Tag: Fiscal Commission

Bright Spots in Fiscal Commission Report

President Obama’s Fiscal Commission has produced a serious and sobering analysis of the government’s budget mess, and it provides some of the needed solutions. Three of the report’s main themes are on target: the need to make government leaner, the need to cut business taxes to generate economic growth, and the need to impose tighter budget rules to discipline spending.

The report rejects the view of many Democratic leaders that the welfare state built over the last 80 years must be defended against any and all budget cuts. “Every aspect of the discretionary budget must be scrutinized, no agency can be off limits, and no program that spends too much or achieves too little can be spared. The federal government can and must adapt to the 21st century by transforming itself into a leaner and more efficient operation.” How lean the government should be, and how many agencies to eliminate, will be the central fiscal debate in coming years. Downsizing government is the order of the day.

The report recognizes the need to spur economic growth, particularly by cutting the corporate tax rate. “The corporate income tax, meanwhile, hurts America’s ability to compete… statutory rates in the U.S. are significantly higher than the average for industrialized countries … and our method of taxing foreign income is outside the norm…. the current system puts U.S. corporations at a competitive disadvantage against their foreign competitors.” The report recommends cutting the 35 percent federal corporate tax rate to 28 percent or less to respond to the Global Tax Revolution and to “make America the best place to start a business and create jobs.”

Finally, the report suggests that Congress impose new procedures to enforce budget restraint. However, the rules suggested by the commission are complex and not tight enough. It would be simpler and more powerful to impose a cap on overall federal spending. For example, a law could require that the government’s overall budget not grow faster than general inflation each year else the president would sequester spending across-the-board. Such a cap would be easy for the public to understand and enforce.

In sum, the report provides a useful menu of reform options that incoming members of a more conservative Congress can pursue next year. We need bigger spending cuts than the commission has laid out—as I’ve outlined in this balanced-budget plan—but the commission deserves credit for spurring a national discussion on how to downsize the federal government.

Deficit Reduction Commission Says Military Spending Can and Must be Cut

President Obama’s Fiscal Commission’s report is out and they have wisely kept military spending on the table. Having not seen the accompanying list of specific cuts, it seems that rather than micromanage DoD’s decisions with respect to which weapons systems to cut or keep, the commissioners have laid down a different marker: find the cuts that make sense, but understand that the business-as-usual of the past decade is over.

The report fixes on a number of spending cuts and reforms that Benjamin Friedman and I call for in the Cato Policy Analysis “Budgetary Savings from Military Restraint” including cuts to the civilian workforce (see recommendation 1.10.4). They also hold fast to the proposition that all spending must be on the table, and reject out of hand the notion that military spending must be held sacrosanct. This is bad news for the “defending defense” crowd.

I am not going to comment on the Commission’s other proposals with respect to taxes, social security, health care, etc.  As for specific military spending cuts, this report is less detailed than the preliminary report issued a few weeks ago by Co-chairs Bowles and Simpson. It is appropriate, however, to task the Department of Defense with identifying additional savings (as they do in recommendation 1.11). Responsible cuts can be made if the Pentagon and the White House adopt a strategy of restraint, one that husbands American resources, focuses on a few core missions vital to U.S. national security, and requires other countries to take primary responsibility for their defense.

Washington’s Dishonest Budget Math

The Chairmen of President Obama’s Fiscal Commission have a new draft proposal that is filled, according to Reuters, with “sharp spending and benefit cuts.”

That’s music to my ears, so I quickly flipped to the back of the report in hopes of finding hard numbers showing that the federal government will be smaller in future years.

Much to my chagrin, it turns out that the federal government will increase by about $1.5 trillion between 2010 and 2020 according to the Commission’s numbers. Here’s a chart based on the data from page 57.

As I explain in the video below, this disconnect between supposed spending cuts and actual spending increases is the result of politicians creating a system where a spending increase can be called a “spending cut” if outlays don’t climb as fast as previously planned. This “baseline” or “current services” budgeting is a great gimmick for the politicians since they can simultaneously give more money to special interest groups while also telling voters that they are cutting the budget.

This does not mean that the folks at the Fiscal Commission are being deliberately dishonest. This process has been in use for decades and many budget wonks routinely rely on this common practice without giving any thought to whether it misleads voters.

And there are good reasons to collect “current services” data. Those numbers tell lawmakers how much spending has to increase if they, for instance, leave entitlement programs on autopilot (i.e., more senior citizens automatically leading to more Social Security spending).

Nonetheless, the debate about federal budget policy should be honest. If the Fiscal Commission thinks spending should increase at about twice the rate of inflation, and they want higher taxes to finance that spending growth, they should openly argue for that position. And if the hard left wants spending to increase three times faster than inflation, as it has during the era of Bush-Obama profligacy, they should openly make the case for why America should be more like France.

Debt Commission Reform Proposals – What Are Their Chances?

It’s kudos to President Obama’s Debt Commission co-chairs for clearly outlining the gargantuan size of the fiscal problem facing the United States.  The reforms will re-direct the exploding debt trajectory downward by reforming taxes and cutting spending – reminiscent of recent fiscal reforms in the United Kingdom. Unfortunately, history is likely to repeat itself: Even if they are enacted soon – which seems unlikely – chances are bleak that we’ll stick with them for long enough to achieve their stated goals.

The Debt Commission co-chairs have done a stellar job in framing the nation’s fiscal challenge and placing it squarely before the American public. The contrast between the current trajectory that increases the national debt beyond 80 percent of GDP by 2040 and one of declining debt under their reforms likely to be consistent with long-term economic growth because the Commission also proposes limiting government spending to 21 percent of GDP – is striking.

The Commission has marked wide-ranging reforms – to broaden the federal tax base, reduce income tax rates and simplify the tax system; cut discretionary expenditures that are unaffordable and antiquated in all spheres; reduce long-term health care cost growth, and restore Social Security to financial solvency through a combination of benefit cuts and revenue measures.

It’s sad but true that the political barriers stacked up against this promising approach appear to be insurmountable.  Given the make-up of Congress and with Obama as President, the chance that something even remotely resembling the Commission’s proposals would be enacted is negligibly small.  With the Democratic majority in the Senate, President Obama is unlikely to even have to use his veto.

But what if my conjecture is proved incorrect and a roughly similar set of reforms is enacted in 2011?  Remember that our fiscal problem is of a long-term nature.  It is produced by an aging population; rapid health care cost growth; slower revenues from a flagging economy as a large cohort of experienced workers retires; slowing education and skill acquisition by younger workers; and slower capital formation as more resources are consumed by an aging population.  The commission’s reforms have to be enacted and maintained for at least 30 years to deliver its “target” debt-to-GDP ratio of 40 percent.  History tells us that such an outcome is quite unlikely.  For example, the Budget Enforcement Act of 1990 – that helped President Clinton accumulate his now much touted laurel as a fiscal conservative – was maintained for just 12 years – until Congressional Budget Office projections revealed “budget surpluses as far as the eye could see” in 2002.  With those projections in hand, lawmakers raced to the exits: the BEA was abandoned and federal spending shot through the roof.  Even as conservative a policy maven as Alan Greenspan shone a green light to adopt budget busting tax cuts.

To improve the chances that history does not repeat itself, the commission’s proposals need to be combined with proposals to reform the budget process.  The first thing to consider on that score is to use better budget measures to assess if reforms are achieving their goals. Stating those goals in terms of the national debt and annual cash flow deficits is unlikely to work – just as those measures have not worked for the European Union in the context of their now defunct Stability and Growth Pact.

Federal debt and the current budget deficit that is reported on the government’s books is the result of past policies and outcomes.  They summarize where we came from, not where we’re going.  If the commission’s reforms are enacted, a better method would be to anchor judgment about their success on the size of prospective debt—the value in today’s dollars of all future deficits that the federal government would incur under the new policies; alternatively under premature abandonment of those policies – as happened in 2002 when the BEA was abandoned.  It is also important to know whether the sacrifices that the commission’s policies require from today’s generations are fairly distributed and are being invested for the future rather than being dissipated.  For example, will the Social Security surpluses that the reforms generate be effectively saved and invested, or would they promote additional government spending as in the past? Without a budget process that delivers real investments for the future, and without metrics to measure their operation properly, chances are that even if Congress and the President enact them into law next year, the reforms will be abandoned too soon.

There Ain’t No Such Thing as a Tax Expenditure

The co-chairs of President Obama’s Fiscal Commission propose to eliminate several tax loopholes while reducing marginal rates.  Hear, hear.  But they describe those loopholes as “backdoor spending in the tax code.”  It is incorrect and dangerous to equate tax loopholes with government spending.

The tax code’s countless credits, deductions, and exclusions let people keep a portion of their earnings, provided they use the money how the government wants them to use it.  Tax loopholes therefore have a lot in common with government spending: they give power to politicians, inhibit freedom, reduce economic output, unjustly enrich special-interest groups, et cetera.

But to call them “tax expenditures” or “tax subsidies” or ”backdoor spending in the tax code” is to claim that when the government fails to take a dollar from you, it is spending that dollar.  It implies that your dollar actually belongs to the government, which is graciously letting you keep it.  And it implies that eliminating a tax loophole is not a tax increase, because that dollar already belonged to the government anyway.  The government has simply decided to spend its money somewhere else.

When you hear a politician use the terms tax expenditure, tax subsidy, or backdoor spending in the tax code, beware.  He’s about to raise your taxes.

Obama’s Fiscal Commission and Health Care Spending

Following up on what Dan and Chris have said …

If the co-chairs of President Obama’s fiscal commission were serious about reducing federal spending and deficits, they would have proposed eliminating the federal deficit, rather than “reduc[ing] it to 2.2 percent of GDP by 2015.”  Yawn. They would have proposed cutting federal spending (currently, 24 percent of GDP and rising) to match federal tax revenue (currently at 15 percent of GDP).  But the co-chairs proposed only to “bring spending down to 22 percent and eventually 21 percent of GDP.”  Not only does that elicit another yawn, but since the co-chairs only asked for half a loaf, they won’t even get that much.

If the co-chairs were serious about reducing federal spending and deficits, they would have proposed a balanced-budget amendment.  They would have proposed block-granting Medicaid.  They would have proposed implementing Medicare vouchers immediately.  (Vouchers are the only way to reduce Medicare spending while protecting seniors from government rationing.  They would also change the political dynamics that repeatedly stymie efforts to reduce Medicare spending.)  Instead, the co-chairs propose the same ol’ failed strategy of trying to limit Medicare and Medicaid spending using government price-and-exchange controls, which they euphemistically describe as “rebates” and ”payment reforms.”  Along the same lines, they propose strengthening IPAB, ObamaCare’s rationing board.  IPAB’s mandate is – you guessed it – to ration care by fiddling with Medicare and Medicaid’s price and exchange controls.  It will therefore inevitably fall prey to the same political buzzsaw.  To appease Republicans, the co-chairs propose unwise and unconstitutional federal rules that would prevent patients injured by negligent physicians from recovering the full amount they are due (euphemism:  medical malpractice liability “reform”).  Finally, the co-chairs propose that if federal health spending continues to grow faster than GDP growth plus 1 percent, Congress should consider “a premium support system for Medicare” (which could mean vouchers) and “a robust public option and/or all-payer system” for people under age 65 – a debate that wouldn’t even begin until 2020.

Fiscal Commission members, congresscritters, and citizens who are serious about reducing federal spending and deficits – and who are looking for specific ways to cut government spending – should instead consult Cato’s excellent web site DownsizingGovernment.org.

Obama’s Fiscal Commission: The Good and Bad

The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform released a draft report yesterday on how to reduce federal budget deficits.

Despite the liberal savaging the report is taking as some sort of conservative plot, its proposals are really center-left in orientation. That said, there is some good stuff in the report, which will be useful for incoming Republicans looking to tackle the budget mess.

Good Ideas and Positive Directions

The report provides a menu of possible spending cuts for incoming Republican members of Congress to consider, particularly Tea Party members, who proposed to cut the budget during their campaigns.

The report proposes to reduce spending from 25 percent of GDP currently to 21 percent over the long run. That’s a good start, but we need to pursue deeper cuts, as discussed on www.downsizinggovernment.org. After all, federal spending was just 18 percent of GDP in President Clinton’s last two years in office.

I like that the report suggests a broad array of budget cuts, including defense, nondefense, and entitlement programs. Everything needs to be cut, including programs traditionally defended by both liberals and conservatives.

The report proposes to cut $200 billion from discretionary spending by 2015 from Obama’s proposed spending that year of $1,309 billion. That’s a 15 percent cut. However, the word “cut” needs to be qualified because discretionary outlays were $1,041 billion in the pre-stimulus year of 2007, and they were just $615 billion in the pre-Bush year of 2000.

The report recommends an array of Medicare and Social Security cuts. That’s great, but the report doesn’t include the fundamental structural reforms—such as Social Security individual accounts and Medicare vouchers—that are needed to reduce costs and provide benefits to the broader economy, such as boosting savings and improving health care quality.

The direction of the proposed tax reforms is positive. The co-chairs propose to reduce or repeal narrow deductions and other special tax benefits, while reducing marginal tax rates. The idea to treat capital gains and dividends as ordinary income, however, reveals a faulty understanding of the proper tax treatment of capital.

The report proposes to cut the corporate tax rate from 35 percent to 26 percent, while moving to territorial treatment for foreign investment. It suggests making “America the best place to start and run a business and create jobs.” That’s a laudable goal, but to fulfill it we need to bring the rate down to, say, 15 percent.

The report’s goal of reducing the damaging buildup of federal debt is laudable. Government overspending is the nation’s primary fiscal problem, but spending financed by debt creates an array of problems that are additionally troubling.

Bad Ideas and Shortcomings

The report proposes to raise taxes by $1 trillion over the next decade. But the federal budget crisis is caused by overspending not undertaxing. The election results showed that most Americans understand that, but the message hasn’t penetrated the beltway yet.

The report’s discretionary spending cuts are timid. For example, farm subsidies are cut by just $3 billion, just a fraction of their annual cost of about $20 billion. Farm prices and farm incomes are at high levels these days, so now would be a good time to repeal farm subsidies completely.

The report characterizes tax deductions and exemptions as “spending in the tax code.” That is becoming common parlance in Washington, but it is incorrect. Yes, the mortgage interest deduction and other narrow benefits distort the economy and ought to be abolished, but they also reduce the flow of revenues to Washington, which is a good thing.

The report makes faulty and naïve arguments often heard from centrists about government “investments.” While we need to cut spending, we also need to “invest in education, infrastructure, and high-value R&D” the report says. But why does the federal government need to be involved in education? Why can’t we privatize infrastructure investment? If certain R&D is so “high-value,” wouldn’t the private sector do it?

Along the same lines, the report calls for the creation of a “Cut-and-Invest Committee” to move spending from “outdated” programs to “high-priority long-term investments.” That’s just naïve. The government will never be an efficient allocator of resources, and that’s why we need to shrink it, not just make it run better.

Finally, the commission should have placed more emphasis on fundamental restructuring of government, and not just spending trims. This is true with the entitlement proposals. But also with areas such as infrastructure spending—we don’t need higher gas taxes and government spending for infrastructure, we need privatization.