issue: Fiscal Policies

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.

School Reform or Edujobs?

Posted on by The Progressive Policy Institute

There’s a move afoot in Congress to cut one of President Obama’s most creative and cost-effective reforms – the Education Department’s $4.3 billion Race to the Top fund. Which GOP troglodyte is behind it? Actually, it’s a prominent liberal: Rep. David Obey (D-WI).

Obey, chairman of the mighty House Appropriations Committee, introduced a bill this week to cut $500 million from the fund. He also wants to skim $200 million from the Teacher Incentive Fund, which helps districts set up pay-for-performance systems to reward excellent teachers, and to take $100 million from a pot of money set up to help finance charter schools.

These raids on signature Obama school improvement initiatives are intended to raise $10 billion to help fund the Keep Our Educators Working Act, otherwise known as the “edujobs” bill. It would send federal dollars to the states to prevent teacher layoffs. Pitting jobs against efforts to improve America’s lowest-performing schools is a profoundly bad idea.

Education Secretary Arne Duncan has used the Race to the Top Fund brilliantly to leverage overdue changes in state laws that inhibit innovation in underperforming school districts. To compete for federal grants, states must remove arbitrary caps on charter schools, track students’ educational growth year by year, and include that information in teacher evaluation. The other funds operate on the same principle that the federal government should play a strategic role in education, using small investments to stimulate state and local innovations in teacher compensation and public school choice.

No one wants to see teachers lose their jobs in today’s dicey economy. But no one wants to see firefighters or police or, for that matter, construction workers, sales reps or bank tellers lose their jobs either. With unemployment stuck near 10 percent, Congress has a clear moral responsibility to extend unemployment and transitional health care benefits. But what’s the rationale for singling out teachers for a special measure of job protection?

What’s more, Obey and his liberal allies have not tied the extra money to changes in the way school districts conduct reductions in force. Most districts use the last-in-first-out (LIFO) method, in which teachers with the least seniority and lowest salaries are dismissed first. LIFO thus reinforces a tenure system that ties compensation to years on the job irrespective of job performance, and that deters more talented people from becoming teachers. It also means that the cost of overall spending on teacher salaries will rise faster than if reductions in force had been made across the experience spectrum.

If edujobs is bad policy, it’s worse politics. It practically begs conservatives to charge that Democrats put the interests of the adults in public education over the interests of the kids.

It happens, however, that that’s not true. Obey’s proposal has sparked strenuous objections both from the Education Department and from progressive school reformers in Congress. “If we are to meet the President’s goal of becoming global leaders in college graduates by 2020, we must rethink and reinvent our approach to education by moving forward with bold reforms,” Rep. Jared Polis (D-CO) wrote in a letter to his colleagues. “Unfortunately, the proposed cuts represent a major step backward.”

Obey is a liberal lion who is retiring after a long career in Congress at the end of this term. Polis is only a freshman, but he’s right, and progressives ought to rally behind the president’s efforts to fix America’s broken schools.

Photo credit: House Committee on Education and Labor’s Photostream

Give Innovation Economics a Chance

Posted on by The Progressive Policy Institute

Budget deficits are emerging as one of Washington’s chief economic obsessions, with both liberal and conservative economic camps opining about the deficit’s effect on the economy. Robert Samuelson’s recent column in the Washington Post describes how the major economic doctrines—particularly Keynesian and monetarists (or supply-siders)—interpret the fiscal impact of budget deficits.

Keynesians believe budget deficits (either from increased spending or reduced taxes) can stimulate the economy, leading to more demand and therefore more jobs. As Paul Krugman’s recent arguments have demonstrated, they believe that when unemployment rates are high job creation should not be sacrificed on the altar of deficit reduction. In contrast, many neoclassical economists, especially conservative supply-siders, argue that big government deficits reduce national savings and increase interest rates while also contributing to financial uncertainty and reducing private sector investments.

While Samuelson rightly points out the differing perspectives of the Keynesian and supply-siders, he misses what they have in common. Neither of them considers the role of innovation in their growth models or distinguishes between spending and investment. And with this omission they fail to see what particular types of deficit spending can be harmful to the economy and conversely what kinds can be beneficial.

Innovation economists argue that the long-term benefits of investments, particularly in innovation, outweigh the costs of temporary budget deficits. For example, as the Information Technology and Innovation Foundation recently demonstrated, expanding the R&D tax credit, while costing the government money in the short run, would actually lead to more revenue for the Treasury in the medium term. Innovation economists support direct investments, such as government research, and indirect public investments, such as an expansion of the R&D tax credit. Robust investment in innovation and technology are essential to long-term growth. This is because innovation increases productivity, and productivity gains have accounted for the lion’s share of economic prosperity over the last several decades.

Once economists recognize innovation as the most important part of economic policy, the impact of budget deficits becomes clearer. For example, neoclassical economists worry that deficit spending will increase interest rates and reduce the amount of capital available for private sector investment. Innovation economists believe that investments in technology and knowledge spur economic growth and will generate more capital. The problem is that the market doesn’t always allocate as much capital to these endeavors as it should. Indeed, the extremely low interest rates in the early 2000s did little to boost these kinds of investments. Instead, people used low interest rates to increase capitalized spending, specifically in housing, which created the housing bubble. Instead of emphasizing access to capital, innovation economics argues that if investment in technology (including new capital equipment used by business) is the goal, then policy makers would do better to focus on policies that incentivize such investments, such as allowing first-year capital expensing—even if doing so temporarily increases the budget deficit.

Samuelson frets that the differing opinions on how to handle the budget deficit indicate that “[w]e may be reaching the limits of economics.” Indeed, if in the knowledge-based economy we are limited by theories that still define the production process as only land, labor or capital, as Adam Smith did, these legacy economic doctrines will likely offer little advice on the budget. On the other hand, the new-growth theory of innovation economics that puts knowledge and innovation at the center of the contemporary production process is more able to intellectually navigate the modern, global economy and dictate appropriate policy decisions.

Photo credit: TheTruthAbout…’s Photostream

Time To End Supplemental Budgeting

Posted on by The Progressive Policy Institute

The House has taken up a $30 billion supplemental appropriations bill to fund Afghanistan. However, the bill has ballooned to over $70 billon as the Democratic leadership has had to slather on non-defense appropriations to attract the votes of more progressive caucus members frustrated with nine years of slow progress in Afghanistan. There’s a $10 billion education jobs fund, $18 billion in Department of Energy loan guarantees, and $500 million for border patrol. This bill has turned the old guns vs. butter argument into a fight about guns and butter.

The bottom line is Democrats’ left flank is fed up with tough but “must have” votes on issues they view as too centrist (a health care bill minus the public option, multiple war appropriations). But this bill’s incentives are wholly inappropriate: Spending $10 billion on education-related jobs may be a worthy expenditure when considered separately, but it has no business in a defense bill. The Republicans, of course, are having a field day — they’ve exposed the Democratic split by threatening to pull potentially vital support of war-funding unless the bill is stripped “clean” of non-defense expenditures.

The good news is that there is a magic bullet, and it would solve a lot more than political bickering: End the practice of supplemental budgeting. Beyond politics, having just a single, unified defense budget would force trade-offs in a defense spending culture that has run wild in the last 10 years.

Here how supplementals work. Every year since 9/11, we’ve had essentially two or three defense budgets. This year, we’ve had three: a baseline defense budget appropriation of approximately $549 billion, a $159 billion “overseas contingency operations” (i.e., mostly Afghanistan and Iraq) budget and the current supplemental request of $30 billion (which includes several tens of billions for non-defense items discussed above).

The dirty secret is that even many of Pentagon’s “emergency war appropriations” have nothing to do with our current wars. Take the F-22, for example. Before Secretary Gates won last year’s fight to cap production of the F-22, lawmakers inserted $600 million to buy additional planes in the 2009 “emergency supplemental” after the money was shut out of the baseline 2009 budget. This happened even though not one of the 183 F-22s already owned by the U.S. military had flown a single mission over Iraq or Afghanistan. That doesn’t sound like an emergency spending necessity, does it?

Having three budgets is like having three strikes in a baseball at-bat — you have the luxury to swing and miss twice. Projects that don’t make the baseline DoD budget (strike one!) can be considered in either of the additional supplementals (strike two! strike three!) before they’re “out.”

Ending the supplementals would be like giving the batter just one strike. By combining all defense spending into one (larger) appropriation each year, the batter has just one swing — miss the first time, that’s it. The practice would force Congress to make hard choices that prioritize the war-fighter. Who wants to be the representative that adds defense pork to a bill at the expense of our fighting soldiers’ needs? And with no hope of getting additional money later in the year, it would begin to create a culture of efficiency and discipline in spending priorities.

Ultimately, Afghanistan will be funded. Having a single defense budget minimizes divisive political bickering and prioritizes the war-fighter. That’s a real win-win.

Follow the Leader

Posted on by The Progressive Policy Institute

Congress isn’t always the first place you look for intellectually honest discussion of America’s fiscal dilemmas. Neither party has clean hands, yet each points smudged fingers at the other. How refreshing then to hear Rep. Steny Hoyer (D-MD) uttering blunt truths rather than partisan cant about America’s exploding debts.

“Unfortunately, we can blame our long-term deficit on policies that are almost universally popular,” the House Majority Leader said yesterday at a forum hosted by Third Way. “We’re lying to ourselves and our children if we say we can maintain our current levels of entitlement spending, defense spending, and taxation without bankrupting the country,” he added.

Hoyer also wondered aloud about the wisdom of permanently extending any of the Bush tax cuts absent a serious plan for long-term deficit reduction. It’s a pertinent question for both Republican anti-tax zealots and President Obama.

Even as they excoriate Obama and the Democrats for ballooning the federal deficit, Republicans insist that all the tax cuts passed in 2001 and 2003 be extended. That would cost a cool $3 trillion over the next decade, but don’t expect the GOP to fill that gaping hole in the federal budget with spending cuts. As Hoyer pointed out, Republicans have run like scalded dogs from Rep. Paul Ryan’s “roadmap” to a balanced budget, which calls for deep cuts in Medicare and Social Security.

But President Obama is in a bind as well. He has set up a fiscal commission to come up with a plan after the midterm election to start unwinding America’s massive debts. Many economists believe such a plan is essential to boost investor and lender confidence in the soundness of the U.S. economy, and to reverse the enormous imbalances in world financial flows.

During the 2008 campaign, however, Obama promised to extend the Bush cuts for the “middle class,” which he defined as families earning less than $250,000 and individuals earning less than $200,000. That promise helped him deflect GOP efforts to brand him as an inveterate tax hiker. But it carries a high price tag: about $1.4 trillion over the next decade according to the Joint Committee on Taxation.

What’s more, the nation’s fiscal outlook has deteriorated dramatically since the campaign. Massive public spending to avert a financial and economic collapse last year could push this year’s deficit to a record $1.7 trillion. The national debt now stands at about $13 trillion, and is on course to reach 90 percent of GDP by 2020 – not far from Greek-style proportions.

America really can’t afford any of the Bush tax cuts right now. Letting them expire would give the fiscal commission more room to devise a balanced package of spending and tax reforms aimed at whittling down our debts.

But with unemployment stuck in the stratosphere, and with Democrats apparently facing sizable losses in the midterm election, it’s hard to ask them to expose middle-class families to higher taxes – especially when Republicans can be counted on to indulge in monolithic, over-the-top demagoguery.

GOP Senate Minority Leader Mitch McConnell wasted no time in unloading on Hoyer yesterday. “It’s now official. Top Democrats on Capitol Hill are starting to signal their intention to raise taxes on the middle class,” he declared on the Senate floor.

To limit the long-term fiscal impact, centrist Democrats like Hoyer are considering a temporary extension of the middle-class tax cuts. Many liberals, however, are more concerned about the supposed dangers of “austerity” than the nation’s colossal debt burden. In fact, they want to make the cuts permanent now, while Democrats still enjoy big majorities in both Houses.

So chances are Congress will extend the middle-class tax cuts this fall, setting a less-than-inspiring example of restraint for the fiscal commission.

Nonetheless, Hoyer said House Democrats are pushing a budget resolution that would limit discretionary spending; cut deeper than the president’s budget; reinforce PAYGO rules; and commit to a vote on the fiscal commission’s recommendations. It’s a modest down payment on fiscal reform that’s unlikely to suppress demand and throw the economy into a tailspin.

In any case, the contrast between Hoyer’s fiscal realism and the GOP’s denial couldn’t be sharper. Let’s hope Democrats follow their leader.

Photo credit: Center for American Progress Action Fund

Orszag a Tough Act to Follow

Posted on by The Progressive Policy Institute

Today’s big personnel news is Peter Orszag’s decision to leave the White House budget office sometime in the next few weeks. The departure, which has already sparked speculation on possible replacements, will be the Obama administration’s first major exit. Whoever the White House picks to replace him will have big shoes to fill.

As the director of the Office of Management and Budget (OMB), Orszag played a key role in two of the biggest pieces of progressive legislation we’ll see in our lifetime: the economic stimulus package and the health care reform bill. On the latter, in particular, Orszag’s acumen and advocacy were key assets, his forceful case for the bill’s cost-cutting properties no doubt crucial in bolstering support for a gigantic piece of social legislation. It’s worth noting that his contributions to passing health reform began well before his stint at OMB. As the director of the Congressional Budget Office in 2007-2008, Orszag repeatedly sounded the alarm on rising health costs as the biggest threat to our fiscal future, warnings that undoubtedly helped set the stage for reform’s passage.

For an administration numbers-cruncher, he was unusually visible, which was a good thing. With a reputation for impartiality and brilliance, Orszag gave the administration’s agenda analytical ballast. There will no doubt be efforts on the right to brush Orszag with the red ink that the administration finds itself swimming in, but that’s politics as usual. Inheriting the worst economy since the 1930s, Orszag presided over the Herculean task of preventing a complete meltdown and setting the foundation for a recovery. In many ways, he’s a reflection of the administration at its best: a rigorous, pragmatic empiricist.

Photo credit: Center for American Progress’ Photostream

Gates and Fiscal Responsibility (Again)

Posted on by The Progressive Policy Institute

This past weekend Secretary of Defense Bob Gates continued to talk his Kansas brand of sense about Pentagon spending. After a lecture on shipbuilding last week at the Navy League teed up tough questions to the Navy — like whether we can continue to afford $7 billion submarines — Gates took to the Eisenhower Library in his home state to expand that theme across his entire department. I’d bet you a crisp $20 bill that this is the line that caused an audible gasp in Reston and on the Hill:

The Defense Department must take a hard look at every aspect of how it is organized, staffed, and operated – indeed, every aspect of how it does business. In each instance we must ask: First, is this respectful of the American taxpayer at a time of economic and fiscal duress? And second, is this activity or arrangement the best use of limited dollars, given the pressing needs to take care of our people, win the wars we are in, and invest in the capabilities necessary to deal with the most likely and lethal future threats?

As a starting point, no real progress toward savings will be possible without reforming our budgeting practices and assumptions. Too often budgets are divied up and doled out every year as a straight line projection of what was spent the year before. Very rarely is the activity funded in these areas ever fundamentally re-examined – either in terms of quantity, type, or whether it should be conducted at all. That needs to change.

But then again, maybe the shock value has worn off — fiscal responsibility has been such a theme under Gates’ leadership that perhaps tough-minded rhetoric on defense spending now comes with little surprise.

Then Gates delved into specifics. And now it was the soldiers’, sailors’, airmen’s, and marines’ turn to get nervous:

[H]ealth-care costs are eating the Defense Department alive, rising from $19 billion a decade ago to roughly $50 billion – roughly the entire foreign affairs and assistance budget of the State Department. The premiums for TRICARE, the military health insurance program, have not risen since the program was founded more than a decade ago. Many working age military retirees – who are earning full-time salaries on top of their full military pensions – are opting for TRICARE even though they could get health coverage through their employer, with the taxpayer picking up most of the tab. In recent years the Department has attempted modest increases in premiums and co-pays to help bring costs under control, but has been met with a furious response from the Congress and veterans groups. The proposals routinely die an ignominious death on Capitol Hill.

The resistance to dealing with TRICARE stems from an admirable sentiment: to take good care of our troops, their families, and veterans – especially those who have sacrificed and suffered on the battlefield. This same sentiment motivates the Congress routinely to add an extra half percent to the pay raise that the Department requests each year. Furthermore, the all-volunteer force, which has been a brilliant success in terms of performance, is a group that is older, more likely to have spouses and children, and thus far costlier to recruit, retain, house, and care for than the Eisenhower-era military that relied on the draft of young single men to fill out its ranks.

Those are the political and demographic realities we face. To a certain extent they limit what can be saved and where. But as a matter of principle and political reality, the Department of Defense cannot go to the America’s elected representatives and ask for increases each year unless we have done everything possible to make every dollar count. Unless there is real reform in the way this department does its business and spends taxpayer dollars.

Two quick points here.

First, America’s armed personnel and their families represent an important political constituency. No administration wants the baggage that comes with reducing benefits for America’s fighting men and women. For the time being, that includes this one. If a serious restructuring of military pay and benefits ever occurs, it would likely be in about year six or seven of the Obama administration, safely after reelection.

Even then, it might prove impossible as Congress continues to feed the beast of fiscal irresponsibility. News broke just today that the Hill is about to vote on a 1.9 percent military pay raise. Guess what? That’s a half-percent more than the Pentagon recommended.

Second, in my mind, the structure of the benefits isn’t the problem. It’s the amount of care. I wrote a paper last year called “The Pentagon’s Most Expensive Weapon,” and I concluded that once you add up all outlays — including costs associated with the Department of Veterans Affairs — for military personnel, DoD spends not the $136 billion it tells you, but more than $300 billion.

Why are these costs skyrocketing? It’s a simple function of our foreign policy — America’s service members may be getting older and costlier, but since Afghanistan and Iraq, they’re also getting injured more frequently and in greater numbers.  Here’s my conclusion:

The problem of rising personnel costs can only be addressed from higher up the chain. Extended deployments overseas invariably increase costs because of the strain they place on the force — in casualties, logistics, sustainability, and recruiting and retention costs. Once the force has recovered from Iraq and Afghanistan, it is incumbent on America’s civilian leadership to carefully weigh the extended cost burden placed on the Pentagon’s personnel account when plotting our global security strategy. In short, America must choose its wars and deployments carefully, as exploding personnel costs are the untold story of Pentagon spending in 2010 and beyond.

In other words, you can talk about trimming benefits and reducing the ever illusive “waste, fraud, and abuse,” and that is no doubt a good thing. And so is eliminating unneeded weapons systems.

But if we’re going inject real savings on personnel into the system, we can’t just talk about TRICARE, we have to stop fighting dumb wars. And ultimately, that decision is above Gates’ pay grade.

Photo credit: https://www.flickr.com/photos/eschipul/ / CC BY-SA 2.0

High-Speed Rail May Stall Without More Push from the White House

Posted on by The Progressive Policy Institute

Unless the White House acts forcefully and decisively to advance its transportation agenda in Congress, the president’s vision for high-speed rail may get sidetracked by the looming federal deficit.

That’s the growing perception on Capitol Hill as Congress grapples with an infrastructure program that could cost between $22 million and $132 million a mile if developed along the lines of 200-mile-per-hour bullet trains now running in Europe and Asia.

Unlike the health care debate, President Obama has been conspicuously unengaged from the details of how to move his high-speed-rail (HSR) plan from a one-off award program using Recovery Act stimulus funds to a dedicated multi-year program akin to the scope and ambition of the Interstate Highway System.

The House Transportation and Infrastructure Committee has raised concerns about the program’s lack of a solid revenue source. In a letter addressed to the president, Chairman James L. Oberstar (D-MN) and Railroad Subcommittee Chair Corrine Brown (D-FL) wrote:

We stand ready to help move your vision of high-speed rail closer to reality. But given budget constraints, we cannot continue to rely on general authorizations and appropriations to finance high-speed rail. We need to identify a dedicated revenue source for high-speed rail, and we need your help to do that.

More than 100 House members signed the letter.

What has especially upset HSR supporters is that, in the wake of $8 billion awarded to states last January under the American Recovery and Reinvestment Act, there is precious little additional funding earmarked for the program.

Congress authorized $2.5 billion for HSR projects in the current fiscal year, but HSR funding then drops to just $1 billion under the administration’s proposed FY 2011 budget.

That’s not enough to complete the 85-mile corridor proposed between Tampa and Orlando, not to speak of helping underwrite such ambitious projects as California’s proposed 800-mile HSR network connecting the state’s largest cities.

A coalition of transportation advocacy groups is calling on Congress to appropriate $4 billion for high-speed rail in 2011. Tomorrow the coalition will hold a press conference at Washington’s Union Station to present their case, with Rep. Brown among those scheduled to speak.

Last summer, Oberstar’s committee introduced a draft bill that would place $50 billion in the reauthorized surface transportation program to fund HSR development over the next six years. The actual method of funding the program was left open “in hopes that the administration would help Congress identify a dedicated revenue source for high-speed rail,” according to Oberstar.

The establishment of a national infrastructure bank, which would leverage private capital, has been discussed as a possible source for rail funding. Oberstar has embraced this idea in principle.

Another idea is to raise the federal tax on gasoline (which was last raised 28 years ago during the Reagan administration) to increase the revenue stream to the Highway Trust Fund. Some portion of the trust fund would then go to HSR development.

For its part, the administration opposes a gas tax increase and has proposed a more modest transportation infrastructure fund. Financed with $4 billion in public money, the bank would help bankroll transportation projects of national significance, presumably including HSR. This proposal has yet to be taken up by Congress.

Like any political vacuum in Washington, the absence of a strategy to pay for high-speed rail has emboldened critics of the program.

Sen. Kit Bond (R-MO), the ranking minority member of the Senate transportation appropriations subcommittee, last month lambasted the administration for spending funds on expensive trains during a budget crunch. “With a $12 trillion and growing [federal] deficit, we can’t just throw funds at projects willy-nilly,” he said.

Patty Murray (D-WA), chair of the Senate panel, also questioned the absence of a long-term plan by the administration.

While some of this criticism is ill-founded – the administration is on target for completing a National Rail Plan by the date requested by Congress — what the carping on Capitol Hill makes clear is that both sides of the aisle recognize that a modern rail infrastructure will be very expensive to build.

Neither Democrats nor Republicans are willing to commit to a potentially unpopular funding mechanism — such as an increase in the gas tax — that could jumpstart HSR development and allow states, manufacturers and potential rail operators to make long-term investments in infrastructure and manpower.

The need for administration leadership is clear. Lest he watch his vision dissolve in drift and delay, the president must make the case that a national program of rail construction will not only unsnarl our highways, but stimulate economic growth (with new jobs and emerging technologies) and protect our national security (by breaking our dependence on foreign oil). The time to start is now.

Photo credit: https://www.flickr.com/photos/mujitra/ / CC BY 2.0