Tag: debt limit

McConnell’s Cave-In and Boehner’s Opportunity

Senate Minority Leader Mitch McConnell has offered the president a way to raise the debt ceiling by $2.5 trillion without having to cut spending. The WaPo reports that “McConnell’s strategy makes no provision for spending cuts to be enacted.”

This appears to be an epic cave-in and completely at odds with McConnell’s own pronouncements in recent months that major budget reforms must be tied to any debt-limit increase.

House Republicans should obviously reject McConnell’s surrender, and they should do what they should have done months ago. They should put together a package of $2 trillion in real spending cuts taken straight from the Obama fiscal commission report and pass it through the House tied to a debt-limit increase of $2 trillion. Then they shouldn’t budge unless the White House and/or the Senate produce their own $2 trillion packages of real spending cuts, which could be the basis of negotiating a final spending-cut deal.

For those who say that House tea party members won’t vote for a debt increase, I’d say that $2 trillion in spending cuts looks a lot better than the alternative of having Democrats and liberal Republicans doing an end-run around them with McConnell’s no-cut plan.

For those who say that House members are scared of voting for specific spending cuts, I’d say that they’ve already done it by passing the Paul Ryan budget plan. I’d also say that you can’t claim to be the party of spending cuts without voting for spending cuts.

Obama’s Fiscal Commission handed Republicans ready-made spending cuts on a silver platter—Republicans will never get better political cover for insisting on spending cuts than now.

$1 Trillion in Phony Spending Cuts?

In the Washington Post Friday, Ezra Klein partly confirmed what I fear the Republican strategy is for the debt-limit bill—get to the $2 trillion in cuts promised through accounting gimmicks. As I have also noted, Klein says that there is about $1 trillion in budget “savings” ($1.4 trillion with interest) to be found simply in the inflated Congressional Budget Office baseline for Iraq and Afghanistan. Klein says, “I’m told that a big chunk of these savings were included in the debt-ceiling deal” that Rep. Eric Cantor (R-VA) and Sen. Jon Kyl (D-AZ) are negotiating with the Democrats.

Republican leaders have promised that spending cuts in the debt-limit deal must be at least as large as the debt-limit increase, which means $2 trillion if the debt-limit is extended to reach the end of 2012. In a Daily Caller op-ed, I noted that you can find $1 trillion in “savings” from this phony war accounting and another $1 trillion by simply pretending that non-security discretionary will stay flat over the next decade.

There is more evidence that few, if any, real spending cuts are being discussed. One clue is that the media keeps quoting Joe Biden essentially saying that it was easy to reach agreement on the first $1 trillion in cuts.

The other suspicious thing is that the media keeps floating trial balloons for specific tax hikes, but I’ve seen very few trial balloons for specific spending cuts. Friday, the Washington Post story on the debt discussions mentions all kinds of ideas for raising taxes on high earners. A few days ago, news stories revealed that negotiators were talking about changing tax bracket indexing to create annual stealth increases in income taxes. The only item I’ve seen being discussed on the spending side is trimming farm subsidies.

If Republican and Democratic lawmakers were really discussing major spending cuts, then the media would be full of stories mentioning particular changes to entitlement laws to reduce benefits and stories about abolishing programs widely regarded as wasteful, such as community development grants.

I hope I’m wrong, but this is starting to look a lot like the phony $100 billion spending cut deal from earlier this year.

Sean, Rush, Greta, Glenn, Bill: When you get Republican leaders on your shows, get them to promise that they won’t use phony baseline accounting like war costs to reach the $2 trillion in cuts. The budget and the nation desperately need real cuts and real government downsizing.

Wednesday Links

  • Next up for marriage equality: Perry v. Schwarzenegger. Please join us at 12:00 p.m. Eastern today as co-counsels for the plaintiffs Theodore Olson and John Boies join Center for American Progress president John Podesta and Cato chairman Robert A. Levy for a panel discussion on marriage equality, exploring legal and moral questions dating back to the landmark 1967 Loving v. Virginia decision that ended state bans on interracial marriage. If you cannot join us here at Cato, please tune in to watch a live stream of the event.
  • “Republicans have an opportunity for a much more important debate, which will frame the election campaign next year.”
  • In President Obama’s next speech, Cato director of foreign policy studies Christopher Preble hopes “that the president reaffirms the importance of peaceful regime change from within, not American-sponsored regime change from without.”
  • What will former Massachusetts governor Mitt Romney’s next position on health care be?
  • Like cleanliness next to godliness, so is democracy next to tyranny.
  • The U.S. hit the debt limit–what’s next?


Boehner’s Price for Increasing the Federal Debt Limit

House Speaker John Boehner, in his speech to the Economic Club of New York on Monday night, was very clear about the conditions for which he would support an increase in the federal debt limit:

… Without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase.  And the cuts should be greater than the accompanying increase in debt authority the president is given.

We should be talking about cuts of trillions, not just billions.

They should be actual cuts and program reforms, not broad deficit or debt targets that punt the tough questions to the future.

And with the exception of tax hikes – which will destroy jobs – everything is on the table.

Congress is institutionally incapable of formulating and approving a large responsible package of spending cuts in the next month or two, even if there were the basis for an agreement in the longer run.  The most likely outcome of this condition is that Congress would approve an increase in the debt limit for the next year or two with no significant amendments.  John Boehner would be the major loser from this outcome, for having talked tough and promised too much, without delivering anything to his party base.

Another possible outcome of this condition is that an increase in the debt limit would be deferred indefinitely.  This would lead to a period of fiscal anarchy in which total federal spending would have to be reduced to federal revenues on a month-by-month basis, and non-interest spending would have to be reduced about 40 percent with no political guidance on what activities are paid how much.

The House Republicans are better advised to sort out their priority budget changes in the longer run.  I suggest that it is desirable to maintain a commitment against any increase in tax rates but to consider major reductions in what is now roughly one trillion dollars of off-budget tax preferences; such reductions would increase both revenue and economic growth.  Finally, I  suggest that reductions in the defense budget should also be considered.  In a world in which the United States now faces no major power military threat, total real (inflation-adjusted) annual national security spending is now over twice that during the Ford and Carter administrations and over 40 percent of the total national security spending by all governments.

For the most part, I suggest, the Republican fiscal priorities are correct, but it will take better preparation and a longer time to implement these priorities.

John Boehner’s Spending and Debt Promise

House Speaker John Boehner has promised to tie substantial spending cuts to upcoming debt-limit legislation. He said spending cuts will have to be at least as large as the dollar value of the allowed debt increase. Thus, if the legislation increased the legal debt limit by $2 trillion, then Congress would have to cut spending over time by at least $2 trillion.

How can we be sure that spending cuts are real?

There are only two types of solid and tough-to-reverse spending cuts—legislated changes to reduce entitlement benefit levels and complete termination of discretionary programs. Republicans will have to define what time period they are talking about, but let’s assume it’s the standard 10-year budget window.

  • Entitlements: The legislation, for example, could change the indexing formula for initial Social Security benefits from wages to prices. The Congressional Budget Office says that change would reduce spending by $137 billion over 10 years (2012-2021). Other options include raising the retirement age for Social Security and raising deductibles for Medicare.
  • Discretionary: Each session of Congress decides the following year’s discretionary spending. Promises of discretionary spending cuts beyond one year are meaningless. Thus, the various promises in Republican and Democratic budget plans to freeze various parts of discretionary spending through 2021 or reduce spending to 2008 levels over the long term have no weight. Those are not real cuts.

The only way to get real cuts in discretionary spending—cuts that would be tough to reverse out in later years—is complete program termination and repeal of the program’s authorization. That way, policymakers in future years would generally need at least 60 votes in the Senate to reinstate the spending.

Thus, if the GOP promises to save $50 billion over 10 years by reducing the levels of Title 1 grants to the states for K-12 schools, that is not a real and solid cut. However, if they pass a law to repeal Title 1 spending altogether, that cut may well be sustained over the long term.

To make spending cuts even more secure, the GOP should also insist on a statutory cap on overall outlays with a supermajority requirement to break, as I’ve outlined here. For program termination ideas, see www.DownsizingGovernment.org.

In sum, the GOP needs to ensure that spending cuts tied to the debt-limit vote are either:

  1. Changes to entitlement laws to reduce benefit levels, or
  2. Discretionary program terminations.

    Promises to hold down future discretionary spending levels and partial program trims are not real spending cuts.

    Wednesday Links

    Federal Budget Cap at 3%

    The federal government is approaching its legal borrowing limit, and fiscal conservatives in Congress are wondering what spending reforms they can extract in return for supporting a debt-limit increase. Various sorts of balanced budget amendments and debt limits relative to GDP are being kicked around. I support those ideas, but I fear that they may be too complicated to gain traction right now.

    A simpler idea would be to impose a statutory limit on annual spending growth of 3 percent. If total federal outlays in a year were $4 trillion, the government couldn’t spend more than $4.12 trillion the next year. It would be that simple.

    Such a limit would be easy for policymakers and the public to understand and enforce. It would put ongoing pressure on Congress to cut discretionary programs and reform entitlements. With spending growth limited to 3 percent, the budget would be balanced in just over a decade and growing surpluses would be generated after that. The federal government would shrink as a share of GDP. The math is simple: federal revenues and GDP are expected to grow substantially faster than the 3 percent spending limit over the next decade and beyond.

    I want Congress to enact major cuts to spending, not just to limit spending growth. But one advantage of an annual growth cap is that it would lock-in any spending cuts that are made, and thus spending would be ratcheted downwards.

    Under such a limit, the OMB and CBO would issue regular reports showing spending for the coming fiscal year relative to the projected legal cap, which would make it clear to political leaders, reporters, and voters how much needs to be cut. The president would also be required to propose a budget each year that fit under the estimated legal cap. If the beginning of a new fiscal year arrives and spending is still expected to be above the limit, the president would be required by law to impose an across-the-board cut to bring spending into line.

    In the past, I’ve proposed a spending growth cap equal to the sum of inflation plus population growth. (This sum is expected to be about 3 percent in coming years). But a fixed and explicit percent cap would be even simpler and easier to enforce. A fixed percent cap would also encourage policymakers to support a low-inflation policy by the Fed because the lower was inflation, the higher the budget limit in constant dollar terms.

    The chart shows the proposed spending in Obama’s new budget compared to spending capped at 3 percent. The spending cap line assumes that the GOP’s discretionary cuts are put in place this year. It also assumes that spending grows at the maximum 3 percent each year, but if spending were restrained more than that, the cap would ratchet down to a lower level. The chart also shows projected federal revenues based on CBO data, assuming the extension of current income tax cuts and AMT relief. (See page 22).

    Limiting spending growth to 3 percent is a modest goal, but over time the results would be quite dramatic compared to Obama’s no-reform spending plan. Spending in 2021 would be about $1 trillion less than the president is projecting—$4.7 trillion rather than $5.7 trillion. As a share of GDP, Obama’s 2021 spending of 23.9 percent would be cut to 19.9 percent. And the budget would be closing in on balance that year with revenues at 18.6 percent of GDP with tax relief in place. (Figures based on OMB GDP).

    At DownsizingGovernment.org, I’ve proposed spending cuts that would take the federal government down to 15 percent of GDP or less. But getting a new budget mechanism signed into law takes centrist support, and I think that a 3 percent growth cap to balance the budget in a decade or so is a reasonable goal that could gain broad agreement.

    Finally, it makes sense to include in such a budget law the ability of policymakers to spend over the cap temporarily for emergency war funding with a two-thirds vote in both House and Senate. Without such a temporary escape hatch, Congress would likely simply repeal the law when it entered a costly war.

    I’ve discussed a spending growth cap in more detail here and here and here. Dan Mitchell has made similar observations about spending growth rates. The folks at One Cent Solution are recommending a tighter cap.