Comprehensive tax reform is also necessary. Reforming the tax code to lower rates and broaden the tax base will be both good for economy and our fiscal health.
There are at least two other crucial points that the deal must include. First, it must be based off an agreement that fixes the size of the government as a percent of GDP. The federal government since the end of World War II through 2007 has been approximately 19.8 percent of GDP. In the last few years it has grown to over 23.5 percent and is still headed up.
Some of this growth is inevitable due to the retirement of the baby boomer generation, which is doubling the number of retirees in our society. Agreeing to fix the size of the government to a percent of the GDP that is closer to its historical range is essential.
Secondly, all entitlement changes that reduce projected spending need to be locked in with a procedural provision that keeps later Congresses from arbitrarily rescinding them.
The opportunity for the deal is sitting there. It is not rocket science. It is very doable. It should be done so that a predictable fiscal crisis can be muted and our nation can move on.
Letter from 160 Economists to President and Congressional Leadership Calling for Comprehensive Deficit Reduction
USA Today | March 13, 2013
Just as Republicans and Democrats are poised for the next battle to bring down deficits through their budget proposals, a new argument is emerging about the impact of the sequestration. The New York Times, among others, is reporting that these forced cuts, combined with other negotiated savings, get us close to the deficit reduction we need — $4 trillion over the next decade. This is dangerously misleading, whether or not sequestration remains intact in budget negotiations.
The truth is we are not even close to addressing the real drivers of our fiscal cancer, and we're running out of time. Let's set the record straight on the myths standing in the way of budget sanity:
Reductions in the projected 10-year deficit matter. That's the wrong target. Those figures are easily and often manipulated. Assumptions about the future and technical details drive the numbers as much as real change in government programs. The measure of progress less prone to manipulation is the percentage of public debt to GDP.
Most economists will tell you that if we want to avoid economic harm and damage to our ability to respond to foreign crises or domestic catastrophes, we should stabilize public debt at about 60% of gross domestic product. Back in 2010, before any of the deficit reduction deals took place, the Congressional Budget Office (CBO) projected under its more realistic set of assumptions that public debt to GDP would be 100% by 2023. Based on reasonable assumptions, budget agreements since then have resulted in an estimated debt to GDP no lower than 80% in 2023 and rising thereafter. That's progress, but to get moving in the right direction, we need to add $1.5 trillion or so to the $4 trillion in deficit cuts so far.
Cuts to our deficit are coming overwhelmingly from spending, not tax increases. That's exaggerated. The Times asserts that cuts to date represent $4 in spending reductions to every $1 in new revenue. But that calculation conveniently excludes the anticipated costs of the Affordable Care Act.
At the time of enactment, the congressional budget watchdog said the health law would increase spending by $382 billion over 10 years and raise taxes by $525 billion. Based on these estimates, the law would decrease the deficit, so why not include these spending and revenue numbers in the ratio?
If you do, we get a ratio of spending cuts to revenue increases of less than 2 to 1. Quite a change. Even that could be too optimistic. The chief actuary of Medicare reports that over 75 years, projected savings from health reform might come in short $10 trillion.
Federal budget cuts we've made are improving the long term budget outlook. That's flat out wrong. We have not made significant cuts to the part of the budget that is responsible for our mounting fiscal problems. As of today, 64% of our federal budget is mandatory spending, meaning that it is on autopilot rather than voted on by Congress. By 2023, it is projected to be 76% of the budget. Medicare, Medicaid and Social Security account for most mandatory spending and, along with other health care costs, are the real drivers behind our growing long-term debt. Our aging population will also help ensure that these budget items gobble up more and more federal money.
Yet, except for revenue raised in the recent "fiscal cliff" deal, our reduction has come largely from cuts in discretionary spending. This is money that goes to our national defense as well as to investments in our future, such as education, transportation, infrastructure and research. Without sufficiently funding these needs, America will not grow as fast and will become less competitive over time. In 2023, discretionary spending will be 5.5% of the economy, split roughly between defense and non-defense programs. That's a huge drop from today's 7.7%.
The fiscal proposal from House budget Chairman Paul Ryan properly recognizes that spending on mandatory programs, including Medicare and Medicaid, needs to be reduced. However, it fails to provide the additional revenue needed to avoid more discretionary spending cuts. While Senate budget Chair Patty Murray has yet to release her fiscal plan, it will likely include significantly more revenue, but it is unclear how much in reductions to programs like Medicare, Medicaid and Social Security will be included.
Elected officials must recognize that slashing discretionary spending doesn't treat our fiscal disease. Our elected officials should tell the American people the truth about our fiscal condition and its causes.
Until we fundamentally reform our tax code in a way that brings in more revenue, address demographic trends that threaten our social insurance system, and rein in heath care, we can't claim to have achieved deficit reduction in an honest and meaningful way. Meanwhile, the clock is against us: 2014 is an election year for Congress, and a "grand bargain" will be off the table for political reasons. The presidential election cycle kicks in right after. Tough choices will get delayed further.
All of which means that 2013 is the time to act. There is a critical opportunity to speak truth, think big and act bold. Right now, we are getting the opposite from our elected officials.