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.
Obama’s Fiscal Commission and Health Care Spending
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.
Charitable Donations to the Government
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.
GOP’s Pledge to America
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.
‘Mountain of Debt’
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.
USA Today Abets ObamaCare Supporters’ Misinformation Campaign
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.”
Did ObamaCare Get Medicare’s Price Controls Right?
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.)
Cheap Talk from a Fiscal Commissioner
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.
Put Housing GSEs in the Budget and then Privatize
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.
20-somethings Will Pay for Big Government
A front-page Washington Post story today notes that the cost of Obama-style health care reform will fall disproportionately on young adults.
Younger workers are typically more healthy than the population at large, and a significant share of them quite rationally choose not to buy health insurance, as my colleague Mike Tanner explains in a recent op-ed. The major health care plans on the table in Washington would force them to buy coverage. As the Post story explains:
Drafting young adults into any health-care reform package is crucial to paying for it. As low-cost additions to insurance pools, young adults would help dilute the expense of covering older, sicker people. Depending on how Congress requires insurers to price their policies, this group could even wind up paying disproportionately hefty premiums—effectively subsidizing coverage for their parents.
I’m beginning to see a pattern. Those same young workers will be forced to pay the bills for soaring Social Security and Medicare expenditures when the Baby Boomers begin retiring en masse a decade from now. And of course, they will be the ones paying off the $9 trillion in additional federal debt expected to be wracked up from the current explosion in federal spending.
I always thought parents were supposed to support their kids, not saddle them with bigger bills and huge debts.
‘No Child Left a Dime’
That’s my favorite placard from the Washington tea party protests on Saturday. No Child Left a Dime underlines perhaps the central concern of the protesters — the ongoing massive fiscal irresponsibility in Washington by both parties.
We’ve got deficits of more more than $1 trillion for years to come. Federal debt will approach World War Two levels within a decade. Even so, the Democrats are trying to ram through a $1 trillion health care expansion, and the head of the Republican National Committee, Michael Steele, is defending against any cuts to Medicare, the program that is the single biggest threat to taxpayers. People are marching not just because Obama and the Democrats are scaring their pants off, but because most Republicans in positions of power are spendthrifts as well.
The chart illustrates that no child will be left a dime because the government will have it all. This is the CBO’s “alternative fiscal scenario,” which essentially means the business-as-usual scenario if Congress doesn’t cut anything in coming years.
Note that the most rapidly growing box, the white box, is the program that Michael Steele doesn’t want to touch. The program is expected to grow by 6.3 percent of GDP by 2050. In today’s money, 6.3 percent of GDP is about $900 billion a year in added spending. So it’s like Steele doesn’t see anything wrong with tomorrow’s young families forking over an additional $900 billion a year in taxes on this one program, or about $7,700 a year for every American household.
It’s worse than that. The biggest box on the chart by 2050 is interest on the government debt, and by far the biggest contributor to the growth in interest is Medicare. So including interest, Michael Steele’s (ridiculous) Medicare position is sort of like supporting a more than $10,000 tax hike on every young family for this one program.
Come on Republicans, you can do better than that. How about starting simply by proposing some of CBO’s modest and commonsense Medicare reforms like raising deductibles?
(By the way, interest costs rise in coming years because of an excess of spending, not a shortage of revenues. Under this CBO scenario, all current tax cuts are extended, and yet federal revenues still rise as a share of GDP over time above the historical norm of recent decades).
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