The Way Forward on the Deficit

The President's Deficit Commission passed by an 11 to 7 vote; this is short of the 14 yes votes needed to trigger an 'up or down vote' in the House and Senate. However, I am not really sure what that would have meant....a general 'sense of the Senate' vote? Surely, the Deficit Commission report has not been put into legislative language.....no matter now.

I an any event, looking at who voted yes and no is instructive:

• Chairs of the Committee, both yes.
• Business leaders, both yes.
  
• Alice Rivlin, former CBO head (founding Director) and policy wonk extraordinaire, yes.
• Sitting U.S. Senators, 5 of 6 yes (Max Baucus, D) voted no
• Sitting U.S. House members, 5 of 6 no (John Spratt, D) who lost election in Nov. voted yes
• Organized Labor leader, voted no

The bipartisan range of the Senate members who voted yes is impressive: Coburn is one of the most conservative members, and Durbin a reliable liberal. Both the Chair of the Senate Budget Committee (Conrad) and the ranking member, (Gregg) managed to both agree.

In the House, the bipartisan agreement is also impressive. Paul Ryan, the soon-t0-be chairman of the House budget committee, and who has no problem issuing sweeping proposals, to change, well everything, voted no because he said it did too little on health care, and didn't cut enough. Xavier Becerra, a liberal from California, said it cut too much. Ryan voting no especially dims his reputation as a young gun a bit. He thinks that he is going to get support of something even more radical than this? He should recognize quite a lot about his roadmap here, especially the tax reform (fewer brackets, lower rates, broader base by ending tax expenditures). He is getting plenty of deserved derision.

The theory of the Senate is that members are more insulated from elections (only every 6 years) while the House is always running for re-election (we are less than 23 months from the next one and they haven't even been sworn in yet).

I think that the President's Commission has succeeded in generating lots of elite discussion of the deficit and how it should be addressed, and is a reasonable way forward, certainly as a starting point. I think there is grudging acceptance by most that something must change. The only question is whether we wait for an economic crisis to bring it about, or go ahead and fight it out now.

There is a profoundly delusional aspect of the current tax rate debate: extending all the rates (those above and below $250,000) would add around $4 Trillion to the deficit over the next 10 years. The plan released by the Deficit Commission would reduce it by around $4 Trillion over the next 10. That is quite a swing....

The next big move is that of the President. Will he propose a budget to Congress that contains these hard choices, perhaps forcing continued discussion of these issues? The results of the Commission suggest there could be hope of the White House being able to work with the Senate on these issues. If they build momentum, it may become increasingly hard for the Republican controlled House to ignore things given how much Republicans have traditionally talked about deficits (they have mostly only talked, however).

Especially if we extend the tax rates of the past decade into the future, we have got to move to develop a plan to address the long term deficit in a reasoned manner. Reasoned means that we certainly need some short term stimulus, perhaps the payroll tax holiday suggested by the Deficit Commission is the simplest, most consequential way to act.

Simply continuing the tax rates that have existed through the economic crisis and doing nothing else is akin to flooring it when you finally see clearly the bridge is out ahead. Perhaps an extension makes a large change (esp a tax reform) such as that proposed by the Deficit Commission much more likely to gain traction. It may be that the extension of the current rates makes a big change inevitable, sooner rather than later.

Commssion Report, 11 Yay, 7 Nay

The President's Deficit Commission report was approved by a 11-7 vote, but this is short of the 14-4 vote needed to get an up or down vote in the House and Senate. All 3 Republican House members (Ryan, Hensarling, Camp) voted no as did Max Baucus, the Chairman of the Senate Finance Committee. But, early reports that none of the elected Republicans would vote for the report proved false, as Sens. Coburn and Crappo who will return to the next Congress and Gregg who is retiring voted in Favor. Sen. Conrad (D) and Sen Gregg (R) both voted yes and they are the current Chairman and ranking member of the Senate budget committee.

WSJ coverage.

Op-Ed on Deficit Commission: fight it out now

I have an op-ed in today's Raleigh, (N.C.) News and Observer arguing that the President's Deficit Commission report is a good place to start discussions and that we need to go ahead and fight this out now and not wait for a debt-driven financial crisis to address our fiscal problems.

The Deficit Commission proposes to achieve balance at 21 percent of GDP, which would be a historical tax increase and a historical cut of spending seen at many points in the past 40 years. Here is an overview of historical spending and taxation levels the past 40 years.

Taxes and Spending as Percent of GDP, 1970-2009

Year	Taxes Collected, % GDP	Spending, % GDP	-Deficit/+Surplus, %GDP
1970	19.0	19.3	-0.3
1975	17.9	21.3	-3.4
1980	19.0	21.7	-2.7
1985	17.7	22.8	-5.1
1990	18.0	21.9	-3.9
1995	18.4	20.6	-2.2
2000	20.6	18.2	+2.4
2005	17.3	19.9	-2.6
2009	14.8	24.7	-9.9

source: my calculations from CBO sources.

The proportion of our economy that is redistributed by the federal government is a profound one that is deserving of reasoned debate. And every dime of government spending is redistributive because government's produce spending patterns that markets won't achieve. That is the point of government spending. It is not job food stamps that is redistributive. Every single dime.

Medicare, the earned income tax credit, home mortgage deduction, Social Security all produce patterns of spending that would not occur without government action. Medicare was created because society decided the outcome produced by the market (around 50% uninsured for those 65 and over in the early 1960s was not acceptable). The existence of the Department of Defense is an explicit claim that the market won't produce the appropriate amount of Military spending our nation needs, and that government knows how much we need. So, don't say you are opposed to redistribution unless you want 0 government spending. Say which redistribution you are opposed to.

Update: The Medicare example is better to illustrate the point that govt action is a rejection of what the market would otherwise provide and not defense since 'the common Defence' is explicitly noted in article 1, section 8 of the Constitution, so there is the clear statement from the Constitution that the federal govt would be responsible for Defense. Article 1, sect. 8 also notes the 'general Welfare' as being a reason the Congress can levy taxes. Many disagree what is legitimately done by the federal government in this way....that is the conversation we need to have: how much 'common Defence' and how much 'general Welfare' we will have and then we need to pay for it.

Bottom line: lets fight it out now and not wait for a debt-driven crisis that gives us fewer options and less time.

A short term extension

of both the tax cuts might actually be good for the deficit commission, the ensuing discussion and our ability to actually address the long term issues. Extending them both forever is a disaster if you are interested in a balanced budget. The current tax code won't produce anywhere near the amount of revenue needed to fund any level of spending that has any chance of being enacted. It will raise 16-17% of GDP in a good economy; maybe 5% of the country wants the cuts that would be necessary to make spending that low.

The current tax code as the default, and therefore perpetual and growing deficits, may make a large scale tax reform like proposed by the Commission report that gets rid of many/most tax expenditures just about the only way to proceed politically. Because you can say (correctly) that you will be lowering rates. And increasing fairness. And doing it in a progressive manner, because most of the tax expenditures help those with higher incomes. And it will be good in health policy terms because that may be the only way we will actually address (cap, maybe end some day) the tax exclusion of employer paid health insurance, which is easily the best, simplest and most straightforward way to slow health care cost inflation.

Extend them both for a period of time, and then get down to business.

Deficit Commission Good Place to Start

The Deficit Commission final report is out, and its recommendations are a good place for our country to start the discussion about how to address the federal deficit, and its effect on our cumulative level of debt. I don't like everything in it, but I would take it over the status quo in one second.

The problem we face is that the very large deficits due to the economic downturn will give way to large ones from our paying for several basic governmental functions: Military, Social Security, Medicare, Medicaid and the interest on the debt. Our tax code simply doesn't raise enough revenue to pay for the spending we have. One or both have got to change. In fact, if we do nothing, the 5 line items above will consume all federal revenue in 2020, and every other dime spent would be deficit-financed. The deficit would be over $1 Trillion then, and this assumes a normal economy.

The deficit is a problem because it adds to our cumulative debt. It was around 33% of our GDP in 2000, and at the end of this year it will be around 63% of GDP. Now borrowing costs are low, but if the debt gets too high, investors will be worried, and we will have to pay higher interest rates to finance our debt. No one knows for sure what level of debt will trigger this crisis. It would be better for us to hash it out now while we can have some reasonable debate than to wait and deal with it under a financial crisis.

The broad outline of the Commission report is the same as the earlier draft report from the co-chairs, Erskine Bowles and Alan Simpson.

• 21% of GDP as the target balance point to be achieved by 2035. This would be a historical tax increase and a historical cut to our spending level. I would probably be willing to spend a bit more, but I think a target is necessary.
• The future deficit is driven almost entirely by health care costs. The plan caps the tax exclusion of employer paid insurance at the 75th percentile of premium costs nationally in 2014, and holds this amount constant through 2018 which means even more policies will be affected. They propose then moving slowing to eliminate this tax exclusion by 2038. This would be the most consequential cost-control health policy enacted by the U.S. since, well ever. And this policy is flexible, meaning it will work as intended regardless of whether the Affordable Care Act is implemented fully, repealed or anywhere in between.
• The plan is a bit wobbly over the ACA, and basically comes down with expansion of the Ind Payment Advisory Board, which is the strongest part of ACA to address Medicare cost inflation. Then it notes disagreement on the board about whether ACA and these expanded policies will slow costs. They recommend that Medicare growth be capped at 1% above inflation after 2020 if enough cost savings do not materialize.
  
• Bottom line on health care: capping the tax exclusion and beefing up the IPAB would (by far) be the strongest cost control health policies our nation has enacted. There are others proposed such as malpractice reform, but these are the two biggest, and in and of themselves make it a strong health policy package.
  
• The plan proposes a profound tax reform, which is essentially a trade of fewer brackets and lower rates for the removal of around $1.1 Trillion in tax expenditures, or aspects of the tax code that benefit one group of taxpayers over another. Progressives need to get on board with this approach, because it is a progressive way to reduce this type of 'spending.' Some of the tax expenditures are proposed to be added back, but the plan makes clear how much they cost. One of the benefits of the debate so far is that (maybe) more people are beginning to understand that the 'outs' include explicit spending and tax expenditures like the home mortgage deduction and the tax exclusion of employer paid insurance.
  
• Regarding Social Security, it is in need of tweak, while the health care system is in need of tremendous changes. I would rather not raise the retirement age, but more directly cut benefits for high wage beneficiaries and increase the amount of wages subjected to payroll taxes faster than what they propose (they want to eventually get back to the 1983 standard of the 90th percentile of wages being subjected). We need a deal on Soc Security so we can redouble our efforts on health care costs.
  
• Their plan cuts Military spending, and discretionary spending and is filled with symbolic things like cutting the budgets of the White House and Congress. But, symbolism can be important so long as you get to the actual policies needed.

This report is a good place to start. There are now 5 or 6 deficit plans, from liberals, conservatives and everyone in between. This report has the benefit of having been discussed and put together in the context of Democrats and Republicans being involved, many of whom are in Congress. So, it has already been subject to some of the inevitable negotiations. And some Democrats and Republicans have signed on: Conrad and Gregg, for example, the Chair and ranking member of the Senate budget committee are going to vote for the report on Friday. Xavier Becera, a Democrat on the more liberal end is undecided but says this is a template for how we address the problem, and Sen. Tom Coburn who is decidedly conservative is reportedly considering voting yes. That is some progress. The business leaders on the panel are supporting it as the way forward.

The President of course has the ability to propose dramatic changes in his own budget. If he choose to do so, that will ensure continued discussion of these difficult changes next year, and put an end to the hyperbolic discussion of miniscule spending programs as a way to deal with the deficit. It is the correct policy for him to focus our country on the hard things. He has said he would rather be a good one term President than a mediocre two-term one. And because his political fortunes with independents have been on the rocks, perhaps the stars are aligning and what will be good politics for him in terms of maybe wooing back independents which seems necessary for his re-election will be the same thing as the right thing to do. Here's hoping.

The Moment of Truth

is the title of the Deficit Commission final report. More later.

More on deficit Commission Delay

Update 9:15am: Commission Report, "The Moment of Truth" just released. Some tweaks, such as replacing the mortgage deduction with a refundable tax credit, which is a capping of an otherwise unlimited tax subsidy. The bottom balance point remains 21% of GDP.

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NY Times with a bit more reporting saying that the Republican members are unified is being against the Commission report. It is not clear how much it may have changed since Bowles and Simpson released their draft report earlier in November.

If the Commission negotiations are only among the Democrats it shows several things. (1) Republicans are total frauds in worrying about the deficit. They lament tax and spend but practice don't tax but still spend.
(2) The Democrats have allowed the Republicans to get away with the above because they have been mostly worried about programs and haven't talked about the deficit.
(3) The deficit and cumulative debt is an actual problem, and we will have to address it at some point. The only question is whether that point comes during an economic crisis or through some sort of (reasonable?) debate.
(4) Republicans have more to lose short term in actually doing the hard thing, because they think they can ride bad economy and Obama unpopularity to win the White House and Senate in 2012.
(5) For the President, good policy and good politics (for his re-election chances) are coming toward the same thing. He should call the bluff of the Republicans and propose a budget that actually lays out many of these hard decisions.

Again, the historical data on taxes and spending. 21% of GDP is lower than spending was in 1975, 1980, 1985 and 1990. Spending was 22.8% of GDP in 1985. And the baby boomers were working then and not receiving Soc Security and Medicare.

And 21% of GDP collected in taxes would be the highest amount since I have been alive.

Taxes and Spending as Percent of GDP, 1970-2009

Year	Taxes Collected, % GDP	Spending, % GDP	-Deficit/+Surplus, %GDP
1970	19.0	19.3	-0.3
1975	17.9	21.3	-3.4
1980	19.0	21.7	-2.7
1985	17.7	22.8	-5.1
1990	18.0	21.9	-3.9
1995	18.4	20.6	-2.2
2000	20.6	18.2	+2.4
2005	17.3	19.9	-2.6
2009	14.8	24.7	-9.9

source: my calculations from CBO sources.