Other CRFB Papers
The New York Times | June 28, 2013
Few goals in Washington have more bipartisan support, at least in theory, than cleaning up the tax code. Republicans and Democrats say they want a system that is simpler, fairer and more efficient. Put simply, they want a system with fewer special tax breaks and lower rates.
Yet one of the best ideas for advancing all of those goals – and also heading off catastrophic climate change — isn’t even on the table. I refer to a carbon tax, which would impose a price on emissions of carbon dioxide and other greenhouse gases.
Most climate experts concur that dangerous climate change is occurring at a more rapid rate than expected. They also agree that the deterioration in the earth’s climate is primarily a result of carbon emissions from fossil fuel consumption by humans. If you dispute the overwhelming scientific consensus about man-made climate change and the role of fossil fuel emissions, you should probably stop reading now. Evidence is unlikely to affect your opinions.
But if you accept this consensus, you should know that economists across the political spectrum agree that a carbon tax is the most effective way to discourage carbon consumption and lower the risks of catastrophic climate changes.
I am convinced by the environmental case for a carbon tax. But I want to make a broader argument: a carbon tax could be an engine for tax simplification, deficit reduction, less government regulation and even increased competitiveness.
To be sure, the environmental urgency alone is compelling. In May, atmospheric concentrations of carbon dioxide reached nearly 400 parts per million. When concentrations were last that high – more than three million years ago — humans had not yet appeared, the world was warmer by 3 to 4 degrees Celsius, and sea levels were 80 feet above where they are today.
United Nations negotiators have set a limit of 450 parts per million to prevent costly and irreversible changes in the earth’s climate. At current emission trends, the world will cross this limit in a matter of decades.
The anecdotal evidence of climate change is everywhere: melting Arctic ice, new migration patterns for plants and animals and extreme weather events including record droughts, heat waves, epic floods and super storms. The frequency, intensity and costs of such events are increasing at an alarming rate. Climate scientists have moved from the view that such events are consistent with climate change to the view that climate change significantly increases the odds of their occurrence.
Economists have long contended that a carbon tax is the most effective and simplest way to reduce carbon emissions. Conservative supporters include Gregory Mankiw, a former economic adviser to President George W. Bush, and George P. Shultz, who was secretary of state under President Reagan. Economic centrists include Alan Blinder of Princeton and Robert Frank of Cornell University. Further to the left are the Nobel laureate Joseph Stiglitz and Robert Reich, former secretary of labor. James Hansen, NASA’s former top climate scientist, is also a vocal champion of carbon taxes. So is former Vice President Al Gore, who has advocated carbon taxes for the last 35 years as the policy most likely to be successful in combating carbon emissions.
The beauty of a carbon tax is its market-based simplicity. Economists since Adam Smith have insisted that prices are by far the most efficient way to guide the decisions of producers and consumers. Carbon emissions have an “unpriced” societal cost in terms of their deleterious effects on the earth’s climate. A tax on carbon would reflect these costs and send a powerful price signal that would discourage carbon emissions.
Producers and consumers would adjust their behavior in response to this signal in ways that are most efficient for them. And these efficient micro decisions would support efficient societal outcomes.
There’s much debate about what the proper “social cost of carbon” might be, but there is no debate that carbon emissions are seriously underpriced. Any tax on carbon would be an important step in the right direction, and it could be gradually increased to give consumers and producers time to modify their decisions.
Without a tax, the government has to rely on second-best regulations to limit carbon emissions. Facing Congressional inaction and staunch opposition to a carbon tax, this week President Obama proposed regulations on carbon pollution standards for new and existing power plants using his executive authority under the Clean Air Act.
A carbon tax is also a cheaper and often more efficient way to reduce carbon emissions than subsidies for alternative fuels. Generous subsidies for biofuels have cost billions of dollars; by reducing the price of gasoline they may have perversely increased rather than decreased carbon emissions.
Other subsidies, like the production tax credit, have been successful at ramping up research, development and deployment of alternative energy technologies in recent years. Such subsidies would be even more effective in combination with a carbon tax that would make fossil fuels less price-competitive and would stimulate research on renewable and energy-saving technologies.
The Congressional Budget Office estimates that even a modest carbon tax could reduce both greenhouse emissions and the federal budget deficit. A tax of $20 per ton of carbon dioxide, which would translate to about 15 cents per gallon of gasoline, would reduce emissions by 8 percent and generate up to $1.2 trillion in tax revenues over 10 years.
None of this is controversial to economists. As Professor Mankiw remarked a few years ago, the basic argument for a carbon tax “is so straightforward as to be obvious.”
Politically, of course, it’s anything but obvious. Republicans and Democrats fear that a carbon tax would antagonize voters by raising the prices of products with fossil fuel content for everyone who uses them. Republicans worry that a carbon tax would be a source of government revenue to feed “big government spending.” Democrats worry that a carbon tax would be regressive.
Both objections are easy to address. The revenues from a carbon tax do not have to be used for more government spending; the tax’s burden on low-income families can be offset by targeted income support measures, like those used in other countries to offset the regressive effects of value-added taxes.
Adele Morris at the Brookings Institution estimates that diverting just 15 percent of the revenues from a $16-per-ton carbon tax would provide enough money to keep low-income households whole. The remaining money could be used to finance a substantial reduction in corporate tax rates and reduce deficits by $815 billion over 20 years. Government spending would not increase.
Put another way, a carbon tax can be a central pillar of tax reform and sound fiscal policy. If a carbon tax were used in part to replace other forms of taxation, it would be a major force for tax simplification. It may seem like a “liberal” initiative, because its core purpose is to slow climate change. But a carbon tax also bears a strong resemblance to the kind of flat, broad-based tax on consumption favored by many conservatives.
Opponents of a carbon tax, and of climate-change legislation in general, often assert that it would put the United States at a competitive disadvantage. They usually point to China, the world’s biggest emitter of greenhouse gases (the United States is in second place and not far behind).
The competitiveness objection to a carbon tax is crumbling fast, however. This year, China announced plans for a carbon tax. Many European countries with which the United States competes, including Germany, an export powerhouse, already have carbon taxes in addition to very high gasoline taxes.
In May, the World Bank reported that countries that either have carbon taxes or are scheduled to impose them account for 21 percent of global greenhouse emissions. If you add China, Brazil and other countries that are actively considering carbon taxes, the share goes up to more than 50 percent.
In his speech, President Obama said the United States must lead international efforts to combat climate change, calling for a global free trade in environmental goods and services and renewed negotiations on a global agreement to reduce carbon. The United States could breathe new life into these negotiations by announcing its commitment to a carbon tax harmonized with those of other nations.
A well-designed carbon tax is probably the single best tool for fighting catastrophic climate change and safeguarding the earth for future generations. It can also be a key component of tax reform and deficit reduction, both of which would enhance the nation’s competitiveness. Much of the world is already heading for a carbon tax: the United States should get out in front and lead the way. As Mr. Gore recently blogged, “A tax on carbon is an idea whose time has come.”
New England Journal of Medicine | June 27, 2013
Despite high national spending, health care in the United States is uneven in quality and often wasteful, uncoordinated, and inefficient. Leaders on both sides of the political aisle, and in the health and economic policy communities, recognize the urgency of improving the quality and effectiveness of care while slowing the growth of spending. Far too often, however, attempts to address our national health and budget issues have been fragmented and unproductive, frequently owing to partisan disagreements over how to approach these highly sensitive issues.
We, the four leaders of the Bipartisan Policy Center Health Care Cost Containment Initiative, came together to bridge this divide — to start a constructive dialogue on strengthening the U.S. health care system. A strong health care system, a stable federal budget, and a productive economy are complementary, not competing, priorities. On April 18, 2013, we released a report entitled “A Bipartisan Rx for Patient-Centered Care and System-Wide Cost Containment” (see the Supplementary Appendix, available with the full text of this article at NEJM.org), which describes a comprehensive, coordinated set of recommendations to improve quality, reduce waste, and control cost. We think that solely budget-driven efforts to achieve health care savings will fail; public and private health care savings must be an outgrowth of health reform, not the underlying reason for it. We believe our policy analysis and recommendations reflect this principle, as well as a growing convergence of thinking across a wide spectrum of stakeholders.
In the long term, we envision health care that is value-driven and coordinated through organized systems, rather than volume-driven and fragmented. These systems will be developed and will evolve through a process of innovation and improvement that is based on collaborative structures of care delivery and payment with accountability, coordination, competition, and patient choice. The tools and incentives built into these systems will ensure that patients receive high-quality, coordinated care across multiple settings. They will avoid unnecessary or redundant treatments and services, engage patients in decisions about their care, and pay physicians for the services that patients need and want — including increased time consulting with their doctors. Our recommendations seek to align efforts in the public and private sectors to promote high-quality, coordinated systems of care. Our Medicare reforms include steps toward greater coordination in care delivery and payment, such as shared savings, bundled payments, and competitively bid, capitated health plans.
We are convinced that reforming the U.S. health care system to prioritize quality and value over volume will not only improve health outcomes and the patient experience but also constrain cost and produce systemwide savings. If enacted, our policies would reduce the federal deficit by an estimated $560 billion over the next 10 years, including nearly $300 billion in Medicare savings, which includes the cost of a permanent fix to the sustainable growth rate (SGR) formula for physician payments and the cost of increased assistance to low-income beneficiaries.
Our initiative is unique in that we have brought bipartisanship to the table, dedicating nearly a year to reasoned negotiations to break through the partisan rhetoric surrounding health care. We sought policy options around which both sides of the political aisle could realistically coalesce, and we prioritized political and economic realities over discrete options that achieve budget savings in the near term. We have been encouraged by the responses to these recommendations from representatives of both political parties.
We would engage both beneficiaries and providers with incentives to pursue a more coordinated, accountable, and sustainable health care system. These recommendations span four broad categories: improve and enhance Medicare to create incentives for quality and care coordination; reform tax policy and clarify consolidation rules to encourage greater efficiency and competition; prioritize quality, prevention, and wellness; and encourage and empower states to improve care and constrain costs by means of delivery, payment, workforce, and liability reform. The recommendations described below are highlights from the report but are not an exhaustive list of all the issues addressed in our report.
Improve and Enhance Medicare
Recommendation: Promote quality and value through an improved version of accountable care organizations — Medicare Networks — that encourage providers to meet the full spectrum of their patients' needs. Replace the SGR formula for physician reimbursement and offer all Medicare providers strong financial incentives to participate in new payment models.
Our policies would engage beneficiaries in choosing the coverage that best suits their needs. In addition to fee-for-service Medicare and Medicare Advantage, providers within traditional Medicare would be able to form Medicare Networks. Beneficiaries could choose to enroll in a Medicare Network and would receive a premium discount if they did so. They and their providers could share in savings that result from greater quality and efficiency of care. We believe that these organized systems would provide patients and families with better, more coordinated care while reducing overall spending growth.
Beneficiaries would also be free to remain in an improved fee-for-service Medicare. Our report identifies inefficiencies, misaligned incentives, and fragmented care delivery in the current fee-for-service reimbursement system that have both undermined quality and increased costs. Fee-for-service Medicare would be modernized by means of a greater commitment to competitive bidding, bundling, and other reforms that make provider health systems more accountable and affordable.
To encourage providers to move from fee-for-service Medicare to Medicare Networks, we offer carrot-and-stick incentives. Full payment updates (based on the Medicare Economic Index, which reflects the cost of medical practice) would be available to providers who form or join Medicare Networks. Payment rates would be frozen at current levels for physicians who remain in fee-for-service Medicare and temporarily frozen for other providers who remain in the fee-for-service program. The SGR formula for physician reimbursement would be eliminated. For geographic areas of the nation that could not set up alternative delivery systems, the secretary of health and human services would be authorized to ensure adequate reimbursement levels to fee-for-service providers.
Recommendation: Establish a standardized minimum benefit for Medicare Advantage plans — including all services covered by traditional Medicare, a cost-sharing limit to protect against catastrophic expenses, and slightly lower cost sharing for services than in traditional Medicare — and pay plans with the use of a competitive-pricing system.
We also propose to bring market forces to bear on Medicare Advantage by implementing a competitive-bidding structure. Today, many Medicare Advantage plans compete for beneficiaries by offering extra benefits, leading to higher costs. We propose a more rational system, in which Medicare Advantage plans would bid on a standardized Medicare benefit package and compete on the basis of price. Thus, beneficiaries would be able to make clear comparisons and choose the plan that offers the best value. This system would be phased in over time and include transitional protections for beneficiaries. Competitively bid payments to plans would take effect only in regions where the payments are lower than those under current law. Therefore, this policy will guarantee savings for the Medicare trust funds in regions where the new competitively bid price takes effect. Initially, a portion of the savings would be allocated to finance a reduction in beneficiary cost sharing. To help beneficiaries navigate plan selection, we propose a user-friendly, up-to-date Medicare Open Enrollment website.
Recommendation: In 2016, improve and strengthen the traditional Medicare benefit structure for Parts A and B by simplifying existing deductibles and providing protection against catastrophic costs. At the same time, restrict first-dollar supplemental coverage, increase support for low-income beneficiaries, and reduce subsidies to higher-income beneficiaries.
We propose to improve the Medicare benefit by providing long-overdue protection against catastrophic costs. We also would offer a modernized cost-sharing design, including a single annual deductible and predictable copayments. Our proposal would ensure that beneficiaries could visit a doctor for a reasonable copayment, even before meeting a deductible. In addition, we would prohibit first-dollar supplemental coverage that leads to greater use of services without necessarily producing better outcomes. We pursue further balance by providing new, substantial cost-sharing support to approximately 8 million low-income beneficiaries while reducing federal subsidies for higher-income persons.
Reform Tax Policy and Clarify Consolidation Rules
Recommendation: Replace the “Cadillac tax” on high-cost health insurance plans with a limit on the income-tax exclusion for employer-sponsored health insurance.
We propose to target the limited financial resources of our nation on health care coverage and services that are valuable. The nation cannot achieve affordable care with an open-ended, overly generous subsidy for the purchase of private health insurance that predominantly benefits higher-income persons. The tax exclusion for employer-sponsored health insurance makes providing health benefits cheaper than paying cash wages, thereby encouraging high-cost benefit designs and blunting incentives to deliver care more efficiently. We propose to reform and rationalize the current tax exclusion for employer-sponsored health insurance and make it less regressive. We recommend replacing the flawed Cadillac tax on high-cost health insurance plans with a limit on the income-tax exclusion for employer-sponsored health benefits in 2015 at the 80th percentile of employer-sponsored–plan premiums. We also support replacing the current excise tax on fully insured plans with a paid-claims tax, to remove the current distortion that favors self-insured plans and to encourage all plans to adopt alternatives to fee-for-service payment.
Recommendation: Streamline and clarify the application of existing federal legal and regulatory guidance for private-sector entities seeking to form integrated, coordinated systems of care delivery.
Another strategy for aligning incentives to support high-quality, coordinated care delivery and payment is to ensure that private-sector payers and providers who want to form integrated delivery systems have clear guidance on how to do so without violating antitrust or fraud and abuse laws. We believe that guidance should be provided in this area and that there should be strong enforcement against consolidation that leads to anticompetitive behavior and to increases in cost.
Prioritize Quality, Prevention, and Wellness
Recommendation: Prioritize, consolidate, and improve the use of quality measures by consumers and practitioners.
Effective quality metrics are essential to accountability in organized systems of care. Quality-performance metrics must be precise and clinically relevant to create incentives for better delivery, to show providers how their performance relates to that of their peers, and to facilitate the real-time design and implementation of strategies to improve quality and safety. Quality metrics must also provide the meaningful data needed for patients and families to make informed choices. Although providers have pursued quality-metric design, evaluation, and reporting, as well as the identification of different quality metrics, the quality-reporting roles and responsibilities of organizations such as health plans and accrediting bodies are ill defined, leading to confusion and inefficiency. We would strengthen the quality-reporting system and the validity of available metrics by identifying redundant or inefficient metrics and by promulgating minimum requirements that are clinically relevant and useful to providers and also understandable and accessible to consumers.
Recommendation: Advance our understanding of the potential cost savings of prevention programs, by means of support for research and innovation on effective strategies to address costly chronic conditions.
We recommend exploring the potential of prevention in improving health and containing cost, as well as eliminating barriers to the wider implementation of preventive approaches, such as workplace wellness programs, that are found to be effective. Helpful strategies include support for better collection, analysis, and dissemination of data from prevention programs, and incentives that will engage small businesses in comprehensive worksite health promotion.
Encourage and Empower States
Recommendation: Adopt a broad strategy to deliver Medicare and Medicaid services to persons with dual eligibility through a single program.
The Medicaid program provides coverage to approximately 60 million low-income Americans, including pregnant women, low-income parents, children, and persons with disabilities. Approximately 9 million persons are dually eligible for both Medicare and Medicaid coverage. Persons with dual eligibility constitute a diverse population with many complex care needs. Historically, distinct federal law, regulation, program administration, and financing for Medicare and Medicaid have constrained opportunities to better integrate care between the two programs. We recommend that state and federal leaders work toward a more streamlined and coordinated approach to deliver care to persons with dual eligibility. In addition, we recommend several ways to strengthen demonstration projects that are currently under way for persons with dual eligibility.
Recommendation: Offer a federally funded financial incentive to states that enact reforms to the scope of practice for health professionals, medical liability systems, and insurance laws.
We support resources and incentives, rather than top-down mandates, to engage state leaders in supporting coordinated and accountable models of health care delivery and payment. To this end, we recommend policies to strengthen the primary care workforce and make greater use of nonphysician practitioners, to create safe harbors for physicians to improve the medical liability system and reduce the practice of defensive medicine, to address consolidation in the financing and delivery systems, and to promote price and quality transparency for consumers, families, and businesses.
We believe that the vision and recommendations articulated in our bipartisan report, if enacted together, would help to put our national health care system, as well as our economic outlook, on a more sustainable, healthful path for the future.
Project Syndicate | June 26, 2013
How to tax the income of multinational corporations (MNCs) was an unlikely headline topic at the recent G-8 summit in Ireland. It will be a key agenda item at the upcoming G-20 summit in Russia as well. Given these companies’ significance to national and global economic performance, world leaders’ focus on the arcane intricacies of corporate taxation is easy to understand – perhaps nowhere more so than in the United States.
As the US embarks on the difficult path of corporate tax reform, it should heed the United Kingdom’s example. Even as it champions multilateral cooperation to ensure that MNCs pay their “fair” share, the British government has slashed its corporate rate, exempted the active foreign income of British MNCs from the national corporate tax, and enacted a “patent box” that stipulates a 10% tax rate on qualified patent income.
As a result of years of cuts in corporate tax rates by other countries, the US now has the highest rate among the advanced economies. Reducing the top US federal rate, currently at 35%, to a more competitive level – the OECD average is around 25% – would encourage investment and job creation in the US by both domestic and foreign MNCs.
Paying for a rate cut by eliminating various corporate credits and deductions would simplify the code and trim the cost of compliance. It would also enhance efficiency by curbing tax-based distortions in companies’ investment decisions (what and where) and their choices concerning how to finance investments and which organizational forms to adopt. The Obama administration and Congressional leaders from both parties agree that a cut in the corporate tax rate should be revenue-neutral.
Other advanced industrial countries have paid for corporate rate reductions partly by restricting depreciation and other deductions. Despite lower tax rates, corporate tax revenues have not declined in these countries and represent a larger share of GDP than they do in the US.
In addition to reducing its corporate tax rate, the US needs to reform the way it taxes its MNCs’ foreign earnings. All other G-8 countries (and most OECD countries) boost their MNCs’ competitiveness by taxing only their domestic income, exempting most of their foreign earnings from domestic taxation (an approach known as a territorial system). The US, by contrast, taxes its MNCs’ worldwide income, with taxes paid elsewhere credited against their US tax liability to avoid double taxation.
The worldwide system puts US-based MNCs at a competitive disadvantage. They must pay the high US corporate rate on profits earned by their affiliates in low-tax foreign locations, while foreign MNCs headquartered in territorial systems pay only the local tax rate on such profits.
Current US law blunts this disadvantage by allowing US companies to defer paying US tax on profits earned abroad by foreign affiliates until they are repatriated to their US owners. As a consequence of both the high US tax rate and deferral, US-based MNCs have a strong incentive to keep their foreign earnings abroad. Indeed, their non-US affiliates currently hold an estimated $2 trillion in accumulated foreign earnings.
These earnings are “locked out” and unavailable to finance investment and job creation in the US, without incurring significant additional US taxes. Moreover, US companies incur efficiency costs from the suboptimal use of deferred earnings and higher levels of debt, as well as the burden of maintaining worldwide tax strategies. And these costs, estimated at 1-5% of deferred earnings, have been rising rapidly in recent years, in line with the growing share of foreign markets in US-based MNCs’ revenues.
A territorial system would address the competitiveness disadvantages, the “lock-out” effect, and the inefficiencies of the US’s worldwide approach. But it would not reduce incentives for US corporations to shift their reported profits to low-tax jurisdictions; on the contrary, such incentives would be even stronger in a pure territorial system. Given increasing globalization of business activity; the rising importance of intangible capital that is difficult to price and easy to move (for example, patents and brands); competitive cuts in national corporate tax rates; and the spread of tax havens, income shifting and the resulting tax-base erosion have become a major policy concern throughout the OECD.
In response, other developed economies have used a variety of techniques to create “hybrid” territorial systems aimed at countering tax-base erosion. Such systems include transfer-pricing rules based on OECD guidelines (used by the US as well), limits on interest deductibility, and domestic taxation of some kinds of income earned in low-tax locations where companies report large earnings but carry out little real economic activity.
As part of comprehensive corporate tax reform that includes a revenue-neutral rate cut, the US Congress is currently considering a hybrid territorial reform and evaluating several measures to counter tax-base erosion and income shifting, including those used by other advanced countries. Republican Congressman David Camp, who is leading the legislative effort in the House of Representatives, has proposed an innovative alternative that rests on the “destination principle”: MNCs’ taxable earnings should be based largely on where their products are sold, rather than on where the companies are headquartered, where their production and financing occur, or where their profits are reported.
Camp’s proposal would significantly reduce incentives to move manufacturing abroad for tax reasons. By contrast, both America’s worldwide system and other countries’ hybrid territorial systems rely on an “origin or source principle” that bases taxation largely on where input costs and production activities are located.
The US last reformed its business tax code in 1986, when it had one of the lowest corporate tax rates in the world and the competitive dynamics of the global economy were very different. It is time for another comprehensive corporate tax reform, one that reduces the tax rate, broadens the tax base, and adopts a hybrid territorial approach with effective base-erosion safeguards.
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.
Brookings | June 12, 2013
Federal policy makers always seem to be looking for reasons to dodge the difficult choices necessary to avoid the fiscal crisis. This month, they got some new excuses.
First, in mid-May, CBO updated its fiscal outlook, predicting the Fiscal Year 2013 deficit would be $200 billion less than earlier forecast. That’s delightful, but the 10-year forecast remains substantially unchanged. It also remains dismal.
Later in May, the Trustees of Social Security and Medicare made their annual report. It again showed the Social Security Trust Fund going into the red in 2033, at which time, recipients, by law, will take a 23 percent cut in benefits. It also showed the Social Security Disability Trust fund going broke in 2016, with a similar benefit cut of 20 percent. But, Medicare looked a bit better. It does not tank until 2026, two years later than previously forecast. That small improvement was another excuse.
And when the debt ceiling extension ran out on May 19, nobody cared because the Treasury has a little wiggle room. The moment of default has been pushed back until after Labor Day – an eternity in Washington. The later default date was hailed as a positive sign of economic improvement.
Despite these tiny rays of sunshine, all the long-term forecasts remain dismal. The long-term deficit and debt problems have not changed. But, small reasons to refrain from hard choices are never wasted in Washington. Inaction marches on. Neither Congress, nor the President, is conducting any observable negotiations. Nobody wants to fix the debt.
Fiscal fatigue and political recalcitrance have smothered budget negotiations. Even tax reform, an essential element of a comprehensive budget solution, seems now to have been drained of its vitality. Hopes for a “grand bargain” in 2013 have faded. Now the best outcome is to successfully avoid the debt ceiling default.
Having side-stepped the long term problem, both branches and both parties are content to wait until the last moment before worrying about defaulting on the full faith and credit of the United States. For now, political practitioners are giving their attention to assessing their bargaining clout, and predicting election victories, rather than in solving either the long, or short-term fiscal crisis.
The three budgets (House, Senate and the president’s) are still dueling. There is no apparent negotiation for budget reconciliation in process. The Chairs of the House and Senate Budget Committees meet from time to time, but there is no formal conference committee, and the administration has not expressed concern.
In FY 2013, which closes at the end of September, there was no Congressional budget. Nor has there been one in 5 years. There will certainly be none again this year. Without a budget, the Appropriations Committees of the House and Senate, each following its own budget, will determine federal spending for FY 2014. That will be exciting because the Senate budget assumes away sequestration, while the House budget etches it in stone.
We are thus doomed again to another series of short-term Continuing Resolutions (CRs) to fund federal government operations in FY 2014. Long-term solutions are politically impossible. Our representatives have other priorities. In Washington, politics are more fun, and core constituencies more important, than solutions.
Another debt ceiling mini-crisis will probably be avoided in the fall, but long-term debt will continue to cloud our future. The easy stuff has been done. The sequester made some small progress in limiting discretionary expenses.
On the hard stuff, entitlements and taxes, we are no better off than we were five years ago. The size of the problem, and its dire consequences, have long been common knowledge. The most predictable crisis in history has, as yet, not even generated a good discussion.
Every minute of delay in doing the hard stuff will make its ultimate cost more painful, both for the taxpayers, and for the recipients of federal spending.
So the answer to the question of what ever happened to our fiscal crisis is: little or nothing. The threat has not subsided. It has merely been ignored. The economic albatross of deficit and debt continues to threaten our future.
The Government We Deserve | June 11, 2013
Nothing better exemplifies our gridlock over the future of 21st century government, as well as how to recover from the Great Recession, than the false dichotomy of austerity versus stimulus.
The austerity thesis, reduced to its simplest form, suggests that government has been living beyond its means for some time, only exacerbated by the actions that accompanied the recent economic downturn. Sequesters, tax increases, and spending cuts become the order of the day.
The stimulus hypothesis, reduced also to simplest form, suggests that more government spending and lower taxes puts money in people’s pockets and helps cure a country’s economic doldrums. Once the economy is doing better, government spending will naturally fall and taxes rise.
The debate then plays out largely over deficits: do you want larger or smaller ones?
But reduced to this form, the debate is a fallacy, for several reasons.
First, one must define larger or smaller relative to something. Last year’s spending or taxes or deficits? What’s scheduled automatically in the law? The public debate often glosses over these issues. Which is more expansionary when keeping taxes at the same level: an economy whose growth in spending is cut from 6 to 4 percent or one whose growth is increased from 1 to 3 percent?
Second, a country’s ability to run deficits depends on its level of debt. A recent debate over whether at some point higher debt starts to slow economic growth doesn’t change the fact that lenders want to be repaid. People won’t loan to Greece now, but they still find the U.S. Treasury securities a safe haven for their money.
Third, and by far the most important, what timeframe is involved? Is the Congressional Budget Office pro-austerity or pro-stimulus when it concludes that sequestration hurts the economy in the short run, but is better in the long run than doing nothing about deficits? No one on either side suggests that debt can grow forever faster than the economy. Everyone implicitly or explicitly believes that to accommodate recessions when debt grows faster there are times when debt must grow slower.
So where’s the rub? Here you must understand the emotional systems, usually veiled, that lie behind those on both sides trying to force the problem to an either/or solution.
Start with hardline austerity advocates. Many of them don’t just want smaller deficits. They want smaller government—or, at the very least, they want to prevent the government from taking ever larger shares of the economy, even given changing demographics. Essentially, austerity advocates don’t trust their pro-stimulus adversaries, some of whom can almost always find an economy going into a recession, in a recession, coming out of a recession, or attaining a lower-than-average growth rate and, therefore, needing some form of stimulus. Austerity advocates have learned from long experience that once government spending is increased, it’s hard to reduce. So they feel they have to get what deficit reduction they can now that the public’s attention to recent large debt accumulations is creating pressure to act.
Now for many the hardline stimulus advocates, their support for additional temporary government intervention cannot be entirely disentangled from their sympathy for a larger future government. Else why not agree to cut back now on the scheduled acceleration of entitlement programs, particularly fast-growing health and retirement programs? That would bring the long-run budget, at least as currently scheduled, back toward balance. It would simultaneously please many of their austerity opponents and allow for more current stimulus.
The hidden agendas are complicated further by inconsistencies on both sides. Many hardline austerity advocates, at least in the United States, don’t want cuts to apply to defense spending. For their part, many hardline stimulus advocates would be glad to pare growth in tax subsidies.
Regardless, the dichotomy falls apart once one realizes that a solution can involve a slowdown in scheduled growth rates in spending and a higher rate of growth of taxes, accompanied by less short-run deficit reduction and an abandonment of poorly targeted mechanisms such as sequesters.
Consider the buildup of debt during World War II, the last time we saw U.S. levels above where they are today. Debt-to-GDP fell fairly rapidly after the war all the way until the mid-1970s. While the growing economy certainly helped, tax rates that were raised substantially during the war were largely maintained afterward, and spending had essentially no built-in growth (actually huge declines when the troops came home). Just the opposite holds now even with recovery: there are limited tax increases to pay for past accumulations of debt or wartime spending, and spending is scheduled to grow long-term, even after temporary recession-led spending and defense spending on Afghanistan declines.
Both sides—pro-austerity and pro-stimulus—want desperately to control an unknown future, either by not paying our current bills with adequate taxes or by maintaining built-in growth rates in various programs, mainly in health and retirement. The false dichotomy between austerity versus stimulus has fallen by the wayside, and what we see through the veil are two sides in mutual embrace trying to control our future, whatever the cost to the present.
Arizona Capitol Times | June 10, 2013
Our federal budget is on a destructive and dangerous path. It is vital for our leaders to find a solution to our $17 trillion national debt, or the next generation of Americans will inherit a country in a deeply dysfunctional state.
If we continue down this path, America will be unable to act on promises made in the past or to invest in our future, and those in the millennial generation will be stuck with more debt, higher taxes, fewer jobs and a lower standard of living. Lawmakers need to muster political courage and begin to rebuild our fiscal house.
A comprehensive approach will be necessary to lower our federal deficit, and our leaders in Washington should take note. Such an approach means tackling the real drivers of the debt, protecting high-value investments, and asking for shared sacrifice from every American.
Non-defense discretionary spending — a category that includes funding for education, infrastructure and research — has taken the brunt of the cuts so far through measures like the sequester. All the while, programs like Medicare and Social Security — which account for nearly all the growth in future federal spending — remain untouched. Any meaningful measure will tackle both the spending and revenue sides of the equation, but we all must accept that everything will have to be on the table for broad, bipartisan compromise to take place.
We need to achieve, at the minimum, $2.4 trillion in additional deficit reduction over the next decade to ensure our debt is on a downward path relative to the economy, and this can only be done by reforming our tax system and entitlement programs.
The first step is to understand the actual size and future impact of our fiscal imbalance and how policy changes distribute the benefits and burdens not only on one generation but among all generations. Congress can do this by passing a proposal put forth by The Can Kicks Back to instate generational accounting analysis, which would show the effect of policy changes to members of different age groups.
Many of the proposals that come out of Washington do not affect middle-aged Americans since reforms are phased in. Although such proposals are politically more favorable to an influential voting bloc, lawmakers cannot ignore the burden facing the next generation. Indeed, they must not only consider this constituency’s concerns, but also invite its leaders to testify before relevant committees. Young people deserve to have their voices heard on this critical issue, as they truly have the most to lose.
If we wait much longer to address these problems, the solutions we’ll be forced to enact will only be more disruptive and more visible, as the damage will have already been done. According to the Congressional Budget Office, over the next decade, the United States will spend $5.4 trillion on interest payments on the national debt, and $847 billion in 2023 alone.
Republicans and Democrats alike share the responsibility of addressing our fiscal problems now to ensure future generations of Americans do not inherit them. Kicking the can down the road for the next generation shows that our political leaders are unwilling to take political responsibility, and we urge Arizona Sens. John McCain and Jeff Flake to lead on this critical issue.
Both of us — a member of the Arizona chapter of The Can Kicks Back and a former member of Congress from Arizona and member of the Congressional Fiscal Leadership Council at the Campaign to Fix the Debt — want to leave a legacy of prosperous fiscal stewardship for the next generation. We strive to ensure that today’s leaders seriously understand the consequences of their fiscal decisions and that tomorrow’s leaders are given a chance to weigh in on issues that will affect them in the decades to come. We urge you to learn more about The Can Kicks Back (www.thecankicksback.org) and the Campaign to Fix the Debt (www.fixthedebt.org).
The Hill | June 4, 2014
The latest Social Security Trustees report, released last week, shows a program in peril. Within three years, the Social Security disability trust fund will run out of money, at which point the program will only be able to pay 80 percent of benefits to disabled workers. Assuming policymakers decide to allow the disability fund to take money from the old-age fund, the whole program will become insolvent in 2033.
The good news from the trustees report is that the program is in no worse shape than last year. But that should be of little comfort to anyone on the program two decades from now, who will face an immediate 23 percent benefit cut regardless of age or income.
Fortunately, this tremendously unfair and indiscriminate cut can be avoided. And if we act today, it can be averted through a number of modest and gradual changes that mostly slow and speed growth and give workers plenty of time to plan.
There is no shortage of policy ideas to fix Social Security, and as far as government programs go, Social Security is a relatively simple one. Most of the goals of reform can be met by adjusting a few levers — the initial benefit formula, the retirement age, the cost-of-living adjustment, the payroll tax rate and the maximum income subject to the payroll tax.
Indeed, with an online program called The Reformer: An Interactive Tool to Fix Social Security, anyone with a computer and an Internet connection can design his or her own reform. The tool lets users identify the tax and benefit changes they like in order to make the system sustainably solvent for the next 75 years and beyond.
Want to close the shortfall mainly on the spending side? Start by slowing benefit growth for the top 70 percent of beneficiaries and indexing the retirement age to growing life expectancy. Those two changes alone will get you three-quarters of the way toward solvency.
Want to close the shortfall mainly on the revenue side? You can close that same three-quarters of the gap by increasing the payroll tax from 12.4 to 13.5 percent and raising the maximum amount of income subject to the payroll tax from $114,000 to roughly twice that (though this plan would do far less in the 75th year).
Reforms ranging from measuring inflation more accurately to altering disability benefits to applying the payroll tax more broadly can close the remaining gap and even leave room to enhance benefits for some populations.
As a matter of policy, reforming Social Security just isn’t that hard. And changes can be made in ways that encourage work, exempt current retirees from benefit reductions, protect or enhance benefits for the most vulnerable and keep future benefits at least as generous as today’s for almost everyone else.
Unfortunately, politics has gotten in the way, and politics could be the program’s undoing. Benefit changes as sensible as measuring inflation more accurately have become an anathema to the AARP and to many on the left. And revenue changes as modest as gradually increasing the percentage of wages taxed to the levels seen in the mid-1980s are opposed by Grover Norquist and many on the right.
As a result, inaction may be good politics today, but it is incredibly myopic.
While both sides may prefer to wait until they are in a position to enact a solution on their own terms, the choices necessary to close the shortfall will be much more painful for both sides if we wait. As the baby boomers retire and benefits continue to grow, policymakers will soon lose the ability to phase changes in gradually and allow benefits continue to grow for new beneficiaries in real terms. And not too many years in the future, it will become impossible to exempt current retirees from changes or avoid broad benefit changes that affect even the lowest income beneficiaries.
At the same time, waiting will lead to larger and more broad-based tax increases as fewer generations will be able to share in the burden and benefit change simply won’t be able to phase in fast enough.
In the end, waiting to act will lead to unfair and unnecessarily abrupt changes that would rob today’s workers of the ability to plan and adjust.
Luckily, we have an opportunity to fix Social Security now — the easy way — if both parties are willing to come together and negotiate in good faith. But time is running out.