Topic: Tax and Budget Policy

Restoring the Old-Fashioned Budget Virtue of … FDR and Truman?!?

This is a column I never expected to write. That’s because I’m going to applaud Presidents Franklin Roosevelt and Harry Truman.

This won’t be unconstrained applause, to be sure. Roosevelt, after all, pursued awful policies that lengthened and deepened the economic misery of the 1930s. And, as you can see from this video, the “economic bill of rights” that he wanted after WWII was downright malicious.

Truman, meanwhile, was a less consequential figure, but it’s worth noting that he wanted a restoration of the New Deal after WWII, which almost certainly would have hindered and perhaps even sabotaged the recovery.

But just as very few policymakers are completely good, it’s also true that very few policymakers are totally bad. And a review of fiscal history reveals that FDR and Truman both deserve credit for restraining domestic spending during wartime.

In a new column I wrote for The Hill, I specifically responded to the cranky notion, pursued by Bernie Sanders, the openly socialist U.S. senator from Vermont, that there should be tax hikes on the rich to finance military operations overseas.

The idea has a certain perverse appeal to libertarians. We don’t like nation-building and we don’t like punitive tax policy, so perhaps mixing them together would encourage Republicans to think twice (or thrice) before trying to remake the world.

But “perverse appeal” isn’t the same as “good policy.”

Chairmen of House and Senate Budget Committees Propose Good Fiscal Frameworks, Particularly Compared to Obama’s Spendthrift Plan

Earlier this year, President Obama proposed a budget that would impose new taxes and add a couple of trillion dollars to the burden of government spending over the next 10 years.

The Republican Chairmen of the House and Senate Budget Committees have now weighed in. You can read the details of the House proposal by clicking here and the Senate proposal by clicking here, but the two plans are broadly similar (though the Senate is a bit vaguer on how to implement spending restraint, as I wrote a couple of days ago).

So are any of these plans good, or at least acceptable? Do any of them satisfy my Golden Rule?

Here’s a chart showing what will happen to spending over the next 10 years, based on the House and Senate GOP plans, as well as the budget proposed by President Obama.

Keep in mind, as you look at these numbers, that economy is projected to expand, in nominal terms, by an average of about 4.3 percent annually.

The most relevant data is that the Republican Chairmen want spending to climb by about $1.4 trillion over the next decade (annual spending increases averaging about 3.3 percent per year), while Obama wants spending to jump by about $2.4 trillion over the same period (with annual spending climbing by an average of almost 5.1 percent per year).

The Senate Budget: Even More Vague than the House

Senate Budget Chairman Mike Enzi released his budget proposal yesterday afternoon. The request follows yesterday’s proposal from House Budget Chairman Tom Price. The two requests are similar. Both would reduce projected spending by $5 trillion and balance the federal budget over the next ten years. Both budgets repeal ObamaCare, and neither includes reforms to Social Security. The big difference between the two is that the Senate version is even vaguer than the House version.

Like the House budget, the Senate budget includes Medicare reforms. It also includes a proposal that would cut $400 billion from Medicare over the next ten years, matching the level of cuts from President Obama’s budget request in February. The Senate version does not specify how it will cut $400 billion, other than stating that it “does not endorse the President’s specific policy proposals.”  The House plan at least it acknowledged how it would reduce Medicare spending (by using a premium support model to generate savings).

The Senate’s defense funding plan is also less clear than the House plan. Both keep the 2011 bipartisan Budget Control Act spending levels for the base defense budget, which is $523 billion for fiscal year 2016. The Senate budget includes an additional $58 billion in “emergency” defense funding, the same amount the president includes. While the House included $90 billion in “emergency” defense funding, the Senate includes a provision that would allow it to establish a “deficit-neutral reserve fund” for further increases in defense spending. That is budget-speak for an undisclosed amount of defense spending hikes, with some sort of spending cut elsewhere in the budget to offset the increase. So while the House plan appears more expensive than the Senate plan, the Senate’s total defense spending level for fiscal year 2016 isn’t obvious and could eventually be higher.

Overall, the proposals from Price and Enzi are similar. As the two chambers reconcile their proposals over the next several weeks, the negotiated budget should provide further insight into Republican spending priorities.

The House Budget Proposal Leaves Much to Be Desired

House Budget Committee Chairman Tom Price (R-GA) released his budget proposal this morning, which outlines spending priorities for 2016 through the next decade. The proposal is a mixed bag. It includes some reform steps, but also fails to aggressively confront the dire fiscal realities facing the nation with specific spending-cuts.

The positives:

Spending Restraint– The budget proposes $43.2 trillion of total spending over the next decade, which is $5.5 trillion below baseline projections from the Congressional Budget Office (CBO). Ten year projected deficits are also much lower than CBO projections; $1.3 trillion compared to $7.2 trillion. This proposal balances the budget within ten years, moving us closer to solving our long-term fiscal challenges.

ObamaCare Repeal– Price’s proposal includes full repeal of ObamaCare including all of its health care and tax provisions. This constitutes a large share of the spending cuts, $2 trillion of the $5.5 trillion.

The negatives:

Defense–The 2011 bipartisan Budget Control Act (BCA) set caps on defense and nondefense discretionary spending through 2021. Many Republicans have pushed Price to rescind the caps on defense spending, claiming that they are too draconian and will undermine America’s security. Other Republicans pushed to keep the BCA caps as an effective restraint on spending. The Price budget goes for the easy political solution: it retains the BCA caps for defense spending for fiscal year 2016, but it increases the “emergency” defense spending account, known as Overseas Contingent Operations (OCO), by $16 billion compared with fiscal year 2015. This allows Price to honor the BCA, while violating its spirit. Under this plan, the U.S. will spend $387 billion more on defense over the next decade than CBO baseline projections.

Entitlement Reform–CBO projects that 85 percent of spending growth over the next decade will be due to Social Security, Medicare, and net interest. The Price budget acknowledges the need to reform Social Security and Medicare, but fails to meet the challenge. The budget does not include a plan to reform Social Security, other than saying it needs a “long-term solution” from a “bipartisan commission.” Medicare reforms don’t start until 2024. Waiting up to a decade to reform these two programs is a dereliction of duty.

Tax Reform–The budget proposal is vague about this important topic. It urges Congress to consider tax reform, but does not detail any specific reforms, nor does it provide a timeline for considering proposals.

Overall, Price’s budget proposal would cut spending and balance the budget, but it still leaves much to be desired.

Even the IMF Agrees that Spending Caps Are Effective

It’s not very often that I applaud research from the International Monetary Fund.

That international bureaucracy has a bad track record of pushing for tax hikes and other policies to augment the size and power of government (which shouldn’t surprise us since the IMF’s lavishly compensated bureaucrats owe their sinecures to government and it wouldn’t make sense for them to bite the hands that feed them).

But every so often a blind squirrel finds an acorn. And that’s a good analogy to keep in mind as we review a new IMF report on the efficacy of “expenditure rules.”

The study is very neutral in its language. It describes expenditure rules and then looks at their impact. But the conclusions, at least for those of us who want to constrain government, show that these policies are very valuable.

In effect, this study confirms the desirability of my Golden Rule! Which is not why I expect from IMF research, to put it mildly.

Upcoming Fiscal Deadlines

The federal government’s debt ceiling will return on Monday following a 14 month suspension. This is the first of many important fiscal deadlines that Congress must consider before the end of the calendar year. These deadlines represent opportunities for Congress to control spending growth and reform entitlement programs.

Below is a list of the major fiscal deadlines:

  • Debt Ceiling: The federal debt ceiling limits the amount of outstanding federal debt. When the debt ceiling returns on March 16, it will be approximately $18.1 trillion. Congress is not expected to raise the limit this weekend, so the Treasury Department will have to use its flexibility to fit the debt within that limit. With these Treasury procedures, the Congressional Budget Office expects that congressional action can be put off until October or November.
  • Sustainable Growth Rate: The Sustainable Growth Rate (SGR or “doc fix”) was passed in 1997 and attempts to control Medicare spending growth. If Medicare grows faster than the legislated formula, reimbursements to doctors are cut. However, Congress has never let the cuts go into effect. The current relief from cuts expires on April 1. If Congress doesn’t act, reimbursements would be cut by 20 percent. Congress is expected to pass a short-term patch, the 18th time it will have done so in 13 years.
  • Budget Resolution: The House of Representatives and the Senate are supposed to pass the annual budget resolution by April 15. The budget resolution sets the broad trajectory of spending for the upcoming fiscal year. Both chambers are expected to release their budget drafts during the week of March 16 to give themselves several weeks to work through this process and provide an opportunity to reconcile the two proposals.
  • Highway Trust Fund: The Highway Trust Fund will become insolvent on May 31. For a number of years, the Highway Trust Fund has spent more than it collects in revenue from the federal gas tax. Its current annual imbalance is $14 billion. Congress will need to figure out a way to balance the trust fund’s spending and revenue.

Furman’s Folly: Nostalgia about 1973 and Nonsense about the Bottom 90 Percent

Jason Furman, chairman of the Council of Economic Advisers, set out to explain “middle-class economics” in the Wall Street Journal, March 11, in an earlier Vox blog and in a presentation to National Association of Business Economists (NABE), as well as the first chapter of the Economic Report of The President

The intent is to make the recent economy look healthier (massaging 2.3-2.4 percent growth for 2013-14 into 2.7 percent), and to claim that “subpar” 2010-14 income gains for the middle class (generously defined as the bottom 90 percent) are not due to a subpar recovery but to something that has gone on ever since 1973.  His Wall Street Journal article complains of “the decades-long trend of slower income growth for the middle class.”

Furman says, “Congressional Budget Office data (with a minor extrapolation) show, median U.S. incomes are up 17 percent since 1973.”  Actually, CBO data start with 1979 and end with 2011, so it takes more than minor extrapolation to extend that back to 1973 or forward to 2013.  CBO estimates show real after-tax median income rising from $45,400 in 1983 to $68,000 in 2008 (in 2011 dollars), but not yet back to the 2008 level by 2011. Making up a number for 1973 can’t undo stagnation after 2008. 

He continues: “But from 1948-73, median incomes rose 110 percent, according to broadly comparable Census estimates.”  Yet the two series aren’t remotely comparable.  Unlike pre-tax “money income” from the Census Bureau, the CBO subtracts federal taxes (middle-income tax rates were nearly cut in half since 1981) and includes rapidly increased health and other in-kind benefits from employers and government (Medicaid, SNAP, CHIP and housing allowances).