Tag: congressional budget office

Federal Spending: Ryan vs. Obama

House Budget Committee Chairman, Paul Ryan, introduced his budget resolution for fiscal 2012 and beyond today entitled “The Path to Prosperity.” The plan would cut some spending programs, reduce top income tax rates, and reform Medicare and Medicaid. The following two charts compare spending levels under Chairman Ryan’s plan and President Obama’s recent budget (as scored by the Congressional Budget Office).

Figure 1 shows that spending rises more slowly over the next decade under Ryan’s plan than Obama’s plan. But spending rises substantially under both plans—between 2012 and 2021, spending rises 34 percent under Ryan and 55 percent under Obama.

Figure 2 compares Ryan’s and Obama’s proposed spending levels at the end of the 10-year budget window in 2021. The figure indicates where Ryan finds his budget savings. Going from the largest spending category to the smallest:

  • Ryan doesn’t provide specific Social Security cuts, instead proposing a budget mechanism to force Congress to take action on the program. It is disappointing that his plan doesn’t include common sense reforms such raising the retirement age.
  • Ryan finds modest Medicare savings in the short term, but the big savings occur beyond 10 years when his “premium support” reform is fully implemented. I would rather see Ryan’s Medicare reforms kick in sooner, which after all are designed to improve quality and efficiency in the health care system.
  • Ryan adopts Obama’s proposed defense (security) savings, but larger cuts are called for. After all, defense spending has doubled over the last decade, even excluding the costs of wars in Iraq and Afghanistan.
  • Ryan includes modest cuts to nonsecurity discretionary spending. Larger cuts are needed, including termination of entire agencies. See DownsizingGovernment.org.
  • Ryan makes substantial cuts to other entitlements, such as farm subsidies. Bravo!
  • Ryan would turn Medicaid and food stamps into block grants. That is an excellent direction for reform, and it would allow Congress to steadily reduce spending and ultimately devolve these programs to the states.
  • Ryan would repeal the costly 2010 health care law. Bravo!

To summarize, Ryan’s budget plan would make crucial reforms to federal health care programs, and it would limit the size of the federal government over the long term. However, his plan would be improved by adopting more cuts and eliminations of agencies in short term, such as those proposed by Senator Rand Paul.

Bailout Coming for the Postal Service?

The U.S. Postal Service is in financial trouble. Undermined by advances in electronic communication, weighed down by excessive labor costs and operationally straitjacketed by Congress, the government’s mail monopoly is running on fumes and faces large unfunded liabilities. Socialism apparently has its limits.

While the Europeans continue to shift away from government-run postal monopolies toward market liberalization, policymakers in the United States still have their heads stuck in the twentieth century. That means looking for an easy way out, which in Washington usually means a bailout.

Self-interested parties – including the postal unions, mailers, and postal management – have coalesced around the notion that the U.S. Treasury owes the USPS somewhere around $50-$75 billion. (Of course, “U.S. Treasury” is just another word for “taxpayers.”)  Policymakers with responsibility for overseeing the USPS have introduced legislation that would require the Treasury to credit it with the money.

Explaining the background and validity of this claim is very complicated. Fortunately, Michael Schuyler, a seasoned expert on the USPS for the Institute for Research on the Economics of Taxation, has produced such a paper.

At issue is whether the USPS “unfairly” overpaid on pension obligations for particular employees under the long defunct Civil Service Retirement System. The USPS’s inspector-general has concluded that the USPS is owed the money. The Office of Personnel Management, which administers the pensions of federal government employees, and its inspector-general have concluded otherwise. Again, it’s complicated and Schuyler’s paper should be read to understand the ins and outs.

Therefore, I’ll simply conclude with Schuyler’s take on what the transfer would mean for taxpayers:

Given the frighteningly large federal deficit and the mushrooming federal debt, a $50-$75 billion credit to the Postal Service and debit to the U.S. Treasury will be a difficult sell, politically and economically. Although some advocates of a $50-$70 billion transfer assert it would be “an internal transfer of surplus pension funds” that would allow the Postal Service to fund promised retiree health benefits “at no cost to taxpayers,” the reality is that the transfer would shift more obligations to Treasury, which would increase the already heavy burden on taxpayers, who ultimately pay Treasury’s bills. (The Congressional Budget Office (CBO) prepares the official cost estimates for bills before Congress. Judging by how it has scored some earlier postal bills, CBO would undoubtedly report that the transfer would increase the federal budget deficit.) For those attempting to reduce the federal deficit, the transfer would be a $50-$70 billion setback.

Sounds like a bailout to me.

See this Cato essay for more on the U.S. Postal Service and why policymakers should be moving toward privatization.

‘1099’ Repeal Speaks Volumes About ObamaCare

From my latest Kaiser Health News op-ed:

When 34 Senate Democrats joined all 47 Republicans last week to repeal ObamaCare’s 1099 reporting requirement, their votes confirmed what their talking points still deny: ObamaCare will increase the deficit, no matter what the official cost projections say…

This public-choice dynamic [of concentrated benefits and diffuse costs] is why the Congressional Budget Office, the chief Medicare actuary, and even the International Monetary Fund have discredited the idea that ObamaCare will reduce the deficit. It is one of the principal reasons why, as Thomas Jefferson wrote, “The natural progress of things is for liberty to yield, and government to gain ground.” In other words, the game is rigged in favor of bigger government.

It also explains why the Obama administration is sprinting to implement ObamaCare in spite of a federal court having struck down the law as unconstitutional. The White House needs to get some concentrated interest groups hooked on ObamaCare’s subsidies – fast.

Read the whole thing here.

New CBO Numbers Re-Confirm that Balancing the Budget Is Simple with Modest Fiscal Restraint

Many of the politicians in Washington, including President Obama during his State of the Union address, piously tell us that there is no way to balance the budget without tax increases. Trying to get rid of red ink without higher taxes, they tell us, would require “savage” and “draconian” budget cuts.

I would like to slash the budget and free up resources for private-sector growth, so that sounds good to me. But what’s the truth?

The Congressional Budget Office has just released its 10-year projections for the budget, so I crunched the numbers to determine what it would take to balance the budget without tax hikes. Much to nobody’s surprise, the politicians are not telling the truth.

The chart below shows that revenues are expected to grow (because of factors such as inflation, more population, and economic expansion) by more than 7 percent each year. Balancing the budget is simple so long as politicians increase spending at a slower rate. If they freeze the budget, we almost balance the budget by 2017. If federal spending is capped so it grows 1 percent each year, the budget is balanced in 2019. And if the crowd in Washington can limit spending growth to about 2 percent each year, red ink almost disappears in just 10 years.

These numbers, incidentally, assume that the 2001 and 2003 tax cuts are made permanent (they are now scheduled to expire in two years). They also assume that the AMT is adjusted for inflation, so the chart shows that we can balance the budget without any increase in the tax burden.

I did these calculations last year, and found the same results. And I also examined how we balanced the budget in the 1990s and found that spending restraint was the key. The combination of a GOP Congress and Bill Clinton in the White House led to a four-year period of government spending growing by an average of just 2.9 percent each year.

We also have international evidence showing that spending restraint - not higher taxes - is the key to balancing the budget. New Zealand got rid of a big budget deficit in the 1990s with a five-year spending freeze. Canada also got rid of red ink that decade with a five-year period where spending grew by an average of only 1 percent per year. And Ireland slashed its deficit in the late 1980s by 10 percentage points of GDP with a four-year spending freeze.

No wonder international bureaucracies such as the International Monetary fund and European Central Bank are producing research showing that spending discipline is the right approach.

This video provides all the details.

Nondefense Discretionary Spending Freezes

When it comes to reining in federal spending, House Republicans and the president have one idea in common: freezing nondefense discretionary spending. That category accounts for about 18 percent of total spending, so let’s see how such a freeze would affect the overall budget.

Today the Congressional Budget Office released updated budget figures and baseline projections of federal spending through fiscal 2021. Projecting the budgetary future is obviously an inexact science, and the CBO’s baseline reflects unrealistic assumptions. However, it does allow us to get an idea of the impact of a nondefense discretionary freeze on total federal spending.

Three proposals have been put forward:

  • In his State of the Union address, President Obama proposed freezing nondefense discretionary spending for five years, beginning in fiscal 2012, at fiscal 2010 levels.
  • The conservative House Republican Study Committee and Sen. Jim DeMint (R-SC) recently proposed freezing nondefense discretionary spending for ten years, beginning in fiscal 2012, at fiscal 2006 levels.
  • Ever since the release of its “Pledge to America,” the House Republican leadership has been talking about returning spending to fiscal 2008 levels. They apparently have non-security discretionary spending in mind, which is an even smaller category than nondefense discretionary. It’s not clear if they intend to freeze it at the new lower level.

Using the CBO’s latest figures, I calculated baseline spending from fiscal 2012-2021 under ten year freezes in nondefense discretionary spending at fiscal 2006, 2008, and 2010 levels:

Note:   To make an apples-to-apples comparison, I extended the proposed Obama freeze at fiscal 2010 levels from five years to ten years, and I assumed a ten year freeze at fiscal 2008 levels for the House Republicans. Also, projected annual interest payments on the debt are excluded. Therefore, the chart refers to “baseline program spending,” which is the sum of nondefense discretionary, defense, and entitlement spending.

The chart makes it excruciatingly clear that freezing nondefense discretionary spending at the levels specified or implied by Republicans and Democrats is only a start toward needed reforms in the federal budget. Congress also needs to cut defense spending, and spending on Social Security, Medicare, Medicaid, and other entitlement programs.

Republican Sellout Watch

Grousing about the GOP’s timidity in the battle against big government will probably become an ongoing theme over the next few months. Two items don’t bode well for fiscal discipline.

First, it appears that Republicans didn’t really mean it when they promised to cut $100 billion of so-called discretionary spending as part of their pledge. According to the New York Times,

As they prepare to take power on Wednesday, Republican leaders are scaling back that number by as much as half, aides say, because the current fiscal year, which began Oct. 1, will be nearly half over before spending cuts could become law.

This is hardly good news, particularly since the discretionary portion of the budget contains entire departments, such as Housing and Urban Development, that should be immediately abolished.

That being said, I don’t think this necessarily means the GOP has thrown in the towel. The real key is to reverse the Bush-Obama spending binge and put the government on some sort of diet so that the federal budget grows slower than the private economy. I explain in this video, for instance, that it is simple to balance the budget and maintain tax cuts so long as government spending grows by only 2 percent each year.

It is a good idea to get as much savings as possible for the remainder of the 2011 fiscal year, to be sure, but the real key is the long-run trajectory of federal spending.

The second item is the GOP’s apparent interest in retaining Douglas Elmendorf, the current director of the Congressional Budget Office.

Many of you will remember that the CBO cooked the books last year to help ram through Obamacare. Under Elmendorf’s watch, CBO also was a relentless advocate and defender of Obama’s failed stimulus. And CBO under Elmendorf published reports saying higher taxes would improve economic performance.

But Elmendorf’s statist positions apparently are not a problem for some senior Republicans, as reported by The Hill.

The new House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), gave a very public endorsement of the embattled head of the Congressional Budget Office during his first major speech as committee head Wednesday night. …“You’re doing a great job at CBO, Doug,” Ryan said after receiving the first annual Fiscy Award for his efforts at tackling the national debt. He added that he looked forward to crunching budget numbers with him in the future.

In the long run, the failure to deal with the problems at CBO (as well as the Joint Committee on Taxation) may cause even more problems than the timidity about cutting $100 billion of waste from the 2011 budget. Given the rules on Capitol Hill, it makes a huge difference whether CBO and JCT are putting out flawed numbers.

I’ve already written that fixing the mess at CBO and JCT is a critical test of GOP resolve, and I actually thought this would be a relatively easy test for them to pass. It is an ominous sign that Republicans aren’t even trying to clean house.

Our Tax Dollars Are Funding Bureaucrats Who Advise Congress that Higher Taxes Increase Prosperity

I’ve already written about the terrible work of the Congressional Budget Office. The CBO did an awful job on the stimulus, for instance, repeatedly asserting that diverting money from the private sector to government somehow would create jobs. CBO also was a disaster on Obamacare, claiming that a giant new entitlement program would reduce budget deficits. And the legislative bureaucracy even has argued that higher tax rates boost growth.

That sounds absurd (and it is), but CBO is not the only taxpayer-funded bureaucracy on Capitol Hill producing this kind of nonsensical analysis. The Congressional Research Service just published a new report asserting that higher tax rates will boost economic performance. Here’s an excerpt from that CRS publication.

…it is ambiguous whether tax cuts lead to more or less work, saving, and investment. The expiration of the tax cuts would nevertheless reduce the budget deficit, absent other policy changes, which economic theory predicts would have a positive effect on the economy in the long run.

To be fair, CRS doesn’t actually claim higher taxes are good for growth. And neither does CBO. But CRS and CBO both assert that there is no clear evidence that higher taxes hurt growth. Budget deficits, however, supposedly have a very negative impact on economic performance according to these Capitol Hill bureaucrats. More specifically, CRS and CBO believe that government borrowing leads to higher interest rates, and they think that higher interest rates reduce investment. And since investment is a key to long-run growth, this leads them to endorse any policy – including higher taxes – that reduces red ink.

Taking the CRS and CBO analysis to its logical extreme (and neither bureaucracy has stated that there are limits to their methodology), tax rates of 100 percent would be the most effective way of maximizing prosperity.

This video explains that the real problem is spending, and that deficits are just a symptom of a government that is too big. This is not to say that CRS and CBO are completely wrong. We have record budget deficits and very low interest rates today, but it’s possible that interest rates might be even lower without all the red ink. And it’s certainly true that interest rates are one of the many factors that determine investment choices, so there’s nothing wrong with including them in the equation.

But magnitudes matter. For all intents and purposes, CRS and CBO want us to believe that more government borrowing will have a very significant impact on interest rates and that those higher interest rates will have a very negative impact on investment. Yet neither bureaucracy offers any evidence for these linkages, in large part because the academic research shows that the relationships between deficits, interest rates, and investment are weak.

By contrast, CRS and CBO have no problem supporting higher tax rates – including more double taxation of income that is saved and invested. Yet there is considerable evidence that punitive tax rates have a significant impact not only on decisions to earn income and be productive, but also on decisions whether to consume today or to save and invest (and thus consume in the future). CRS and CBO also assume, rather naively, that politicians would use any additional revenue for deficit reduction instead of new spending.

Let’s call this the triumph of left-wing theory over real-world evidence. To add insult to injury, the sloppy analysis at CRS and CBO is financed by our tax dollars. So we pay bureaucrats so they can tell politicians to seize more money from us. Gee, what’s not to love about a scam like that?

P.S. If Republicans are actually serious about restraining government spending, CRS and CBO are target-rich environments. Just saying.