Other CRFB Papers
Ed Lorenzen Testimony Before the House Ways and Means Committee's Subcommittee on Social Security: Chained CPI
The Hill | April 10, 2013
When it comes to the federal budget standoff, those looking for a breakthrough are caught between a rock and a hard place. One side offers all cuts and no revenues to reach a balanced budget. The other offers tax increases with some spending cuts to appear even handed, but never actually moves the nation’s finances from red to black.
Uncertainty over the ultimate solution has businesses keeping capital on the sidelines, waiting to see what the playing field will look like in the months ahead. It is time to get a big deal to fix the nation’s debt and deficit problems and get everyone back in the game.
Dante once wrote, “The hottest places in hell are reserved for those who, in times of great moral crisis, maintain their neutrality.” It is time to turn up the heat on those who remain in their corners without a passable solution.
Washington leaders have gotten quite good at taking the easy way out. The time to say goodbye to short-term fixes is long overdue. President Obama’s outreach efforts on Capitol Hill are a good start, but he has remained aloof for far too long. House Speaker John Boehner must lead his conference, rather than settling for lockstep opposition.
Every kick sends an opportunity to get serious about the nation’s debt and deficit a few months into the future, to the detriment of the economy’s long-term prosperity. Market forecasters Macroeconomic Advisors predict that the threat of a default on the nation’s credit card could reduce GDP by one half of a percentage point. That sort of self-inflicted wound could be fatal to a sluggish economy, and it is incumbent upon everyone to make sure it doesn’t happen. It will require the hard work and will of the White House, both chambers in Congress, and most importantly the collective voice of the American people.
Since almost everyone acknowledges that there is a problem, the next step is to evaluate the potential solutions. Rather than applying yet another half-trillion dollar Band Aid as Washington has done since 2011, legislators should make the next attempt mean something and make a sizeable dent in the nation’s deficit.
So far, participants in the discussion have fallen into three general groups: snake oil peddlers, wafflers, and true patriots.
The peddlers try to convince the public that this problem can be solved without revenues or changes to entitlement programs. It’s certainly possible to do that on a spreadsheet, but the approach is politically untenable. People who insist on a plan that has no hope of passage are not a contributing to the discussion. They need to pipe down or be shunned into silence.
Wafflers agree that something must be done, but steer clear of presenting or advocating an honest solution. These members should be encouraged to go all the way and embrace a plan. If they are unwilling or unable to do that, they should move on and give someone else the chance.
Finally, our true patriots should be commended for getting out on the front lines and proposing a solution. The answer doesn’t have to be loved by everyone. Given that it will require hard choices and shared sacrifice from all, it may not be popular. That’s why groups like Fix the Debt stand ready to support those that are willing to make the tough choices necessary to get the nation’s finances back on track.
This is the president’s contest to lose. Approaching fiscal matters a half a trillion dollars at a time ensures that this will be all anyone talks about, crowding out second term priorities such as immigration and gun legislation. If he wants to start ensuring his legacy, the president should kick his outreach efforts into overdrive. Speaker Boehner should use this opportunity to show that his conference can do more than say “no,” that it is open to constructive ideas that truly solve common problems.
The best part about the deal will be the dawn. As the cloud of uncertainty surrounding the nation’s fiscal future dissipates, Americans will once again be able to see the bright lights of our nation’s economic strengths. America can continue to be a beacon of hope and opportunity, but only if we act.
Brookings | April 4, 2013
Throughout our population, experts and non-experts alike, the verdict is nearly unanimous. The U.S. tax code is a hopelessly complex mess, antithetical to growth, and is crammed with conflicting incentives, which screams for reform. But there is little agreement on how to repair it. My preferences are necessary, just, and ordained in heaven. Your preferences are unnecessary, unjust and counter-productive.
Tax reform is the most difficult and complicated piece in the U.S. budget battle. It is integral to both the Republican House and the Democratic Senate budgets. As in every budget item, there is a conservative vs. liberal confrontation, but tax reform is loaded with more confusing detail, and it adds extra layers of difficulty to the budget debate.
Some liberal and conservative inclinations tend to intersect when the conversation focuses on elimination of tax preferences. But, both sides have their favorite exceptions. Democrats love tax expenditures for the less affluent. Republicans love the preferences they suspect will stimulate growth.
Additionally, there are wide divergences about how the deficit savings from eliminated tax preferences should be used. Republicans like deficit-neutral solutions which invest all savings in lowering rates for growth. Democrats would like to spend those savings, either for compassionate spending or for Keynesian growth stimulus.
More real difficulties arise when tax preferences, individual and corporate, are considered one at a time. This is where powerful lobbying interests intervene. These are the interests that finance campaigns and parties. Regional factors arise, too. The normal political “rules” are often overridden. In some committee votes, it is hard to distinguish Democrats from Republicans.
Three of the four largest individual preferences are interesting examples. The first is the homeowners’ preference, which allows deductions for mortgage interest and real estate taxes. Homeowners’ enthusiasm for those benefits is exceeded, exponentially, by the real estate lobby, including real estate and mortgage firms, sun-belt governors, etc. The lobby, with bi-partisan support, easily defended its prize in the 1986 Tax Reform Act, and again, more easily, in President Bush’s Commission on Tax Reform in 2005.
The other two large preferences are charitable deductions and medical insurance (untaxed income for employees, and a deduction for corporations). Taking on the Little Sisters of the Poor, the big universities, or the United Fund is a fool’s errand. And standing up to powerful unions and corporations is not much easier.
Because these three big preferences, and others, are so well defended, many observers have suggested that placing a limitation on total individual preferences, a la Martin Feldstein, is a better approach. That strategy offers some hope, but it’s no piece of cake, either.
Reforming individual preferences is tough, but corporate preferences are, in some ways, even more perplexing. The last tax reform was achieved, at least partly, by shifting individual tax burdens on to corporations. That was okay in 1986. Today the common wisdom in both parties, and among knowledgeable observers, is that the U.S. corporate income tax rate must be reduced for reasons of international competition.
The task would be easier if individual and corporate income tax reform could be considered separately. Here again, there is a problem. Much of American business is transacted by small companies taxed as individuals. Separating these companies from their corporate competitors may not be practical.
Business operations are scattered over the U.S. supply chains extend everywhere. The tentacles of strong lobbying organizations also extend everywhere. Our system of territorial representation in Congress makes nearly every member a special defender of certain companies, industries, or unions. This factor tends to upset tax reform strategies. Sub-contracts loom large. Majorities appear, and disappear, unexpectedly.
Some budget observers believe that tax reform could be the key to long term fiscal compromise. Instead, some of these extra dimensions could make it the enemy. The devil is always in the details. Tax reform teems with details. Its politics are sometimes treacherous, even for seasoned politicians.
On the positive side, the tax committees of both houses are primed and ready to move forward. Chairman Camp and Baucus, while not exactly political soul-mates, have some similar ideas, a good business relationship, and regular communications. Both parties seem to want to try it.
Speaker Boehner has assigned tax reform the precious number of H.R. 1. If President Obama can extend his Congressional charm offensive, tax reform will never be the odds-makers’ favorite, but it is not out of the question for 2013.
Los Angeles Times | April 2, 2013
In his March 22 blog post criticizing proposals to switch from the consumer price index to "chained CPI" to determine cost-of-living adjustments for Social Security beneficiaries and other items in the federal budget, Michael Hiltzik claimed that there were "no grounds" for the statement made in a recent paper from the Moment of Truth Project ("Measuring Up, The Case for Chained CPI") that the chained CPI provides a more accurate measure of inflation than the measure currently used.
In fact, experts across the ideological spectrum agree that the chained CPI is indeed more accurate. In his 2005 book "The Plot Against Social Security," Hiltzik listed various proposals for reforming Social Security, among them chained CPI. He wrote, "Many economists maintain that CPI consistently overstates inflation ... because it doesn't account for so-called substitution effects." Hiltzik doesn't explicitly endorse the proposal, but this is certainly a far cry from his objection that there are "no grounds" for the claim that chained CPI is a more accurate measure of inflation.
Advocates for using chained CPI to more accurately index government programs to inflation include Austan Goolsbee, who served as chairman of the president's Council of Economic Advisors under President Obama, and Michael Boskin, who held the same position under the President George H.W. Bush. Their view is shared by the overwhelming majority of economists. A report by the nonpartisan Congressional Budget Office stated that the chained CPI "provides an unbiased estimate of changes in the cost of living from one month to the next." Two of the most respected and prominent defenders of Social Security, the late Sen. Daniel Patrick Moynihan (D-N.Y.) and the late Robert Ball, the longest-serving Social Security commissioner, who founded the National Academy of Social Insurance, both supported the use of chained CPI to more accurately achieve the goal of providing inflation protection for seniors and disabled beneficiaries.
The Bureau of Labor Statistics has noted the shortcomings of the current inflation indexing and specifically designed the chained CPI to be a closer approximation to a cost-of-living index. The bureau has developed and refined the chained CPI over more than a decade.
The government indexes benefit programs such as Social Security as well as provisions in the tax code to ensure they keep pace with inflation. Using a more accurate measure of inflation is not a benefit cut, but rather ensures that the benefits increase by the proper amount to achieve the desired policy goal. This change does not single out Social Security, as Hiltzik implies, but would apply to provisions throughout the federal budget. Social Security accounts for slightly more than one-third of the $390 billion in total savings over the next decade that would result from switching to chained CPI, with a similar amount of savings from revenue and the remainder from other government programs indexed to inflation along with interest savings.
To the extent that the overpayments under the current formula provide important help to certain low-income and elderly individuals, a switch to the chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations rather than providing higher-than-justified inflation adjustments for everyone. Every significant bipartisan deficit reduction effort, including the Simpson-Bowles plan, the Domenici-Rivlin plan and the negotiations between Obama and House Speaker John Boehner (R-Ohio) has proposed using chained CPI to index spending programs and the tax code, with a portion of the savings used to provide enhancements for low-income, elderly and other vulnerable populations.
Addressing our fiscal challenges will require many tough choices and policy changes, but the chained CPI represents neither. Eliminating the unjustified increases in spending and reductions in revenue that have resulted from using an inaccurate measure of inflation should be at the top of the list for any deficit reduction plan.
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.