Looking for Serious Program Terminations
The House passed a bill last week eliminating the Presidential Election Campaign Fund, which the Tax Foundation calls a “voluntary tax that stirs little enthusiasm.” It would also save a whopping $14 million by eliminating the Election Action Committee and transferring certain functions to other federal agencies.
The Republican-sponsored bill passed on a straight party-line vote with the exception of Rep. Walter Jones’ (R-NC) no vote. Eliminating the fund would result in the transfer of $200 million to the U.S. Treasury for deficit reduction. From a fiscal standpoint, $200 million in deficit reduction isn’t even worthy of a yawn. And based on press reports, floor debate centered on whether Republicans were really just trying to disenfranchise Democratic voters. Seriously, didn’t the GOP leadership have anything more substantial to bring to the floor?
I went looking for bills introduced in the House that would eliminate programs. The conservative Republican Study Committee’s Sunset Caucus has a list of bills sponsored by their members that would cut spending (see here). Although there are some worthy bills that the GOP leadership ought to at least get to the floor, I wasn’t overwhelmed by the offerings.
One that did look particularly good is a bill from Rep. Duncan Hunter (R-CA) that would “eliminate ineffective and unnecessary federal education programs.” I’d say that describes the entire Department of Education. However, as soon as I saw the bill’s title – The Setting New Priorities in Education Spending Act – I immediately knew that it would be a joke. Sure enough, the Congressional Budget Office’s scoring of the bill shows that I was, unfortunately, correct:
H.R. 1891 would amend the Elementary and Secondary Education act of 1965 to eliminate more than 40 discretionary grant programs. For 2011, the Department of Education allocated $413 million in funding from amounts appropriated in the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (P.L. 112-10) to programs that would be eliminated by H.R. 1891. Under current law, however, the funds allocated to those programs may be used for other grant programs that would not be eliminated by the bill.
Because annual appropriations to the Department of Education can be used for other programs, enacting the bill would not have a significant effect on spending from the appropriation provided for 2011. Furthermore, the authorizations for all of the programs specified in the bill have expired, so CBO estimates the bill would have no impact on such authorization levels. However, savings would accrue – as compared to 2011 appropriations levels – if the total amounts provided in 2012 and subsequent years are lower than the current-year funding for the department.
Note to Duncan Hunter: Why bother?
Obama-Lee Summit: Time for New Thinking on the Korean Peninsula
Three issues are likely to dominate the talks this week between President Obama and South Korean President Lee Myung-bak. On the economic front, the two leaders will emphasize the extensive potential benefits of the bilateral free trade agreement.
On the security front, there will be considerable discussion of both North Korea’s nuclear-weapons program and the future of the U.S.-South Korean alliance. Unfortunately, leaders of the two countries are locked into increasingly obsolete and dysfunctional policies with respect to both issues. New thinking on those security matters is badly needed.
Seoul and Washington routinely contend that they will not tolerate North Korea having a nuclear arsenal. But other than the long-standing attempt to isolate Pyongyang internationally, U.S. and South Korean officials present no plausible strategy for preventing Kim Jong-il’s regime from expanding its nuclear capabilities. The much-touted six-party talks clearly have not worked. Moreover, without China’s active cooperation to deny crucial food and energy aid to North Korea (and there is no indication that Beijing is willing to take that step), North Korea cannot be truly isolated. Obama and Lee need to consider the possibility of learning to live with a nuclear North Korea, since the current U.S.-South Korean strategy for dealing with the nuclear issue is hopelessly ineffectual.
Policy regarding the bilateral security alliance is no better. Predictably, Lee and Obama will reaffirm the importance of that alliance. But from the standpoint of American interests, this commitment makes little sense. The principal effect of Washington’s security blanket for South Korea is to enable that country to shamelessly free-ride on America’s military exertions. Despite being located next to perhaps the most dangerous and unpredictable country in the world—Kim Jong-il’s North Korea—South Korea continues to spend an anemic 2.5 percent of its gross domestic product on defense. That is woefully inadequate, and the only reason Seoul can get away with such irresponsible behavior is that South Korean leaders believe they can rely on the United States to take care of their country’s security—at the expense of American taxpayers.
That arrangement was dubious even when South Korea was a weak, traumatized country facing a North Korea strongly backed by both the Soviet Union and Communist China. Today, South Korea is a wealthy country, and Moscow and Beijing regard North Korea as an embarrassment, not a crucial ally.
President Obama should inform Lee that an America whose government is hemorrhaging red ink at the rate of $1.5 trillion a year can no longer afford to subsidize the defense of free-riding allies—especially those that are perfectly capable of providing for their own defense. This summit meeting creates an opportunity for Washington to begin phasing-out the obsolete military alliance with South Korea.
Washington Post Asks for Budget Plans
The Washington Post’s editorial board issued a challenge to the president and his Republican opponents: “show us your plans” for deficit reduction. In fact, the Post says it would be “delighted” to receive plans from its readers. However, the Post isn’t interested in “meaningless promises” to cut “waste, fraud, and abuse”—it wants specifics:
Here’s what we’re not looking for: pablum about eliminating unnecessary spending without identifying where. Gauzy rhetoric about making hard choices without making them. Meaningless promises about eliminating waste, fraud and abuse. Broad assertions about where to find the money — “Medicare savings,” “tax reform” — without specifics. Arbitrary spending caps without accompanying details about how those limits are to be met. If you believe, for example, that federal spending should be kept to a specific share of the economy — 18 percent? 20 percent? — show the plausible path to getting there.
Amen. Chris Edwards and I have been beating the drum for Republican policymakers in particular to get specific about what they would cut. Chris recently noted that with the exception of Sen. Tom Coburn (R-OK), Sen. Rand Paul (R-KY), and perhaps a few others, Republicans aren’t putting much effort into identifying programs to terminate. And I have noted that “It’s more common to hear Republicans blubber on about ‘reducing waste, fraud, and abuse’ in government programs and ‘saving’ the pillars of the welfare state (Social Security and Medicare) for ‘future generations.’”
As for deficit reduction ideas from Washington Post readers, we have a balanced budget plan on our Downsizing the Federal Government website. In fact, not only do we have a plan, we have over three dozen essays on numerous government agencies that provide details on what programs to cut and why.
A Turning Point?
Greg Sargent cites a CNN poll question:
As you may know, the agreement would cut about one trillion dollars in government spending over the next ten years with provisions to make additional spending cuts in the future. Regardless of how you feel about the overall agreement, do you approve or disapprove of the cuts in government spending included in the debt ceiling agreement?
Approve 65
Disapprove 30
Sargent continues:
Sixty five percent approve of deal’s spending cuts. But it gets worse. Of the 30 percent who disapprove, 13 percent think the cuts haven’t gotten far enough, and only 15 percent think the cuts go too far. One sixth of Americans agree with the liberal argument about the deal.
About 20 percent of Americans self-identify as liberals. This would suggest that all non-liberal Americans and one-fourth of self-identifying liberals approve of the deal or think the cuts have not gone far enough. It could also mean that some non-liberal Americans disapprove of the deal and more than one-quarter of liberals approve of it. Either interpretation will not encourage those who believe government should be larger.
Still, the political agenda is defined as cuts, and the public seems willing to go along. 2008 seems like a generation ago.
We’re In This for the Long Haul
Today POLITICO Arena asks:
Is it the Senate’s turn to take a crack at the debt ceiling?
My response:
Speaker Boehner has both the Constitution and convention on his side — “money bills” arise in the House. In fact, the Constitution is his strongest ally in his struggle to win the support of recalcitrant Tea Party members. They revere the document, after all, and no one has put the point better than Charles Krauthammer in this morning’s Washington Post.
Boehner’s bill, just to be clear, is a far cry from what this debt-ridden nation needs. As my colleague Chris Edwards put it yesterday, even the revised plan “doesn’t cut spending at all.” It “cuts” only from the CBO baseline, which assumes constantly rising spending. If Congress were serious about addressing our deficit and debt problems, Edwards says, it would have “to start abolishing programs, privatizing activities, and making other lasting reforms.”
Absolutely. But now step back and look at the larger context at the moment. As Krauthammer says,
We’re in the midst of a great four-year national debate on the size and reach of government, the future of the welfare state, indeed, the nature of the social contract between citizen and state. The distinctive visions of the two parties — social-democratic vs. limited-government — have underlain every debate on every issue since Barack Obama’s inauguration.
And the terms of that debate have shifted radically since the Tea Party came on to the scene. The “cuts” in the Boehner plan are modest, to be charitable, but there are no new taxes, which in an earlier day would have been taken as essential. And the focus in Congress and in the nation, as long as the Tea Party keeps up the pressure, is not on new programs but on eliminating old ones — when that is possible.
But right there we bump up against constitutional realty. As Krauthammer puts it, “you cannot govern from one house alone.” We’re light years beyond living under the substantive Constitution, which authorizes only limited government, not the out-of-control welfare state that got us into this mess. But we still live under the procedural Constitution, which means that Reid and Obama can block Boehner’s modest plan. Posturing aside, that’s not likely at this late date. Yet if Tea Party members overplay their hand, they play right into Obama’s hand, politically, going into 2012, when the battle over real change will be waged.
No war — and that’s what we’re in — was won in a day. It took 80 years for John Locke’s ideas about liberty to find their way into the Declaration of Independence. It took another 90 years for those ideas to bring an end to slavery. The limited-government ideas that the Tea Party has brought back to the surface are just now being felt in Congress. This is no time to abandon them. But neither is it a time to set the course of events back, perhaps irretrievably, by employing them unwisely. Take what you can, and live to fight another day, on the battlefield that lies just ahead.
Thoughts on the Boehner Plan
These are the times that try budget analysts’ souls—especially budget analysts who’d like to see Washington dramatically cut spending. The debate over lifting the debt ceiling has produced a number of proposals from Capitol Hill—none of them have been worth celebrating. We can now add House Speaker John Boehner’s latest proposal to the pile.
Boehner’s proposal boils down to the following: cap discretionary spending over 10 years to achieve $1.2 trillion in savings; have (another) bipartisan group of policymakers come up with $1.8 trillion in “deficit reductions” over ten years; and get a vote on a balanced budget amendment. In exchange, the president would get to increase the deficit by $900 billion this year and by another $1.6 trillion next year.
Here are some thoughts on Boehner’s plan:
- Under the Congressional Budget Office’s optimistic spending baseline, the federal government will spend $46 trillion over the next ten years. Obviously, reducing spending by $1.2 trillion oven ten years is relatively small.
- The same dysfunctional congress that treats entitlement programs like lit sticks of dynamite is supposed to come up with $1.6 trillion in “deficit reduction.” Note that we’re not even talking specifically about spending cuts here, so that figure would likely include tax increases assuming they’re able to even come up with something.
- Under the Boehner plan, spending and debt will continue to rise. At the most, the plan would produce an average of $300 billion a year in cuts in exchange for increasing the debt ceiling by $2.5 trillion over the next two years.
- Boehner’s bill includes language that tightens up the definition of what constitutes “emergency” spending. Congress regularly slaps the “emergency” designation on all sort of non-emergency spending bills. I have no faith that the new language will stop the foxes guarding the henhouse from continuing to devour chickens.
- Where are the immediate spending cuts? Once again, we have the promise of cuts but no specifics. Even if the discretionary caps hold the line on that portion of spending, total federal spending (and debt) will continue its unsustainable upward climb. Entitlement spending is the biggest driver of our long-term budgetary problems but entitlement spending isn’t capped under the Boehner plan.
In sum, this plan is another stinker. But with Harry Reid controlling the Senate and Barack Obama sitting in the White House, the votes just aren’t there to get a plan passed that sufficiently addresses our fiscal mess by reining in the size and scope of government.
Senate Finance Hearing on Debt
I testified to the Senate Finance Committee today regarding federal spending and debt.
Here are some of the points I made:
- Last night, President Obama called for a “balanced solution” to our fiscal problems, including tax increases and spending cuts. However, CBO projections do not indicate that we face a “balanced” problem. Instead, projections show that the deficit problem is caused all on the spending side of the budget.
- The United States has sadly become a big-government country. Until recently, government spending in this country was about 10 percentage points less than the average of OECD countries. That smaller-government advantage has now shrunken to just 4 percentage points.
- In recent years, policymakers have given us the largest deficit-spending “stimulus” since World War II, yet we are suffering from the slowest economic recovery since World War II.
- Rising government spending suppresses GDP because the government’s “leaky bucket” gets leakier and leakier as spending increases.
- Leaders in Congress are talking about cutting spending by $3 trillion over 10 years, or roughly $300 billion per year. The result would be that spending would rise from $3.6 trillion this year to $5.4 trillion in 2021, rather than the currently projected $5.7 trillion. That would be only a 5 percent cut. Interest savings would reduce spending a little more—but, come on Congress, you can do better than that!
Health Care Entitlements Are the Real Debt Bomb
I’m a few days behind on this, but over at The Corner Yuval Levin has written an important post about how health care entitlements are the real cause of the debt crisis facing the federal government. Using Congressional Budget Office projections, Levin creates this magnificent chart, which I plan to steal over and over again:
If Republicans want to conquer the federal debt, they need to embrace health policy like they embrace tax cuts.
Boehner’s Price for Increasing the Federal Debt Limit
House Speaker John Boehner, in his speech to the Economic Club of New York on Monday night, was very clear about the conditions for which he would support an increase in the federal debt limit:
… Without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase. And the cuts should be greater than the accompanying increase in debt authority the president is given.
We should be talking about cuts of trillions, not just billions.
They should be actual cuts and program reforms, not broad deficit or debt targets that punt the tough questions to the future.
And with the exception of tax hikes — which will destroy jobs — everything is on the table.
Congress is institutionally incapable of formulating and approving a large responsible package of spending cuts in the next month or two, even if there were the basis for an agreement in the longer run. The most likely outcome of this condition is that Congress would approve an increase in the debt limit for the next year or two with no significant amendments. John Boehner would be the major loser from this outcome, for having talked tough and promised too much, without delivering anything to his party base.
Another possible outcome of this condition is that an increase in the debt limit would be deferred indefinitely. This would lead to a period of fiscal anarchy in which total federal spending would have to be reduced to federal revenues on a month-by-month basis, and non-interest spending would have to be reduced about 40 percent with no political guidance on what activities are paid how much.
The House Republicans are better advised to sort out their priority budget changes in the longer run. I suggest that it is desirable to maintain a commitment against any increase in tax rates but to consider major reductions in what is now roughly one trillion dollars of off-budget tax preferences; such reductions would increase both revenue and economic growth. Finally, I suggest that reductions in the defense budget should also be considered. In a world in which the United States now faces no major power military threat, total real (inflation-adjusted) annual national security spending is now over twice that during the Ford and Carter administrations and over 40 percent of the total national security spending by all governments.
For the most part, I suggest, the Republican fiscal priorities are correct, but it will take better preparation and a longer time to implement these priorities.
Response to Joe Weisenthal’s Critique of My Politico Opinion Piece
Yesterday I had an op-ed in Politico suggesting that U.S. lawmakers should consider not raising the federal debt limit (at least for now). I argued that freezing the ceiling would assure investors that the United States is serious about reducing its debt, and that it would serve as a commitment device for lawmakers and President Obama to forge and follow a serious debt-reduction strategy.
A financial website writer named Joe Weisenthal strongly disagreed with my column. He seems to misunderstand several of the points that I was making, and so I offer the following response to his comments:
From Weisenthal’s post:
Another day, another economist advocating that the US default on its debt.
The latest is Jagadeesh Gokhale of the Cato Institute, who has a big piece advocating an immediate freeze of the debt ceiling.
It’s so convoluted, we hardly know where to begin, but let’s just address a few sloppy parts.
Many knowledgeable federal officials, like Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, as well as left-leaning lawmakers, insist that the answer lies in lifting the debt limit. They warn Congress about the dire consequences if it fails to do so. President Barack Obama has chimed in — though he voted against raising it when he was a senator.
They all assert that failing to increase the debt limit could sharply undermine the economic recovery.
But that view could be wrong. A temporarily frozen debt limit could instead signal U.S. lawmakers’ resolve to get our fiscal house in order. It may even reassure investors about long-term U.S. economic prospects.
This line about “reassuring investors” is nonsense. Investors are already reassured, which is why interest rates have only fallen amidst all the squawking from the political class about this “crisis.”
From the start, Weisenthal doesn’t follow my argument. I am not concerned about the state of market confidence today, but what it would be if the debt limit were frozen. The contrarian view that I expressed in my op-ed is that participants would interpret a debt-limit freeze positively, just as they appear to have interpreted the recent downgrade of the U.S. economic outlook by Standard and Poor’s positively — U.S. equities, U.S. treasuries, and the dollar are up less than 48 hours after S&P’s downgrade announcement.
He also misunderstands why interest rates have declined. It is because of the Federal Reserve’s sustained intervention in bond markets, not because there is little investor concern over the United States’ long-term fiscal outlook.
Thoughts on the Debt Limit Debate
The origins of the federal government’s statutory debt limit can be traced back to 1917, when the country was borrowing money to finance the Great War. Congress has voted to increase the limit numerous times over the decades, including 10 times since 2001.
The present debt limit is $14.3 trillion, and total outstanding debt subject to the limit currently stands at just under $14 trillion. Given that policymakers don’t have the will to cut spending immediately in order to keep the debt from hitting the limit, a political battle over raising it is unfolding.
The Obama administration is basically warning that congressional (i.e., Republican) intransigence over raising the limit could potentially lead to the federal government defaulting on its debt, because it needs to borrow money in order to make its debt payments. Treasury Secretary Tim Geithner warned Congress that failing to increase the limit would result in “catastrophic economic consequences that would last for decades.” The president’s chief economic adviser, Austan Goolsbee, warned Congress not to “play chicken” over whether to raise the debt limit, as failing to do so would cause “a worse financial economic crisis than anything we saw in 2008… This is not a game. The debt ceiling is not something to toy with.”
Back in 2006, then-Senator Barack Obama apparently wasn’t concerned about the “catastrophic economic consequences” when he voted against raising the debt limit. ABC News recalls Obama’s stated reason for his “no” vote:
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” he said on March 16, 2006. “Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.
Debt Commission Reform Proposals – What Are Their Chances?
It’s kudos to President Obama’s Debt Commission co-chairs for clearly outlining the gargantuan size of the fiscal problem facing the United States. The reforms will re-direct the exploding debt trajectory downward by reforming taxes and cutting spending – reminiscent of recent fiscal reforms in the United Kingdom. Unfortunately, history is likely to repeat itself: Even if they are enacted soon — which seems unlikely — chances are bleak that we’ll stick with them for long enough to achieve their stated goals.
The Debt Commission co-chairs have done a stellar job in framing the nation’s fiscal challenge and placing it squarely before the American public. The contrast between the current trajectory that increases the national debt beyond 80 percent of GDP by 2040 and one of declining debt under their reforms likely to be consistent with long-term economic growth because the Commission also proposes limiting government spending to 21 percent of GDP — is striking.
The Commission has marked wide-ranging reforms — to broaden the federal tax base, reduce income tax rates and simplify the tax system; cut discretionary expenditures that are unaffordable and antiquated in all spheres; reduce long-term health care cost growth, and restore Social Security to financial solvency through a combination of benefit cuts and revenue measures.
It’s sad but true that the political barriers stacked up against this promising approach appear to be insurmountable. Given the make-up of Congress and with Obama as President, the chance that something even remotely resembling the Commission’s proposals would be enacted is negligibly small. With the Democratic majority in the Senate, President Obama is unlikely to even have to use his veto.
But what if my conjecture is proved incorrect and a roughly similar set of reforms is enacted in 2011? Remember that our fiscal problem is of a long-term nature. It is produced by an aging population; rapid health care cost growth; slower revenues from a flagging economy as a large cohort of experienced workers retires; slowing education and skill acquisition by younger workers; and slower capital formation as more resources are consumed by an aging population. The commission’s reforms have to be enacted and maintained for at least 30 years to deliver its “target” debt-to-GDP ratio of 40 percent. History tells us that such an outcome is quite unlikely. For example, the Budget Enforcement Act of 1990 — that helped President Clinton accumulate his now much touted laurel as a fiscal conservative — was maintained for just 12 years — until Congressional Budget Office projections revealed “budget surpluses as far as the eye could see” in 2002. With those projections in hand, lawmakers raced to the exits: the BEA was abandoned and federal spending shot through the roof. Even as conservative a policy maven as Alan Greenspan shone a green light to adopt budget busting tax cuts.
To improve the chances that history does not repeat itself, the commission’s proposals need to be combined with proposals to reform the budget process. The first thing to consider on that score is to use better budget measures to assess if reforms are achieving their goals. Stating those goals in terms of the national debt and annual cash flow deficits is unlikely to work – just as those measures have not worked for the European Union in the context of their now defunct Stability and Growth Pact.
Federal debt and the current budget deficit that is reported on the government’s books is the result of past policies and outcomes. They summarize where we came from, not where we’re going. If the commission’s reforms are enacted, a better method would be to anchor judgment about their success on the size of prospective debt—the value in today’s dollars of all future deficits that the federal government would incur under the new policies; alternatively under premature abandonment of those policies – as happened in 2002 when the BEA was abandoned. It is also important to know whether the sacrifices that the commission’s policies require from today’s generations are fairly distributed and are being invested for the future rather than being dissipated. For example, will the Social Security surpluses that the reforms generate be effectively saved and invested, or would they promote additional government spending as in the past? Without a budget process that delivers real investments for the future, and without metrics to measure their operation properly, chances are that even if Congress and the President enact them into law next year, the reforms will be abandoned too soon.
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