issue: Fiscal Policies

The Strange Logic of Samuelson’s High-Speed Rail Critique

Posted on by The Progressive Policy Institute

Give Washington Post columnist Robert J. Samuelson credit – he’s a strong believer in recycling. Last year, he loudly derided the “mirage” of high-speed rail as “the triumph of fantasy over fact.” Yesterday, he denounced the “absurdity” of fast trains as “a triumph of politically expedient fiction over logic and evidence.” OK, he’s gotten a bit wordier, but you can see that once his mind is made up, it’s fixed in stone.

The same kind of thinking comes from nearly all critics of high-speed rail who bunker at the Heritage Foundation, Cato Institute, and other right-leaning groups – they have a curiously static view of transportation. To them, investing in future high-speed rail is an extravagant and illogical expenditure of public money because the lack of prior investment in high-speed rail has done little to change our travel patterns.

By that logic, America should never have built a transcontinental railroad. Consider that only a handful of wagon trains made it to California in 1862. Had Samuelson been writing then, he probably would have criticized President Lincoln’s proposal to spend taxpayer money on a steam railroad to San Francisco as a plan that “would subsidize a tiny group of travelers and do little else” – to borrow a phrase from yesterday’s column.

What’s missing from Samuelson’s worldview is that major advances in transportation drive economic growth. They have throughout human history. The joining of the Union Pacific and Central Pacific railroads in 1869 ushered in what economic historian Walt Rostow called the “takeoff period” of American industry.

Likewise, President Dwight Eisenhower did not justify interstate highways on the basis of established transportation patterns. U.S. railroads – not roads – carried the bulk of interstate freight, military personnel, and civilians during World War II. Instead, he warned that our national security in the Cold War 1950s depended on our ability to establish fast new highways to transport supplies throughout the country.

So when Samuelson denounces high-speed rail by citing today’s Amtrak ridership levels, he’s forgetting that rail traffic is far below what it would be if our passenger trains were remotely up to world standards. When we begin opening 200-mph railroads, a new level of traffic will appear very rapidly. It’s been dormant, waiting for a chance to move.

It is impossible to predict how much dormant traffic is waiting for a truly modernized rail system. Economic models don’t tell us, and Samuelson fails to even pose the question amid his attacks on high-speed rail as government “pork barrel.”

What’s remarkable (though not surprising, if one reads Cato’s Randal O’Toole and other rail critics) is Samuelson’s utter blindness to the fact that highways and airports require massive government “pork” to build and maintain. They don’t pay for themselves through fuel or ticket taxes, as their backers like to assert.

A Texas Department of Transportation study found that a new section of highway in Houston would generate only 16 percent of its total lifecycle cost from gas taxes. Texas DOT estimated a gas tax of $2.22 per gallon – nearly six times the present state and federal tax of 38.4 cents – reflected the actual cost of building and maintaining the highway.

Constructing 800 miles of high-speed rail in California is liable to cost more than $40 billion. Constructing and operating all 13 corridors proposed by the Obama administration could easily approach $200 billion. But these dramatic headline figures need context. The current transportation act allots $300 billion to highways – not for new construction since the interstate system is completed, but just for maintenance and rebuilding.

Huge costs loom as America’s highways reach the end of their productive life. Replacing the Tappan Zee Bridge in New York State is estimated to cost $17 billion. That figure is guaranteed to rise.

If interstate thoroughfares and vital bridges paid their way, private investors would be clamoring to commit funds to refinance them. They aren’t.

All modes of transporting people require subsidies. Amtrak’s direct subsidies of about $1.5 billion a year are transparent and highly publicized. Subsidies for cars and airlines are hidden in trust fund appropriations, user tax breaks, and local and state programs paid for by all taxpayers, including those who rarely drive and never fly.

In portraying himself as a hard-nosed realist free of the “fashionable make-believe” of rail advocates, Samuelson would do well to explain how he’d fix congestion, advance mobility, lessen pollution, and reduce our dependence on foreign oil by jettisoning an infrastructure program that directly addresses these issues.

photo credit: arbyreed

Fiscal Reform From the Radical Center

Posted on by The Progressive Policy Institute

It’s crazy, I know, but imagine that U.S. political leaders after the midterm election called a truce in the partisan tong wars to work out a compromise solution to the nation’s fiscal dilemmas. The result would probably look a lot like a new fiscal reform blueprint drawn up by two canny policy veterans, Bill Galston and Maya MacGuineas.

In The Future Is Now: A Balanced Plan to Stabilize Public Debt and Promote Economic Growth, Galston and MacGuineas map a radically centrist course to fiscal discipline that demands equal sacrifice from the left and the right, and that doesn’t impede economic recovery. Here’s hoping that President Obama’s deficit commission, which is groping for a politically feasible formula for fiscal restraint, will give this plan a close look.

Reducing America’s swollen deficits and debts is fast becoming an urgent national priority. Since President Obama took office, we’ve added three trillion dollars to the public debt, largely thanks to emergency spending to rescue the banking system and goose a faltering economy. But it’s the zooming growth of health care and retirement spending that really threatens to drown the federal government in debt. For decades, we’ve ignored warnings about the growing funding gaps in Medicare, Medicaid, and Social Security, but with the first wave of baby boomers now reaching retirement age, the future really is now.

We’ve dug ourselves more than a hole – it’s a canyon. So any talk now about balancing the federal budget is pure fantasy.  The best we can hope for is to arrest the runaway growth of public debt and bring it back down to a sustainable level.

The administration’s forecasts show public debt, 40 percent of GDP two years ago, rising to more than 100 percent in 2012. The Galston-MacGuineas plan would bring that down to 60 percent of economic output by the end of this decade. It also would slash annual budget deficits from a projected five-to-six percent to around one percent, ensuring that our debts don’t grow faster than the economy.

Inevitably, the plan envisions a 50-50 split between spending reductions and tax hikes. It’s hard to image any other way forward considering liberal resistance to spending cuts, especially for the big entitlements that are driving our long-term debt problem, and the conservative allergy to tax increases of any kind. The hacking and lifting, however, would be phased in gradually to give the economy room to breathe and recover.

More specifically, the plan would:

  • Make sizeable cuts in defense spending, and impose a war surtax should our current conflicts extend beyond mid-decade.
  • Freeze discretionary spending for three years, such that increases in spending in one area would have to be made up by cuts elsewhere.
  • Modernize Social Security by indexing the retirement age to longevity, and trimming benefits for affluent retirees in the future. It would also raise the minimum benefit, strengthening the program’s anti-poverty effect, cut the payroll tax and add a new, mandatory savings account.
  • Supplement the cost-containment features of President Obama’s comprehensive health plan, by raising Medicare premiums, reducing subsidies and adding tort reform.
  • Prune tax expenditures (which cost more than one trillion dollars a year) by 10 percent and limit their future growth. The proceeds would go to lower tax rates and deficit reduction.
  • Enact a carbon tax, both to “buy down” the payroll tax and cut deficits.

Many of these proposals, of course, are deemed politically radioactive now, even if they are familiar fixtures on the wish lists of serious fiscal hawks. So why should we expect a package stuffed with political non-starters to advance?

Because the habit of evading even modestly tough choices has allowed the debt problem to reach such ginormous proportions that it can’t be solved in any other way, say Galston and MacGuineas. And if it isn’t solved, it will slow down U.S. economic growth, transfer our wealth to overseas creditors, and limit the federal budget’s fiscal capacity to respond to future emergencies.

The big question is: what impact will the midterm election have on the politics of fiscal evasion? Republicans say cutting taxes is the way to shrink government, but showed little stomach for cutting spending when they were in office. Result: huge public debts. Some Democrats believe deficits should be closed mostly by tax hikes, but aren’t really willing to propose them. Result: huge public debts.

As the Galston-MacGuineas plan shows, solving our fiscal problems doesn’t have to be a political zero sum game. The question is whether our political leaders can rediscover the lost arts of compromise and risk-sharing to advance vital national goals.

Photo credit: Steve Rhodes

The President’s New Gamble

Posted on by The Progressive Policy Institute

President Obama’s call yesterday for $50 billion in new transportation spending is politically risky, given public worries about government spending and debt. But if linked to a strategic and sustained strategy for modernizing the nation’s infrastructure, it could signal the start of America’s economic comeback.

Even more important than the money, however, is an Obama initiative that didn’t get as much media play: a proposed National Infrastructure Bank. It is the key not only to leveraging business capital – U.S. companies are sitting on $2 trillion in potential “private stimulus” money – but also to making sure we invest that money wisely.

The president said he would ask the lame-duck Congress next month to approve the $50 billion measure, which would front-load money that otherwise would be spread over the life of a six-year surface transportation bill.  He left little doubt his immediate goal is to goose the pace of the agonizingly slow economic recovery.

“Nearly one in five construction workers is still unemployed and needs a job. And that makes absolutely no sense when so much of America needs rebuilding,” Obama told reporters at the White House on Memorial Day. Attempting to preempt Republican objections that infrastructure spending is simply stimulus is drag, Obama noted that “Investing in infrastructure is something members of both parties have always supported.”

Maybe so, but it’s worth noting that the word “infrastructure” appears nowhere in the GOP’s 48-page Pledge to America.  What’s more, Republicans are likely to over-interpret likely midterm gains as vindication of their attacks on Obama as a big spender, so good luck getting them to vote for infrastructure in the lame duck.

That’s a shame, because spending on infrastructure is both stimulus and investment.  It could get more Americans working now, but it is also essential to building our country’s long-term capacity to compete in fast growing global markets for high speed rail, civilian nuclear energy, clean cars, intelligent transport systems and renewable fuels.

The federal government, of course, is constrained by enormous deficits and a growing national debt. That’s why we need a National Infrastructure Bank, which would structure public-private deals to fund big capital projects that can generate real economic returns. As noted by an economic analysis the White House released yesterday:

“There is currently very little direct private investment in our nation’s highway and transit systems due to the current method of funding infrastructure, which lacks effective mechanism to attract and repay direct private investment in specific infrastructure projects. … A National Infrastructure Bank would also perform a rigorous analysis that would result in support for projects that yield the greatest returns to society and are most likely to deliver long-run economic benefits that justify the up-front investments.”

An infrastructure bank, along with new public seed capital and a third element of the Obama infrastructure initiative – merging the many stovepiped “modal” transportation funding streams so public dollars can be used strategically – begin at last to push the economic debate in a constructive direction.  The two great challenges America faces now are reviving our economic dynamism and shrinking a massive overhang of public debt. To meet them, the Obama administration needs to fashion an ambitious, “cut and invest” strategy aimed at slowing health care and entitlement spending generally, and using public dollars to leverage massive private investment in productivity-enhancing infrastructure.

That’s why President Obama should press ahead with his infrastructure plan, despite the political fallout from the midterm election. If Republicans want to frame the economic debate as a choice between more tax cuts and rebuilding the common foundations of American prosperity, so much the better. That’s one progressives can win.

Photo credit: Center for Neighborhood Technology

To Oppose or to Propose?

Posted on by The Progressive Policy Institute

France, 15 of September, 2010. The Pension Reform passes in the National Assembly after months of struggle. The obstruction instigated by the left parties leads to one of these cinema-like scenes when the right-oriented President of the Lower House (Bernard Accoyer) decides to suspend the debates, prompting call for his resignation by the Socialists – when not accusing the current government of fascism and a putsch.

The issue of reforming the pension system is in itself a subject of concern for all aging western democracies. France has an almost completely repartition-based system where working citizens contribute a percentage of their wages to the retirement pensions of the previous worker-generation. No need to explain that with the population pyramid, every developed country is facing nowadays, fewer young workers will have to pay for a “papy-boom” generation that is living longer and longer.

But what is also at issue here is the behavior of the opposition party, this vital nerve of every democracy, which faces the “to oppose or to propose” dilemma: How to make needed concessions without having them considered as surrender of principles?

After years of failed attempt at reforms, the French government has proposed extending the retirement contribution years and postponing the retirement age from 60 to 62  by 2018. Even if the Socialists officially accept lengthening the retirement contribution years, they fight against the loss of the symbolic legal age at which you can chose to quit work. The extreme left wing, for its part, is simply denying the reality of the age pyramid: They definitely want to “freeze the counters” up to 40 years of contribution, arguing that people deserve to experience healthy retirement years and that their departure would leave more work to the next generation.

The Socialist opposition clearly decided to apply the “opposing for opposing” strategy, which not only works against their interest, but also prevents any possibility of constructive democratic debates leading to a meaningful compromise.

Such an attitude makes the opposition seem unconstructive and static. At best, it only strengthens the extremes which seem to give voters a clearer choice – even if often extravagant. In the long haul, it weakens democracy not to have opposition parties willing and able to be serious partners in debate and deliberation.

Moreover, crying wolf at every proposition from the party in power turns the opposition into background noise citizens no longer bother to pay attention to. Consequently, it gives the governing party a freer hand in proposing and implementing policies — an opportunity the current French Government did not miss when passing bills against minorities without facing any reaction worthy of being called opposition.

Ultimately, it is up to the voters to reject opposition merely for the sake of opposition, and the extremism it builds. This is not always easy. Strong opposition can provide the appeal of moral clarity and righteous indignation. But it leads nowhere productive. Hard choices are ahead, but they only get harder when opposition parties take on a reflexive opposition stance and make compromise impossible.

Photo credit: marcovdz

A Smart Way to Finance High-Speed Rail: Restructuring the Highway Trust Fund into a results-driven transportation fund

Posted on by The Progressive Policy Institute

Since announcing an $8 billion “down payment” for high-speed rail development, the Obama administration has been silent about how to pay for a program as ambitious as the Interstate Highway System.

The interstates cost more than $250 billion in current dollars to build. A fast train network, based on systems being developed worldwide, most noticeably in China, could be equally expensive.

So far, Congress has come up with $2.5 billion in general fund appropriations for high-speed rail (HSR) in 2010, and the administration has asked for $1 billion a year for the 2011-14 budgets. Such allocations are hardly enough to begin detailed engineering for California’s HSR proposal between Los Angeles and San Francisco, let alone the nine other intercity corridors that the White House has envisioned.

On Labor Day, President Obama proposed a $50billion transportation infrastructure program that would include 4,000 miles of rehabbed and new railway track. The proposal calls for integrating HSR projects into the next surface transportation bill, a promising step that would ensure some level of federal commitment to the program over the five- or six-year life of the bill. But again, the president did not specify how he would finance HSR or the larger infrastructure program other than to say that his administration “is committed to working with Congress to fully pay for the plan.”

The president’s reticence raises a legitimate question: Can the nation afford HSR in a time of looming federal deficits?

The answer is yes – financing HSR is entirely feasible, but will only happen if the administration and its congressional allies take bold steps to rebalance our transportation priorities. Fortunately, there is both a funding source and a road map for moving from today’s scattershot federal transportation spending to a results-driven enterprise.

The funding source is the Highway Trust Fund, with approximate funds of $52 billion a year. Allocating a portion of highway funds for rail construction is an equitable way to wean drivers away from auto travel by providing them with a faster, safer, and more environmentally sound alternative.
Congress could easily allot $5 billion a year for HSR construction – without an increase in the gas tax – by cutting out earmarks and formula-based grants that now soak up billions of dollars, according to the General Accountability Office (GAO). Such fund reallocations could not only jumpstart HSR projects but serve as seed money for public-private partnerships to get the work done.

Already, international rail operators have expressed interest in competing for high-speed train contracts in the U.S. But these groups are waiting for the Obama administration to lay out a comprehensive financing plan before structuring bids. The use of a well-established and reliable source of transportation financing could make these deals happen.

Download the entire memo.

The Conservative Politics of Common Purpose

Posted on by The Progressive Policy Institute

The primary defeat of incumbent Alaska Sen. Lisa Murkowski (confirmed by her concession yesterday) by former judge Joe Miller is generally being interpreted as another scalp for the Tea Party Movement in its assault on Republicans deemed too moderate on this or that key issue. But there’s something going on a bit deeper, if you consider Alaska’s exceptional dependence on the federal government and the past political track record of politicians like Murkowski’s mentor, the late Ted Stevens, who aligned themselves with the anti-government GOP but emphasized their ability to “bring home the bacon” via appropriations.

In endorsing Miller on behalf of his Senate Conservatives Fund, Jim DeMint emphasized this dimension of Murkowski’s defeat:

Joe Miller’s victory should be a wake-up call to politicians who go to Washington to bring home the bacon. Voters are saying ‘We’re not willing to bankrupt the country to benefit ourselves.’

Now it wouldn’t be quite right to accept DeMint’s characterization of either Alaska voters’ motivations or Miller’s ideology at face value. After all, when Miller calls for abolishing the federal Department of Energy, he’s appealing to the rather selfish desire of Alaskans to control their “own” energy resources–whose value is a lot higher than any federal earmark– regardless of what it means nationally.

But it’s true that there’s an element of collective self-denial among those conservatives who are genuinely willing to take on federal spending categories that are popular among their constituents. Miller is just the latest of a number of Republican Senate candidates this year who have called for phasing out Social Security and Medicare. DeMint himself has long described these programs, along with public education, as having seduced middle-class Americans into socialist ways of thinking.

As Republican pols from Barry Goldwater to George W. Bush can tell you, going after Social Security and Medicare is really bad politics. And they’ve yet to come up with a gimmick, whether it’s “partial privatization” or grandfathering existing beneficiaries, to make major changes in these programs popular (I seriously doubt the very latest gimmick, “voucherizing” Medicare, will do any better once people understand the idea). Indeed, Republicans notably engaged in their own form of “Medagoguery” by attacking health care reform as a threat to Medicare benefits.

Yet the sudden Tea Party-driven return to fiscal hawkery among Republicans, particularly if it’s not accompanied by any willingness to consider tax increases or significant defense spending cuts, will drive the GOP again and again to “entitlement reform.” In Senate candidates like Rand Paul and Sharron Angle and now Joe Miller, we are seeing the return of a paleoconservative perspective in the GOP that embraces the destruction of the New Deal/Great Society era’s most important accomplishments not just as a matter of fiscal necessity but as a moral imperative.

You can respect this point of view even if you abhor its practical implications. But there’s little doubt it represents political folly of potentially massive dimensions. Certainly Democrats owe it to these brave conservatives to take them seriously in their desire to free middle-class seniors from the slavery of Social Security and Medicare, and draw as much attention to it as possible.

Photo credit: Steve Rhodes’ photostream

This item is cross-posted at The Democratic Strategist


Robert Gates, Progressive Conservative

Posted on by The Progressive Policy Institute

Secretary of Defense Robert GatesDefense Secretary Robert Gates makes an unlikely progressive hero. A holdover from the Bush administration, Gates is an ex-spy and button-down conservative who keeps a portrait of President Eisenhower behind his desk. Yet he’s also warned against the “militarization” of U.S. foreign policy, forced the armed services to adapt to untraditional modes of warfare, and axed major weapons programs.

Republicans like to posture as the scourge of big government, but they’ve long been AWOL in the battle to discipline the biggest, most bloated bureaucracy of them all: the Pentagon. Not so with Gates, who has taken Ike’s farewell warning about “the military-industrial complex” to heart.

Even as he’s presided over America’s wars, Gates has sought to restrain military spending. He has canceled dozens of non-essential programs, saving taxpayers over $300 billion, and has ordered his department to find another $100 billion in administrative savings over the next five years. Going where others have feared to tread, Gates has targeted soaring military health-care cuts. And he’s promised to thin the ranks of top military commanders, whose numbers have mushroomed all out of proportion to recent increases in troop strength.

All this has drawn predictable fire from conservative hawks, for whom any cut in defense spending apparently signals an ominous weakening of national will. However, they’ve found it hard to make the usual “soft on defense” charge stick to George W. Bush’s tough-minded former Pentagon chief.

Some liberals, apprehensive over the possibility of deep cuts in domestic and entitlement programs once unemployment rates fall, want Gates to go a lot further. But until the United States is in a position to withdraw most of its troops from the Middle East and Central Asia, that’s not likely to happen. As PPI’s Jim Arkedis has documented, the truly big driver of Pentagon costs is manpower. To get the kind of military spending reductions many doves would like to see would require major changes in U.S. foreign policy – not just nips and tucks in this weapons system or that, or administrative reforms. That’s hard to do in the middle of two wars and a global counterinsurgency campaign against Salafist extremists.

But as Gates recognizes, defense will have to make a substantial contribution to America’s coming fiscal retrenchment. He’s offering credible reforms that will promote efficiency and reduce needless redundancy and waste, and, frankly, provide the administration with political cover against the GOP’s ritual claims that Democrats want to eviscerate the nation’s defenses.

All that may not win Gates many cheers at the next netroots convention. But this is a clear instance in which Obama’s “post-partisan” penchant for reaching across political divides has served him, and the nation, well.

Dems and Spending: There Will be Blood

Posted on by The Progressive Policy Institute

The Congressional Budget Office’s latest fiscal forecasts confirm that America faces a fiscal emergency. The national debt is projected to double as a share of GDP from 32 percent in 2001 to 66 percent next year. Then it could rise to 90 percent by the end of this decade, and reach 146 percent by 2030. At that point, we’d be spending about 36 percent of tax revenue to finance our debts, up from 9 percent today.

The nation’s yawning fiscal gaps, driven largely by entitlement spending, can’t be closed by a combination of economic growth and tax hikes. When it comes to government spending, there will be blood. Only not now: At the federal level at least, unemployment will have to fall dramatically, probably to around 5 or 6 percent, before real discipline can be imposed on public spending. Otherwise a premature turn to austerity could plunge the national economy back into recession.

Let’s stipulate that Republicans are consummate hypocrites when it comes to fiscal discipline. On taking power in 2000, they let budget controls lapse, spent the hard-won surplus they inherited on tax cuts, charged a trillion-dollar prescription drug entitlement to the nation’s credit card, and launched the very Wall Street bailout they now have the temerity to denounce.

And now GOP leaders insist that the Bush 2001 and 2003 tax cuts be extended to the wealthy, not just middle class families as President Obama has proposed. Since they offer no offsetting spending cuts or tax hikes, this would add between $2-$3 trillion to the national debt over the next decade.

Okay, Republicans have no shame, and Democrats are paragons of fiscal rectitude by comparison. Nonetheless, Democrats before long will have to commit what many regard as unnatural acts: make deep cuts in public spending.

For a sobering glimpse of what the future might hold, look at California. Gov. Arnold Schwarzenegger yesterday declared a state of emergency in a bid to force state legislators to pass a budget aimed at closing a $19 billion shortfall.

The Golden States deficit, according to Reuters, “is 22 percent of the $85 billion general fund budget the governor signed last July for the fiscal year that ended in June, highlighting how the steep drop in California’s revenue due to recession, the housing slump, financial market turmoil and high unemployment have slashed its all-important personal income tax collection.”

Democratic lawmakers nonetheless have blocked Schwarzenegger’s proposals for deep spending cuts, leaving the gubernator to threaten another round of unpaid furloughs for state workers. California may also be forced to issue IOUs instead of payments to vendors if the legislature fails to pass a budget soon.  And the state is trying to renegotiate generous pension schemes for state employees.

The California crisis should be a wake up call for Democrats in Washington. A major fiscal retrenchment is coming, and they need to be better prepared for it than their counterparts in Sacramento.

Photo Credit: Anonymous Account’s Photostream

Celebrating Unemployment

Posted on by The Progressive Policy Institute

It’s hardly news that state and local governments around the country are laying off workers and reducing services in the current economic and fiscal climate. But putting aside services for a moment, the sheer impact of public-sector job layoffs is becoming pretty alarming:

Cash-strapped cities and counties have been cutting jobs to cope with massive budget shortfalls — and that tally could edge up to nearly 500,000 if Congress doesn’t step up to help.

Local governments are looking to eliminate 8.6% of their total full-time equivalent positions by 2012, according to a new survey released Tuesday by the National League of Cities, the National Association of Counties and United States Conference of Mayors.

“Local governments across the country are now facing the combined impact of decreased tax revenues, a falloff in state and federal aid and increased demand for social services,” the report said. “In this current climate of fiscal distress, local governments are forced to eliminate both jobs and services.”

That’s just local governments, mind you, not the states who are themselves facing major layoffs.

Now many conservatives would celebrate this news on grounds that eliminating some of the parasites who work for government will somehow, someway, free up resources for the private sector. I’ve never understood exactly how that’s supposed to look, but as Matt Yglesias points out, it’s a really bad time to experiment with efforts to counter-act a recession by increasing unemployment:

Conservatives have largely convinced themselves that public servants are such vile and overpaid monsters that anything that forces layoffs is a good thing and the moderates in Congress seem scared of their own shadows so nothing will be done. But economically speaking, the time for local governments to try to trim the fat is when unemployment is low and your laid-off librarian, ambulance driver, or guy who keeps the park clean can get a new job where his or her skills will plausibly be more optimally allocated. But guess what produces less social welfare than driving a bus? Sitting at home being unemployed. And so it goes down the line. Dumping people into a depressed labor market all-but-guarantees an increase in idleness along with a drop in revenue for local retailers that will lead to more idleness and waste.

Higher unemployment is simply bad. Deliberately promoting it is worse.

Photo Credit: Alfcio’s Photostream

This item is cross-posted at The Democratic Strategist.

Why Democrats Must Change the Defense Budget Process, Now

Posted on by The Progressive Policy Institute

For the first time in my life, I think I agree with John Boehner (R-OH) when it comes to national security. Well, sort of. (And trust me, that’s a tough admission from a guy who wrote this column eviscerating Boehner’s track record on national security.)

Here’s what the Minority Leader said following yesterday’s war funding vote to send $33 billion to support the military deployment in Afghanistan:

“We’ve been through all of this wrangling, and for what? All we’ve created is more uncertainty for our troops in the field, more uncertainty for the Pentagon, and it’s all unnecessary.”

Before you go thinking that I’ve lost my mind, let me explain. Boehner is trying to ding Democrats politically for so much as debating (and then voting against) the Afghanistan supplemental. Essentially, Boehner chafes because Democrats refuse to write the Pentagon a blank check. While I fully support funding troops in the field, you’re about to see why I’m not endorsing Boehner’s blank check by any stretch.

But on the other hand, if you’re sick and tired of having to revisit this “wrangled” vote several times a year, the man might just have a point. And I’ll bet he doesn’t even know it. Democrats would do well to pay attention.

For the third time this year, Congress has appropriated money for Afghanistan. They did it first in the baseline defense budget (“check please!” $549 billion), the “overseas contingency fund” ($129 billion), and now this $33 billion supplemental. That comes to a whopping total of some $711 billion (depending on how you round, of course).

Each of these appropriations not only causes consternation throughout the Democratic caucus, but also reinforces the idea that Pentagon spending is void of any sense of restraint. After all, if you’re trying to sneak a defense appropriation into the first bill and it gets axed, the current system gives you two more chances to slide it in.

The current appropriation is a perfect example — just one month ago it was $30 billion, yet at yesterday’s vote, it grew ten percent to $33 billion. Why does Congress need an extra $3 billion today that they didn’t 30 days ago?

The good news is that Boehner has unwittingly opened the door for a sensible, pragmatic solution to defense budgeting: end the supplemental budgeting process. End the wrangling.

Instead of voting on three separate defense bills that total $711 billion, just vote on one bill that is $711 billion. Not only would it avoid stomach-turning votes for Democrats, a single defense appropriation would limit wasteful spending and prioritize America’s soldiers deployed on the field of battle.

Think of it this way: Once that money is appropriated, that’s it. There’s a definitive bottom line that Congress has to stick to. This forces hard choices about spending priorities based on a set amount. It is not the typical defense budget two-step of what’s available both now and what can be added in the future.

Money would be allocated first and foremost to the warfighter. Faced between the choice of spending money on the weapons, logistics and salaries that our deployed troops need, and buying more of a weapons system we don’t require. What choice do you want your member of Congress to make?

But with today’s three defense budgets, Congress can buy the all the weapons they want, and then appropriate as much as they need for the war.

John Boehner talks about “certainty” for the Pentagon, but he’s only talking about the certainty of spending more, with no sense of discipline.  If Democrats are smart, they’ll roll our three budgets into one, and be certain about prioritizing the warfighter and starting to control defense spending.

Photo Credit: The U.S. Army’s Photostream

Congress and Climate: The Long View

Posted on by The Progressive Policy Institute

As you know by now, no climate bill will emerge from this Congress. Most have picked up Lindsey Graham’s metaphor — “cap and trade is dead” — though I prefer to think of a bill as “mathematically eliminated”. In other words, the right reaction is not permanent loss of hope but “wait til next year.” That hope is faint, however, given the likely makeup of the next Congress.

It has not taken long for the process of taking stock and assigning blame to begin. Will Marshall here at Progressive Fix has written on Congress’ failure (and I agree with everything he writes). The New York Times op-ed page has been dominated by pieces on why the bill failed, and who is to blame. Grist  summarizes reactions. I don’t have much to add to what has already been said. I’m disappointed, but not surprised, and I think there is plenty of blame to go around. That said, I’m still very optimistic about the prospects for action on climate – and by that I mean specifically a national, comprehensive carbon price – in the relatively near future. I think failure in 2010 is a setback, but will be viewed in retrospect as a minor one. This is little different from the way I felt weeks or months ago, but events of last week seem to have suddenly made me a contrarian. Climate pessimism is the new zeitgeist. So why the optimism? Because changes are coming that make climate action inevitable. The world is moving, with or without the Senate.

Some of these changes are structural. Above all, climate policy has to face physical reality, not just social and political preferences. The science of climate change is clear on the big issues, is constantly improving its predictions, and is deepening our understanding of the climate system. The longer we wait, the more we will know — and the warmer the planet will get. Those skeptical of climate science have played almost no role in the failure of climate legislation this year; they were marginal from the beginning. Better knowledge, and tangible evidence of the consequences of climate change, will make the case for action steadily stronger. Physics, as much as politics, will move the “centrist” position on climate towards action. I hope this will be by way of clear but remote physical evidence, such as melting icecaps, rather than by way of weather disasters or droughts. Demographics point in the right direction as well. Young people tend to be more strongly in favor of limiting carbon emissions (though not all polls agree). As today’s youth start to vote and gain power and influence, legislators will have to respond or choose another career.

Another more or less structural change on the way is pressing need for deficit reduction. As both Tyler Cowen and Nate Silver have pointed out in the last couple of days, this, too, will increase the chances of a price on carbon. Higher taxes are almost a certainty given our debt burden and the plausible range of spending cuts. As Cowen puts it, a price on carbon is the “least bad tax” in the sense that it discourages harmful actions (emitting carbon) rather than productive activity.

Other changes come from policies already in the pipeline. Existing state and federal laws provide some authority for regulating carbon emissions, though results will be more modest and costs higher than they would be with a uniform national carbon price. This is my area of expertise, and we’ve written a lot on the issue at Resources for the Future. The summary is this – the EPA can get modest but meaningful carbon reductions with the tools it has, likely at modest cost. EPA regulations on “traditional” pollutants like sulfur dioxide, which are emitted primarily by fossil fuel (and above all coal) plants will also have co-benefits for carbon emissions. These incidental reductions in carbon emissions will make the goals we need to reach with an eventual carbon price more modest. In the past, health benefits from reduction in pollution from coal has been cited as a secondary reason to price carbon. Now, the tables are turned – moves to reduce these pollutants using existing Clean Air Act authority will have climate benefits. Put it this way – in the long or even medium-term, climate action isn’t dead, but coal is, at least unless carbon capture and storage technology becomes available at modest cost. David Roberts at Grist makes this point, with the added irony that coal will likely be begging for cap-and-trade before long, since it would probably give the industry a handout in the form of allowances that could be sold as plants are shut down.

Finally, there’s the economy. Whether out of opportunism or genuine fear, concerns over the economic impact of climate policy fueled opposition this year. If 2010 politics could be matched with the 2007 economy, I have no doubt that a climate bill (of some kind) would have passed the Senate. The politics will get rosier for climate action, for the reasons I explained above. The economy will strengthen as well, and “jobs” will not dominate politics to the extent that they are the only acceptable justification for policy, and the rhetorical foundation of all opposition to policy. Those that agree with Ross Douthat that “sometimes it makes sense to wait, get richer, and then try to muddle through” will be more prepared to muddle through as we get richer. If the economy does not improve, we have bigger problems – though the one small benefit of our economic troubles is that it has likely bought us a little time on climate. Carbon emissions are down sharply over the last few years. In fact it will be an interesting question to look back once we have some perspective and ask whether the economic crisis was beneficial or harmful in climate terms.

These changes are all inevitable or at least very likely. Together, they will make a carbon price ever more politically possible, and eventually politically necessary. As most people who have considered the climate problem seriously have known for a long time, pricing carbon is the only workable solution. Eventually, it will come.

Of course, whether climate action will happen is easier to predict than how long it will take. I don’t have an solid answer for the latter question. Some of the shifts I mention will take longer than others. Structural changes, like global warming itself and demographic shifts, may take a long time to affect politics. Policies in the pipeline are more well-understood, but many are in the planning stage and could be held up, possibly by litigation. Meaningful EPA regulations on carbon could be in place by late 2011, or might not be effective until near the end of the decade. Economic improvement should, I hope, come more quickly – but there are of course no guarantees, and the “joblessness” of the recovery to date may mean the economy will dominate politics for longer than growth figures would indicate. So I don’t  know when we’ll have real climate legislation. My best guess would be 2013 –  another presidential & congressional election, presumably a stronger economy, fossil industries under pressure from the EPA and states, and, plausibly, palpable evidence of climate change could all converge to make a comprehensive climate bill politically possible. But that’s only a guess.

A critical look at last week’s events and, indeed, the last few years of congressional inertia is warranted. Pushing for action on climate – whether at the grassroots or in the Capitol – is still desperately needed. The longer we wait, the greater the risk and the higher the cost. But these events are just minor scenes in a story whose end we already know. Climate action may come sooner, or it may come later, but it will come.

Photo Credit: Casino Jones’ Photostream

America in 2030: A Fiscal Portrait

Posted on by The Progressive Policy Institute

The Congressional Budget Office’s long-term budget forecasts on the national fiscal health are highly educated guesswork, but guesswork just the same. The 2030s are pretty far off, and the degree of forecasting uncertainty is higher than it once was. As CBO explains “the current degree of economic dislocation exceeds that of any previous period in the past half-century, so the uncertainty inherent in current forecasts probably exceeds the historical average.” But let’s imagine that the 2030s have arrived, and that CBO’s budget projections have come true. What would America look like?

For starters, Social Security would be flat broke. All U.S. Treasury’s IOUs to Social Security will have been cashed in. Since the Social Security trust funds will be completely depleted and, because Social Security is barred by law from borrowing from the federal government, the program will be unable to meet its obligations. Thus, by the end of the 2030s, payable benefits would have to be cut by 20 percent. Is it possible to imagine that the government will suddenly cut 20 percent of the benefits it hands out? That seems unlikely — the law would be changed and borrowing would resume.

In fact, Social Security’s problems would start much earlier. In 2016, according to CBO, its outlays would begin to regularly exceed its revenues, and consequently Social Security would first start to regularly call in its IOUs. Thus, the Treasury Department would need to borrow billions of dollars each year to pay back what it borrowed from Social Security’s trust funds.

If Social Security is expected to be in bad shape by the 2030s, the big public health care programs, Medicare and Medicaid, would be doing even worse. The culprits being an aging population and expanding health care costs, which are scheduled to grow faster than the U.S. economy. By the 2030s the number of people over the age of 65 — the beneficiaries – will have increased by 90 percent while those between 20 and 65 — the contributors — will have grown by a meager 10 percent.

In the 2030s, federal spending on mandatory health care programs accounts for 11 percent of GDP, about twice the level in 2010. Add in Social Security, and the big three entitlements cost about 16 percent of GDP. Keep in mind that primary spending for the 40 year period before 2010 averaged 18.5 percent of GDP. This means that in 2030, the U.S. government will either be unable to direct resources to other priorities (like education,) or will have to increase a tax rate by roughly double that of 2010.

Finally, America in the 2030s will groan under mind-boggling public debt, assuming the country’s fiscal fortunes are calculated by the CBO under what’s called a “current policy” scenario. In this case, the CBO assumes that no major public policy innovations will occur throughout the lifetime of its projection. This scenario reflects the political reality we face today. For example, congress is currently debating whether to extend the Bush tax cuts and “patch” the Alternative Minimum Tax. If political inaction prevails, debt-to-GDP ratio would exceed 200 percent by the 2030s, even with an economic recovery.

It is true that the U.S. holds a privileged position by virtue of the dollar’s role as the world’s reserve currency. But we have no idea how a debt of this magnitude would affect our ability to invest in future growth, and to keep borrowing from abroad. Moreover, in the 2030s, interest payments on the national debt are nine percent of GDP, from just one percent of GDP in 2010. If we continue borrowing at the projected rates beyond 2030, interest spending would exceed total federal revenues 15 years thereafter.

Finally, this grim fiscal portrait of America in the 2030s rests on optimistic assumptions. CBO projections assume that revenue will average around 19 percent of GDP and that long-term interest rates remain low. They also assume away the strong likelihood that America will face another economic crisis or armed conflict between 2010 and 2030.

The key for policy-makers, of course, is to envision a different fiscal future for America – and to act on it just as soon as the economy recovers.

Photo Credit: Alancleaver_2000’s Photostream

The Changing Political Discussion Around Defense Spending

Posted on by The Progressive Policy Institute

With today’s New York Times’ article, we may be on the verge of a sea change in political attitudes on defense spending. To be sure, the political dialogue has not fully accepted the necessity of fiscal restraint at the Pentagon, but we’re getting there.

When you hear the likes of Republican Sen. Judd Gregg (R-NH) say, “defense should be looked at” as a part of deficit reduction and Democratic Sen. Daniel Inouye (D-HI) toe a harder-line, something’s up.  Okay, Inouye has a long, hard-earned reputation as a defense porker, but the contrast with the conservative Gregg (even if he is from New Hampshire) is notable.

Defense spending has been a counter-intuitive third-rail of its own in domestic politics. Conservatives, allergic to every government program they’ve ever come across, drip with hypocrisy when they can’t seem to get enough pork at the barbecue of weapons systems. And progressives are often skittish about restraining defense spending in order to preserve home-district jobs and out of fear of “weak on defense liberals” charges.

But Erskine Bowles, Bill Clinton’s chief of staff and co-chair of the Deficit Commission, insists, “We’re going to have to take a hard look at defense if we are going to be serious about deficit reduction.”

It’s something your friends here at PPI have been pushing. Will Marshall, PPI’s president, testified in front of Bowles’ commission in late-June and was adamant that “defense has a contribution to make” in deficit reduction.

The hard part, however, is making sure it’s the right contribution. Secretary of Defense Bob Gates has said that he’s looking at a whole-sale restructuring of Pentagon spending:

What I’m asking for is not a simple budget cut; [what] I’m talking about is changing the way we do business. It’s taking the savings from that and applying it to long-term investments… This is a lot harder than cutting the budget for one year.”

In doing so, it’s critical to strike a balance between fiscal restraint and maintaining national security. This calls for a nuanced approach that doesn’t just ax a few weapons programs one year and starts all over the next. To keep America safe, strong, and solvent, we need creative ideas for restructuring defense spending.

Continue to check in at ProgressiveFix.com, as PPI plans to issue our own plan in the coming weeks.

Photo credit: TrueBritgal’s Photostream

Everything Should Not be on the Budget Cutting Table: The Case for Expanding Public Investment

Posted on by The Progressive Policy Institute

The International Monetary Fund recently scolded the U.S. government for running large budget deficits. Leaving aside the absurdity of cutting deficits when unemployment is still extremely high, it’s clear that at some point – as joblessness declines toward 5 percent – deficit reduction will need to begin in earnest. But the real question is how to do that. There’s a risk that the Washington economic class – grounded as they are in 20th century neo-classical economics — will fail to balance the twin imperatives of fiscal discipline and public investment.

Indeed the common refrain that has become the new “group think” in DC is that “everything should be on the table” when it comes to addressing the debt. For example, the Bipartisan Policy Center’s Debt Reduction Task Force says, “everything should be on the table.” Even President Obama, who has at least rhetorically talked about the need for increases in public investment and fought to include public investment in the stimulus, now says that everything should be on the table. Other groups echo this intellectually easy, but intellectually simplistic, position. Pete Peterson’s Concord Coalition likewise calls for “applying budget discipline to all parts of the budget.” The New America Foundation’s Committee for a Responsible Budget supports a budget freeze on all discretionary spending. For these budget hawks, subsidies to farmers to produce crops that aren’t needed fall in the same category as funding for the National Science Foundation to advance science and technology critical to our nation’s future: they both cost money and both should be cut.

The Government’s Role

But there are some things that governments do – on the tax and spending sides – which drive productivity, spur innovation, improve health, clean up the environment and create other benefits that most certainly should not be on the table. The National Commission on Surface Transportation Financing (which I had the honor of chairing) recently highlighted a federal highway and transit funding gap of nearly $400 billion over the next five years. Increased federal support for highways and transit would lead to significantly greater societal benefits (reduced traffic congestion, higher productivity) than the costs in revenues. Yet some groups wave the budget red flag to oppose expanded infrastructure investment, even if increased user fees, such as the gas tax, pay it for. As ITIF has demonstrated, increasing the Research and Experimentation Tax Credit from 14 to 20 percent would return $9 billion more to the Treasury than it would cost. And as ITIF and the Breakthrough Institute have shown, solving climate change requires significant increases in federal support for clean energy innovation, but the benefits (saving the planet) are massive.

If neo-classical-inspired budget hawks want everything to be on the table, liberal Keynesians want to put practically nothing on the table, except higher taxes on the wealthy and business. For example, economist Jamie Galbraith would take entitlement reform off the table. His solution: pray the Chinese keep lending us money. Likewise, Jeff Faux, founder of the liberal Economic Policy Institute argues that, “The deficit projections no more reflect a crisis of “entitlement” overspending than they reflect a ‘crisis’ in any other category of spending, like military spending or agricultural subsidies. Sensible governance understands that the fact that a program area is expanding does not make it the source of fiscal imbalance. But with entitlements off the table, you can’t solve the government’s fiscal problems simply by raising taxes on the rich.

All Spending Is Not the Same

What’s behind this widespread unwillingness to prioritize investment? Budget hawks fear that sparing one item from the chopping block will only validate the demands of interest groups to exempt their pet programs. In addition, many adhere to a neo-classical economics perspective, which holds that government plays a negligible role in economic growth and should be neutral with regard to private sector activity. In the purest form of this thinking, everything is on the table, because nothing is more important than anything else. To paraphrase Michael Boskin, a neo-classical Bush I economist, a dollar of public investment on computer chips has the same societal value as a dollar spent on potato chips. But government should be anything but neutral. Science and infrastructure funding is more valuable than farm subsidies. Government support for research in computer chips is more valuable than support for potato chips.

For liberals, reducing spending on entitlements will not only harm working Americans, but will also reduce economic growth, since Keynesian doctrine holds that growth comes from increasing aggregate demand – meaning pump more money into the economy, period.

In contrast, an innovation economics approach to the budget distinguishes between spending on consumption and spending on investment. For innovation economics advocates, all spending (either on the tax or expenditure side) should be on the table, and all investment (on the tax and expenditure side) should be off the table.

Tax, Cut and Invest

The last time Washington paid attention to deficits was in the first Clinton term. At that time PPI Vice President Rob Shapiro wrote a series of reports with the title, “Cut and Invest.” The notion was that we should cut unnecessary spending and use a significant share of the savings to invest in the nation’s future, including education, infrastructure and research. That was the right message then and it is the right message now. Although today, such a report might be best titled, “Tax, Cut and Invest.” To solve the budget deficit in a way that enables the significant increases needed in investment, we need to raise some taxes, cut some spending and increase some investment.

The general outline should look like this: On the tax side, we should let the Bush tax cuts on the wealthy expire, including: dividend taxes, estate taxes (above a certain modest size) and top marginal rates. We should increase the gas tax by at least 15 cents a gallon (and index it to inflation) and at the same time institute a carbon tax. We should consider a border-adjustable business activity tax. We should eliminate the home mortgage interest deduction. (Home ownership has many societal benefits, but as we see from other nations without these large tax incentives, nations can get high levels of home ownership without wasteful subsidies.)

On the spending side, we need to deal with entitlements, including: progressive indexing of Social Security benefits and increasing the retirement age, continued health care reform — particularly focused on driving innovation to cut costs and cutting entitlements to farmers — farm subsidies. This should be a gradual process to spread the pain over time.

And most importantly, we should significantly expand investments. We need to expand investments in education and training, science and research, technology (including, but not limited to clean energy) and physical infrastructure. In order to ensure that companies in the U.S. are globally competitive and create jobs here at home, we need to expand corporate tax expenditures. For example, create a new corporate competitiveness tax credit that would include a much more generous credit for research and development, and a credit for business investments in workforce training and new capital equipment, especially software. Making these investments will cost money in the short run. But they will also generate returns to the economy and the government in the long term. In economic downturns, successful corporations don’t cut key investments because they know that these investments are vital to gaining market share and competitive advantage in the moderate term. Governments should think the same way.

So let’s stop talking about putting everything on the table and instead recognize that not only do investments need to be off the table, they need to get more from what’s on the table.

Rob Atkinson is president and founder of ITIF, a Washington-based think tank providing cutting-edge thinking on technology and economic policy issues.

Photo Credit: Gliko’s Photostream

Recommendations on Curbing the National Deficit

Posted on by The Progressive Policy Institute

The following is the is an excerpt from Will Marshall’s June 30 testimony before the National Commission on Fiscal Responsibility and Reform during the commission’s first public listening session:

Chairman Bowles, Chairman Simpson, and Members of the Commission, I appreciate the opportunity to appear before you to discuss ways to put America on a fiscally sustainable course.

Once unemployment rates start to fall, U.S. policy makers must be prepared to pivot sharply from fiscal stimulus to fiscal restraint. Otherwise, a large and growing federal debt will deplete our capital stock and thereby limit future economic growth. It will divert resources from productive investment to interest payments on the debt, half of which is already held by foreign lenders. And it will shake investor confidence, here and abroad, in the fundamental soundness of the U.S. economy, eventually driving interest rates up and the dollar down.

Despite these dire and entirely foreseeable consequences, too many federal policy makers remain in denial about the need for fiscal discipline. You have taken on what many consider a Mission Impossible: forging a bipartisan consensus on how to defuse the nation’s debt crisis. That’s put you in the crosshairs of extreme partisans of the left and right, who imagine this problem can be solved strictly at the other side’s expense. By refusing either to cut spending or raise taxes, the two have joined in a tacit conspiracy to bankrupt the country.

Common to both is the assumption that you can have fiscal responsibility, or you can have progressive government, but you can’t have both. We at the Progressive Policy Institute have always rejected this false choice. We believe that a progressive government can and must live within its means, and that if it instead chases the illusion of borrowed prosperity, it’s not really progressive.

To paraphrase Franklin Roosevelt, Americans know instinctively that borrowing routinely to consume more than you produce is both bad economics and bad morals. I don’t think it’s an accident that, as public worries about deficits have been mounting, public trust in government has been plummeting.

So there’s a lot riding on your ability to forge consensus behind a bold and balanced plan to restore fiscal responsibility. Let me offer some thoughts on what that plan should include from the perspective of a “progressive fiscal hawk.”

Read the entire testimony.