Cooper-LaTourette was not Bowles-Simpson

The Bipartisan Policy Center has a post up on the budget resolution offered last night by Rep. Cooper (D) and Rep. LaTourette (R),and which was overwhelminngly rejected (it got only 38 votes). This budget has been referred to as Bowles-Simpson after the report/proposal from the fiscal commission chairs, but it differed substantially from that proposal in two main ways:

  • raised around $1 Trillion less in taxes over 10 years
  • cut non-defense discretionary spending by much more

As Loren Adler (@LorenAdler) and Shai Akabas (@ShaiAkabas) note, the budget is notable in that it was offered by a Democrat and a Republican, but it is not correct to say that it was Bowles-Simpson. They have two nice charts comparing all the budgets that have been debated in the House, compared to Bowles-Simpson and the Bipartisan Policy Center’s Domenici-Rivlin plan, in terms of revenue and spending, and cumulative debt, both in terms of GDP in 2022.

Now, 38 votes (only 180 to go!) is not exactly suggesting a bipartisan budget is just around the corner, but at least members from different parties were talking. However, we shouldn’t say that Bowles-Simpson was rejected because there are some big differences between the reality of the budget offered by Reps. Cooper and LaTourette and Bowles-Simpson.

CPC budget v. Ryan budget

It is easier to move toward a balanced budget if you are willing to raise taxes–that is the main take home for me from the Congressional Progressive Caucus (CPC) budget put forth yesterday. The Bipartisan Policy Center does a great job comparing this budget to other proposals. Here is the money graph that compares spending and revenues as a percent of GDP in 2022:

The CPC budget is not balanced in 2022–but then again neither is anyone else’s–not Bowles-Simpson, not Ryan’s, not the President’s, etc. showing that you cannot achieve balance or anything close quickly. The CPC budget is an interesting book end to Chairman Ryan’s budget because both achieve the same debt-to-GDP ratio (~62%) in 2022, but do so at very different levels of aggregate spending, as well as different spending priorities and tax burdens and distribution. When I look at Ryan v. CPC budget, the spending side for CPC is very plausible, while Ryan’s is a political fantasy. It is easy to imagine a majority of the nation getting behind the spending side of the CPC budget, but less easy to imagine them supporting the taxes necessary to pay for it. The converse is true for the Ryan budget.

At some point, we will have to grow up and decide, which of course will most likely entail a compromise, which seems both inevitable and impossible.

The debt limit and the Ryan budget

The debt ceiling debate and discussion as a secondary step outside of the federal budget should be abolished.

Today, the House Budget Committee will mark up, or revise the Chairman’s mark of the Fiscal Year 2013 budget (aka the Ryan budget). This means they will go through and set the high level budget figures for the Fiscal Year 2013 budget, and set targets for the federal budget through 2022. Revenues, taxes, etc. One of the items they will be filling in is the debt limit, or how much borrowing authority will be required to implement THIS budget. The figures can be found on pages 5 and 6 of the Chairman’s mark (concurrent budget resolution that was adopted on March 22, 2012):

p. 5 bottom (start line 25) [my comment]

DEBT SUBJECT TO LIMIT.—The appropriate
levels of the public debt are as follows:

p 6. top (start with line 1) [my comment]
Fiscal year 2013: $17,072,810,000,000.
Fiscal year 2014: $17,769,762,000,000.
Fiscal year 2015: $18,277,348,000,000.
Fiscal year 2016: $18,752,806,000,000.
Fiscal year 2017: $19,216,661,000,000.
Fiscal year 2018: $19,676,545,000,000.
Fiscal year 2019: $20,168,534,000,000.
Fiscal year 2020: $20,657,588,000,000.
Fiscal year 2021: $21,121,620,000,000.
Fiscal year 2022: $21,627,396,000,000.

The numbers are now blank because the House Budget Committee has to decide these amounts today. The numbers above are what was passed by the House of Representatives on March 22, 2012. Sometime next December, or January, the U.S. government will hit the currently approved debt limit, and there will be a circus discussion in Congress about whether Congress will grant approval for the U.S. Treasury to borrow more money to pay the bills that Congress has told the Treasury to incur. Keep in mind when we do that in the future that the budget resolution being passed out of the House Budget Committee today has already laid out what they say the debt limit will have to be through 2022 to pay the bills for the budget authority they today will vote to grant (many details of how to implement the budget will be carried out by the Ways and Means and Appropriations committees). However, the big picture is set in the budget resolution.

Because the debt limit is denominated in nominal dollars (not indexed for inflation or the size of the economy in any way) we will have to increase the borrowing authority of the U.S. government for a long time to come, even if the Ryan budget became law; later today after they set these figures, I will fill in the blanks above. Success from a fiscal standpoint would mean the debt-to-GDP ratio would decline; even if this happens the debt ceiling will have to be raised. The only way to not raise the debt ceiling is to only have balanced budgets going forward.

The time to debate the debt ceiling is today, not later, after we have already agreed to spend the money.

College students and deficit reduction

This post is cross posted at The Incidental Economist.

Last week the students in the class I co-teach with David Schanzer (Gridlock: can our system address America’s big challenges?) completed an in-class exercise created by the Concord Coalition that lets people devise their own plan to reduce the federal budget deficit (or not) over the next 10 years. A brief report on what they (10 groups of about 4 each; mostly undergrads, with a few grad students) decided.

  • 9 of the 10 groups embraced policies that would reduce the federal deficit over the exercise baseline (which includes taxes greatly increasing on Jan. 1, 2013 and the implementation of the ~ $1.2 Trillion in spending cuts agreed to in the debt limit deal).
  • The spread of the difference between the groups was over $5 Trillion over 10 years (a $430 Billion increase in the deficit to a $4.7 Trillion decrease, over 10 years; half of the groups identified deficit reduction of over $3 Trillion, again as compared to the baseline noted above).
  • You can download the materials we used (and you can use with a class, etc.) here.
  • The students engaged in long discussion about investing more in some areas, while cutting in others.
  • Any such exercise necessarily simplifies the choices available, and this one boils it down to 40 choices about spending and taxation. The portion of the exercise that students were most frustrated with was the section on health care and Social Security. They wanted more nuance than was available in this section. For example, it offers the choice to repeal the ACA, or not. Likewise, they wanted more subtlety to address Social Security with a mix of benefit cuts and taxes.

There are other models available for such an exercise, and I highly recommend the online budget simulation tool developed by the Committee for a Responsible Federal Budget. It provides a bit more nuance in some of these key areas than does the tool produced by Concord, but the materials from Concord were more suited to an in-class group discussion format. Tradeoffs! Both are excellent tools to get students (and anyone) thinking about the choices our nation faces.

A tale of two (CBO) scenarios

If you can pick one thing in a policy argument, pick the baseline scenario against which to compare a series of policies.

The CBO’s baseline budgetary projections released this week show that the federal budget deficit will shrink greatly over the next few years. This is the so-called baseline scenario, that simply means that current law is followed. If you have a particular set of public policies you would like to enact, and you compare it to this scenario, it will be very hard for your policy tool kit to reduce the federal deficit in the next 10 years as compared to this baseline scenario because it contains some very large tax increases, and also some large spending reductions (Cuts from the Budget Control Act of 2011, Medicare payments to doctors).

However, I think there is almost no one who thinks all of the assumptions in the baseline projection will come to pass because it contains politically difficult things to enact.

So, the CBO also constructs an alternative fiscal scenario, that contains a mix of policies that might be viewed as more likely to come to pass. The alternative scenario assumes the following differences from the baseline shown above.

  • all expiring tax provisions other than the payroll tax cut are extended
  • AMT is indexed for inflation after 2011
  • Medicare payments to physicians in Part B are held constant at current levels
  • the automatic spending cuts from the Budget Control Act of 2011 do not take effect

The alternative fiscal scenario looks like this:

Deficit problem not fixed anymore, as deficits drop from the very large ones during the economic downturn, but begin to rise steadily again in the latter part of the decade as the tax receipts from our current tax code are unable to finance the default spending of our federal budget, particularly health care (Aaron points out we can’t get to sustainability via cutting discretionary spending).

I am not sure when, or even if, we will get a Grand Bargain to address the long run deficit issue. However, I am sure that if you can pick just one thing in the debate around these issues, pick the baseline against which to compare the policy options.


update: Here are the slides CBO Director Elmendorf used in testimony to the House (figures above taken from there).

After the super committee

Things are much like they were before: the U.S. needs to ensure economic growth in the short term, while developing a path to a long range sustainable budget. During 2011, we have achieved neither, and I see no reason for optimism that legislative action on either front will occur before the 2012 election.

The only way to achieve a long range sustainable budget is for taxes as a percent of GDP to rise over current levels, and spending to decline, also as compared to current levels. The Simpson-Bowles plan proposed achieving balance at 21% of GDP in 2035, which would be the highest level of taxation observed (20.6% in 2000 is previous max), but we routinely spent more than 21% of GDP in the 1970s and 1980s.

If we adopted 21% of GDP as a future target for balancing the budget, we would be saying government spending will be less while the baby boomers are eligible for Medicare and Social Security than it commonly was when they were paying taxes to support these same programs. This will be very hard. Plans seeking balance at lower levels seem implausible.

Now that the Super Committee has not agreed to anything to replace the sequester, the next step toward a long range sustainable budget will either be some clarity from the next election with the knowledge of what the Supreme Court has ruled about the ACA, or some economic calamity that will spur action. The former is possible. The latter is a near certainty, eventually, the question is when and what the crisis looks like?

The only source of optimism I can find is the similarity of the grand bargain deals that include both substantial tax increases and spending cuts (without both, it is not a plan, but a fantasy). If we have to act fast, we really know a great deal about what the last step looks like. We just don’t know what it will take to get us to act.

Balanced Budget? Taxes Up, Spending Down, or a Mixture of Both

CBO has a new report out yesterday that addresses the big questions our nation must face with respect to our long term fiscal situation.The figure below shows that if we maintain our 40 year historical average of 18 percent of GDP raised in taxes, the we will have a deficit simply due to paying for interest, health care, social security and defense in 2021. That means that even with no FBI, FAA, NIH, NEA, Homeland Security, and nothing else but these line items–18% of GDP collected in taxes still won’t be enough to produce a balanced budget. With NO federal spending other than these categories, we will have a deficit in 10 years if our tax code brings in 18% of GDP.

The CBO report is quite clear about our task:

The budget numbers tell a clear story: Given the aging of the population and the rising cost of health care, attaining a sustainable budget for the federal government will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:

  • Raise federal revenues significantly above their average share of GDP;
  • Make considerable changes to the sorts of federal benefits we provide for older Americans;
  • Substantially reduce the role of the rest of the federal government—that is, defense (the largest single piece), Food Stamps, unemployment compensation, other income security programs, veterans’ benefits, federal civilian and military retirement benefits, transportation, health research, education and training, and other programs—in our economy and society.

We as a society will either have to pay more for our government, accept less in government services and benefits, or both. For many people, none of those choices is appealing—but they cannot be avoided for very long.

Our country wants low taxes and high spending. Of course we cannot continue to have that. There is no way we will achieve anything near a balanced budget without a substantial increase in taxes received as a percent of GDP given the difficulty of cutting Medicare and Social Security in the context of the baby boomers moving into eligibility for these programs. Even the 21% of GDP as the target balance point for spending and taxes suggested by the Chairman’s mark of the Fiscal Commission (to be reached in 2035) will be hard to achieve. Spending was higher than 21% of GDP in each year of the Reagan administration (high 23.5% of GDP in 1983; low 21.3% in 1988; table 1.2 in this link). And the baby boomers were working and paying taxes then.

If you want a balanced budget, the ins must match the outs. Under any plausible scenario taxes as a percent of GDP must rise and spending as a percent of GDP must fall. 21% of GDP as a long range target balance point will be hard, but feasible. 18% of GDP seems a fantasy.

Balanced Budget Amendment is a Bad Idea

David Leonhardt in Economix blog lays out nicely that while we very much need to address our long term fiscal imbalance, a balanced budget amendment is a terrible idea. We need to be able to run a deficit in times of emergency (war, economic), and indeed could sustain a small annual deficit in perpetuity. We have had a very large deficit the past few years due to the economic emergency, and we will have very large ones going forward even if the economy returns to normal primarily due to the joining of the demographic reality of the baby boomers with our nation’s generalized health care cost problem (Medicare), and the fact that our current tax receipts are far below our aggregate default spending levels.

Two-thirds of the federal budget is comprised of 5 line items: Military, Social Security, Medicare, Medicaid and Interest on the debt.  If we extend our current tax code for another decade, then we will have deficit in 2020 even if we eradicate ALL federal spending other than these 5 line items.

Over the long run, taxes will have to rise and spending will have to fall as compared to current default levels of both if we are to move toward a sustainable federal budget.