issue: Fiscal Policies

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.

A Game Plan for Infrastructure

Posted on by The Progressive Policy Institute

A Game Plan for InfrastructureIt’s a sign of the times when “our bridges and roads are falling apart” gets cited as an issue more pressing than college football’s annoying Bowl Championship Series (BCS) on ESPN.

And, while the president hasn’t fulfilled his promise to set up an eight-team playoff yet, he’s taken the issue of infrastructure head-on. The administration’s focus on infrastructure investment is good for both long-term growth and generating jobs through the quick start-up of “shovel ready” projects.

However, one-time disbursements like those outlined in the Recovery Act or the president’s announcement earlier this week fall short of fixing more fundamental issues.

On the heels of Obama’s speech at Brookings on Tuesday, Rep. Keith Ellison (D-MN) is at the same venue today pushing a much more sustainable approach.

Ellison is a co-sponsor on Rep. Rosa DeLauro’s (D-CT) National Infrastructure Development Bank Act, a good start on developing sustainable infrastructure funding the country so desperately needs.

DeLauro and and Ellison’s bill builds on the work of a bipartisan commission chaired by former Sen. Warren Rudman (R-NH) and titan of finance Felix Rohatyn. The bill envisions $5 billion a year from the federal government to capitalize the bank and a government debt guarantee of up to $50 billion.

But even Ellison and DeLauro’s idea can be improved upon. As outlined in Jessica Milano’s PPI policy memo, “Building our 21st Century Infrastructure,” an American Infrastructure Bank (AIB) seeded with a one-time investment at the federal level — a potential use for the TARP funds the president announced this week — and stakeholder buy-ins from the states would be a more effective way to fund a bank dedicated to financing infrastructure programs.

An infrastructure bank would offer a way to leverage much larger private sector investments from a strapped public budget. The bank would raise inexpensive funding for infrastructure projects by issuing debt on the capital markets backed by the U.S. government’s credit rating. By backing these bonds with the revenue or assets of the projects they are financing, taxpayers would not be left to pick up the bill. These projects would be determined according to strict criteria that promote economic development while being fiscally and environmentally sound.

After the President’s remarks on Tuesday, Gov. Ed Rendell of Pennsylvania — an infrastructure bank supporter — said the president had “essentially” endorsed the idea of an AIB. But while the president sounded open to the idea this week, he hasn’t gotten behind the legislation needed to get it done. President Obama endorsed an infrastructure bank back when he was candidate Obama. But, much like his promise of reforming the BCS, this threatens to become another campaign promise that falls by the wayside. Now’s the moment for the president to come off the sidelines and lead a sustained drive down the field.

States Undermining Stimulus

Posted on by The Progressive Policy Institute

It’s reasonably well understood that this year’s federal economic stimulus legislation helped (though not as much as it might have) cushion state and local governments from a fiscal disaster attributable to falling revenues, automatically increasing entitlement expenditures, and balanced budget requirements. The rationale for this federal aid — to keep states and localities from counteracting the stimulative effect of federal spending via tax increases and spending cuts — is less well understood. So, too, is the fact that the continuing fiscal crisis around the country continues to undermine the impact of federal stimulus.

That’s the departure point for an important new article by Harold Meyerson in The American Prospect. Aggregating the numbers, Meyerson reaches a startling but entirely justified conclusion:

[H]ow much does the government’s stimulus come to when we subtract the amount the states and localities are taking out of the economy from the amount the feds are putting in? The two-year Obama stimulus amounted to $787 billion, of which $70 billion was really just the usual taxpayers’ annual exemption from the alternative minimum tax, and $146 billion was actually appropriated for the years 2011 to 2019. That leaves $571 billion that the federal government is pumping into the economy during 2009 and 2010. Subtract the amount that state and local governments are withdrawing from the economy (they have a combined shortfall of around $365 billion, but let’s say they do enough fiscal finagling so that the total of their cutbacks and tax hikes is just $325 billion), and we’re left with $246 billion.

At $787 billion, the stimulus came to 2.6 percent of the nation’s gross domestic product for 2009 and 2010 — not big enough, but a respectable figure. At $246 billion — the net of the federal stimulus minus the state and local anti-stimulus — it comes to just 0.8 percent of GDP, a level lower than those of many of the nations that the U.S. chastised for failing to stimulate their economies sufficiently.

In other words, most of the debates we’ve heard about the size and impact of the federal stimulus effort have ignored the actual net spending once you aggregate federal, state and local government actions. That’s a pretty big omission, and that’s why the University of Chicago’s Harold Pollack and I argued earlier this year that we need to start thinking comprehensively about intergovernmental coordination:

[F]ederal budget debates should expand to include the national budget, the sum total of spending, taxes and policies that implement and finance national governance. At a minimum, the Office of Management and Budget and the Congressional Budget Office should routinely scrutinize the financial impact of proposed federal policies on every level of government.

Meyerson goes on to examine other damaging aspects of our federal system with respect to economic policy that are well worth reading. But what’s most interesting and alarming about his analysis is that it’s so unusual. Most policy discussions in Washington either ignore state and local governments, treat them as an unimportant sideshow, or assume that the many parts of the intergovernmental system move roughly in coordination, and in the same direction. Now more than ever, it’s time to understand that the left hand of our system may be working at active cross-purposes with the right.

RIP Compassionate Conservatism

Posted on by The Progressive Policy Institute

The Republican message on extending health care coverage can be summed up in two words: “Bah, humbug.”

In taking a purely obstructionist stance, the GOP has evinced scant empathy for tens of millions of fellow Americans who lack basic protection against illness or injury. So much for compassionate conservatism.

On Saturday, not a single Republican voted to allow the Senate to even consider a bill to expand coverage and reform health insurance markets. When the House passed its version of health reform, just one Republican voted aye. He is Rep. Joseph Cao, a freshman from normally Democratic New Orleans.

Republicans, of course, are under no moral or political compunction to support Democratic proposals for health reform. But since they haven’t offered any credible alternatives of their own, it’s reasonable to conclude that they don’t care all that much about fixing America’s broken health care system.

Sure, House Republicans proffered their version of “reform” earlier this month. It would spend just $61 billion over 10 years and leave the percentage of uninsured Americans in 10 years exactly where it is today – at 83 percent. Thanks to population growth, there would actually be more uninsured people than today.

In opposing serious efforts to expand coverage, Republicans say they are trying to protect Americans against runaway deficits, not to mention death panels, publicly financed abortions and other confected horrors. They rail against President Obama and the Democrats for proposing to pile a costly new health care entitlement atop others we don’t know how we’ll pay for.

That’s actually a valid concern, one that progressives should take more seriously. But the GOP’s newfound fiscal piety would be more convincing if President Bush and party leaders had not muscled through Congress a massive new Medicare drug entitlement just six years ago.

Showing their customary solicitude for America’s haves – Medicare offers all seniors the basic health coverage the uninsured lack – Republicans insisted on creating a universal entitlement, rather than targeting help for truly needy seniors. At first projected to cost $534 billion over 10 years, revised estimates in 2005 put the bill’s price tag at $1.2 trillion. That’s several hundred billion dollars more than the bill passed this weekend by Senate Democrats. David Walker, former U.S. comptroller general, called the 2003 prescription drug bill “probably the most fiscally irresponsible piece of legislation since the 1960s.”

In contrast, the Senate Democrats’ bill is paid for. In fact, the Congressional Budget Office estimates that it would cut the federal deficit by $130 billion in the first decade and by more than $500 billion in the second decade.

But there’s a hitch, and it’s a big one. Cutting future deficits refers only to the public costs of expanding medical coverage and reforming U.S. health care markets. That’s not at all the same thing as “bending the curve” of health care cost growth. Slowing the unsustainable pace at which medical costs in America are growing requires confronting the perverse incentives and inefficiencies that plague health care delivery. It also means rebalancing the big entitlement programs, as retiring baby boomers swell the number of people receiving Medicare benefits.

This is the big piece of unfinished business facing both health care reformers and President Obama. The Senate bill expands coverage and cuts the federal deficit. According to some leading budget analysts, however, it doesn’t do enough to slow down the rising health costs that plague the vast majority of U.S. workers and that handicap many U.S. firms in global competition.

They deserve some compassion, too.

A Chart That Should Keep Progressives Up at Night

Posted on by The Progressive Policy Institute

In my last post, I noted that progressives need to turn their attention toward the medium- and long-term fiscal crisis the country faces. How massive is the challenge we face? The following chart, from Keith Hennessey, an ex-Bush policy advisor, says it all:

taxes-and-spending-long-term-trends 2

Obviously the first thing to jump out is the escalating divergence between federal spending and revenues in the decades ahead. And the spending projection in the chart is from 2007, so it doesn’t include the stimulus or spending on the financial crisis (or the projected cost of health care reform). That’s scary enough. But the scariest part may not be evident at first glance.

The red line shows federal taxes as a percent of GDP going back to 1945 and projected outward to 2080 by Hennessey based on its historic growth. The yellow line shows federal spending as a percent of GDP. The chart makes clear that the level of federal taxation has actually varied little since World War II (which says nothing about how marginal tax rates faced by different groups have changed). You can see the last build-up of deficits that occurred from the 1970s through the mid-1990s. You can also see the build-up of the Bush years.

Historic Shortfalls

The kind of budget shortfalls we are looking at in the future dwarfs anything we’ve ever seen. There are two ways to close the fiscal gap – cut spending or increase revenues. What Hennessey’s chart makes clear is that the level of taxation it would require to meet projected spending needs is far higher than anything the country has ever seen-slash-tolerated. Indeed, even closing half the gap through higher taxes would necessitate historically unprecedented taxation levels.

Progressives, in short, are going to be caught between a rock and a hard place: we will either have to find a way to convince the electorate to go along with massive tax hikes, with all of the electoral risk that entails, or we will have to come up with a plan to make equally massive cuts to entitlements that are likely to also be unpopular and that may do significant harm if not thought through carefully.

It’s true that the right will also be caught in this dilemma, but its situation is not quite as severe for two reasons. First, as the chart implies, their preferred path to fiscal sanity (spending cuts) starts off a much easier sell than tax hikes, given historical patterns. And second, the right has little programmatic interest in permanent spending hikes. The Reagan and Bush years showed that there is a constituency on the right for greater defense spending, but unless we really end up permanently at war with radical Islam, it can be expected that the Pentagon’s budget will rise and fall as global circumstances dictate. Progressive goals, on the other hand, such as greater federal education spending, expansion of child care assistance, more generous safety nets, and broader social insurance constitute costly and (ideally) permanent spending increases that will exacerbate the fiscal gap in the above chart.

The Upshot for Progressives

What does this mean for the progressive agenda? First, it is vital that we prioritize our goals, a process that is going to require us to drop many of them, as difficult as that may be. Second, we need to come to terms with what “higher taxes” is going to mean in practice. U.S. taxation is actually as progressive as in Europe because we have taken so many families off of the income tax rolls. The added boost to raising taxes on “the rich” is much smaller than the revenue that could be raised by broadening the tax base so that we were not so reliant on upper-income families to pay for the benefits of government that everyone enjoys.

Third, we need to look for ways to achieve progressive aims that do not cost the federal government so much. That could include certain types of regulation, but it could also include a shift toward progressive cost-sharing in social insurance programs. Rather than trying to raise taxes to give people the benefits they say they want, we could move toward a paradigm where people gradually incur increasing costs of these benefits privately, forcing them to directly confront the trade-offs and efficiency concerns that social insurance tends to hide. Those with limited incomes could receive federal assistance but would still be incentivized to use benefits efficiently. (I will suggest what such programs might look like in future pieces here.)

Some progressives may object to the idea of progressive cost-sharing because it shifts costs and risk onto individuals. But they are going to incur the costs one way or another, whether through higher taxes or greater out-of-pocket spending. And given the impracticality of paying for future benefits solely out of taxes, risk is also likely to be privatized either way — whether by a thoughtful policy framework or through massive cuts in existing programs.

But let there be no doubt — the long-term prospects for significantly expanded progressive government are dim, and in fact, a retrenchment in coming decades is inevitable. President Clinton was wrong — the Era of Big Government is not over. But it will be soon. As progressives we must lead the process of winding it down in a responsible and fair way.

On Health Reform, Cost Containment Remains the Missing Piece

Posted on by The Progressive Policy Institute

President Obama’s push for health care reform has provoked so many political sideshows that it’s easy to lose track of the main plot. The most important debate – how to slow the inexorable growth of health care costs – has scarcely begun.

Instead, Democrats spent months wrangling over the public option, which is basically a proxy for the endless debate over the proper size and role of government. Now they are tussling over abortion, that hardy perennial of the culture wars. And the Senate may add immigration to the already combustible mix.

These are, of course, large and important issues in their own right. But they distract progressives from what health reform is really supposed to accomplish. What most Americans want is relief from constantly rising health care costs and the nagging fear that they could lose coverage altogether if they get sick or lose their job. The public also wants a system that leaves no one out, though polls show mounting worry about the cost of guaranteeing universal coverage.

The House bill passed last weekend passes the coverage test. Through a mix of insurance market reforms, public subsidies and a mandate on individuals to buy insurance, it extends coverage to 39 million Americans. That’s as close to universal coverage as we are likely to get, and by itself a major progressive achievement.

But it comes at a stiff price: $1.2 trillion over the next decade. At a time when the federal deficit has tripled in just a year, many Americans think that’s a lot of money to spend. According to the Congressional Budget Office, the House bill includes enough offsetting savings to pay for health reform without adding to deficits. To his credit, President Obama has vowed to veto a bill that isn’t deficit-neutral.

But if it doesn’t aggravate America’s short-term fiscal woes, the House bill fails to deal seriously with the long-term challenge of reducing the unsustainable pace at which health care costs grow each year. That is what drives premiums up for working Americans, helps to price U.S. businesses out of global competition, and escalates spending on Medicare and Medicaid.

Today’s New York Times reports on a “growing revolt” among some Democrats and prominent health care experts over the lack of strong cost controls in the House bill or others under consideration. “My assessment at this point is that the legislation is heavy on health and light on reform,” the Times quotes Sen. Ron Wyden (D-Ore) as saying. He’s exactly right.

As the action now shifts to the Senate, Wyden and pragmatic progressives need to insist on adding credible measures for “bending down” the health cost curve. The menu of plausible options includes a Medicare Commission with real powers to reduce payments for low-quality or ineffective health care, and strict limits on the federal government’s open-ended tax subsidy for employer paid health plans.

It goes without saying that real cost containment will meet resistance from powerful interests, from doctors to organized labor. Against that, Democrats must weigh the dismal prospect of a health care “reform” that merely makes a deeply flawed system bigger and more expensive, without changing the incentives and behaviors that lead to runaway medical inflation.