Tag: federal budget

The Kiss-Your-Sister Budget Deal Is Finalized, but Claudia Schiffer Still Ain’t Your Sibling

There were reports about 10 days ago that the crowd in Washington reached a budget deal, for the remainder of the 2011 fiscal year, with $33 billion of cuts. That number was disappointingly low. I wrote at the time that if this was a kiss-your-sister deal, we didn’t have any siblings that looked like Claudia Schiffer.

I knew it was unrealistic to expect the full $61 billion, but I explained that $45 billion was a realistic target.

We now have a new agreement, which supposedly is final, and the amount of budget cuts has climbed to $38 billion. So our sister is getting prettier, but she still isn’t close to being a supermodel. Here are the highlights (or lowlights) from the New York Times story.

Congressional leaders and President Obama headed off a shutdown of the government with less than two hours to spare Friday night under a tentative budget deal that would cut $38 billion from federal spending this year. …the budget measure would not include provisions sought by Republicans to limit environmental regulations and to restrict financing for Planned Parenthood and other groups that provide abortions.

As with all deals (such as last December’s agreement extending the 2001 and 2003 tax cuts), there are good and bad provisions. The good news is:

Now let’s look at the less desirable parts of the agreement.

  • Total spending jumped by almost $2 trillion during the Bush-Obama spending binge, so a $38 billion cut is almost too small to mention.
  • Left-wing organizations such as Planned Parenthood will continue to feed at the public trough, something that should be objectionable to everyone, regardless of your views on abortion.
  • Obamacare is not repealed (not that I ever thought that was possible) and there is no restriction on the EPA’s unilateral assertion that is has regulatory power to implement radical Kyoto-style global warming policies.

I will have more comments this week about what happens next. Suffice to say that this was just one battle in a long war.

The 2012 budget resolution, for instance, will be a key test of fiscal responsibility, but in this case the debate will be about $trillions rather than $billions. The debt limit vote will an opportunity for some much-needed reform of the budget process. And it is quite likely that there will be another potential shutdown fight when it is time to put together appropriations bills for the 2012 fiscal year, which starts October 1.

Why Should Social Insurance Reform Not Affect Those Over Age 54?

House Budget Committee Chairman Paul Ryan’s budget plan is ostensibly for FY 2012, but it contains reforms with far-reaching implications for the nation’s fiscal condition.

Most of the action in his plan is on the spending side and mainly on health care entitlements: Medicare and Medicaid.  Many pundits on the left are claiming it is a political document rather than a serious budget proposal, especially because it lacks details on many of its proposed policy changes. 

One thing that stands out, as pointed out by David Leonhardt in the NYT, is that Ryan’s plan exempts people older than age 55 from bearing any share of the adjustment costs.  They should, instead, be called upon to share some of the burden, Leonhardt argues — a point that I agree with.  If seniors are receiving tens of thousands of dollars more than what they paid in for Medicare, then they should not be allowed to hide behind the tired old argument of being too old to bear any adjustment cost.  Indeed, seniors hold most of the nation’s assets and a progressive-minded reform would ask them to fork over a small share to relieve the financial burden that must otherwise be imposed on young workers and future generations.

The numbers presented by Leonhardt are computed by analysts at the Urban Institute.  However, those numbers aren’t quite as one-sided as Leonhardt and Urban scholars suggest, because they only compare Medicare payroll taxes by age group to Medicare benefits.  A large part of Medicare benefits (Medicare’s outpatient care, physicians’ fees, and federal premium support for prescription drugs) are financed out of general tax revenues, not just Medicare taxes. General tax revenues, of course, include revenues from income taxes, indirect taxes, and other non-social-insurance taxes and fees.  Seniors pay some of those taxes as well — especially by way of capital income and capital gains taxes — but the Urban calculations fail to account for this.  That means that the net benefit to seniors from Medicare is smaller than Leonhardt claims in his column.  I don’t know whether it would bring the per-person Medicare taxes and benefits as close to each other as they are for Social Security, however. (See Leonhardt’s column for more on this point.)

Leonhardt also notes that Chairman Ryan’s proposal leaves out revenue increases as a potential solution to the growing debt problem.  Leonhardt argues that wealthy individuals (mostly large and small entrepreneurs) received high returns on assets during the last few years (pre-recession) and could afford to pay more in taxes.

But it would be poor policy to raise these entrepreneurs’ income taxes — that would distort incentives to work, invest, innovate, and hire in their businesses.  Instead, policymakers should consider reducing high-earners’ Medicare and Social Security benefits (premium supports under the Ryan plan) in a progressive manner, including allowing them to opt out of Medicare and Social Security completely if they wish to.

During recent business trips to a few Midwestern towns, I met several investors and professionals in real estate, financial planning, and manufacturing concerns, most of whom expressed their willingness to forego social insurance benefits during retirement.  So there seems to be some public support for such a reform of social insurance programs.

Why Are Self-Proclaimed Deficit Hawks Unenthusiastic about the Ryan Budget?

Washington is filled with groups that piously express their devotion to balanced budgets and fiscal responsibility, so it is rather revealing that some of these groups have less-than-friendly responses to Congressman Ryan’s budget plan.

The Committee for a Responsible Federal Budget, for instance, portrays itself as a bunch of deficit hawks. So you would think they would be doing cartwheels to celebrate a lawmaker who makes a real proposal that would control red ink. Yet Maya MacGuineas, president of the CRFB, basically rejects Ryan’s plan because it fails to increase the tax burden.

…while the proposal deserves praise for being bold, the national discussion has moved beyond just finding a plan with sufficient savings to finding one that can generate enough support to move forward. All parts of the budget, including defense and revenues, will have to be part of a budget deal… Now that both the White House and House Republicans have made their opening bids, this continues to reinforce our belief that a comprehensive plan to fix the budget like the one the Fiscal Commission recommended has the best hope of moving forward.

I’m mystified by Maya’s reference to an “opening bid” by the White House. What on earth is she talking about? Obama punted in his budget and didn’t even endorse the findings of his own Fiscal Commission. But I digress.

Another example of a group called Third Way, which purports to favor “moderate policy and political ideas” and “private-sector economic growth.” Sounds like they should be cheerleaders for Congressman Ryan’s plan, but they are even more overtly hostile to his proposal to reduce the burden of government.

House Budget Chairman Paul Ryan’s budget is a deep disappointment. There is a serious framework on the table for a bipartisan deal on our long term budget crisis. It’s the Bowles-Simpson blueprint, now being turned into legislation by the Gang of Six. It puts everything on the table – a specific plan to save Social Security, significant defense cuts, large reductions in tax expenditures and reforms to make Medicare and Medicaid more efficient, not eliminate them.

That sounds hard left, not third way. But it’s not unusual. Many of the self-proclaimed deficit hawks on Capitol Hill also have been either silent or critical of Ryan’s plan.

Which leaves me to conclude that what they really want are tax increases, and they simply use rhetoric about debt and deficits to push their real agenda.

Rep. Ryan’s Budget Avoids Cuts to Military Spending

For all the boldness of Rep. Paul Ryan’s proposal to reduce projected federal expenditures by $6 trillion, an initiative that I support, the Pentagon’s budget emerges essentially unscathed in Ryan’s plan. This is a mistake on both fiscal and strategic grounds. Significant cuts in military spending must be on the table as the nation struggles to close its fiscal gap without saddling individuals and businesses with burdensome taxes and future generations with debt. Such cuts will also force a reappraisal of our military’s roles and missions that is long overdue.

The Pentagon’s base budget has nearly doubled during the past decade. Throw in the costs of the wars in Iraq and Afghanistan, plus nuclear weapons spending in the Department of Energy, and a smattering of other programs, and the total amount that Americans spend annually on our military exceeds $700 billion. These costs might come down slightly as the wars in Iraq and Afghanistan are drawn to a close – as they should be – but according to the Obama administration’s own projections, the U.S. government will still spend nearly $6.5 trillion on the military over the next decade. Surely Rep. Ryan could have found a way to cut…something from this amount?

Defense is an undisputed core function of government – any government – and spending for that purpose should not be treated on an equal basis with the many other dubious roles and missions that the U.S. federal government now performs. But please note the emphasis. The U.S. Department of Defense should be focused on that purpose: defending the United States. But by acting as the world’s de facto policeman, we have essentially twisted the concept of “the common defence” to include the defense of the whole world, including billions of people who are not parties to our unique social contract.

The rest of the world is more than content to free ride on Uncle Sam’s largesse. Absolved of their core obligation to provide for the defense of their own citizens, the governments in other countries have been busy expanding the social welfare state and growing the public sector. The true burdens fall on U.S. taxpayers who spend two and a half times more on national security programs than do the French or the British, five times more than citizens living in other NATO countries, and seven and a half times more than the average Japanese. Meanwhile, our troops and their families are struggling to cover the many commitments that their civilian leaders have unwisely incurred. And yet the defenders of the status quo – those who prefer that Americans pay these costs and bear these burdens – cry for more. More money and more missions.

Fiscal hawks such as Ryan are not serious if they cannot see massive waste and inefficiency in the Pentagon. Robert Gates’ ballyhooed reforms barely scratch the surface of the problem. Mismanagement of major weapons programs is rampant; cost overruns are the norm. A meaningful cap on future defense expenditures will force the Pentagon to seriously confront these inefficiencies, and might also precipitate some useful competition between the services on who is best positioned to keep the country safe and secure.

If Washington is serious about cutting spending, and if the Pentagon’s budget is included in the search for savings, then we need to adopt a different strategy, one that would husband our resources, focus the military on a few core missions, call on other countries to take responsibility for their own defense, and share the burdens of policing the global commons. A serious proposal for reining in runaway Pentagon spending would have precipitated such a strategic shift. By giving the Pentagon a free pass, Rep. Ryan practically ensures that such a discussion never sees the light of day.

Cross-posted at The National Interest.

Tuesday Links

  • Republicans have a big opportunity to undo Obamacare and reform Medicaid and Medicare all at once.
  • It’s a good thing, too, because we’re facing a big debt crisis and if we don’t change course, federal spending will crest 42% of GDP by 2050.
  • There’s also a big elephant in the room in an excessively complicated tax code.
  • One has to wonder if the Republicans intend to put the big sacred cow of defense spending on the table.
  • Unrelated to the budget, education choice proponents scored a big victory in the U.S. Supreme Court yesterday in ACSTO v. Winn, a decision that upheld education tax credits:

Congressman Ryan’s Budget Is a Big Step in the Right Direction

The chairman of the House Budget Committee, Rep. Paul Ryan of Wisconsin, will unveil his FY2012 budget tomorrow. Not all the details are public yet, but what we do know is very encouraging.

Ryan’s plan is a broad reform package, including limits on so-called discretionary spending, limits on excessive pay for federal bureaucrats, and steep reductions in corporate welfare.

But the two most exciting parts are entitlement reform and tax reform. Ryan’s proposals would simultaneously address the long-run threat of bloated government and put in place tax policies that will boost growth and improve competitiveness.

  1. The long-run fiscal threat to America is entitlement spending. Ryan’s plan will address this crisis by block-granting Medicaid to the states (repeating the success of the welfare reform legislation of the 1990s) and transforming Medicare for future retirees into a “premium-support” plan (similar to what was proposed as part of the bipartisan Domenici-Rivlin Debt Reduction Task Force).
  2. America’s tax system is a complicated disgrace that manages to both undermine growth and promote corruption. The answer is a simple and fair flat tax, and Ryan’s plan will take an important step in that direction with lower tax rates, less double taxation of saving and investment, and fewer distorting loopholes.

One potential criticism is that the plan reportedly will not balance the budget within 10 years, at least based on the antiquated and inaccurate scoring systems used by the Congressional Budget Office and Joint Committee on Taxation. While I would prefer more spending reductions, I’m not overly fixated on getting to balance with 10 years.

What matters most is “bending the cost curve” of government. Obama’s budget leaves government on auto-pilot and leaves America on a path to becoming a decrepit European-style welfare state. Ryan’s budget, by contrast, would shrink the burden of federal spending relative to the productive sector of the economy.

Along with other Cato colleagues, I’ll have more analysis of the plan when it is officially released.