Other CRFB Papers

Op-Ed: Finally, Good News On The National Debt

AOL News | November 11, 2010

It's not every day that the country receives some encouraging news on the deficit and debt front. But Wednesday just so happened to be one of those days.

The co-chairs of the White House's National Commission on Fiscal Responsibility and Reform, former White House Chief of Staff Erskine Bowles and former Sen. Alan Simpson, R-Wyo., released their own proposal for how to get the deficit and debt to manageable levels. While this proposal is not the final report of the commission, it reflects the first step in the commission's task of trying to forge a consensus among a minimum of 14 of the 18 members.

The proposal in a nutshell? Quite impressive.

With the population aging, health care costs growing faster than the economy and a seemingly ever-present imbalance between federal spending and revenues, our nation's debt is set to truly erupt in coming decades.

So how do the fiscal commission's co-chairs get us back to a sustainable course? Well, they take a hard look at every area of the budget.

On spending, the proposal cuts discretionary spending over the next few years and then limits its growth to inflation. Mandatory spending is pared back through changes to civil service and military retirement, farm subsidies and further reductions and controls on health care costs, among others. The proposal also advocates for serious reform of our outdated and inefficient tax system, calling for lower rates, fewer tax credits and exemptions, a simpler code and improved compliance.

The proposal also restores Social Security's solvency, for the sake of ensuring that the program will be there for future generations who will need to rely on it, not for the sake of deficit reduction.

Will every person agree with every proposal in the plan? Of course not. But just a brief reminder -- deficit reduction is hard. If the plan were filled with things we love, we'd be making the deficit worse, not better. This is the fiscal reality.

Reforming our fiscal path is about making our economy stronger down the road, it's about making government work more efficiently, it's about ensuring that social safety nets will still be around for the most vulnerable in society, and it's about tackling our debts before they tackle us. Most importantly, it's about keeping America's promise to bestow better opportunities to future generations.

OK, OK. So with all this praise, there's also got to be major downsides as well, right?

Well, reasonable people can disagree with some of the specific recommendations, and some may call for more spending cuts or more tax increases. But the fact remains that when viewed in its entirety, it's a giant step in the right direction.

As for all the attacks -- that's to be expected. But the co-chairs' proposal is a great starting point for an adult conversation on how to fix the budget, and we eagerly await expanding these conversations into a national discussion on how to stabilize and reduce our national debt.

Maya MacGuineas is president of the Committee for a Responsible Federal Budget.

Op-Ed: Dear Speaker Boehner

CNN Money | November 3, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Welcome to the job! Uh, I think. Of course, Republicans must be thrilled to have taken back the House and all.

But let's get real, at times like these, being in charge isn't all that fun. And if you do it right, it will be really tough. So assuming you don't want to call for a recount ...

My advice comes from someone terribly worried about the fiscal direction of the country. I don't care which party holds the majority. Consult your political advisers for the other side of what I am about to suggest. (The deficit debate: Game on)

Fixing the economy: We are in real bind here. The truth is that things probably won't get all that much better anytime soon.

So when it comes to talking about where we are headed, don't over-promise: Manage expectations.

 

After years of overspending at the household level, and decades of overpromising at the government level, we have a lot of digging out to do. At the same time, the economy continues to face many vulnerable spots. A nuanced response is in order.

In the short run, the economy needs more stimulus. Sorry, I know that word doesn't travel well in your circles, so call it what you want. Business investment. A downpayment on growth. Innovation policy. Whatever.

GDP is well below potential and something will have to fill the gap.

Focusing on incentives to promote business spending and investment would probably dovetail best with your agenda.

But while stimulus spending is politically desirable because it comes from borrowed money -- so, for instance, you get to cut taxes without offsetting the costs -- that borrowing must only be temporary. This is not an excuse for permanent, deficit-financed tax cuts.

Speaking of which, I realize I'm not going to convince anybody to stop pushing to make the Bush tax cuts permanent, but just between friends, we all know that these tax cuts are not the best way to stimulate the economy, nor are they the centerpiece of any real effort at fundamental reform in the longer run.

If you do proceed with making some or all of the tax cuts permanent, it will only make fixing the deficit and debt problem all the more difficult. And you can't fix the economy if you don't fix the debt problem.

That brings us to controlling government spending.

Reforming spending for real: No question about it --government spending is projected to grow out of control. As soon as the economic recovery takes hold, the focus has to be on bringing spending back down to more manageable levels.

Unfortunately, the solutions offered on the campaign trail won't do it. The heart of the problem is entitlement spending, and the Pledge to America only mentions entitlements twice. TWICE. Come on now. I fear you will have a tough time fixing government spending if you are scared to even discuss it.

Paul Ryan, your colleague from Wisconsin, has been a real hero on this topic, laying out his ideas for long-term entitlement reform. But one of the most frustrating things during the election was watching members of both parties run away from these ideas without introducing alternatives of their own.

If politicians are too scared to talk about how to fix Social Security, Medicare, and Medicaid, we are truly headed for trouble. It is time to drop the focus on things like earmarks and repealing TARP and focus on where the real money is.

I know, I know, no new taxes. But how? I have no problem with the concept of not raising taxes. I personally prefer a smaller government (though I'd make it more progressive, especially on the spending side.) But if you don't want to raise taxes, and you don't want to march us towards a nasty fiscal crisis, I am hard pressed to see how you get there.

I, along with a colleague, Bill Galston from the Brookings Institution, offered a plan to fix the budget over the next decade by first going after spending and then filling in the gap by raising revenue. Let me just say, the more specific you get, the harder it gets to find those savings.

We need a plan on how to go after spending. But until someone develops a viable one, it is just irresponsible to take taxes off the table.

Time to get specific: You have made a number of courageous and important comments recently. You suggested that we should be open to raising the retirement age, reforming tax expenditures, and only temporarily extending the tax cuts. We need more of this kind of honesty and specificity.

As I see it, the two most likely scenarios are absolute fiscal gridlock and showdowns early next year when Congress has to prepare a 2012 budget and raise the debt ceiling. (While I have you: You should tie an increase in the ceiling to agreement on a reasonable debt reduction plan.)

By the way, this will end badly when financial markets turn against us, which they certainly will if we don't put a long-term plan in place.

The good news is there's an alternative: We could be pursue bipartisan cooperation and put in place a reasonable budget plan that is phased in gradually. It would involve freezing discretionary spending, including defense, reforming Social Security, slowing the rise in health care costs and dramatically reducing tax expenditures.

Voters are ready for it. They want the national budget fixed. They said it loud and clear during the election.

Op-Ed: Britain's Austerity: 4 Lessons For Washington

CNN Money | October 25, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

The Brits sure did mean it when they promised a tough fiscal austerity plan. Man, the difference between our two governments' ability to act when necessary is depressing. It sure would be nice to have a parliamentary system at a time like this.

The U.K. coalition government last week spelled out spending reductions that average 19% across all agencies over 4 years. That's 500,000 public-sector jobs. Little is spared. Housing benefits and education funds will be cut. Defense will be pared 8%. The cuts go on.

It remains to be seen whether this aggressive plan will be enacted as outlined, and how the U.K. economy will respond. But there are already a number of lessons for Washington.

Too quick a pace for U.S.
 
Prime Minster David Cameron's plan is structured to aggressively reduce the deficit over the next four years.

That schedule jibes with the time span for the U.K. parliament.

But given the state of the world economy and the need to balance stimulus and deficit reduction, such a short-term timeframe is too aggressive for the United States to follow. And we are lucky that, thanks to the dollar's "safe haven" status, we don't have to follow a tight time frame.

In fact, Britain's timeline highlights a flaw in President Obama's current approach: The White House fiscal commission is laboring under the goal of trying to eliminate the primary deficit by 2015. That goal too is too shortsighted. (Deficit cutting: The first cut is the deepest)

A more sensible plan would be to set a medium-term fiscal target to be achieved over about 10 years.

In the first few years we should focus more on "fiscally responsible stimulus," while also adopting a specific deficit reduction plan that can be phased in gradually as the economy recovers.

This is not the Krugmanesque model of giving lip service to the need for future budget changes with all the emphasis on stimulus now. Instead, we need a multi-year legislative agenda that includes specific stimulative and deficit-reducing policies.

The savings should kick in when the economy is strong enough. But Congress needs to commit to budget cuts in law as quickly as possibly -- or the markets just won't believe us.

On target: Go after spending
 
Thumbs up to the Cameron team for its aggressive tack on spending. Past experiences show that spending cuts tend to be better than tax increases for trimming deficits while generating strong economic performance.

We'll need to take a page from Britain here. The U.K. reductions in public sector employment are a useful model -- and we should emphasize wage freezes and compensation restructuring.

And while we talk timidly about freezing spending, we will need to think in terms of cuts as well.

The British government is also right to means-test where possible. For example, its decision to scale back the universal child credit for those on the high-end of the income scale is an excellent model for many of our universal programs, including Social Security and Medicare.

Footnote: Refreshingly, the Brits show none of the foolishness we do about promising to make changes without touching taxes. Their model suggests a sensible sequence: Cut spending first, then raise taxes as needed to close the remaining gap.

Tax pitfalls
 
I argue over and over that tax increases will have to be part of the budget solution. Still, I share many of the fears of the anti-tax crowd: A value-added consumption tax could become a money machine and temporary taxes will inevitably be made permanent.

And, yup, these fears are borne out in the Britain austerity plan.

Once a VAT is in place, the rates keep getting ratcheted up, as the Brits are doing now. If we do end up with a consumption tax in this country, we need to find a way not to turn it into an AMT.

Similarly, there's a good lesson for Congress in the Brits' plan to make their temporary bank tax permanent.

I support a temporary consumption tax to help with stimulus and close the fiscal gap. (Beware the VAT: Why the consumption tax is possible)

But any temporary tax needs to hit a broad swath of taxpayers so there's a big constituency rooting for its demise as soon as the fiscal ship is righted.

U.S. lawmakers need to focus on the big picture: Systemic budget reforms and a fundamental restructuring of the tax system.

Dramatically reducing tax expenditures and reforming the corporate tax code would serve as an excellent first step in enhancing efficiency and competitiveness while increasing revenues.

Political courage: If only ...
 
Finally, Cameron has shown real leadership in indicating that fixing the budget situation is worth risking losing office over. He is right. Would that a politician or two here in Washington be willing to show that kind of courage. 

Op-Ed: How To Avoid A Debt Doomsday

CNN Money | October 17, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Here is a scary question: What could trigger a full-blown fiscal crisis in the United States?
 
OK, now breathe. It is not at all clear that we will have one. There is the highly desirable possibility that policymakers will act preemptively and gradually phase in major entitlement reforms, spending cuts and tax reform.
 
You know the old Winston Churchill saying that Americans can always be depended on to do the right thing -- after exhausting all other alternatives. Well, there's still time.
 
And then there is the scenario one step removed from a full crisis: a Japan-style "lost decade" situation in which the economy muddles along. Job growth is lackluster for an extended period. Low interest rates allow Washington to keep borrowing. And the country gets stuck in an ineffective borrow and stimulate cycle with little to show for it other than more debt.
 
If that muddle-along scenario is the frog in the boiling water, then a full-blown fiscal crisis is the frog hopping along the interstate until he abruptly becomes road kill.
 
A fiscal crisis would not be pretty. Creditors could lose faith and pull their money from the United States. Interest rates would spike, causing interest payments to grow. The government would be forced to borrow more, which would push rates even higher. The endgame would be a vicious debt spiral and another recession.
 
Yes, rates are now extremely low. But that's because, as one of my colleagues likes to say, "We are the best looking horse in the glue factory." It's not because anyone looks at our economy as the next great investment story. Because of that, things could change on a dime. (Take the CNNMoney debt quiz.)
 
What could trigger a worst-case scenario? Even if it's not likely to happen anytime soon, it's important to understand the possibilities.
 
Sovereign debt contagion: We have already seen how quickly markets can turn against overly indebted countries. While the United States is not likely to become Greece in the immediate future, the parallels are too similar for comfort.
 
The fact is debt investors eventually grow intolerant of countries that don't have plans to improve their fiscal condition.
 
And markets may eventually turn against the United States. If that happens, the situation could deteriorate very quickly. No money manager will want to be the last one invested in a place from which other investors are pulling their capital.
 
Ticking time bombs in the budget: The government runs all sorts of potentially risky and costly programs.
The Pension Benefit Guarantee Corp., Fannie Mae and Freddie Mac and the Federal Deposit Insurance Corp. are some examples. These agencies embody trillions of dollars in government obligations, and the full extent of the exposure is not well-known.
 
The dramatic deterioration in the balance sheet of any of these institutions could lead to a chain of events where markets conclude that the government is not as sound as they had previously believed.
 
The White House's fiscal commission: President Obama has shifted the responsibility for coming up with a deficit reduction plan to his bipartisan commission.
 
But there is no guarantee that Congress will do anything other than glance at the commission's recommendations and tuck them away. This could be the confirmation that U.S.-debt watchers fear -- that the political system is incapable of dealing with the country's fiscal challenges.
 

As the chairman of Standard & Poor's sovereign rating committee recently warned, it is critical that policymakers consider the recommendations of the commission or it could jeopardize our AAA credit rating.

The states: If the fiscal situation is bad at the federal level, it's even worse for many states. A state or even a local government attempting to default on its legal obligations could be enough to roil credit markets.

Just a few years back it would have been hard to imagine that talk of a full-blown U.S. fiscal crisis would be anything other than fear mongering. Now, however, these scenarios are starting to feel alarmingly possible. Let's hope Churchill was right. 

 

Op-Ed: Dear Congress: Don't Blow It On Bush Tax Cuts

CNN Money | October 12, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Ahem. Excuse me, Congress? I don't mean to nag, but there are 58 more working days until the Bush tax cuts expire. Trust me, I get it: I always waited to cram until the night before the test. Still, shouldn't you get a move on?
 
I know there are a lot of possible combinations of tax extensions floating around. To help move things along, here are a number of options, ranked in order from best to worst.
 
Bingo! Fundamental tax reform
By far the best option would be an overhaul of the tax code.
 
No one needs to be convinced that our current system is a mess. It is outdated, overly complex, a drag on economic growth, and as leaky as an old fisherman's dingy.
 
There is really nothing to love there.
 
Reforms with the most potential:
 
  • close many of the more than $1 trillion in loopholes that permeate the code;
  • modernize the corporate income tax so we don't stifle business with one of the highest marginal tax rates in the world;
  • shift away from taxing income toward taxing consumption;
  • and replace some of our less desirable taxes such as the payroll tax with a broad-based energy tax.
This will take some fortitude. For example, those "loopholes" include things we all love like the home mortgage interest deduction or the tax break for state and local taxes, not just pernicious corporate welfare which is so easy to oppose.
 
And even though Sens. Judd Gregg and Ron Wyden have a bipartisan bill that could serve as a solid starting point, and former President Bush's tax commission issued a report chock full of good ideas, getting this done in 58 days is a tall order. This one may have to come later.
 
Next best: Let cuts expire but enact temporary stimulus
The economic argument for keeping the tax cuts in place, even in the face of immense fiscal pressures, is that now is not the time to pull so much liquidity out of the economy.
 
True. However, these tax cuts are not particularly stimulative.
 
A better option would be to let all the tax cuts expire, but use the money they would have cost over the next two years for more targeted and effective stimulus measures -- such as unemployment benefits, aid to states, a payroll tax cut, business incentives or more help for the weakest sectors such as housing.
 
All told, such an approach would cost roughly $350 billion over the next two years, but save almost $3 trillion over the decade. And, importantly, it would surely do at least twice as much good for the economy.

Hold your nose: Temporary extension
 The political compromise many are leaning toward is extending some or all of the tax cuts temporarily and then deciding what to do.
 
Yes, punt.
 
This approach could be useful if it came with an ironclad commitment not to extend the tax cuts again without combining them with a full-fledged budget reform deal or a pledge to offset their costs.
 
Of course, the risk is that they just become another Alternative Minimum Tax patch or Medicare "doc fix." These supposedly "temporary" budget maneuvers actually cause budget mayhem year after year as policymakers enact last-minute extensions with no budgetary offsets.
 
In terms of particulars, extending the tax cuts only for those making less than $250,000 is preferable to extending them all, and would save around $100 billion over two years. (I refuse to call this the middle class, because really, since when did the 98% percentile become the middle class?)

A one-year extension is too short if we want to get even some stimulative effect, but if they end up being extended for all income levels, it's worth staggering them so that tax cuts for the wealthiest expire after one year and the rest do after two or three years.

Don't fall for it: Extend cuts temporarily for all making less than $1 million
This is one of those compromises that makes you want to say, "just stop already." It's the kind of slippery slope policymaking that happens too often in Washington. Soon we'll be hearing about extending all the tax cuts except specifically those for Bill Gates and Warren Buffett.
 
For sure, we need to address the country's growing income inequality problem. The tax code and spending side of the budget should be more progressive. But we can't just lump all the responsibility for paying taxes on a few hedge-fund types. The government needs more revenue, and everyone has to be part of the solution.

No! No! No! Permanent extension
Don't do it. We can't afford it. It will make climbing out of the fiscal hole we are in nearly impossible.
 
It is absurd that there's even a debate. Extending all of the Bush tax cuts will add $3.7 trillion to the debt, and extending them for those making less than $250,000 a year will add $3 trillion.
 
So what will Congress do? My bet is on a two-year temporary extension for all of the tax cuts -- or maybe three years to get us through the next election.
 

But hope springs eternal: I am not giving up on fundamental reform.

 

Op-Ed: Stimulus Even A Deficit Hawk Could Love

CNN | October 5, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Am I alone in thinking that all the ideas for economic stimulus and debt control are the handiwork of political pollsters -- and not experts? I know it's election season, but the nature of the discussion pretty much ... um, how to say this? It stinks.

It is particularly alarming since the economic threats the country faces are so real.

In the short-run, the jobs picture is bleak and consumers and businesses aren't spending. In the long run, the growing national debt could lead to many years of substandard growth or even an abrupt fiscal crisis.

The politicized solutions being tossed around fall into one of two camps: stimulus or fiscal responsibility. The economy needs both -- and that's coming from a full-fledged deficit hawk like me.
 
There's a big risk, however, and it is that we will do additional stimulus now, and then continue to punt on closing the budget gap. After all, pushing through hundreds of billions of dollars in tax cuts and spending is easy. Paying for these measures is the hard part.
Fortunately, there is a solution: Tie stimulus to budget reforms. That would create a "twofer" out of each policy -- first help the economy and then the budget.
 
Fix No. 1: Aid to states -- with strings attached
 
The states are hurting badly. They are raising taxes and cutting spending to close their gaps, which is putting pressure on the recovery. And down the road, the states' situation will worsen, as their growing pension obligations -- estimated to be short by $1 trillion -- will push some toward default.
 
Congress should make significant aid available to state and local governments. But instead of just doling out the money, lawmakers should attach an important condition: States that take the money would be required to reform their pension programs.
 
It's not a crazy idea. Some are already doing it. Under a plan in Utah, new public sector employees would get a reformed defined-contribution system, which would limit the state's future exposures. Throwing public sector health care reforms into the mix would improve things even further. State policymakers I have talked to would be grateful to be pushed into making these tough political changes they know have to be made.
 
Fix No. 2: Payroll tax break -- but fix Social Security
 
Another effective stimulus option is a payroll tax holiday. Employers and employees would be exempt from paying payroll taxes on say the first $50,000 of earnings for a full year, pumping hundreds of billions of dollars into the economy.
 
But given that Social Security's trustees keep telling us that changes must be made to the nation's retirement system to avert insolvency, making reforms should be part of the deal. An obvious change would be to phase in a future increase in the retirement age to reflect growing life expectancies.
 
We could speed up the currently slated increase to 67, raise the age further to 68, and then index the age to life expectancy. We just can't afford to pay for people to spend close to a third of their life in retirement. Adjustments to the retirement age are only fair -- especially when combined with an expansion of the disability program to protect people who, due to the nature of their work, can't work longer.
 
Fix No. 3: Temporary VAT -- but not right away
 
And if we want to think even bigger, here is another idea: a "temporary consumption tax deficit-surtax." I know, it's a mouthful, but hear me out.
Right now the challenge is to get people to spend more; in a few years the challenge will be to cut the government's deficit.
 
If we announced a temporary consumption tax, or a VAT, that wouldn't begin until 2013, it would induce people to spend more now. Better buy that new dishwasher before the VAT kicks in!
 
The temporary consumption tax would also raise money for the government down the road. It is stimulus without spending a dime.
A temporary VAT would also address the problem many of us have with a permanent new consumption tax on top of the existing tax system: that it would take pressure off Congress to cut spending by producing so much revenue. Yet many of the changes that need to be made to programs like Social Security and Medicare will have to be phased in over time. A temporary VAT could fill the hole and buy time until those changes produced enough savings.
 
One additional condition: The temporary VAT would go away as soon as the budget was balanced (or reached another agreed upon fiscal goal). That way there would be ongoing pressure to cut spending as soon as possible. The entire country would be rooting for policymakers to fix the budget and eliminate the VAT. Suddenly, there would be a built in constituency for fiscal responsibility.
 
Economic growth will not get us out of this deficit mess, but it will be nearly impossible to fix the budget without fixing the economy first. Stimulus-with-strings attached could be a big part of the fix. 

 

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