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?

Looking for Serious Program Terminations is a post from Cato @ Liberty - Cato Institute Blog

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.

Obama-Lee Summit: Time for New Thinking on the Korean Peninsula is a post from Cato @ Liberty - Cato Institute Blog

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.

Washington Post Asks for Budget Plans is a post from Cato @ Liberty - Cato Institute Blog

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.

A Turning Point? is a post from Cato @ Liberty - Cato Institute Blog

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.

We’re In This for the Long Haul is a post from Cato @ Liberty - Cato Institute Blog

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.

Thoughts on the Boehner Plan is a post from Cato @ Liberty - Cato Institute Blog

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!

Senate Finance Hearing on Debt is a post from Cato @ Liberty - Cato Institute Blog

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.

Health Care Entitlements Are the Real Debt Bomb is a post from Cato @ Liberty - Cato Institute Blog

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.

Boehner’s Price for Increasing the Federal Debt Limit is a post from Cato @ Liberty - Cato Institute Blog

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.

Returning to Weisenthal’s post:

He then gets to the discussion of a default.

…the current prospect of a technical default, from failing to increase the debt limit, would not be due to any real national insolvency. Given today’s low interest rates, the federal government could easily raise the resources needed to meet today’s contractual government obligations.

This doesn’t make any sense. How do “low interest rates” matter to the government in a situation where it’s legally unable to borrow?

Here, Weisenthal misunderstands what it means to freeze the debt limit. It does not mean, as he believes, that the government is “legally unable to borrow.” It only means that the government cannot issue any additional debt beyond the limit. But the government can (and will) continue to roll over its existing debt, and must do so at current interest rates, which makes those rates relevant to the discussion.

More Weisenthal:

Anyway, here’s the biggest whopper of them all:

How might investors really view this ersatz U.S. debt crisis? If some lawmakers’ refusal to vote for increasing the debt limit without also passing prudential fiscal policies resulted in a technical U.S. default, it would demonstrate their significant political strength.

Might that not actually induce investors to buy long-term U.S. debt — reducing long-term interest rates and improving the U.S. investment climate?

Oy, where to begin? First of all, the notion that a “technical default” would induce investors to buy long-term U.S. debt is prima facie absurd.

Perhaps he knows something I don’t, but I don’t see this as absurd at all. I’d expect that a serious commitment by political leaders to get the nation’s fiscal affairs in order would inspire investor confidence in U.S. securities. If anything, it’s absurd to think that investors would be encouraged by Weisenthal’s preferred policy of the nation continuing to expand its borrowing without a plan to manage its debt.

Back to his post:

Second, as we stated above, longterm US interest rates are at historical lows, so the idea of needing to reduce them further to improve the US investment climate is rubbish. And finally, why do we want people to buy more long-term US debt? Ideally we want people going out and actually investing in things with their money: companies, employees, lending to corporations, etc. Aren’t debt hawks supposed to hate the idea of government borrowing crowding out private spending. [sic]

The problem with this comment is that today’s historically low interest rates are not a reflection of freely operating market forces. They result from the Fed’s massive interventions through its Quantitative Easing policy.  The Fed has increased its portfolio of market assets — now approaching a staggering $2.7 trillion — in part by purchasing treasuries with longer maturity than it used to purchase before 2008. Without that injection of liquidity (note to Ben Bernanke: I didn’t say the Fed is “printing money”), market rates would be much higher.

Weisenthal does rightly worry about the effect of U.S. government finance on other sectors of the financial market. Fortunately, investors are beginning to branch out beyond government securities. But even as the Fed has been purchasing so many Treasuries to keep interest rates artificially low and fund the government, it has also purchased private assets because investors have not been buying U.S. private assets as much as they used to. The Fed has been propping up particular U.S. sectors (e.g., securitized finance, insurance, auto, home, credit card loans) to keep them from failing. If you removed the Fed’s $2.7 trillion liquidity injection from markets, interest rates would be much higher today. (How the Fed should conduct monetary policy is a different topic, beyond the scope of this post.)

Government officials are afraid that investor exits from Treasuries (and U.S. assets in general, both government and private) will accelerate if the debt limit is frozen, as I mentioned in the Politico article. I’m suggesting that view might be incorrect.

Weisenthal concludes:

Basically, Gokhale is just throwing a bunch of stuff at the wall, failing to produce an argument, and hoping you don’t really get it. Sorry.

Respectfully, I think my argument is quite coherent, though I admit it’s not the conventional view offered by many other commentators. Indeed, that’s why I wrote the op-ed.

Response to Joe Weisenthal’s Critique of My Politico Opinion Piece is a post from Cato @ Liberty - Cato Institute Blog

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.

That’s actually well stated, although we now know that Obama’s own failure of leadership is also “shifting the burden of bad choices today onto the backs of our children and grandchildren.”

The president’s press secretary says that Obama voted against raising the debt limit because the outcome wasn’t in doubt and “to make a point about needing to get serious about fiscal discipline.” While the revelation is as unsurprising as it is cynical, it demonstrates that the debate over raising the debt limit is mainly driven by politics.

I strongly doubt that the Republicans will ultimately take actions that lead to the federal government defaulting on the debt. They’re simply using the debt limit issue to make political hay over the administration’s fiscal failures, just as Obama did when he was in the Senate and fiscal policy was being made by Republicans.

The never-ending political posturing by both parties when it comes to raising the debt limit has caused some commentators and budget analysts to suggest that Congress should just do away with the limit altogether. They argue that the political brinkmanship simply isn’t worth the risk to the country’s economic well-being.

I believe that forcing policymakers to spar publicly over fiscal policy is healthy, especially at a time when analysts generally agree that the country is headed toward an economic catastrophe if Washington’s mounting debt isn’t brought under control. The country’s economic well-being is already at risk, so I don’t see what there is to be gained from scrapping a tool, albeit a politicized one, that focuses needed attention on a serious problem.

A 2005 paper by Prof. Anita Krishnakumar is similarly supportive:

First, the statute is the last remnant of congressional control or accountability over the national debt—and the primary vehicle through which Congress fulfills its constitutional obligations under Article 1, Section 8 to oversee the borrowing and payment of the public debt. Second, the debt limit statute encourages legislators to consider the interests of the general public and future generations, rather than those of special interests, and thus acts as an important institutional check on party and interest group politics.

As this Article details, the general budget process is party- and interest-group dominated, and involves numerous competing concerns and aggregate figures, among which the annual deficit (borrowing) figure and the status of national debt are only one [sic] of many concerns. Within this framework, debt limit increase bills provide an independent and focused opportunity for Congress to step back and consider the consequences of its deficit-spending decisions, to evaluate its fiscal policies, and even to implement fiscal reform if it decides  that it has been borrowing too much too fast.

Krishnakumar concludes that although the debt limit requirement is “far from perfect,” the “criticisms leveled against the statute … are both exaggerated and misdirected.”

In sum, the federal government is not going to default on its debt obligations in the coming months because of a failure to raise the debt limit. The real intrigue is the political gamesmanship that a vote to raise the debt limit will engender. In this regard, Republicans should use the vote as an opportunity to press the administration for budgetary reforms that address a potentially ruinous debt burden that has been driven by the profligate spending policies of both parties.

Thoughts on the Debt Limit Debate is a post from Cato @ Liberty - Cato Institute Blog

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.

Debt Commission Reform Proposals – What Are Their Chances? is a post from Cato @ Liberty - Cato Institute Blog

Following up on what Dan and Chris have said …

If the co-chairs of President Obama’s fiscal commission were serious about reducing federal spending and deficits, they would have proposed eliminating the federal deficit, rather than “reduc[ing] it to 2.2 percent of GDP by 2015.”  Yawn. They would have proposed cutting federal spending (currently, 24 percent of GDP and rising) to match federal tax revenue (currently at 15 percent of GDP).  But the co-chairs proposed only to “bring spending down to 22 percent and eventually 21 percent of GDP.”  Not only does that elicit another yawn, but since the co-chairs only asked for half a loaf, they won’t even get that much.

If the co-chairs were serious about reducing federal spending and deficits, they would have proposed a balanced-budget amendment.  They would have proposed block-granting Medicaid.  They would have proposed implementing Medicare vouchers immediately.  (Vouchers are the only way to reduce Medicare spending while protecting seniors from government rationing.  They would also change the political dynamics that repeatedly stymie efforts to reduce Medicare spending.)  Instead, the co-chairs propose the same ol’ failed strategy of trying to limit Medicare and Medicaid spending using government price-and-exchange controls, which they euphemistically describe as “rebates” and ”payment reforms.”  Along the same lines, they propose strengthening IPAB, ObamaCare‘s rationing board.  IPAB’s mandate is — you guessed it — to ration care by fiddling with Medicare and Medicaid’s price and exchange controls.  It will therefore inevitably fall prey to the same political buzzsaw.  To appease Republicans, the co-chairs propose unwise and unconstitutional federal rules that would prevent patients injured by negligent physicians from recovering the full amount they are due (euphemism:  medical malpractice liability “reform”).  Finally, the co-chairs propose that if federal health spending continues to grow faster than GDP growth plus 1 percent, Congress should consider “a premium support system for Medicare” (which could mean vouchers) and “a robust public option and/or all-payer system” for people under age 65 — a debate that wouldn’t even begin until 2020.

Fiscal Commission members, congresscritters, and citizens who are serious about reducing federal spending and deficits — and who are looking for specific ways to cut government spending — should instead consult Cato’s excellent web site DownsizingGovernment.org.

Obama’s Fiscal Commission and Health Care Spending is a post from Cato @ Liberty - Cato Institute Blog

The New York Times took a look at people who voluntarily send money to Washington in order to help pay down the federal debt. Last year, the Bureau of the Public Debt received $3.1 million in such donations. Looking at the federal budget, I found a total of $241 million in “gifts and contributions” for fiscal year 2010.

Charitable donations to the federal government are insignificant when compared to donations made to private charities. A Cato essay on welfare spending points out that Americans contribute more than $300 billion a year to organized private charities and volunteer more than 8 billion hours a year to charitable activities, which can be valued at about $158 billion.

Thus when given the choice, people overwhelmingly entrust their donations to private charities not the government. One can only imagine what donations to private charities would be if government at all levels didn’t confiscate trillions of our dollars in taxes every year.

Warren Buffett, one of the richest men in the world, decided several years ago to leave most of his fortune to private charities. Buffett is notorious for advocating tax increases to support government spending. Yet, when he made the decision to donate his wealth, Buffett went with the private sector instead of the government.

A frustrating aspect of today’s public policy debate is that many pundits seem oblivious to the fact that the private sector could take care of those people truly in need if it was allowed to retain more of its earnings from the clutches of government. The government “crowds out” all kinds of private efforts and resources. If the government were to recede, private sector efforts to aid the needy would expand.

Charitable Donations to the Government is a post from Cato @ Liberty - Cato Institute Blog

The House Republicans’ release of its “Pledge to America” has been met with criticism from across the ideological spectrum. While excoriation from the left was inevitable, those who were hoping that the GOP would set out a detailed agenda for limiting government were also not satisfied.

The 48-page document contains more pictures of Republican members of Congress than it does evidence that the GOP is seriously prepared to cut spending. While the introductory commentary is designed to appeal to the tea party movement, the actual “plan” to return budgetary sanity to Washington is both timid and incomplete.

The following are some thoughts on the pledge’s “plan to stop out of control spending and reduce the size of government”:

• The document immediately notes that the “lack of a credible plan” to tackle the mounting federal debt causes uncertainty for employers and investors. The problem is the GOP leadership doesn’t have a credible plan to address the debt, or at least this document doesn’t offer one.

• It disingenuously promises to “cut government spending to pre-stimulus, pre-bailout levels” when in fact it only intends to do so for a small portion of the overall federal budget. The reduction would apply to discretionary, non-security spending, which only accounts for about 15 percent of total federal spending.

• Not only does the GOP punt on the big-ticket programs like Social Security and Medicare, the document devotes an entire section to maintaining the interventionist foreign policy that is helping to bankrupt the country. The GOP doesn’t appear to understand that the American people are having an increasingly difficult time understanding why the government continues to take bricks out of our own economy in order to build nations around the globe.

• The document says that the GOP will “root out government waste.” Waste goes with government the way peanut butter goes with jelly. Nancy Pelosi has made the same promise, which demonstrates the vacuous nature of the proposal.

• The GOP says it will cut the operations budget of Congress. That’s fine, but the legislative branch’s budget is only about $5 billion.

• Calling for an end to the federal government’s control of Fannie Mae and Freddie Mac is a good idea. But that’s an easy position. They should instead be calling for an end to the government’s entire disastrous role in subsidizing homeownership.

• The document calls for a freeze in federal non-security hiring. One would have thought the GOP would at least address exorbitant federal civilian employee pay. Freezing (or reducing) federal employment would take care of itself by eliminating agencies and programs, which is something the document doesn’t lay out a plan to do.

• The GOP proposes to continue holding weekly votes to cut spending via its YouCut initiative. It’s a fine idea, but most of the cuts offered for consideration thus far have been relatively insignificant. For example, one of the cuts being proposed this week would “reduce funding for the wild horse and burro program to previously projected levels.” Not only would this only save $280 million over ten years, the GOP couldn’t even find the nerve to call for its outright abolition.

• One piece of good news is that the GOP explicitly calls for the repeal of Obamacare.

With the Democrats content to irresponsibly promise more free lunches in the face of an unsustainable fiscal situation, it would have been refreshing for the House Republicans to square with the American people. However, with this document the GOP largely fell back on limited government platitudes.

GOP’s Pledge to America is a post from Cato @ Liberty - Cato Institute Blog

The White House Office of Management and Budget homepage currently features the following quote from the president:

President Obama says he wants to “invest in our people without leaving them a mountain of debt.”

That’s a curious statement because the Congressional Budget Office’s analysis of the president’s current budget proposal projects that publicly held debt as a share of the economy would reach levels last seen at the end of the Second World War.

When the CBO’s numbers are plugged into a bar chart, the projected Obama debt levels (red bars) look like…the upward slope of a mountain (!):

To be fair, Obama’s predecessors — particularly the previous Bush administration — share in the responsibility for the mountainous rise in federal debt. However, that’s all the more reason for the Obama administration to work toward a peak instead of a steeper incline.

‘Mountain of Debt’ is a post from Cato @ Liberty - Cato Institute Blog

An article in today’s The USA Today titled, “With Many Still in Dark, Groups Shed Light on Health Care Law,” aims to correct misinformation about ObamaCare.  Ironically, the article is itself a monument to misinformation.

It begins:

True or false: The new health care law will cut Medicare benefits for seniors. It will slash Medicare payments to doctors. It will ration health care.

In three polls conducted last month, large percentages of Americans answered “true” to each statement. All three are false.

In fact, two of the three statements are 100-percent true.

First, ObamaCare will cut payments to the private health insurance companies that provide coverage to the 20 percent of Medicare enrollees who participate in the Medicare Advantage program.  That will eliminate many types of coverage for seniors in Medicare Advantage.  That should be painfully obvious, but if you require confirmation, visit FactCheck.org.  ObamaCare will also ratchet down the price controls that Medicare uses to pay hospitals and many other health care providers.  It should likewise be obvious that that will reduce access to services that are ostensibly “guaranteed” to all enrollees.  But again, if you need confirmation, check in with Medicare’s chief actuary, who works for President Obama.  We can debate whether that’s good or bad.  What’s not up for debate: ObamaCare in fact “will cut Medicare benefits for seniors.”

Second, it is also true — ipso facto – that ObamaCare “will ration health care.”  To ration is to limit consumption.  When ObamaCare reduces coverage for Medicare Advantage enrollees and reduces access to care for all Medicare enrollees, it limits seniors’ consumption of medical care.  We can debate whether that’s good or bad.  What’s not up for debate: that is rationing.

Finally, yes, it is technically false that ObamaCare “will slash Medicare payments to doctors.”  But since current law will slash Medicare payments to doctors if Congress does nothing, and since an earlier version of ObamaCare would have eliminated those cuts, but ObamaCare’s architects dropped that provision so as to make ObamaCare appear deficit-neutral… well, perhaps the public can be forgiven if it confuses “eliminating a provision that would have prevented cuts in Medicare payments to doctors” with “slashing Medicare payments to doctors.”

USA Today continues:

The debunked idea raised by opponents during congressional debate that “death panels” could make end-of-life decisions is seen as real by nearly half of those surveyed.

I’ll rate this statement misinformed and misleading.

First, Sarah Palin’s claim about “death panels” was true at the moment she said it, even if she didn’t know why.

Second, by rationing Medicare enrollees’ access to medical services (see above), ObamaCare will effectively make end-of-life decisions for seniors.  According to Medicare’s chief actuary, ObamaCare could force one in six hospitals to stop accepting Medicare patients.  If ObamaCare results in there no longer being a hospital bed waiting for Grandma at the end of her life, that’s an end-of-life decision.  It wasn’t a personalized decision.  It’s not even necessarily the wrong decision.  But let’s drop this nonsense about ObamaCare not making end-of-life decisions for seniors.  And ObamaCare did create a panel that will make many of these implicit rationing decisions.  It’s called the Independent Payment Advisory Board.

But my guess is that people tell pollsters that ObamaCare will make end-of-life decisions because they understand the Golden Rule, and that he who pays the piper calls the tune.  So long as the government purchases medical care, it will be the government that decides who receives it and who doesn’t.  And ObamaCare gave government a lot more of the gold.

USA Today packed a lot of misinformation into this one sentence:

The National Council on Aging posed 12 questions about the law to 636 seniors and found that fewer than 17% of them knew half the answers.

Actually, it’s NCOA that doesn’t know the answers.  Here are a few of their poll’s true-false questions:

• “The new law will result in future cuts to your basic Medicare benefits.” A plurality of seniors (42 percent) responded “true.”  And they’re right: as Medicare’s chief actuary has explained and as NCOA should know, ObamaCare will reduce access to care for Medicare enrollees.  That’s a benefit cut, unless you think “coverage without care” counts as a benefit.  Yet according to NCOA, the correct answer is “false.”  Just 22 percent of seniors agreed.
• “Under the new health reform law, Medicare Advantage plans will cut benefits and increase premiums.” NCOA says the correct response is “don’t know,” and that’s the answer that 56 percent of seniors gave.  Perhaps seniors haven’t read the chief Medicare actuary’s report, which found that ObamaCare “will result in less generous benefits packages” in Medicare Advantage and “when the MA provisions will be fully phased in, enrollment in MA plans will be lower by about 50 percent.”  But NCOA should have read that report, and should therefore know that the correct answer is “true.”
• “The new law is projected to increase the federal budget deficit over the next ten years and beyond.” Again, a plurality (49 percent) responded “true.”  Again, they’re right.  Yet NCOA thinks the correct response is “false.”  No doubt NCOA would point to the Congressional Budget Office projections that ObamaCare will reduce the deficit.  But those projections are valid only if  ObamaCare “remain[s] unchanged throughout the next two decades, which is often not the case for major legislation.” The CBO wrote this would particularly be a problem with ObamaCare, which “would maintain and put into effect a number of policies that might be difficult to sustain over a long period of time.”  So one could reasonably interpret the CBO to have projected an increase, not a decrease in the deficit.  Alternatively, seniors could have been thinking about former CBO director Douglas Holtz-Eakin, who projected in The New York Times that ObamaCare “would raise, not lower, federal deficits, by $562 billion.”  There are lots of reasons why “true” is in fact the correct answer.  (One of them is that NCOA used the passive construction “is projected.”)  Only 14 percent of seniors agreed with NCOA.
• “As a result of the new law, the solvency of the Medicare Trust Fund will be extended by about 9 years to 2026.” A majority of seniors responded “don’t know” (54 percent), while another 22 percent responded “false.”  Either answer is more correct than NCOA’s preferred answer (“true”).  There are no assets in the Medicare “trust fund.”  Thus there is no date by which those non-assets will be exhausted.  Indeed, the “trust fund” has absolutely no effect on Medicare’s solvency.  The very premise of this question is a fraud.  Someone needs to educate seniors about the Medicare trust fund, but NCOA is not the group to do it.
• “The health care reform law will cut Medicare payments to doctors.” A plurality of seniors responded “true” (45 percent), while only 14 percent of seniors gave NCOA’s preferred response (“false”).  But again, perhaps seniors can be forgiven on this one (see above).

USA Today should have dug a little deeper.

More misinformation:

More than four in 10 people in the Kaiser poll wrongly believe the law included a government panel to make end-of-life decisions for Medicare patients.

Again, ObamaCare does include a panel that would implicit rationing decisions, including for Medicare patients at the end of life (see above).

More misinformation still:

As the Department of Health and Human Services issues the regulations needed to implement the law, it’s trying to get the facts out through its website, healthcare.gov. The Centers for Medicare and Medicaid Services is helping, most recently with a cable TV ad featuring Andy Griffith.

FactCheck.org found that Andy Griffith used “weasel words” to “mislead” seniors about ObamaCare.  How is USA Today not aware of that?

USA Today Abets ObamaCare Supporters’ Misinformation Campaign is a post from Cato @ Liberty - Cato Institute Blog

Congress uses price controls to pay Medicare-participating providers.  Those providers invariably complain that Congress sets prices too low, but many are no doubt too high.

Congress chose to pay for ObamaCare‘s new entitlement spending in part by ratcheting down many of those prices.  That suggests supporters either believe that Medicare’s controlled prices generally exceed the marginal value of the relevant services, or that those prices will begin to exceed marginal value as providers become more productive (i.e., as they learn to provide those services at a lower cost).

Neither assumption is necessarily wrong.  Producers operating under price controls nevertheless have an incentive to improve productivity.  When costs fall relative to prices, producers get to keep the difference.  Ambulatory surgical centers saw a windfall because Medicare took two decades to update those price controls for productivity gains.

Medicare’s chief actuary and many others doubt that providers will realize the productivity gains assumed by Congress.  If the assumed productivity gains do not occur, those price reductions would reduce Medicare enrollees’ access to care.  Medicare providers and enrollees would likely persuade Congress to block the price reductions.  Medicare spending and the federal debt would rise.

Yet even if those productivity gains do occur, ObamaCare’s price reductions would still reduce access compared to a world without them, therefore enrollees and providers may still persuade Congress to eliminate them.  Regardless of what happens with productivity, as Tom Daschle notes, the patient-provider pincer movement usually carries the day.

This is an inherent defect of Medicare not found in markets.  Competitive markets automatically translate productivity gains into lower prices for consumers.  Medicare protects providers at the expense of enrollees and taxpayers.

(Cross-posted at National Journal‘s Health Care Expert Blog.)

Did ObamaCare Get Medicare’s Price Controls Right? is a post from Cato @ Liberty - Cato Institute Blog

The president’s fiscal reform commission started off with some breathtaking chutzpah from Senate Budget Committee Chairman Kent Conrad (D-ND):

Rising federal debt is like a tsunami that could swamp the country at any moment…Our economic strength and security is on the line. Now is the time to act. And we need everyone, Democrats and Republicans, working together on a solution.

If now is the time to act, why did Sen. Conrad just pass a budget plan out of his committee that promises massive spending, deficits, and debt?

From a transcript of Conrad’s opening remarks:

I personally believe that saying, ‘everything is on the table’ is critical. I hope none of us will take things off the table prematurely, because I think it is clear it’s going to take dramatic changes on the spending side of the ledger, and it’s going to take changes on the revenue side of the ledger.

Does Sen. Conrad consider farm subsidies to be on the table? In February, the Wall Street Journal exposed Conrad as a hypocritical big spender. For example, Conrad doesn’t miss an opportunity to shower his farm constituents with federal largesse:

He has been a defender of the state’s grain farmers ever since [his election to the Senate in 1986]. He voted last April against a proposal to cap federal payments to the nation’s farmers at $250,000 per farmer per year, a measure that Mr. Conrad criticized as disastrous but that supporters said would have saved $1 billion a year.

He also helped draft a five-year, $300 billion farm bill in 2008 that boosted overall farm subsidies. The bill created a $3.8 billion emergency “trust fund” for farmers who lose crops or livestock to natural disasters, which was Mr. Conrad’s idea. Since 2008, North Dakota ranchers have received $23 million under the fund, second only to Texas.

What about federal entitlement programs, which represent the biggest budgetary threat going forward?

In 2003, Mr. Conrad joined most Democratic senators to support Mr. Bush’s plan to provide Medicare prescription-drug coverage to seniors, at a cost of around $40 billion a year. The plan required Congress to scrap the spending controls Mr. Conrad once championed. Republicans won the votes of Mr. Conrad and other rural senators by agreeing to expand the program by pumping $25 billion more into rural hospitals and doctors over 10 years.

Then there’s that health care “reform” bill Conrad just voted for, which will cost an estimated $2.6 trillion once fully implemented.

Not to be outdone, the president had his own galling comments:

Flanked by the co-chairmen of the new commission, Obama challenged the two parties to join in taking a “hard look” at the growing gap between what the government spends and raises in revenue, and to “think more about the next generation than the next election.”

The “growing gap” the president cites is one of his own doing. The following chart shows the projected gap between spending and revenues according to the Congressional Budget Office’s analysis of the president’s latest budget proposal:

The chart shows that revenues are already set to consume a larger share of the economy. The problem is that spending is on an elevator going up.

The politicians with the most power in Washington are precisely the ones pretending that they are powerless to steer the nation away from a looming fiscal disaster. Their claims are total, utter, complete nonsense. Both Obama and Conrad could have proposed budgets this year that actually cut spending to reduce the deficit. Both chose not to. They are the ones fueling the “tsunami.” They are the ones who don’t have the guts to cut off this generation’s subsidy recipients for the sake of the next generation. It’s that simple.

Cheap Talk from a Fiscal Commissioner is a post from Cato @ Liberty - Cato Institute Blog

The two large housing government-sponsored enterprises, Fannie Mae and Freddie Mac, have been in government receivership since September 2008. The U.S. Treasury has given the housing GSEs $112 billion in cash infusions, and this past Christmas Eve it quietly announced it would cover all of Fannie and Freddie’s losses beyond the original $400 billion limit through 2012.

The president’s latest budget proposal continues to only count the cash infusions, which it projects to be $188 billion through 2020. On the other hand, the Congressional Budget Office also includes in its budget projections the subsidy cost of new loans or loan guarantees made by Fannie and Freddie, which results in a total projected hit of $370 billion through 2020.

The CBO’s rationale for including the subsidy cost is obvious:

[T]he Congressional Budget Office (CBO) concluded that the institutions had effectively become government entities whose operations should be included in the federal budget.

Is it not obvious to the administration?  Of course it is, but the administration doesn’t want the GSEs “on budget” because it will only make already dismal deficits look worse. It also hinders any effort to count the GSE’s combined $1.5 trillion in outstanding debt against the ever-increasing federal debt limit. Yesterday, Treasury Secretary Geithner waived the idea away when he told the Senate Budget Committee that “we do not believe it’s necessary to consolidate the full obligations of those entities onto the balance sheet of the federal government at this stage.”

Geithner also told Congress the administration will now wait till 2011 to propose an overhaul of Fannie and Freddie. The Associated Press noted the hypocrisy in the administration’s punt:

‘We want to make sure that we are proposing these changes at a time when we have a little bit more distance from the worst housing crisis in generations,’ Geithner said. That argument is exactly the opposite of the case Geithner is making for new financial regulations. Geithner is pressing Congress to move swiftly on new Wall Street rules, saying action must occur before memories of the financial crisis recede.

Geithner said he wanted measures that would ensure “the government is playing a less risky, but more constructive, role in supporting housing markets in the future.” But government “support” of the housing market is what fueled the housing bubble and subsequent damage to the economy. Why should the arsonist be trusted to put out the fire?

Unfortunately, policymakers get a lot of self-serving prompting from the housing industry, as I discuss in this Cato Policy Analysis. For example, the National Association of Realtors is currently shopping a plan on Capitol Hill that would turn Fannie and Freddie into government-chartered non-profits explicitly backed by the government. Instead, policymakers should begin the process of separating housing finance and state by developing a plan to privatize Fannie and Freddie.

Put Housing GSEs in the Budget and then Privatize is a post from Cato @ Liberty - Cato Institute Blog