What’s Not So Great About Obama’s Proposal to Pay As He Goes
June 9th, 2009 . by economistmomToday the President unveiled his proposal to bring back statutory “pay-as-you-go” (PAYGO) rules to the federal budget process. As a story in today’s Washington Post (updated online this afternoon) notes, there are things to like about the President’s proposal:
If approved by Congress, the rules would forbid lawmakers from expanding entitlement programs such as Medicare and Social Security, creating new entitlement programs or cutting taxes unless the cost is covered by spending cuts or tax increases. If lawmakers fail to pay for their initiatives, Obama’s rules would subject some entitlement programs to automatic cuts, according to details of the plan released by the White House.
Deficit hawks applauded the move, saying the automatic trigger, known as sequestration, would mark a return to more serious budget restraint…
“If the administration is going to say, ‘We need to start afresh here and go forward on a pay-as-you-go basis, including health-care reform,’ this is a good way to start out,” said Robert Bixby, executive director of the nonprofit Concord Coalition, which champions deficit reduction.
It certainly seems clear that the Obama Administration is very serious about paying for the cost of health care reform, and that’s certainly better than not paying for it. As OMB director Peter Orszag reemphasized yesterday on his blog:
I have posted on this previously, but it’s worth repeating. The Administration is committed to the principle that health care reform must be deficit neutral over the next decade. That means that every dollar spent on this effort must be paid for – with real savings or revenue proposals that can be scored by the Congressional Budget Office (CBO). The offsets are not in any way theoretical; they are specific proposals that have been determined by CBO to reduce spending or raise revenue…
As we move forward this summer with these changes, you can be sure that health care reform will be paid for – and that we will strenuously debate how to do it.
But there are other things not to like about this PAYGO proposal (from a fiscal discipline standpoint), such as the exemption of some of the largest portions of the federal budget, most notably Social Security, from the automatic cuts (applied if PAYGO is violated), and the exemption of $3.5 trillion (over 10 years) worth of spending and tax cuts (mostly tax cuts) from the PAYGO standard. Again from the Washington Post:
The administration is also proposing that many costly items get a pass under the new rules. Lawmakers would be able to extend the tax cuts passed by the Bush administration beyond their 2010 expiration date, prevent the alternative minimum tax from ensnaring millions of additional taxpayers and increase payments to Medicare physicians without offsetting the enormous costs.
Administration officials have argued that those actions would merely extend current policy, and that exempting them would be “similar to the treatment of expiring mandatory programs under current PAYGO rules.”
That part of the plan is less appealing to fiscal conservatives, who argue that the nation cannot afford to keep the Bush tax cuts in place…
“What I’m not for is waiving PAYGO for $3.5 trillion of items, much of which I think ought to be paid for,” Senate Budget Committee Chairman Kent Conrad (D-N.D.) told reporters…Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, said it “largely undermines the purpose” of enacting budget rules.
“This is like quitting drinking, but making an exception for beer and hard liquor,” MacGuineas said in a written statement.
What I really don’t like about the legislation is that it’s a proposal for budget process that dictates too many specifics about tax policy, which really ought to be something more thoroughly developed by the Obama Administration’s Treasury Department and deliberated within the tax-writing committees of Congress. The statutory PAYGO proposal does not just spell out the revenue amounts that are exempted from PAYGO rules, it dictates which specific tax policies are exempt–mostly (and specifically) the 2001 and 2003 (”Bush”) tax cuts and relief from the Alternative Minimum Tax. Going further with Maya’s analogy, it’s worse than making an exemption for beer and hard liquor; it’s like making an exemption for a particular brand of beer and a particular type of hard liquor.
So what’s the big deal with the budget rule including a deficit-financed, permanent extension of the Bush tax cuts? Exempting the Bush tax cuts from PAYGO eliminates the “action forcing event” that the expiration of the tax cuts under a current-law baseline standard would have produced. If extension of the Bush tax cuts were held to the same higher standard as some of Obama’s own tax proposals, such as the Making Work Pay credit (which was proposed with an offset of carbon revenues–I know, LOL), then maybe we’d more carefully try to evaluate whether the policy is worth the cost. And it’s not just a revenue-level, “baseline issue.” By naming the specific tax policies (not just the revenue levels) that are exempt from the PAYGO rules, the proposal presumes Bush tax policy is extended and is not to be replaced by even a revenue-equivalent tax cut of a different form.
If and when this proposal for statutory PAYGO becomes law, the permanent, deficit-financed extension of the Bush tax cuts will effectively be passed as well, because the relative political cost of any tax cuts that are not the Bush tax cuts (and hence not so “free” of budget constraints) will be so high that no such alternative tax policies will be seriously contemplated. Congress will end up rather mindlessly extending the Bush tax cuts, and President Obama will rather mindlessly (yes, despite his great mind) sign the $2 trillion+ worth of them, entirely deficit financed, into law.
When you choose to treat the “policy extended” baseline as the “current law” baseline, you effectively write those policies into current law. And you’ve done it in a clever way under the guise of fiscal responsibility in a piece of legislation that at least seems to be only about some rather innocent and inconsequential yet well-intended budget rules.
Barak Obama’s mind: great
Barak Obama’s communication skills: superb
Barak Obama’s reasoning: not so much
Barak Obama’s character: what’s that?
The attachment to “current law” as a baseline reminds me of the right wing’s argument for strict interpretation of the US Constitution. That train left the station long, long ago.
In asking for strict interpretation, the right is actually asking for a rollback of current policies. It’s the same fantasy as the “current law” baseline. Ain’t gonna happen. You have to win these issues politically, not on any technicality.
In asking for strict interpretation, the right is actually asking for a rollback of current policies. It’s the same fantasy as the “current law” baseline. Ain’t gonna happen. You have to win these issues politically, not on any technicality.
Yes, in the world of politics, the truth has long been treated as a technicality. That said, I do agree that the full expiration of the Bush tax cuts that was written into current law was likely never going to happen. The Republicans are currently against anything that could be interpreted as a tax hike, even if it just involves standing by and letting the current law that they voted for take effect. And the Democrats are unlikely to allow the expiration of tax cuts that most benefit low-wage earners (like the new 10 percent bracket and the increase in the child tax credit).
However, I would suggest that your disdain should be directed at the idiots who passed a current law that could never survive than to those who simply pointed out current law to be what it was. The effect has been that we have lied to the electorate for eight years, given them projections that were based on this current law. This has become a very common pattern in our Congress. They spend much of their “cleverness” in convincing the electorate that everything is fine. Of course, many in Congress do know know that everything is NOT fine and try to remedy the situation behind the scenes. But, having convinced the electorate that everything is fine, they get little support from them. Hence, “politics” wins out and nothing gets done.
I am very disheartened to see that our current Congress lacks the courage to confront the fact that the Bush tax cuts are unsustainable. But the real cowardice was shown by those members of Congress who passed the original Bush tax cuts and hid its true cost behind the fig leaf of a phony expiration. If we want to avoid these problems in the future, we need to find a way to avoid the passage of such phony, unsustainable “current law”.
@B Davis: Well stated. The current law was a sham from the beginning.
Speaking of deceptive tax law, the much-praised 1986 Tax Reform started the game of phase-outs and hidden tax brackets. That trickery has grown tremendously and continues to grow without limit, including some Obama-proposed additions. If voters knew what marginal rates they are actually paying, they would be shocked.
The problem with arguing about Paygo and the merits of its various flavors is that we are long past the time when paygo can be a solution to anything.
Even with rock-hard paygo limits on all new spending increases/tax cuts, we’re heading for national bankrupty on current law in about 25 years.
Both Moodys and S&P have projected the credit rating of the US falling starting in 2017, only eight years away … with S&P projecting the US credit rating dropping to “junk” by 2027 … while CBO has projected annual deficits exceeding 20% of GDP by the 2040s (as if we could get that far) … and they all did that before Obama announced plans to add another $7 trillion to the national debt over the next 10 years.
Paygo — even rock-hard paygo — is obsolete. At worst, enacting it could make things worse than they are now by giving the illusion of “problem solved”,thus making the political system even less likely to address the real problem than it is today.
What is needed now is a target for “deficits by percentage of GDP” going forward into future years. That’s the only thing that reveals the real scale of the tax increases and cuts in promised spending that are needed — and which will have to come, one way or another.
Deficit hawks have always assumed that the “grand bargain” forced by the expiration of the Bush tax cuts would produce fiscal discipline, but never considered the possibility that it could end up as a log rolling process that produces a Christmas tree. That outcome is at least as likely, if not moreso, than a grand bargain that involves entitlement reform and tax increases in an election year. The 97-1 vote in the Senate on the Baucus amendment to the budget resolution in favor extending the Bush middle class tax cuts without offsets or a nod to fiscal reform definitely points to the latter outcome. The Senate vote on the Lincoln-Kyl amendment increasing the estate tax exemption to $10 million and reducign the top estate tax rate to 35% underscored how difficult it will be to merely hold the line at the current policy baseline. Enacting a statutory PAYGO regime that enforced the current law baseline (assuming it could be passed) would not prevent the Bush middle class tax cuts from being extended in the face of near unanimious support in the Senate for that position, and the inevitable vote to override statutory paygo for those tax cuts would send a message that statutory PAYGO shouldn’t be taken seriously. And under a statutory PAYGO regime enforcing current law PAYGO would need to be circumvented to do anything on PAYGO, there would be no reason for Congress to stop at the 2009 levels when there is bipartisan support for more generous (and more expensive) estate tax relief.
If advocates of paygo take the purist position, the best case scenario is that Congress doesn’t enact statutory paygo and limits itself to passing tax cuts and mandatory spenidng equal to the current policy baseline minuse the upper income tax cuts. the worst case scenario is that Congress enacts an ostensibly strong statutory paygo bill that enforces the current law baseline and then votes repeatedly to pass tax cuts that are exempted from paygo as part of the log rolling to pass the Bush tax cuts and we are left with a budget enforcement regime that has no credibility and is ineffective.
Picketts charge is remembered as an act of great courage and bravery, but is also considered the high water mark of the South that allowed the North to turn the tide of the Civil War. Maybe if Pickett had retreated to higher ground he could defend rather than bravely running up a hill into cannon fire history might be different.