issue: Fiscal Policies

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.

GOP Complaints on Health Care Process Ring Hollow

Posted on by The Progressive Policy Institute

Republicans are warning of ominous political consequences if the Democrats use budget reconciliation rules to help pass health care reform. It would be “a huge mistake,” averred Sen. Olympia Snowe, the chief object of Senate Democrats’ unconsummated quest for bipartisan cooperation on health reform.

Evidently, for the Democrats to resort to reconciliation would be an intolerable abuse of congressional rules, whereas the Republican habit of filibustering everything in sight is perfectly within bounds. Passing health measures by a simple majority vote, the GOP maintains, would be the political equivalent of nuclear war: It would pulverize what little remains of comity and good will in Washington.

It’s a little late for the GOP to be worrying about that. Nor are Republicans more convincing when they complain that it’s somehow illegitimate for President Obama to start the bidding in tomorrow’s health care summit with a plan derived from bills that have passed both houses of Congress.

“I don’t think the people like this any more than…the approach that came down the pike earlier,” House Republican Whip Eric Cantor said. “People are incredulous. I just think they are wondering, does the White House not get it?” He was referring, of course, to polls showing majority opposition to the main health care proposals before Congress.

Cantor seems to be arguing that shifting public attitudes matter more than election results, and that Congress shouldn’t pass legislation that doesn’t poll well. Does the House minority whip not get representative democracy? (It was a good thing he wasn’t around when Lincoln pushed Congress to enact a draft to win the Civil War.) And if Republicans really are so sure Democrats will self-destruct politically by passing Obamacare, why not lash them on?

One reason might be that the health care summit will highlight the embarrassing fact that Cantor and company offer no serious alternative to the president’s approach. (House Republicans last year labored mightily to produce a mouse of a bill that would cover just three million of America’s 40-plus million uninsured.) The real choice is between the president’s far-from-perfect health care reform, and none at all.

And in a way that’s too bad, because if we had a serious opposition, it might help the president push back against some of the bad ideas coming from his own party. An example: under pressure from labor and liberals, Obama has drastically scaled down and delayed an excise tax on expensive employer-paid health plans. Not only does that reduce revenue needed to pay for health reform, it also barely grazes an open-ended federal tax subsidy that economists believe contributes greatly to medical cost inflation. Rather than insist on limiting that government subsidy, many Republicans claim it’s a violation of Obama’s pledge not to raise taxes on the middle class.

In a similar vein, the Republicans have lambasted Obama’s proposal to cut hundreds of billions from Medicare to defray the expenses of expanding coverage. And so in its blindly partisan attacks on Obama’s push for health reform, the GOP has managed to 1) shred its credibility as a force for fiscal responsibility; 2) thwart efforts to rein in runaway health care costs; and 3) reinforce their well-deserved reputation as a party that measures compassion by the thimble-full.

On health care, the Republicans have hit the trifecta of demagoguery – which is why their complaints about parliamentary foul play ring hollow.

Obama’s Deficit Commission

Posted on by The Progressive Policy Institute

The present era of polarization may have reached its nadir on January 25, 2010. That was the day Senate GOP leader Mitch McConnell led a filibuster to kill a deficit reduction commission — something he’d loudly demanded earlier. All it took was President Obama’s endorsement to turn McConnell and the six Senate Republicans who co-sponsored it against the bill.

Senate Republicans, have you no shame? Well, keep in mind that this is the same gang that’s now posturing as the saviors of Medicare, which Obama proposes to cut to help pay for health care reform.

Undeterred by the flight of the GOP’s fiscal chicken hawks, President Obama today unveiled an 18-member special commission to tackle the nation’s budget crisis. Named to lead the panel were Democrat Erskine Bowles, chief of staff to President Clinton, and former Senate Republican leader Alan Simpson.

It’s easy to be cynical about such “blue ribbon” commissions. They are supposed to signal that political leaders are serious about solving intractable problems, but often convey the opposite — a craven desire to punt tough decisions to retired dignitaries who don’t have to face the voters.

And setting up a commission by executive order is distinctly inferior to enacting one into law, since the president can’t compel Congress to give his panel’s recommendations an up-or-down vote. Speaker Nancy Pelosi has offered distinctly unenthusiastic assurances that the House will consider the commission’s suggestions.

Still, such commissions are sometimes the only way to break a political impasse — recall the 1983 Greenspan Commission for Social Security reform, or the congressionally mandated military base-closing commission. Such action-forcing mechanisms give politicians just enough bipartisan cover to embolden them to vote for reforms everyone knows are necessary if unpopular.

In a bow to political reality, the president’s commission will report its recommendations after the midterm election, before the end of the year. Presumably, that will tee up the debate for the next Congress, while giving the economy this year to gain strength and whittle down the unemployment rate.

That’s the right timing, and it belies claims by Obama’s liberal critics that highlighting the urgent need to put America on a more sustainable fiscal course is antithetical to economic recovery. After all, only about $300 billion of Obama’s $800-plus stimulus package has been spent, and Congress is crafting a jobs bill intended to give a smaller but more targeted boost to employment.

But here’s what really irks Obama’s critics on the left: they see the commission setting the stage for an assault on entitlement programs. They are not entirely wrong: it’s the unsustainable growth of Medicare, Medicaid, and Social Security that’s driving America’s long-term fiscal woes. But progressives ought to have more confidence in Obama’s ability to take a balanced approach to reforming the Big Three. It’s better, and safer, to do that now rather than risk handing off the job to some future Republican president who may be hostile to the idea of social insurance.

The president’s commission must do what lawmakers in Washington won’t — craft a balanced program of benefit cuts and tax increases to slow the growth rate of health and retirement benefits and move them toward solvency. Otherwise, those programs will consume the equivalent of every penny Washington now raises in taxes, necessitating unprecedented tax hikes, or borrowing at levels that will jeopardize America’s growth and fiscal stability.

But the commission shouldn’t just look at the Big Three, it should also look at the federal government’s massive spending on tax entitlements. Washington spends over $1 trillion a year on tax breaks and subsidies, including such popular items as the mortgage interest deduction and exclusion of employer-paid health benefits, crop subsidies, and a raft of special bennies for politically influential industries, aka, corporate welfare. There are also lots of important breaks for low-income Americans, like my own favorite, the earned income tax credit. All of these tax expenditures have rationales and constituencies, none should be regarded as sacrosanct.

This will raise hackles among Republicans, just as talk of benefit cuts (which should be focused on upper income beneficiaries) makes Democrats nervous. Both the left and the right will have to give ground to cut a responsible, and politically sustainable, deal that can restore out nation’s fiscal health.

Where Today’s Large Deficits Come From

Posted on by The Progressive Policy Institute

One year after the passage of the Recovery Act, the Obama administration continues to come under fire from Republicans over the size of the deficit. The administration’s propensity for spending, these critics argue, are behind the eye-popping deficits we see today. But as the Center on Budget and Policy Priorities makes clear in a new report, that is simply not true. Analyzing debt projections based on Congressional Budget Office estimates, the report found that the recession that began in 2008 battered the budget by driving down tax revenues and forcing an increase in government spending programs. In the near-term, the Obama administration contributed to the deficit with its financial rescues and stimulus plan, which economists agree saved the country from plunging into a deeper recession. But the effects of those programs pale in comparison to the long-term harm done by the Bush tax cuts and the wars in Iraq and Afghanistan, according to the CBPP.

A Fiscal Dr. Strangelove

Posted on by The Progressive Policy Institute

Paul Krugman wants Americans to stop worrying and learn how to love the bomb – the fiscal bomb that is.

Just as Dr. Strangelove in the eponymous film classic assures the president that America can survive thermonuclear war, Krugman professes blithe disregard for the impact of massive government borrowing on U.S. fiscal stability.

The public and a good many economists may beg to differ, but what do they know? Voter concern about deficits has grown salient over the past year, as Washington has spent trillions to prop up the economy. Last March, a slight majority approved of President Obama’s handling of the federal budget deficit; in January, a CNN/Opinion Research poll found that 62 percent disapprove.

Krugman dismisses such concerns as “hysteria” and puts them down to a combination of economic ignorance and Republican propaganda.

On one point, the intensely partisan Krugman is dead right: GOP credibility on fiscal discipline is shot to pieces. The Bush Republicans squandered the budget surplus President Clinton bequeathed them on tax cuts and profligate spending. In 2003, they rammed through Congress a trillion-dollar prescription drug benefit for Medicare recipients but somehow forgot to pay for it. Quite a contrast to President Obama, who took pains to insist that Congress fully offset the costs of his health reform plan – with Republicans all the while hooting inanely about “socialism” from the peanut gallery.

But on the fundamental question – whether progressives should ignore America’s huge and growing fiscal imbalances – Krugman is flat wrong. GOP hypocrisy aside, plenty of progressive economists are sounding the fiscal alarm.

Jeff Garten, for example, believes America’s ballooning national debt will lead to “the slow but inexorable decline of the U.S. dollar,” undermining a key source of U.S. prosperity and influence in the world.

In a compelling Time essay, Jeffrey Sachs argues that the mounting public debt is symptomatic of a breakdown in political responsibility in Washington that stymies the nation’s progress. Republicans won’t abandon their anti-tax fetish, Democrats won’t rein in spending, especially on fast-growing entitlements, and the result is paralysis. “Until both political parties make a serious effort to improve the performance of government while shrinking its swelling deficits, Americans will watch both their quality of life and their country’s standing in the world erode,” he maintains.

Liberals, says Sachs, are wrong to cite deficit spending during the New Deal as proof that Americans shouldn’t worry about government borrowing today. During the height of the Depression, he notes, the federal government was running deficits of around about 5 percent of GDP as opposed to 10 percent today. Back then, he notes, we financed our debts domestically. Today about half of our national debt is held by foreign creditors, especially China and Japan.

Now, Sachs is neither an economic ignoramus nor a Republican stooge. He believes, as Krugman does, that public investment is an imperative to create jobs, rebuild U.S. infrastructure, and restore shared prosperity. But unlike Krugman, he recognizes that Washington’s unwillingness to defuse the public debt bomb is relentlessly squeezing out fiscal space for such investment.

President Obama gets it too. He is trying to strike a balance between massive, short-term spending (although not massive enough for Krugman) to stimulate the economy, and the need to restore fiscal discipline over the long haul by freezing domestic spending and creating a bipartisan commission to tackle entitlement reform.

That’s not easy, and he deserves more help than he is getting from liberals like Krugman who pose a false choice between progressive reform and fiscal responsibility.

Missing from the Budget: High-Speed Rail

Posted on by The Progressive Policy Institute

What happened to high-speed rail in President Obama’s new budget? You will recall the president sweeping down to Florida after his State of the Union address to announce $8 billion in federal stimulus awards for rail projects that, he promised, will spark jobs and prosperity. Vice President Biden described the awards as “seed money” for developing a high-speed passenger rail system throughout the country.

That was last week. This week the administration unveiled its 2011 budget, which includes a miniscule $1 billion for high-speed rail (HSR). There are several ways to think about this request:

  • It’s 2.4% of the $41.3 billion the administration requested for highways.
  • It’s 0.026% of the overall budget and 0.08% of the projected deficit.
  • It’s not enough even to help Florida complete the proposed Tampa-Orlando high-speed line that the president enthused about last week, not to speak of laying the foundation for a nationwide network of high-speed trains promised by the vice president.

What’s going on? Timidity appears to have struck the administration as it moves from soaring promises to hard decisions about how to develop and finance a major civic work that could take decades to complete.

To get high-speed rail up and running, PPI has advocated a program that focuses on two or three corridors with dedicated rights of way. We specifically recommended funding the Tampa-Orlando line as a demonstration project of the speed and convenience of modern trains operating at twice the speed of conventional Amtrak service.

Although the administration did give some stimulus funds to Florida ($1.25 billion), it did not give enough ($2.6 billion) to fund the construction cost of the 88-mile Tampa-Orlando segment. Florida DOT is now trying to figure out how to plug the gap, which also threatens private investment in the project.

Instead of concentrating on a few select corridors, the administration sprinkled rail stimulus grants across 22 states, mostly for new sidings and signals that will marginally improve passenger train speeds on shared track with freight railroads.

One could argue that spending money on such upgrades would lay the groundwork for later HSR corridors, but the administration hasn’t bothered to make such a claim.

Rather, in its budget report to Congress, the administration blithely states that $1 billion of HSR spending will “sustain large-scale, multi-year support for high-speed rail” and is sufficient “to fund promising and transformative projects.”

That’s bunk. Most experts believe that developing a high-speed rail infrastructure serving key intercity corridors in the Midwest, California, the Northeast, and elsewhere will cost $200-300 billion over the next 30 years.

This would require a funding source of about $7 billion to $10 billion a year, with contributions coming from federal, state, and local governments, together with private investment from companies seeking to service and operate the lines.

Last year, Congress realized that developing high-speed rail requires more than the administration’s lowball figure. That’s why the House and Senate rejected the White House’s $1 billion request for high-speed rail in the 2010 budget and instead authorized $2.5 billion in spending.

The additional rail funds represented one of the few times last year that bipartisan support was found in Congress. One would think that the White House would take the hint and request at least $2.5 billion in the new 2011 budget.

In our HSR policy memo, we wrote that “the administration needs to remain engaged, proactive, and forward-thinking in shepherding high-speed rail to completion.” It’s frustrating that the administration is not exerting leadership in this vital piece of infrastructure-building that promises the very thing that’s at the top of voters’ minds – jobs.

Obama’s Budget: Turning the Aircraft Carrier Around

Posted on by The Progressive Policy Institute

Trying to write a post on the defense budget is nearly an exercise in futility. In something like 500 words, it’s nearly impossible to make an overarching judgment that neatly summarizes the bill for the largest government department in the world. That said, let’s give it a shot!

My frame of reference for Pentagon budgeting is in one sense deeply personal. Now I don’t want to make myself sound like a saint, but as a civilian DoD employee for five years, I was always very conscious that I had a responsibility to be mindful of taxpayer dollars I was spending. I experienced — anecdotally and systematically — just how atrociously, rigidly wasteful and yet astoundingly petty the Pentagon can be. In other words, the way the Pentagon spends cash is downright goofy.

Here’s an idea of where I come from: Yours truly got to spend about two months in Australia working security for a bilateral U.S./Australian war-gaming exercise. I was rather surprised when the government computer reservation system insisted that I stay at the four-star hotel in Sydney at somewhere like $350 a night, when the perfectly acceptable three-star, $150-a-night alternative down the street was available. Now I enjoyed the feather pillows and mints, but would have preferred to swap them for the cheaper hotel plus my inexplicably denied business class airfare on the 26-hour trip.

Then there was my counterterrorism watch center office — completely renovated and upgraded by 2003 to actually resemble something close to the set of 24. Trust me, it was awesome — you couldn’t swing a dead cat without hitting a brand new LCD TV, and I had three classified computer networks at my desk, something almost unheard of throughout DoD. Cost to taxpayer? $5 million. And it would have been a good investment, too, had the Base Realignment and Closing Commission not decided to close the office by 2011.

The FY2011 budget, released yesterday, won’t correct any of those, ahem, anomalies soon. And my experiences have ingrained enough skepticism that I don’t do cartwheels when the Pentagon announces — as it did this year — that “this budget did not defer hard choices, but made them.” As small-time as my stories are, they’re symptomatic of a well-established culture that isn’t going to change with one document. I think it’s probably more accurate to say, “this budget did not completely defer hard choices, but started the process of trying to change the DoD’s culture and the way it spends money. And that’s really tough.”

Though inefficient spending will continue on large and small scales, the Obama administration’s budget priorities are finally focused on the military’s most immediate needs. After eight years of Rumsfeld’s appalling financial sleight-of-hand and willful suspension of reality, Secretary Gates has actually paid necessary attention to funding personnel and equipment needed to compete in the wars we’re in. Rumsfeld’s obsession was technology — he thought whiz-bangs and gadgets could win our wars so soldiers didn’t have to! Then came Afghanistan, Iraq, and Afghanistan (again), which proved that technology could kill a lot of stuff really fast, but that winning the peace required more boots on the ground than he bargained for. So after extended deployments that have exhausted our troops and worn out their equipment, this budget dedicates funding to address the shortcomings of the Bush administration.

The budget’s other highlight addresses how the Pentagon does business. A serious Cold War hangover, Rumsfeld’s technological focus, and two wars have created a race-to-the-bottom culture where defense contractors pitch highly complex systems as cheaply as possible. The industry has conditioned itself to underestimate cost and development time and are amazingly left to evaluate their products’ own successes — hardly a recipe for optimal competition in the best interests of the taxpayer. This budget begins the process of taming that lion:

Our objective is to achieve predictable cost, schedule and performance outcomes based on mature, demonstrated technologies and realistic cost and schedule estimates. We are also implementing initiatives that will increase the numbers and capabilities of the acquisition workforce, improve funding stability, enhance the source selection process, and improve contract execution. Our intent is to provide the warfighter with world class capability while being good stewards of the taxpayer dollar.

It’s a wonderful notion, albeit one that will probably take a generation’s worth of acquisitions to truly implement.

I’ve obviously left out so, so much about this budget. It is encouraging to know that the administration appears in tune with what our military needs, and what the taxpayer can reasonably support. Turning an aircraft carrier takes a long time, and it will be years before we get a read on how well the new mindset is taking hold.

Obama’s Budget Delivers on Energy

Posted on by The Progressive Policy Institute

Elections really do have consequences. After years of virtual inaction from the Bush administration on a clean economy, the president’s new budget is a politically savvy, substantively brave, and altogether impressive collection of proposals. Against the dim eight years, the proposals for the Department of Energy are electrifying, and continue to show the administration’s commitment to bringing path-breaking change to energy and environmental policies.

In the critical area of “negawatts,” for instance, the president proposes a sweeping expansion in energy efficiency, with $500 million in credit subsidies to support $3 to $5 billion in loan guarantees for efficiency and renewable energy projects.

On research and innovation, he proposes $5.1 billion for the Office of Science, including $1.8 billion for basic energy sciences to discover novel ways to produce, store, and use energy. He also puts $300 million into the Advanced Research Projects Agency–Energy (DARPA-E).

And he includes goals regular folks can get our arms around. The budget will double renewable energy generating capacity (excluding conventional hydropower) by 2012. It will push out new battery manufacturing for 500,000 plug-in hybrid electric vehicles a year by 2015. And DOE and HUD will work together to retrofit 1.1 million housing units through 2011.

Renewables, batteries, and retrofits. These are all practical achievements that will make a difference in the lives of millions of people, and that can be easily visualized.

These are progressive measures, to be sure. They’ll be popular in blue states and probably purple ones as well. But the president also includes other measures to ensure the package is taken seriously across the country. The budget includes $36 billion in new loan authority, for a total of $54.5 billion, to support DOE loan guarantees for nuclear power facilities. Specifically, the budget conditionally commits to loan guarantees for two nuclear power facilities for at least 3,800 megawatts during 2010. It’s a move that will help the president sell his budget to pro-nuclear senators.

The budget also proposes $545 million to develop carbon capture and sequestration (CCS) technologies. Substantial support for these exciting technologies is critical to getting support from representatives and senators from states, including the critical Appalachian belt, where coal is, and will continue to be, an important source of energy.

Exciting news to see substance, vision, and strategy coming together in one document and a clear indication that — on the energy front, at least — the change promised in 2008 is resoundingly here.

A First Glance at the Quadrennial Defense Review

Posted on by The Progressive Policy Institute

Flipping through the 2010 Quadrennial Defense Review, a report prepared by the Defense Department every four years for Congress, an image of Ricky Ricardo telling Lucy that she has a lot of ‘splainin’ to do comes to mind.

It’s not that the Quadrennial Defense Review (or more precisely, its executive summary that I’ve just torn through) is “bad” per se. But it certainly requires a bit of context to understand the coded defense-ese. In its purest form, the QDR is supposed to be a review of the Pentagon’s strategy and priorities. In short order, strategic priorities are turned into budgetary ones, as billions of dollars pour into programs that execute the top-tier missions.

The good news is that in this year’s version, certain strategic priorities are credibly enshrined. The Pentagon articulates Secretary Gates’ highly sensible focus on the wars we’re in. (That might seem like a no-brainer, but read the 2006 QDR, where Rummy essentially ignored Iraq and Afghanistan, choosing to focus on pie-in-the-sky “transformation” issues instead.) Other “new” priorities like counter-insurgency, climate/energy, and caring for America’s service members also get deserved top-billing and, eventually, new defense dollars. Reforming the acquisition process also gets a significant nod – but more on that in a second.

As for broad strategies, umbrella priorities like “Prevent and deter conflict” and “Prepare to defeat adversaries on a wide range of contingencies” are necessary missions that the Pentagon has to undertake. I mean, who’s going to do it? You, Lieutenant Weinberg? And certainly, because future conflict and contingency operations will take on unknown forms, their presentation in the QDR has to permit for both continued dollar flow to needed weapons programs while allowing room for unanticipated spending to mitigate new and emerging threats.

The I Love Lucy parallel was triggered only when I dug down within those blanket priorities. Lurking in the fine text is language that suggests the Pentagon continues to evade hard choices. Most glaringly, the QDR continues to include one little phrase with huge implications: U.S. military forces must maintain “the ability to prevail against two capable nation-state aggressors.” Many experts expected this long-held doctrine to be cut from the 2010 QDR because the “two theater” approach — considered almost a placeholder in the strategic void post-USSR, pre-9/11 — was essentially out-of-date in the 21st century. With America preoccupied with a new range of threats arising from rogue and failed states, maintaining this nebulous mission was of dubious importance.

This language distorts priorities. On the one hand, continuing the “two theater” approach is an invitation to defense contractors to pitch too many potentially unnecessary weapons systems, at the expense of new ones better suited to the conflicts we’re actually embroiled in now.  And because this is how the Pentagon has always done business, we’ll probably buy more than we really need. On the other hand, this QDR is clear about the need to reform defense acquisition — and has highlighted cuts in the F-22, Future Combat Systems, and the DDG-1000 — even though it doesn’t state how to institutionalize the reform. (If you’re looking for a place to start, Jordan Tama’s memo to the president is a good one.)

And that’s a central tension in the QDR — can the Pentagon continue to add missions without scaling back others? There is no question that the Defense Department needs to maintain a healthy defense industrial base to do what we need to defend America’s interests. But Pentagon officials need to think harder about how to align that vital goal with the new threats of unconventional warfare. In short, the QDR has to make a clean break with outdated strategic assumptions so that our finite military resources can go where they’re needed most.

On Budget, Obama Must Walk a Fine Line

Posted on by The Progressive Policy Institute

As President Obama prepares to deliver his first State of the Union Address tonight, he is being tugged in conflicting directions. His dilemma is simple, and familiar: independent voters want different things than liberals.

Independents and moderate Democrats worry about big government and deficits. Liberals want more government spending and regulation, and they think fiscal discipline is the death of progressive reform.

These tensions were on display yesterday as the Senate squelched a bipartisan proposal, endorsed by President Obama, to set up a special commission to tackle the nation’s growing fiscal crisis. Offered as an amendment to legislation increasing the debt ceiling, the proposal by Senate Budget Committee Chairman Kent Conrad (D-ND) and Ranking Member Judd Gregg (R-NH) attracted a bipartisan majority of 53 votes. But under the Senate’s tyranny of the supermajority, it needed 60 to pass.

To the independents who have been defecting from Obama’s winning 2008 coalition, it looked like yet another victory for the status quo in Washington. The defeat sets up a confrontation with Senate moderates, who have threatened to vote against raising the debt ceiling unless Congress empowers a commission to rein in the nation’s runaway deficits and debt. It may also prompt President Obama to revive his idea for setting up the commission under executive order. House Blue Dogs yesterday endorsed a commission as part of their plan for fiscal reform.

On the other side of the fiscal divide, many liberals have recoiled from Obama’s call for a three-year “freeze” on non-security discretionary spending, seeing it as a cave-in to budget hawks that will crimp progressive ambitions and possibly forestall economic recovery. Since the bill envisions only modest cuts in spending ($250 billion over the next decade) — none of which go into effect until 2011 when it won’t hinder the recovery — such fears seem overwrought. And Obama cushioned the blow by unveiling a new package of middle-class tax cuts.

Nonetheless, the president has a fine line to walk tonight. He must convince the country that he is taking decisive action to control government spending and deficits. And he must convince his party that big progressive reforms can advance within a framework that restores long-term fiscal stability.

Even as the commission went down, the Congressional Budget Office yesterday released new budget forecasts that underscore why Congress must begin laying the groundwork for a return to fiscal discipline in Washington. CBO projects this year’s deficit at $1.3 trillion. At 9.2 percent of GDP, that is slightly less than last year’s whopping 9.9 percent shortfall, which was the biggest in U.S. peacetime history. But while these short-term deficits are enormous, the more fundamental problem is the nation’s cascading national debt. CBO sees the debt nearly tripling from $5.9 trillion to $15 billion by the end of the decade, or from 53 to 67 percent of GDP, and that estimate is based on very conservative assumptions.

America piled up a similar load of debt after World War II, but at least we owed the money to ourselves. Unchecked, today’s borrowing binge means more dependence on Chinese and other foreign lenders to keep our economy afloat, more tax dollars siphoned off to service our debts, and a growing squeeze on public investment as automatic spending on the elderly crowds out everything else.

Given the magnitude of the problem, Obama’s proposed freeze is exceedingly modest. What’s more, it’s a flexible freeze, not an indiscriminate swipe of the budgetary ax. Congress can boost vital public investments – say in technological innovation and clean energy, as long as it is willing to pass offsetting program cuts. As Ed Kilgore has pointed out, the proposal would basically restore the budget “caps” that effectively restrained spending during the Clinton years.

The deficit commission is a bigger deal because it aims at the core of America’s long-term fiscal challenge: the automatic and unsustainable growth of spending on Medicare, Medicaid and Society Security. Congress, polarized along lines of party and ideology, and intimidated by pressure groups, has repeatedly shown itself incapable of slowing entitlement cost growth. Hence the Conrad-Gregg proposal for a bipartisan commission to develop a package of tax and spending changes, and present them to Congress for an up or down vote.

The president tonight should challenge both anti-tax conservatives and pro-spending liberals to get serious about entitlement reform. And he should use the occasion to spell out for skeptical independents why health care reform is indispensible to controlling public spending. Coupled with a strong message on jobs, a forceful presidential commitment to restoring fiscal discipline in Washington will boost economic confidence and help to bring independents back into the progressive fold.

Cold Confusion

Posted on by The Progressive Policy Institute

The news that the president is going to propose a three-year “freeze” on appropriations for non-defense discretionary programs (with veterans and homeland security programs exempted) is creating a lot of consternation among progressives today.

But folded into this consternation is a significant amount of confusion. The term “budget freeze,” long the default-drive Republican fiscal austerity “idea,” usually connotes an across-the-board flatlining of spending in non-exempt accounts, a total commitment to the budgetary status quo that neatly allows its proponents to avoid separating sheep from goats and offending any constituency for any particular program. If that’s what Obama was proposing, it would indeed be inconsistent with any new jobs initiative, or indeed, with key elements of the “middle-class relief” agenda the administration just announced. But that’s not what he is proposing; it is instead really an overall spending “cap” under which specific programs could be increased or decreased, presumably depdending on their usefullness in creating jobs or other worthy social goods. It’s an approach that Bill Clinton, back in 1992, called “cut and invest.”

Since it’s Congress, not the administration, that will actually make appropriations decisions, and since members of Congress and the committees they chair which often serve as the most powerful constituencies for programs with little real justification, it can definitely be argued that any real “freeze” would look more like the across-the-board variety (indeed, that’s what happened to Clinton’s “cut and invest” budget when Congress got its hands on it in 1993). Alternatively, it can be argued that the whole thing is mainly rhetorical, given public concerns about government spending.

But in conjunction with the president’s push for a bipartisan “deficit commission” that would be empowered to make recommendations on long-term budget savings that would be submitted to Congress for an up-or-down vote, the “freeze” proposal, whatever it actually means, will definitely upset progressives fearing that Obama is “going Hoover” in economic policy. And make no mistake, there’s one objection to the “freeze” idea that’s not based on confusion: if you really do believe that the federal government needs to be running larger short-term deficits in order to provide Keynesian stimulus to consumer demand, then any domestic spending limits, however selective in application, will strike you as a very bad approach.

This item is cross-posted at The Democratic Strategist.