Category: Politics

Fiscal Policy Highlights Around the Net

1. Over at Third Way, Bill Rapp used my data on debt limit votes to make a great graphic showing that those votes are about politics, not principle.

2. Over at the Tax Policy Center, Eric Toder pushes back against the idea that tax expenditures — spending in the tax code — are loopholes and earmarks:

The House Budget resolution promises an individual tax reform that “simplifies the broken tax code, lowering rates and clearing out the burdensome tangle of loopholes that distort economic activity.” The Fact sheet describing President Obama’s new budget framework calls for “individual tax reform that closes loopholes and produces a system which is simpler, fairer, and not rigged in favor of those who can afford lawyers and accountants to game it.” The bipartisan National Commission on Fiscal Responsibility and Reform notes that the tax system is riddled with tax expenditures and adds, “These earmarks not only increase the deficit, but cause tax rates to be too high.”

…

But the largest tax expenditures are not loopholes or earmarks snuck into the law in the dead of night to benefit a shadowy handful of super-wealthy individuals or well-connected corporations. Rather, they benefit tens of millions of taxpayers. Among the biggest: itemized deductions for home mortgage interest, charitable contributions, and state and local taxes, exemption of income accrued within tax-preferred retirement saving accounts, and the exemption from tax of employer contributions to health insurance plans. IRS data show that 39 million taxpayers claimed deductions for home mortgage interest and charitable contributions in 2008, and 35 million deducted state and local income taxes.

3. The Committee for a Responsible Federal Budget offers a helpful side-by-side comparison of four leading budget plans:

Defense Spending Deserves Close Scrutiny Too

My latest column at the Christian Science Monitor makes the case that defense spending deserves close scrutiny as America evaluates its fiscal priorities. Excerpt:

This year the US will spend about $110 billion in Afghanistan and $44 billion in Iraq. Regular defense spending is even larger, at about $550 billion. Military spending will total more than $700 billion this year.

That spending gets far less scrutiny than it deserves. Discussions of our long-run budget challenges usually emphasize the big entitlement programs – Medicare, Medicaid, and Social Security – and the need for new revenues. Congressional budget debates, meanwhile, have bogged down on the sliver of spending that goes to domestic discretionary programs [written before the 2011 budget deal].

Defense should be on the table as well. Military spending has more than doubled over the past decade. Some of that increase has been necessary to respond to the 9/11 attacks and the new challenges they revealed. But not all. Some of the increase has simply been excess.

Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, made this clear in remarks in January. Because of the dramatic expansion of the Pentagon budget, he said, “We’ve lost our ability to prioritize, to make hard decisions, to do tough analysis, to make trades.”

We also have embarrassingly little ability to track that spending. When the Government Accountability Office recently audited the government’s finances, it concluded – as it has for many years – that the Defense Department’s books are so poorly kept that they can’t be audited. Taxpayers are thus giving $700 billion a year to an organization that can’t prioritize and can’t tell us where the money is going. That’s unacceptable.

The Cost of Sunshine: The Downside of Disclosing Campaign Donors

Campaign finance rules emphasize sunlight. For example, all campaign donations above a modest amount (e.g., $200) must be publicly disclosed. That allows everyone to see who is providing financial support to which candidates.

That sounds good if you are worried about campaign contributions buying undue access to our elected leaders.

As I noted last year, however, that sunshine comes with costs. For example, it makes quid pro quo’s easier. Why? Because candidates know who is financing them. A completely anonymous system — in which no one, including candidates, knows the identity of donors — would make explicit quid pro quo’s much more difficult.

Full disclosure also discourages individuals from making donations that would be unpopular with their relatives, friends, neighbors, and employers. You can make anonymous donations to unpopular causes to your heart’s content without anyone knowing. But if you make even a modest donation to an unpopular political candidate that’s a matter of easily-Googleable public record. That can be a real deterrent.

Writing in today’s Wall Street Journal, James L. Huffman raises a related concern: that disclosure stacks the deck in favor of incumbent politicians:

[P]ublic disclosure serves the interests of incumbents running for re-election by discouraging support for challengers. Here’s how it works.

A challenger seeks a contribution from a person known to support candidates of the challenger’s party. The potential supporter responds: “I’m glad you’re running. I agree with you on almost everything. But I can’t support you because I cannot risk getting my business crosswise with the incumbent who is likely to be re-elected.”

…

Disclosure makes threats possible, and fears of retribution plausible. Within weeks of a contribution of $200 or more, the contributor’s name appears on the public record. Contributors know this, and they know that supporting the challenger can, should the challenger lose, have consequences in terms of future attention to their interests. Of course no incumbent will admit to issuing threats or seeking retribution, but the perception that both exist is widespread.

Huffman was the unsuccessful Republican nominee in Oregon’s Senate race in 2010. Depending on your view, that might mean that he speaks from experience or that he suffers from sour grapes. Without evidence, there’s no way to know how much, if at all, such concerns arose in his race.

But the broader issue he raises is worth pondering. Sunshine is sometimes the best disinfectant. But it also lets bad actors see what’s going on.

Time Management and the Budget Debate

What features tiger blood, March madness, federal deficits, and Stephen Covey’s time-management advice? My latest column at CNN Money:

America faces trillions of dollars in deficits in coming years. But Congress has been reduced to funding the government three weeks at a time so it can fight over mere billions.

Why is Congress spending so much time and effort on so little money? Are those billions bigger than they appear because cuts today will carry forward into further cuts tomorrow? Is today’s skirmishing part of a larger political strategy to rein in our deficits?

Maybe.

But I think good old-fashioned human psychology is a bigger factor. Congress faces the same time-management challenge that plagues me and, I suspect, you. The urgent crowds out the important.

Productivity guru Stephen Covey popularized the “important versus urgent” distinction, showing how we should spend our time versus how we do.

People spend too much time on “waste” and “distraction,” immersed in unimportant issues. Waste and distraction can be fun, of course, and are welcome in small doses. Charlie Sheen’s rantings about his “tiger blood” are entertaining. And no one should berate President Obama for filling out his NCAA bracket. But let’s hope he didn’t spend too much time on it.

Today Congress faces a different problem. It seems stuck in the realm of “crisis and necessity,” to use Covey’s terms. Unless lawmakers pass yet another spending bill, many agencies will run out of money on April 8. Unless Congress increases the debt limit, America will be unable to pay some of its bills.

Urgent and important, these issues demand congressional attention. As Samuel Johnson might have said, nothing focuses the mind like the prospect of a government shutdown and subsequent hanging by the voters.

And therein lies the problem. America faces much larger fiscal challenges — a broken tax code and an unsustainable build-up of debt. But these exceptionally important challenges aren’t urgent. Neither has a deadline. And so they languish, prompting commission reports and congressional hearings but little action.

Budget watchers often lament that we won’t fix our budget until struck by an actual fiscal crisis — skyrocketing interest rates or a failed Treasury auction. Indeed, some experts sometimes seem to be wishing for such a crisis so that long-run budget issues finally become urgent.

Let’s hope it doesn’t come to that. Rather than wait for (or cheer on) an actual crisis, we have a better option: leadership. The art of leadership is getting people to pay heed to what’s important, even when it isn’t urgent. President Obama, for example, enacted his health reform legislation one year ago because he pushed for it, not because it was politically urgent.

We need the same leadership on budget issues and tax reform. Our elected leaders must make time to address our long-run challenges, even as they address the urgent problems of the day. The Senate’s bipartisan “Gang of Six” has taken an important first step, working together to turn the recommendations of the president’s fiscal commission into draft legislation.

But more leadership is needed. That’s why 64 senators — 32 Democrats and 32 Republicans — wrote to Obama last week urging him to take the lead in deficit-reduction discussions in which everything would be on the table: discretionary spending, entitlement programs and tax reform.

Let’s hope the president takes the senators up on this request. He is in a unique position to elevate the budget debate from day-to-day urgency mode to the realm of leadership, where it belongs.

Nice NYT Chart of Debt Limit Votes

Over at the New York Times, Jackie Calmes surveys the brinkmanship of debt limit politics.

Accompanying her piece is a lovely reworking by Amanda Cox of my charts showing how Democrats and Republicans have voted in past debt limit showdowns:

I particularly like the horizontal spacing (no missing years). One benefit it that it aligns the Senate votes, House votes, and political control from top to bottom. With just a little effort, readers can see the basic insight: Blue below, Blue above. Red below, Red above. Mixed Blue and Red below, Mixed Blue and Red above. Bottom line: Debt limit votes are a tax on the majority.

Nice job.

What is Health Care Reform?

Health care reform increases the federal deficit over the next ten years. The health care reform legislation, however, reduces the deficit.

Greg Mankiw set off a vigorous discussion in the blogosphere (see, e.g., Ezra Klein, Clive Crook, and the Austin Frakt) with a provocative analogy about health care reform:

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

I read Greg as raising an important rhetorical / pedagogic question which, judging by some responses, may have been overshadowed by his satire.

That simple question is “what is health care reform?”

The policy community and commentariat often equate health care reform with the legislation (actually two pieces of legislation) that President Obama signed into law last year. As everyone knows, the Congressional Budget Office estimated that those two laws would, if fully implemented, reduce the federal budget deficit by $143 billion from 2010-2019. That’s the basis for the claim that “health care reform would reduce the deficit over the next ten years.” (CBO also discussed what would happen in later years, where the law, if allowed to execute fully, would have a bigger effect, but let’s leave that to the side right now.)

The complication, which Greg’s post partly addresses, is that the health care reform legislation included many provisions. Greg notes, for example, that some expanded health insurance, while others raised taxes. In his view, only the first part constitutes health care reform — an effort that by itself would widen the deficit — while the tax increases are what made the legislation deficit-reducing.

In fact, it’s more complicated than that. By my count, the two pieces of health care reform legislation combined seven different sets of provisions:

1. Expanding health insurance coverage (e.g., by creating exchanges and subsidies and expanding Medicaid)

2. Expanding federal payments for and provision of health care services (e.g., reducing the “doughnut hole” in the Medicare drug benefit)

3. Cuts to federal payments for and provision of health care services (e.g., cuts to Medicare Advantage and some Medicare payment rates)

4. Tax increases related to insurance coverage (e.g., the excise tax on “Cadillac” health plans)

5. Tax increases not related to insurance coverage (e.g., the new tax on investment income)

6. The CLASS Act, which created an insurance program for long-term care

7. Reform of federal subsidies for student loans

(The House Republicans’ effort to repeal health care reform would overturn 1-6, but leave the student loan changes in place.)

To capture these complexities, I occasionally refer to the legislation as the health care / tax / student loan / long-term care legislation. But whenever I write that for publication, my editors take it out. Although my lengthy description is accurate, it doesn’t work for friendly conversation. So the law (which again, was really two laws) gets called the health care reform law.

Greg’s point, I think, is that this rhetorical convention creates confusion when talking about the law’s budget impacts. To say “the health care reform law reduces the deficit over the next ten years according to CBO” is absolutely true. But it often gets elided to “health care reform reduces the deficit over the next ten years” which isn’t true if, like Greg, you think the revenue raisers, student loan changes, and CLASS Act aren’t really health care reform.

I think Greg is right to worry about this distinction. Because of the information loss as the details of CBO scores get transmitted through various layers of speakers and media (including this blog), some people are indeed under the mistaken impression that health care reform, by itself, reduces the budget deficit over the next ten years. It doesn’t.

However, Greg’s analogy has a flaw: it presumes that none of the tax increases count as health reform. I disagree.

Our current tax system provides enormous ($200 billion per year) subsidies for employer-provided health insurance. They should be viewed as part of the government’s existing intervention in the health marketplace. And rolling back those subsidies strikes me as essential to future health care reform. I would count any revenues raised from doing so as part of health care reform.

That didn’t happen, but the legislation did include a tax on “Cadillac” health plans as a partial substitute. That will clearly affect health insurance markets, and it offset a portion of existing tax subsidies. For both those reasons, it should be viewed as part of health care reform.

The key thing is not the difference between spending and revenues, but between provisions that fundamentally change the health care system and those that do not.

Happily, I am not alone in this view. Indeed, it has been endorsed by none other than the Congressional Budget Office. CBO grappled with this issue during the health care debate. And after much thought, it came up with a useful measure of the health care reform part of the legislation: the “Federal Government’s Budgetary Commitment to Health Care“. This measure combines the spending and tax subsidies that the government provides for health care.

Taking all the health care provisions into account, CBO concluded that the health care reform legislation would increase the federal government’s budgetary commitment to health care. But not as much as many critics suggest. Adding together items (1) through (4) on my list, CBO concluded that the health care reform parts of the legislation would increase the deficit by about $400 billion over ten years. That would then be more than offset by the other provisions — primarily taxes but also the student loan provisions and the CLASS Act. (In later years, by the way, CBO projects that the legislation would actually reduce the federal commitment to health care.)

Bottom line: Health care reform increases the federal deficit over the next ten years, but the health care reform legislation reduces the deficit. What could be simpler?

P.S. I hope it goes without saying–but will say it anyway–that one should not evaluate the health care reform legislation on its fiscal impacts alone … or even predominantly. The legislation has a wide range of benefits (e.g., 32 million more people with health insurance) and costs. The key question is how they net out.

Geithner Won’t Default on the Public Debt

In a guest column at CNN Money, I argue that Treasury Secretary Timothy Geithner won’t allow us to default on the public debt even if Congress fails to increase the debt ceiling:

America reached two dubious milestones in recent weeks.

Our national debt, including Social Security obligations, has run up to nearly $14 trillion. That’s a lot of money, even in Washington.

And our Treasury Secretary started using the d-word. Writing to congressional leaders, Timothy Geithner warned that failing to increase America’s debt ceiling, currently $14.3 trillion, “would precipitate a default by the United States.”

“Default” is not a word that Treasury secretaries use lightly. For more than two centuries, the United States has paid its debts on time. That’s why U.S. Treasuries have historically been considered the safest investment in the world.

When Geithner was sworn into office, he took responsibility for defending the full faith and credit of the United States.

So why is he openly discussing the possibility of default? Because of the peculiar political theater of the debt limit.

Alone among developed nations, our country separates the legislative decisions that govern spending and taxes from those that govern debt.

As a result, America must periodically watch its elected leaders try to avoid voting for higher debt, even though most of them happily voted for higher spending, lower taxes or both.

During these spells of political brinkmanship, the Treasury secretary’s job is to prod Congress into action.

Given today’s political divisiveness, Geithner understandably decided — as did his predecessors in similar circumstances — that the best way to defend America’s credit worthiness is, paradoxically, to warn of potential default if Congress fails to act.

Geithner is correct that the debt limit must increase. With monthly deficits running more than $100 billion, it’s simply unthinkable that Congress could cut spending or increase revenue enough to avoid borrowing more. America’s daunting fiscal challenges require bold action, but it must be thoughtful and deliberate, not arbitrary and sudden.

Still, I am troubled by any suggestion that the United States might willingly default on its public debt. Doing so would have absolutely no upside. That’s why I’m confident that Geithner won’t let it happen.

If Congress somehow fails to increase the ceiling in time, Geithner would do everything in his power to avoid going down in history as the first Treasury secretary to miss a debt payment.

To do so, he would use the same tactics as any stressed debtor.

Squirrel it away: First, Geithner would hold on to his cash and what little credit he has left. Among other things, he would eliminate unneeded borrowing associated with certain obscure programs such as the Exchange Stabilization Fund and a state and local debt program.

Turn to family for help: He would call in money from his relatives, in this case the Federal Reserve. During the financial crisis, Treasury created a special program to borrow money on the Fed’s behalf; that borrowing now totals $200 billion. Treasury temporarily wound this program down the last time we got close to the debt ceiling. Expect the same this time.

Promise to pay later:He would issue IOUs (which don’t officially count as debt) to friendly creditors who have no choice but to accept them. Geithner’s predecessors did this with two retirement funds for government employees, both of which were later made whole. In his recent letter to Congress, Geithner said he’d do the same.

Sell stuff: Lastly, Geithner would look for assets that are easy to sell. Thanks to the financial crisis, Treasury now owns a sizeable investment portfolio, including stakes in auto companies, banks and other financial institutions. Don’t be surprised if Treasury cashes in some of these positions to raise cash in coming months.

Those tactics would give Congress time to work through its differences and raise the debt limit.

If lawmakers fail to act on time, however, Geithner would face starker choices: Our monthly bills average about $300 billion, while revenues are about $180 billion. If we hit the debt limit, the federal government would be able to pay only 60 cents of every dollar it should be paying.

But even that does not mean that we will default on the public debt. Geithner would then choose which creditors to pay promptly and which to defer.

As the heir to Alexander Hamilton, Geithner would undoubtedly keep making payments on the public debt, rolling over the outstanding principal and paying interest. Interest payments are relatively small, averaging about $20 billion per month, and paying them on time is essential to America’s enviable position in world capital markets. To miss even one is and should be unthinkable.

Other creditors would have to wait in line. Treasury would defer payments to some groups of creditors, perhaps including Social Security beneficiaries, Medicare providers, military personnel, weapons vendors or taxpayers expecting refunds.

Missing such payments would be another dubious milestone in America’s fiscal journey — so dubious, in fact, that the resulting constituent outrage would likely force Congress to increase the debt ceiling immediately.

Here’s to hoping that Congress doesn’t let things go that far and get that bad.

P.S. Stan Collender, Greg Ip, and Felix Salmon have also made the point that hitting the debt limit might cause the the government to delay some payments to some creditors (technically a type of default), but will not and should not default on the public debt.

Handicapping the Debt Limit Debate

Sometime this spring, Congress will vote to increase the debt ceiling. That vote won’t come easy. Newly ascendant House Republicans will threaten to withhold needed votes unless significant spending cuts or budget process reforms are attached to the measure. Democrats will denounce Republicans for threatening the government’s ability to pay its bills. And Treasury Secretary Tim Geithner will be forced into creative financing moves to buy Congressional leaders enough time to strike a deal.

But strike a deal they will. With monthly deficits running around $100 billion, the United States can’t cut spending or increase tax revenues enough to avoid further borrowing this year. It is equally inconceivable (I hope) that our elected leaders will decide to withhold payments from Social Security beneficiaries, our military, and our creditors.

So the debt ceiling will go up. And that means that at least 50 senators and more than 200 House members will cast a politically toxic yea vote.

Which lucky members will they be? The answer may well depend on what other budget provisions accompany the debt limit measure. That’s impossible to handicap today. In the meantime, though, we can look at past votes. They tell a clear story: debt limit votes are about politics, not principle.

Consider, for example, Senate votes on stand-alone debt limit measures over the past decade:

When Republicans held both the Senate and the White House (2003, 2004, 2006), they provided virtually all the yea votes, while almost all Democrats voted no. When the Democrats were in power (2009, 2010), the roles reversed: the Democrats provided all but one of the yea votes, while Republicans voted no. Only when government was divided – with a Democratic Senate and a Republican president (2002, 2007) – has the vote to lift the debt limit been bipartisan.

The House has taken fewer stand-alone votes than the Senate (because of the so-called Gephardt rule, which the Republicans abolished last week), but they show the same pattern: the party in power votes to increase the debt limit:

History thus suggests that Democrats will bear the burden of lifting the debt limit in the Senate; expect at least 50 yea votes. The only interesting question is whether individual Republicans filibuster the increase; if so, a 60-vote cloture measure would require at least 7 Republican votes as well.

Handicapping the House is more difficult since we’ve had no recent experience with divided government. If the Senate provides any guide, roughly equal numbers of Republicans and Democrats will ultimately vote for an increase. That would allow many Tea Party-backed Republicans to vote no without affecting the outcome. And other members might simply skip the vote. That’s what 21 members did in 2004, when it took just 208 votes to raise the debt ceiling.

Note: Congress increased the debt limit three other times during the past decade as part of larger bills: the 2008 housing act, the 2008 TARP act, and the 2009 stimulus. For simplicity, I have included all votes by Independents with the Democrats, since that’s how those members caucused during this period.

Johnny Depp and the New Tax Law

When the President signs the big tax deal later today, will he be cutting income taxes for most families or sparing them a tax hike? Will he be slashing the estate tax or resurrecting it?

Those questions have a clear answer in the official budget world: the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 cuts both income taxes and estate taxes. Period. Why? Because current law is the official yardstick. And that law says that the 2001 and 2003 income and estate tax cuts will expire when the ball hits bottom in Times Square.

But existing law is not the only reasonable benchmark. Another way to look at things is to ask how taxes will change from 2010 to 2011. Viewed that way, extending the 2001 and 2003 cuts is not a tax cut; it’s a way to prevent a tax hike. And the estate tax deal is actually a tax increase: there was no estate tax in 2010, but there will be one—though small by historical standards—in 2011. In addition, as noted by my Tax Policy Center colleague  Bob Williams, many low-income families will see their taxes go up because the gains from 2011’s payroll tax holiday will be more than offset by the expiration of 2010’s Making Work Pay tax credit.

Depending on your perspective, then, today’s tax deal is anything from a tax increase to a major tax cut. It all depends what baseline you use for measuring.

Which brings us to Johnny Depp. Depp plays the title character in the new film “The Tourist”. He doesn’t know anything about budget baselines, but he does learn how perceptions depend on what your benchmark is:

Inspector: Now, you wish to report a murder?
Depp: No, some people tried to kill me.
Inspector: I was told you were reporting a murder.
Depp: Attempted murder.
Inspector: Ah, that is not so serious.
Depp: No, not when you downgrade it from murder. When you upgrade it from room service, it’s quite serious.

Should today’s tax deal be compared to room service or to murder? I leave it up to you, dear reader, to decide.