issue: Fiscal Policies

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

Secretary Gates, Defense Spending and Ship Building

Posted on by The Progressive Policy Institute

In a little-covered address this week at the Navy League Sea-Air-Space Exposition in Maryland, Secretary of Defense Bob Gates stopped just short of ripping defense contractors a new one. Of course, Gates was diplomatic in his admonishment, but the message was clear: we have to be smarter about defense spending, particularly when it comes to the Navy:

These [spending] issues invariably bring up debates over so-called “gaps” between stated requirements and current platforms — be they ships, aircraft, or anything else.  More often than not, the solution offered is either more of what we already have or modernized versions of preexisting capabilities.  This approach ignores the fact that we face diverse adversaries with finite resources that consequently force them to come at the U.S. in unconventional and innovative ways.  The more relevant gap we risk creating is one between capabilities we are pursuing and those that are actually needed in the real world of tomorrow.

Considering that, the Department must continually adjust its future plans as the strategic environment evolves. …

[W]e have to accept some hard realities.  American taxpayers and the Congress are rightfully worried about the deficit.  At the same time, the Department of Defense’s track record as a steward of taxpayer dollars leaves much to be desired. …

[I]t is important to remember that, as the wars recede, money will be required to reset the Army and Marine Corps, which have borne the brunt of the conflicts.  And there will continue to be long-term – and inviolable – costs associated with taking care of our troops and their families.  In other words, I do not foresee any significant increases in top-line of the shipbuilding budget beyond current assumptions.  At the end of the day, we have to ask whether the nation can really afford a Navy that relies on $3 to 6 billion destroyers, $7 billion submarines, and $11 billion carriers.

Talking tough on spending has been a theme for Gates.  While much of the problems he identifies will continue to exist for years, beginning this conversation is a critical signal that will eventually — think decades — change the way the Pentagon does business. He knows this, and he also knows that this idea won’t be solved on his watch. But if he doesn’t start talking about it, who will?

If you’re looking for a good suggestion about how to buy weapons more sensibly, read Jordan Tama’s excellent Memo to the New President, where he calls for a BRAC-style commission to propose a weapons budget each year.

Gates’ whole speech is worth a read, so check it out here.

Photo credit: https://www.flickr.com/photos/smwalton73/ / CC BY-NC-SA 2.0

We Can’t Keep Borrowing to Cut Taxes

Posted on by The Progressive Policy Institute

I am going to ever so slightly step out of my comfort zone to relay what I think is a brilliant policy frame for progressives in 2010 and beyond.

Fiscal hawks, like your hosts here at the PPI, have been clear about the stark choices future generations of Americans face. It’s simply not possible to have one of the lowest marginal tax rates in the world along with massive government spending on entitlements programs and defense. If the country is to emerge from the current economic crisis with its financial house in order, something has to give.

Will Marshall took a scalpel to the problem in a post a few weeks ago:

Here’s the blunt truth: the federal government faces a huge revenue hole – too big to be closed by spending cuts alone. Spending last year reached an astonishing 26 percent of national output, while revenues fell to 15 percent. Full economic recovery is expected to cut that yawning tax gap of 11 percent roughly in half.

Getting federal deficits down to a sustainable level – say three percent a year – will require both spending cuts and tax hikes. The president’s deficit-reduction commission will have to look hard at entitlement spending, but we will also need a sweeping overhaul of our tax system to solve our fiscal crisis.

Extending all the Bush tax cuts, of course, will only dig us in deeper. The Congressional Budget Office estimates that extending them through 2017 would cost $1.9 trillion. That doesn’t include the costs of servicing a bigger national debt, or the cost of adjusting the alternative minimum tax so it doesn’t offset the cuts.

So where does the national security guy get off talking about fiscal responsibility? Allow me to explain. There I was last Saturday night, sitting in a bar in Stockholm talking to two Swedes. One was my long-time buddy Eric Sundstrom, political junkie, ex-PPI fellow and current editor of the Social Democrats’ party newspaper. The other was Eric’s pal Torbjorn, who serves as a policy adviser to the Social Dems’ financial team and whose last name was erased from my memory by the time Scotch #3 rolled around.

I was complaining about America’s fiscal imbalance and national allergy to taxes, when Eric piped up and said, “It’s not just an American problem. Torbjorn concocted a brilliant message on it for Sweden, too.”

Smiling, Torbjorn looked up an uttered what could be the defining policy frame on taxes and spending for progressives this year — or any year:

“We can’t keep borrowing money to cut taxes.”

In that form, it’s brilliant in the American context. It puts Tea Partiers on notice that their tunnel vision for lower taxes is costing America dearly. But I’d make one modification to show exactly what’s at stake and where the money comes from:

“We can’t keep borrowing from China to cut taxes.”

Bill Clinton would probably agree. At the Peterson Institute last week, the former president said, “I think this is a national sovereignty issue,” noting that foreign creditors hold 48 percent of America’s debt. China alone holds more than $877 billion of U.S. debt.

So there you go, progressives — a talking point straight from Stockholm on why the right-wing obsession with cutting taxes is so irresponsible.

Clinton Talks Deficits and Debt at Fiscal Summit

Posted on by The Progressive Policy Institute

Politicians, especially at the national level, have little credibility on matters of fiscal discipline. Bill Clinton is an exception.

As president, Clinton inherited fast-rising budget deficits that threatened to capsize an economy emerging from recession. He made deficit reduction a top priority, incurring the wrath of liberals who accused him of governing like an Eisenhower Republican. Such complaints evaporated as jobs and economic growth surged in the late 1990s, and Clinton handed his successor budget surpluses.

In an act of monumental political irresponsibility, George W. Bush promptly squandered the surplus on big tax cuts and a $1 trillion-plus Medicare prescription drug entitlement that Republicans simply added to the nation’s charge account.

So it was worth listening to Clinton speak about the fiscal challenge facing President Obama, as he did today at a big “fiscal summit” in Washington sponsored by the Peter G. Peterson Foundation.

“I think this is a national sovereignty issue,” said Clinton, noting that foreign creditors hold 48 percent of America’s debt. As that debt grows –- Clinton’s treasury secretary, Bob Rubin, cited projections that it could reach 130 percent of GDP by 2030 –- so will the influence over U.S. policy of foreign bondholders.

As America grows older, Clinton said, “delivery systems” like health care and education become rigid and society in general tends to put a premium on security. It’s no accident that the government’s biggest programs are defense, Medicare, Medicaid and Social Security. By letting this programs continue to eat up a greater share of national output, politicians put a severe squeeze on discretionary programs that invest in the well-being of children and families.

“The future always has a smaller constituency than the present,” the former president said. “We’ve got to be a tomorrow country. We can’t do it if we mortgage our future to people in other countries.”

Clinton also noted that Congress is not organized to deal with America’s fiscal crisis. Congressional committees expand programs and mint new ones; none is charged with putting America back on a sustainable fiscal course.

Since Congress also punted on forming a deficit reduction commission, President Obama has been forced to empanel his own. As it met yesterday at the White House for the first time, Obama vowed that “everything will be on the table.”

Thanks to the cost of bailing out the financial sector and mitigating a severe recession, Obama faces a bigger fiscal challenge than Clinton’s. Budget deficits are now running at about $1.3 trillion a year, a whopping nine percent of GDP. The president’s commission needs to come up with a plan for whittling deficits down to size. But it’s even more important, as Clinton argued, to attack the structural roots of exploding debts, lest America lose control of its own economic destiny.

Photo credit: https://www.flickr.com/photos/bestrated1/ / CC BY-NC-ND 2.0

Reality Check on Taxes

Posted on by The Progressive Policy Institute

Americans are increasingly alarmed by the nation’s massive deficits. Yet according to a new CNN poll, 60 percent favor making the Bush tax cuts permanent, instead of letting them expire this year. This doesn’t compute. If President Obama is to make any headway in restoring fiscal discipline in Washington, he will have to inject a note of realism into the debate over taxes and spending.

Here’s the blunt truth: the federal government faces a huge revenue hole – too big to be closed by spending cuts alone. Spending last year reached an astonishing 26 percent of national output, while revenues fell to 15 percent. Full economic recovery is expected to cut that yawning tax gap of 11 percent roughly in half.

Getting federal deficits down to a sustainable level – say 3 percent a year – will require both spending cuts and tax hikes. The president’s deficit-reduction commission will have to look hard at entitlement spending, but we will also need a sweeping overhaul of our tax system to solve our fiscal crisis.

Extending all the Bush tax cuts, of course, will only dig us in deeper. The Congressional Budget Office estimates that extending them through 2017 would cost $1.9 trillion. That doesn’t include the costs of servicing a bigger national debt, or the cost of adjusting the alternative minimum tax so it doesn’t offset the cuts.

Obama pledged during the campaign to keep the Bush cuts for households making under $200,000 a year. He will either have to break that very expensive promise, or turn to other possible revenue sources. What are the options?

The first, and most attractive, is to go after the hundreds of billions of tax subsidies that range from specific industry tax breaks to broader provisions – like the health care exclusion and mortgage interest deduction – that benefit all taxpayers. This is the essence of an intriguing bill crafted by Sens. Ron Wyden (D-OR) and Judd Gregg (R-N.H.), which would broaden the tax base by eliminating all itemized deductions except for mortgage interest and charitable deductions.

Another option is to look for new revenue sources. The best would be a charge on carbon, which would raise revenue, boost clean energy investment and protect the earth’s climate all in one fell swoop. The emerging Senate climate and energy compromise, engineered by Sens. Kerry (D-MA), Graham (R-S.C.) and Lieberman (I-CT), would cap carbon emissions, but it appears that the revenues would be rebated to the public. This approach would blunt Republican charges that putting a price on carbon is tantamount to raising taxes in a weak economy, but it wouldn’t close our revenue gap.

That’s why there’s rising interest in a value-added tax (VAT). Paul Volcker, the éminence grise of high finance, floated the idea recently. It’s also been endorsed by leading progressive thinkers like Isabel Sawhill and Henry Aaron of the Brookings Institution. A VAT has traditionally been seen as a harbinger of European-level taxes, but Sawhill believes it may be the only way to finance health care. She adds:

In the end, any tax increase will be a heavy lift in a country that seems allergic to paying its bills. But it will have to happen sooner or later and sooner would be much better. As Larry Summers once noted, Republicans don’t like value-added taxes because they are a revenue machine and Democrats don’t like them because they are regressive. We will get a VAT when Democrats realize they are a revenue machine and Republicans realize that they are regressive.

Photo credit: https://www.flickr.com/photos/rhruzek/ / CC BY-NC-ND 2.0

The Wait Is Over

Posted on by The Progressive Policy Institute

It took longer than expected, but the wait was worth it. The CBO score for the Senate health care reform bill and amendments that the House will vote on this weekend is now out (well, in leaked form anyway) and the numbers, at first glance, look good for reform’s prospects.

According to House Majority Leader Steny Hoyer, the legislation got slapped with a price tag of $940 billion over the next decade, more expensive than the Senate version, which makes sense since expanding coverage is one of the fixes the House wants to enact. But the CBO reportedly said the legislation would cut the deficit by $130 billion over the next decade and $1.2 trillion the decade after that — steeper deficit cuts than the Senate bill had. As Ezra Klein summed it up, “that’s more deficit reduction than either the House or Senate bill, and more coverage than the Senate bill.” Hoyer noted that it’s the biggest deficit reduction act since the 1993 Clinton budget.

It’ll be interesting to see how the bill achieves that goal. There had been word in the last 24 hours that the excise tax on Cadillac plans — something labor unions had opposed — had to be tweaked to make sure the legislation met its deficit-reduction aims. Will a more robust excise tax on high-end plans weaken labor’s support for the bill? One thing is certain: with the release of the CBO’s numbers, moderate Democrats concerned about the fiscal impact of the bill can now rest easier and support it.

One wait is over, but another one begins. With the official release of the CBO score later today, the clock officially begins on the 72-hour window that Democrats had promised to give members before voting on the legislation. This pegs the vote for Sunday — though Republicans have promised to pull out all the stops to delay the process.

Blue Dogs Only Chasing Their Tail

Posted on by The Progressive Policy Institute

It often seems that Blue Dog Democrats, along with a handful of Senate moderates, are the only people in Washington who are serious about fiscal responsibility. Chasing the will-o-the-wisp of a balanced budget amendment, however, seems more likely to distract from than advance that essential cause.

The idea is seductively simple: The only way to restrain deficit spending in Washington is to make it unconstitutional. That’s how the states keep their books balanced, and there’s no reason the federal government shouldn’t do the same.

In fact, there are several. Consider that today’s federal deficit is about 12 percent of GDP. It’s going to go down as the economy recovers, but the spending and tax adjustments that would have to be made to get it all the way down to zero would be unduly draconian and disruptive. Also, unlike state mandates, a federal balanced budget amendment for accounting reasons would not distinguish between capital investment and consumption. But government borrowing to invest in public infrastructure or higher education, for example, makes economic sense, because it will generate more economic activity and amortize itself over time.

What’s more, the federal government acts as the nation’s fiscal safety valve, or strategic reserve. During severe economic downturns, the only way many states can provide services while preserving their fiscal virtue is to get counter-cyclical assistance (or revenue sharing) from Washington. A constitutional ban on deficits could prevent Washington from responding to emergencies of all kinds.

In truth, we don’t need a balanced federal budget — we need a disciplined federal budget. Congress would be better off adopting Sen. Mike Bennett’s (D-CO) sensible suggestion that federal deficits be held first to four percent, then to three percent of GDP each year. At that level, they’d be gradually whittled down by economic growth, and the government could borrow without swelling the national debt.

A balanced budget amendment, moreover, is a blunter instrument than we need to deal with overspending and undertaxing in Washington. It doesn’t hone in on the real problem, which is the automatic and unsustainable growth in entitlement spending. A better idea, from the Brookings-Heritage Fiscal Seminar, is to bring Medicare, Medicaid and Social Security on budget, which would require Congress to periodically reconcile income and spending to keep the programs solvent.

Finally, a balanced budget amendment is just too damn difficult to enact. Congress has to approve Constitutional amendments by a two-thirds vote, well nigh inconceivable given how hard it is to muster the 60 votes needed to break a filibuster. Then three-fourths of the states would have to approve an amendment.

Demanding a balanced budget amendment thus is more of a symbolic gesture than a real solution to America’s fiscal crisis. Recall that it was a key plank in the GOP’s 1994 Contract with America, but Republicans quickly lost interest once they won control of Congress. Nonetheless, Newt Gingrich has endorsed the amendment in a bid to recapture the old magic for this year’s midterm elections.

Unlike the Republicans, of course, the Blue Dogs have real street cred when it comes to fiscal rectitude. They fought successfully to resurrect “pay go” rules that require Congress to offset new spending with tax hikes or budget cuts. And key Blue Dog leaders like Rep. Jim Cooper (D-TN) have led the charge for a bipartisan commission to get entitlement spending under control.

It’s vital, though, that progressive deficit hawks not let the holy grail of a constitutional amendment deflect them from the gritty, day-to-day battles in Congress to get America’s exploding deficits and debts under control.

The Bunning Blockade Ends

Posted on by The Progressive Policy Institute

Sen. Jim Bunning (R-KY), who had held up Senate passage of a $10 billion short-term benefits extension for days, finally relented yesterday and allowed the measure to come for a vote. Bunning’s objection to unanimous consent to pass the package resulted in the elapsing of funding for a host of federal programs, including infrastructure projects, unemployment benefits, and Medicare payments.

The Kentucky senator, who is retiring after this year (with a helpful nudge from his fellow Republicans), had demanded that Democrats find offsets in the budget for the legislation. Democrats retorted that the bill was a short-term emergency measure that did not fall under “pay-go” rules. (Democrats, on a party-line vote, reinstituted “pay-as-you-go” rules in January.)

The Bunning blockade proved to be a heaven-sent illustration of Republican obstructionism and heartlessness. McClatchy came up with a handy graphic depicting its state-by-state effects:

Even as the blockade stretched over the first couple of days of this week – leaving about 1.2 million unemployed people high and dry, 2,000 Department of Transportation workers furloughed, and numerous projects halted – some of Bunning’s colleagues actually voiced their support for his actions. Sen. John Cornyn (TX) said:

It’s not fun to be accused of having no compassion for the people who are out of work, the people for who these benefits should be forthcoming, and I believe will be forthcoming. But somebody has to stand up, finally, and say enough is enough, no more inter-generational theft from our children and grandchildren by not meeting our responsibilities today.

Meanwhile, Sen. Jon Kyl (AZ), in response to Bunning’s filibuster of unemployment compensation, helpfully noted: “In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.” Even newly minted Sen. Scott Brown gave Bunning’s efforts a thumbs-up:

The perception in Massachusetts and other parts of the country is that Washington is broken. And if it takes one guy to get up and make a stand, to point out that we need a funding source to pay for everything that’s being pushed here, I think that speaks for itself.

Here’s the best part: Bunning, along with every Republican in the Senate, voted against “pay-as-you-go” legislation. Republicans had thundered that the pay-go bill was a political fig leaf and that Democrats weren’t really serious about budget sanity. Considering that previous pay-go rules elapsed in 2002 under the Republicans’ watch, and that they also presided over the ballooning of the deficit, I suppose they’re experts on the subject.

Why Does the Country Need an Air Force?

Posted on by The Progressive Policy Institute

Okay, okay… simmer down there. Before you go accusing me of being a commie-loving freedom-hater, I’m not asking that question. But General Norton Schwartz, the Air Force’s Chief of Staff, is. He continues in the WaPo, “This is our year to look up and out…to ask big questions. Who are we? What are we doing for the nation’s defense?…Where is this grand institution headed?”

Just think about the gravity of those questions. The Air Forces’ FY2011 budget slides in at $170.8 billion, and if the AF’s top general is asking those types of existential questions, I’ll wager that there are quite a few nerves fraying down on contractor’s row in Crystal City.

At the end of the day, they’re good questions. Greg Jaffe’s article frames the tension right now in terms of the “old” Air Force (one whose hierarchy is predicated on daring pilots risking their lives in dog-fights) versus the “new” Air Force (that trains pilots to sit in air-conditioned trailers in Nevada and pilot drones in Afghanistan) as they are involved in America’s current military deployments.

It’s a fascinating juxtaposition to be sure, but I don’t think the article fully captures what’s at stake here. Instead, these questions cut to definitions of basic mission and competency. The Air Force will tell you that it has six core competencies: “air and space superiority; global attack; rapid global mobility; precision engagement; information superiority; agile combat support; and core values.” In the interest of brevity, I won’t get into a full discussion of each here, but rather direct you to the Air Forces’ whizbang of a website. However, if you read through the varying definitions of each core competency, it’s readily apparently why Gen. Schwartz is asking these questions. The USAF dominates the skies and no other country’s air wing could hope to compete with America’s for another 25 years. So “air superiority”? Check. “Global attack”? Ditto. “Combat Support”? Yup. On top of that, it’s not entirely clear whether the AF should be charged with missions like “information superiority” (that doesn’t fly, does it?) or “global mobility” (after all, you can move more stuff on the Navy’s back).

No better example of the AF’s mission conundrum might be the F-22 fighter jet, canceled last year. The F-22 was designed during the Cold War and designed to engage principally in air-to-air combat against a large nation-state air force. Tellingly, not a single one has flown over Iraq or Afghanistan since 2001. Since we already own 187 of them, we aren’t using them in our current deployments, and there isn’t a single air force out there that stands a chance of challenging the USAF’s “air superiority,” we didn’t need to buy any more. Gen. Schwartz and AF Secretary Michael Donley agreed.

It doesn’t seem anyone has great answer to these pressing questions, and I sure don’t either. But if Gen. Schwartz is willing to ask them, the public dialogue over the next year should be fascinating.

Brainwashed

Posted on by The Progressive Policy Institute

“Flip-flopping” on major issues can be hazardous to your political health. “Flip-flopping” when you’ve branded yourself as a brave principled “maverick” can be especially dangerous. And “flip-flopping” on grounds that you were confused about the issue in question is really, really bad, particularly when you are on the far side of 70.

That’s why John McCain may have ended his long political career the other day when he responded to attacks by primary challenger J.D. Hayworth on his support for TARP (popularly known from the beginning as the “Wall Street Bailout”) by claiming he was misled by the Fed Chairman and the Treasury Secretary into thinking the bill was about the housing industry, not Wall Street:

In response to criticism from opponents seeking to defeat him in the Aug. 24 Republican primary, the four-term senator says he was misled by then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. McCain said the pair assured him that the $700 billion Troubled Asset Relief Program would focus on what was seen as the cause of the financial crisis, the housing meltdown.”Obviously, that didn’t happen,” McCain said in a meeting Thursday with The Republic’s Editorial Board, recounting his decision-making during the critical initial days of the fiscal crisis. “They decided to stabilize the Wall Street institutions, bail out (insurance giant) AIG, bail out Chrysler, bail out General Motors. . . . What they figured was that if they stabilized Wall Street – I guess it was trickle-down economics – that therefore Main Street would be fine.”

What makes this claim especially astonishing is that McCain was rather famously focused on TARP at the time. He suspended his presidential campaign to come crashing back into Washington to attend final negotiations designed to get enough Republican support for TARP to get it passed. He was, by all accounts, a very passive participant in these talks, but it’s not as though he wasn’t there. And you’d think his memories of the event would be reasonably clear, since it probably sealed his electoral defeat.

It’s not obvious how McCain can walk this statement back. And in terms of the political damage he inflicted on himself, it’s hard to think of a suitable analogy without going all the way back to 1967, when Gov. George Romney (father of The Mittster) destroyed his front-running presidential campaign by claiming he had been “brainwashed” by military and diplomatic officials into erroneously supporting the Vietnam War. He never recovered from that one interview line. (Sen. Gene McCarthy, who did run for presidential in 1968, was asked about the Romney “brainwashing” by David Frost, and quipped: “I would have thought a light rinse would have been sufficient.”).

McCain has a more sizable bank of political capital than George Romney ever did, but in a primary contest where he was already in some trouble, the suggestion that he was brainwashed by a Republican administration into fundamentally misunderstanding the central national and global issue of the moment–not to mention the central current grievance of voters with Washington–could be fatal. It doesn’t help that it will vastly reinforce Hayworth’s not-so-subtle claims that McCain is a fine statesman whose time has come and gone, and is now losing it.

This item is cross-posted at The Democratic Strategist.