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.

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.

DT

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

Do we really have to balance the budget?

Josh Barro argues no, and says we really just need a deficit as a percent of GDP that is half of the GDP growth rate. This would stabilize the debt-to-GDP ratio (cumulative debt) at 50% of GDP in the long run. If long run GDP growth were 4% then, you could run a deficit of around 2% of GDP in perpetuity. Doing so would allow the government to finance things that would otherwise not be provided, like health care for my grandmother, a large Military, infrastructure, etc.

I follow the argument, and actually don’t disagree. However, the reality is that for much of the past 50 years the deficit has been larger than the 2% figure he notes. The deficit has been very large the last two years due to the severe economic downturn (~10% GDP), but was consistently larger than this for the entire last decade (2000s), and most of the 1970s-1980s. It was lower or balanced for the last half of the 1990s.

It will take quite a lot of work (taxes will have to go up and spending down over current projections) for us to get the deficit to 2% of GDP from where we are today. Once we get there we can then decide whether to try for long range balance or not.

update: This economix post by Simon Johnson provides useful context and history of the budget deficit across U.S. history.

 

Purity and deficit reduction plans

Matt Yglesias has an interesting post on the various deficit reduction plans from progressive/liberal groups that were a part of the Peterson foundation’s recent deficit reduction conference. Some progressive/liberal groups think engaging the discussion in this way is a sell out of some sort. Yglesias notes that the end policy result is the true outcome of interest, not participation in a conference. His bottom line seems to be:

It sounds to me like progressives ideas have real merit, and that the main thing we learned from this exercise is that progressive policy prescriptions will have to be a major part of any realistic long-term fiscal solution.

The 6 participating groups that offered plans had broad ideological span, yet produced four areas of agreement across plans:

  • current policy is unsustainable, so changes are inevitable
  • maintain government as a key part of the health and retirement safety net
  • subsidy of the well off is now overly generous and should be reduced
  • tax expenditures, or the aspects of the tax code that incentivize, provide tax credits, or exclude income from taxation should be reformed (and their aggregate cost is $1 Trillion annually)

This points out the possible availability of a next step in the health care realm that could increase the cost saving ability of the ACA, and which would likely serve to address costs in any imaginable reform that might later emerge: capping the tax exclusion of employer paid health insurance. My experience in giving talks on health care reform to community groups shows that while they can easily be whipped into a frenzy about the ‘need to control health care costs’ once you begin to offer solutions like capping or ending the tax preference for employer paid insurance they change their tune. Not that change, we work hard for our benefits!

There is no easy way out of the cost problem we face, however, so perhaps this politically difficult choice can emerge from the current deficit/debt limit talks. The Bowles/Simpson commission suggested it. It is an obvious next step to take to address health care cost inflation among health policy wonks, and it would serve to address costs in the private part of the system instead of only focusing these efforts on Medicare. It is a reform of tax expenditures that seems to grow in popularity as a way to increase federal revenue while either leaving marginal tax rates steady or even dropping them. Further, it should pass any sort of progressive litmus test since the current policy disproportionately benefits higher income workers. This is what addressing health care costs will look like.

Is a bipartisan deal to cut spending on the rich possible?

Charles Blahous, a Research Fellow with the Hoover Institution, and a public trustee for Social Security and Medicare, argues that cutting spending for the rich is the best route to a bipartisan budget deal. He notes that the likelihood of reaching such a deal before the 2012 election is slim.

The essential problem is that the two major parties are now seeking to distinguish themselves on politically sensitive tax and entitlement policies at precisely the time that bipartisan cooperation on such issues is becoming most necessary. And yet there is a clear path available for the two parties to cooperate to improve the fiscal outlook while still preserving the cores of their respective political messages: namely, by cutting the growth of federal spending on “the rich.”

Democrats are largely stressing distributional issues. They charge Republicans with pursuing “tax cuts for the rich” and with plotting to cut vital spending on the poor. Democrats, at the same time, deny Republican charges that they (Democrats) are indifferent to the exploding growth of federal spending.

Republicans are generally focusing on the size of government. They charge Democrats with supporting runaway spending. They in turn deny Democratic charges that they are insensitive to the vulnerabilities of the poor.

This narrative leaves a sliver of space for the parties to agree to benefit cuts for high income persons in the areas of Social Security, Medicare and agricultural subsidies (the ‘rich’ must of course, be defined). If they cut such a deal, both parties could rightly claim they had held true to their core constituencies and stated goals (Republicans to reduce size of government; Democrats targeting resources to those most in need). Implementing a policy of cutting direct spending to the rich could be done most consequentially by slowing benefit growth to the rich in Social Security, increasing their Medicare Part B premium, and perhaps applying a new means test of some sort for them on Part A. Farm subsidies for the rich could also be ended. A deal along these lines might also help Democrats to avoid large cuts to the Medicaid program, which seems to be a priority for them.

These steps won’t do all of the work needed to address our long term fiscal imbalance, but they would represent a start, whose adoption might increase the chances that the 2012 election was fought out over the harder next steps to come on Medicare, Medicaid, Social Security, Defense and taxes.

h/t Reihan Salam

Can the President ignore the debt limit?

Bruce Bartlett argues that President Obama can ignore the debt limit and instruct the Treasury Secretary to sell whatever securities necessary to keep the federal government open for business, regardless of the actions (or lack thereof) of Congress later in May.

He argues this is necessary because not doing so would have such dire consequences:

The president would be justified in taking extreme actions to protect against a debt default. In the event that congressional irresponsibility makes default impossible to avoid, he should order the secretary of the Treasury to simply disregard the debt limit and sell whatever securities are necessary to raise cash to pay the nation’s debts. They are protected by the full faith and credit of the United States and preventing default is no less justified than using American military power to protect against an armed invasion without a congressional declaration of war.

Claims the President has Constitutional powers that trump statutory law in this case:

Furthermore, it’s worth remembering that the debt limit is statutory law, which is trumped by the Constitution which has a little known provision that relates to this issue. Section 4 of the 14th Amendment says, “The validity of the public debt of the United States…shall not be questioned.” This could easily justify the sort of extraordinary presidential action to avoid default that I am suggesting.

And that the use of 3 month securities mean investors will be repaid long before the Supreme Court decides the case, meaning interest rates will not likely rise too much under this option:

Some will raise a concern that potential buyers of Treasury securities may be scared off by a fear that bonds sold over the debt limit may not be backed by the full faith and credit of the United States. However, given that the vast bulk of Treasury securities are 3-month bills that will turn over many, many times before this issue ever reaches the Supreme Court, it is doubtful than anyone will be concerned about that. And the Federal Reserve could assure investors that it will always be a buyer for such securities.

Count me as not being a constitutional scholar, so I have no idea if this is an option. It would certainly be an interesting wrinkle.

Update: interesting post from the Atlantic on debt limit maneuvers, including a link from GAO on history of debt limit.

What happened between 2001 and 2011?

Great fact sheet from Pew Charitable Trust on how we went from a projected surplus in 2001 to our current projected debt situation. A very nice figure summarizes:

About two-thirds of the change was due to policy choices made in the past decade. If we are going to ever have a balanced budget, it will take a mix of tax increases and spending reductions over the status quo as it exists today. In other words, policy choices. There are multiple approaches, and all sorts of plans.  Addressing health care costs is a necessary, but not a sufficient condition to ever having a balanced budget. The next step is a political compromise that lets us move ahead.

How the public would deal with the deficit

Interesting study from The Program on Public Consultation at the University of Maryland School of Public Policy detailing how the public would deal with the budget deficit (h/t Steve Sisson via email). The authors frame the study against a backdrop of polls that seem to provide irrational responses to the budget deficit, which they feel occurs because of how information is provided in polls.

The purpose of this study was to give a representative sample of Americans the chance to deal with the problem of the budget in such an integrated framework, one in which they would make tradeoffs. The goal was to have respondents face the kinds of challenges that policymakers face when making a budget. In this way we can see whether Americans are able to deal with such a challenge, and whether they in fact know what their value priorities are.

The Program worked with the Staff of the President’s Fiscal Commission to design study materials that would allow citizens to make informed trade-offs, and split the budget into Medicare and Social Security since they have dedicated funding streams, as distinct from the discretionary budget (incl. Defense). They did not address Medicaid in the study given its complex funding arrangements. The participants (N=1,250) reached a surprising level of consensus about how to reduce the deficit that results from the discretionary spending portion of the budget (which they projected to be $625 Billion in 2015). Note that according to the text, the column ‘Tea Party Very Sympathetic’ should have a negative sign in front of $100B and a positive in front of $188.2B, for a total deficit reduction of $288.2B in 2015.

The average choices of all groups reduced, but did not eliminate, the default discretionary budget deficit of $625 Billion that is projected for 2015, via a mix of spending cuts and tax increases.  Independents and Democrats achieved the most deficit reduction and had the smallest remaining deficit ($124B and $129.9B respectively), while those self-identifying as very sympathetic to the tea party having the highest remaining deficit in 2015 ($336.8B). Looking at detailed information in the report, you can see fairly substantial majorities for many program cuts and tax increases. Respondents seemed to address this portion of the budget deficit in a straightforward manner without too much trouble.

When it came to Medicare’s contribution to the deficit (projected at $400 Billion in 2015), the participants had a harder time. Four options were highlighted: increasing payroll taxes; increasing Part B premiums; raising the Medicare eligibility age; or reducing payments to physicians.  In short, a majority viewed none of these options as being acceptable. The most popular proposal was a 1 percentage point increase in the Medicare payroll tax that was viewed as acceptable by 33% of respondents, and tolerable by nearly another half. Interestingly, this would generate around $68 Billion in revenue in that year, or three times less revenue than the average amount of revenue increase embraced by the most tax averse group when focusing on the discretionary budget.

Respondents were not eager to raise taxes or premiums or to reduce benefits by increasing the eligibility age when focusing on Medicare. Neither were they eager to reduce Medicare payments to doctors. However, Medicare is a key driver of the long term deficit, and it is not possible to obtain a balanced budget via cutting discretionary spending only.  What does this mean? Why could respondents arrive at a consensus of cuts and tax increases for the discretionary budget but not in Medicare? What can we do to counter the seeming unwillingness of the public (even when educated and provided information in a meaningful manner) to identify ways to slow Medicare costs even as many say we must do so?

Perhaps the best hope is to address the discretionary budget aspects of the deficit via a mixture of budget cuts and tax increases, and move to have more dedicated payroll tax funding of Medicare, perhaps increasing the payroll tax to include the substantial Part B support that now comes from the general fund (income taxes). Then we could have a regime whereby the payroll tax automatically increases both in rate, as well as in the proportion of wages to which it applies as the cost of Medicare increases. Perhaps with increased focus on the cost of Medicare, then over time we will embrace cost cutting strategies. Or perhaps we just really like health care spending, and we will decide it is worth it.

Fiscal Commission Aims for Balance at 21% of GDP

President Obama is expected to lay out a vision today for his preferred next steps to achieve a long term balanced budget. Many believe that he will endorse or embrace at least some aspects of the Fiscal Commission final recommendations. Yesterday, I outlined the health policy aspects of the Commission report that provide additional policies beyond those enacted by the Affordable Care Act to address health care costs. Addressing health care costs is a necessary, but not a sufficient condition to ever having a balanced budget. At the 50,000 foot level, the Fiscal Commission charts a path to a balanced budget in 2035 with taxes and spending at 21% of GDP (Table 4 from the Commission Report, p. 16).

Seeking balance at 21% of GDP around 25 years from now means that spending will have to decrease over current levels (and particularly as compared to auto-pilot health care cost inflation levels) and taxes will have to rise. The table below that I put together from CBO sources provides some historical context about the goal of balancing taxes and spending at 21% of GDP.

At 21% of GDP, taxes would be the highest amount since I have been alive (max 20.6% in 2000).  However, spending was higher than 21% of GDP in 1975, 1980, 1985 and 1990, and the baby boomers were working and paying payroll taxes in those years, not collecting Social Security and Medicare. Of course, this is merely another way of restating the fact that we have had a balanced budget in only 4 of the 43 years that I have been alive. While it is mathematically possible to balance the budget at a lower percentage of GDP, it seems non-controversial to me that it will take something like the 21% of GDP target specified by the Fiscal Commission to achieve a balanced budget given the demographic and health care realities of our nation.