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The Value of Sticking to the Laws We Pass, At Least Eventually

June 30th, 2010 . by economistmom

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I haven’t had a chance to digest CBO’s long-term outlook yet (released earlier today), but luckily I did see Ezra Klein’s post on it, which featured two charts which highlight the difference between CBO’s current-law baseline (pictured above), and their “alternative fiscal scenario” which is more of a “policy-extended” baseline–similar to the one the Obama Administration uses as the baseline relative to which they measure the costs (or savings) of their budget proposals.

As Ezra points out, current law, taken literally as CBO must assume, is fiscally responsible:

In theory, CBO’s deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades.

Note that the chart shows that under CBO’s “extended baseline” scenario, reflecting current law, “primary balance” is achieved, where there is no “fiscal gap” between non-interest spending and revenues.  That doesn’t mean the federal budget is perfectly balanced, because interest costs take total federal spending above revenues, but it does mean that the deficit is pretty small–as a matter of fact, less than 3 percent of GDP by 2015, which means it’s economically sustainable (because at 3 percent, the stock of federal debt is growing at about the same pace as the economy).

Coincidentally, this picture above could also be labeled “2015 Goal of President Obama’s Fiscal Commission”–because the commission’s goal is also to achieve “primary balance” and a “sustainable” level of deficits by 2015.

So CBO is showing us we don’t have to do anything to achieve fiscally-responsible policy over the next 25 years.  It’s already set by laws we’ve already passed.  Congress can go home.  They don’t need to pass any deficit-reducing legislation, and President Obama doesn’t have to sign it.

Well, unfortunately life is not so simple.  As Ezra warns:

But current law is not likely to advance unmolested. You’ll notice, for instance, that there’s a big jump in current-law revenues next year. That’s because the Bush tax cuts are slated to expire totally. But few expect Congress to allow them to expire totally. They’re likely to preserve the bulk of the cuts, rejecting only some of the cuts that helped out the rich.

Ah, but here’s where the President’s fiscal commission can help us stick to the “simple” solution of holding onto current law.  They can make it simpler to hold onto this fiscally-responsible, current-law policy over the longer run by giving their blessing to letting go of current law (only) temporarily–letting Congress and President Obama enact a (popular) tax cut to help the recovering-but-still-weak economy: an only temporary extension of the bulk of the Bush tax cuts.  In exchange, the commission could require that the federal government get back on track in a couple years, recommitting to the picture above by getting back to the current-law baseline level of revenues.  That doesn’t have to mean sticking to current tax law, but it does mean that any deviations from that “script” will have to be revenue-neutral.  And that sounds a lot like an exercise in fundamental tax reform, which could boost the strength and sustainability of our federal revenue system even beyond the next 25 years.

In fact, this was a strategy that Bob Bixby, the Concord Coalition’s executive director (and my boss), recommended to the President’s commission today.  From his written testimony:

That leaves us with tax policy. Sticking to the CBO current-law baseline on taxes, 19.7 percent of GDP, gets the budget deficit to the commission’s target. Legislatively, that represents the easiest option, as policymakers simply need to do nothing and let current law play out.

However, that does not mean current law represents the most desirable policy path to achieve the baseline level of revenues. If reverting to the pre-2001 era tax policy (with its higher marginal tax rates) at the beginning of 2011 is deemed undesirable for political reasons, or out of economic concern for raising marginal tax rates during the early stages of economic recovery, tax policy could be reformed to achieve the same revenue levels without raising marginal tax rates.

The commission might find fertile common ground on steps to improve the tax code in ways that would increase efficiency and thus increase revenues. A thorough scrubbing of the system to identify preferences that serve no compelling use or that could be altered in a resetting of priorities is long overdue.

The fact that the commission’s short-term goal is to achieve a lower deficit by 2015 and not sooner suggests a tax policy strategy that could acknowledge the concern of many economists about the dangers of “unwinding” our currently stimulative fiscal stance too quickly. The 2001 and 2003 tax cuts that President Obama has proposed to permanently extend could instead be extended only temporarily. If done for one or two years, this would be long enough not just to allow for a more solid economic recovery, but also long enough to develop a more fundamental reform of the federal tax system that could more efficiently achieve current-law revenue levels by 2015.

This would provide an opportunity to enact a tax policy that meets the commission’s 2015 goal, while earning bipartisan support, while also building a tax system capable of remaining adequate and economically efficient over the longer term — boosting our chances for economic growth and a more sustainable fiscal future.

And so, Ezra’s take-away lesson from the CBO report is (emphasis added):

Either Congress can pass and implement policies that will bring the long-term deficit under control or it can’t. Those are the only two choices here. But there’s no real mechanism for getting the deficit under control aside from Congress passing laws and then sticking to them.

I’ll have some of my own analysis of the CBO long-term outlook report later this week.  There have been some changes to the two baselines CBO defines, some of those changes a bit puzzling and even intriguing.

(My Concord colleague, Josh Gordon, blogged more comprehensively about the CBO report and Bob’s testimony on Concord’s Tabulation blog today.  As he emphasizes, our recommendations for achieving longer-term fiscal sustainability are not just “stick with current tax law” or the “stick with the current-law revenue baseline.”  The largest longer-term challenge remains health care spending.  But the biggest and most reliable “2015 lever” is clearly tax policy, and no matter how great the health-reform lever eventually works decades from now, we’ll still need the tax system to support that not-so-outrageous-but-still-expensive health care system over the longer run.)

Thou Shalt Not Ignore Obviously-Wise Fiscal Solutions

June 28th, 2010 . by economistmom

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In his latest wailing on the failure of politics to produce wise fiscal policy (on any front it seems, lately), Ezra Klein describes what would be the ideal policy were it not for the screwed-up politics (bolding added):

Short-term stimulus spending need not conflict with deficit reduction. A fairly serious injection of funds — say, $300 billion over the next two years — could be paired with twice as much deficit reduction in the three years following the spending. Few economists, I think, would argue against the combination of short-term spending and longer-term deficit reduction if they believed the deficit reduction was certain. But the American political system has a lot of trouble making unpopular choices and some trouble sticking to those choices once they’re made. This is where you might expect a bloc of deficit hawks to step into the middle of the legislative debate with a proposal pairing spending in 2011 with savings beginning in 2014, but we’ve seen no such thing

I still maintain I know the answer–or at least one pretty good possible answer–to the riddle:  How can we find such a policy that Ezra describes as “pairing spending in 2011 with savings beginning in 2014?”  My answer is to extend only the Obama-proposed portions of the Bush tax cuts only temporarily, with a call for revenue neutrality relative to current law (i.e., sticking to the CBO baseline level of revenues) beyond that one or two years.  If policymakers think they can do better than simply reverting back to Clinton-era tax policy (still not such a bad option in my opinion), they can work on fundamental tax reform to achieve the revenue-neutral (or better) goal.

If we’re serious about deficit reduction and the “checkpoint” quantitative (and shorter-term) goal of the President’s fiscal commission to get deficits as a share of the economy down to 3 percent by 2015 (versus 4 percent under the President’s budget proposals), then one way to get there is to stick to the current-law level of revenues.  But that doesn’t necessarily mean sticking with current tax law itself.  Saying that tax policy could be anything as long as it raised the same amount of revenue under current-law policies is exactly how tax economists set up any mental exercise in fundamental tax reform.  And when we tax economists go through such careful thinking of what tax policy is supposed to do and how its efficiency and fairness could be improved, we always think about the definition of the tax base–how broad and how neutral it is–well before we obsess over tax rates.  And when we think of ways to broaden the tax base and make it more neutral and more efficient, it seems the first item on all our lists (whether we be liberal-leaning or conservative-leaning tax economists), is to eliminate or at least reduce the single largest “tax expenditure” in the federal budget–the exclusion from taxation of employer-provided health benefits (worth about $250 billion a year).

So the beauty of the “stick to current-law revenue levels by 2015” goal is that it would serve many purposes.  It would: (i) allow the short-term stimulus provided through the tax cuts to continue temporarily, (ii) achieve the fiscal commission’s goal of the 3 percent of GDP deficit in 2015, (iii) set up the motivation for revenue-neutral, base-broadening fundamental tax reform, which would in turn (iv) likely lead to some reduction in the employer-provided health exclusion which would both turn a revenue-neutral reform into a revenue-gaining one over time (because the costs of the exclusion grow over time with health costs) and would be consistent with the goals of health-care reform (to bring down costs by reducing excess demand), and thus (v) improve longer-term (and not just 2015) fiscal sustainability from both the tax side and health spending sides of the budget.

And earlier this morning, Ezra linked to this IMF blog post by Olivier Blanchard and Carlo Cottarelli on the “Ten Commandments for Fiscal Adjustment in Advanced Economies.” I look over this list of “commandments” and think that a tax policy change of the type I’m describing here–where we don’t just stick to current-law revenue levels by just not doing anything, but use the fiscal commission’s goal to motivate thoughtful tax reform–would obey all of them (or at least be consistent with all of them).

And I don’t mean to suggest this is a cure-all for our long-term fiscal woes, because it’s not.  We need to reform the big entitlement programs, too (and even cut “waste, fraud, and abuse” wherever we can find it), because otherwise even a much more efficient tax system still won’t be able to “keep up.”  But in my mind tax reform holds a lot more promise than people (even the policy experts) seem to be acknowledging.  I think it’s even a more promising solution accounting for the messy politics.  So I hope the President’s fiscal commission starts talking about it–often, clearly, and enthusiastically.

The “Radical” Center

June 24th, 2010 . by economistmom

While on the Fiscal Wake-Up Tour, David Walker used to refer to those who take moderate/bipartisan positions on fiscal responsibility (e.g., suggesting that a mix of tax increases and spending restraint is needed) as the “sensible center.”  In his Washington Post column today, Matt Miller suggests this centrist position is no longer “sensible,” but “radical”:

It’s striking that both liberals and conservatives are convinced nowadays of the imminent demise of the other side’s governing philosophy. The left says the shocking toll of BP’s recklessness and Wall Street’s greed proves the folly of deregulation and unfettered markets. The right looks at Greece, Europe’s welfare strains, and Britain’s stunning new austerity budget and shouts with similar fervor that bloated government is on borrowed time.

The fascinating thing is that both groups are correct about the obsolescence of the other side’s key premises, yet blind to the staleness of their own. What partisans on neither side seem to sense is that events are poised to consign many traditional priorities of both conservatives and liberals to the ash heap.

You’d never know this from the phony way public life is conducted. While independents are America’s largest voting bloc, the left and right retain a stranglehold on the debate. Only the shrill prevail. On TV, talk radio or the campaign trail, it’s almost impossible to hear the kind of common sense that takes us beyond the usual partisan tropes.

Think about it: How often do you hear the same pundit or politician say that (1) we need to reform Wall Street compensation so bankers can’t get rich taking gambles whose losses get picked up by taxpayers (”liberal”), and that (2) Social Security’s growth needs to be trimmed (”conservative”)? Or that (1) we need to scale back gold-plated public employee pensions (”conservative”) and (2) raise taxes in sensible ways to fix our fiscal woes (”liberal”)?

These ideas aren’t inconsistent or incoherent — they’re pragmatic responses to the challenges we face. But our entire system conspires to ban the expression of a practical synthesis of the best of “liberal,” “conservative” and more eclectic views.

That’s why what Steny Hoyer said on Tuesday was considered by most of us who really do care about fiscal responsibility (and not just low taxes or just more spending) as very brave.  (And today the Washington Post editorial board tips their hat to him.)  Hoyer did get more specific about a list of sensible, bipartisan policy ideas that are clearly broadly tough choices–not just the “freebies” that sound like they would cut only “wasteful” spending or raise taxes only on evil corporations or the super rich.  And for a long time now (pretty much since we said “easy come, easy go” with the Clinton-era surpluses), talking plainly and sensibly about what it takes to achieve fiscal sustainability has become more and more a radical thing to do.

…And yes, I have heard that Peter Orszag is leaving OMB and the Obama Administration, and, yes, I’m hopeful that once he’s out of the Administration, he can get back to talking more “radically,” too.  (Perhaps his version of David Stockman’s “Triumph of Politics” is coming?)

Steny Hoyer on How to Be Reasonable About Fiscal Policy

June 22nd, 2010 . by economistmom

Back in Black: A Plan to Defeat the Deficit

House Majority Leader Steny Hoyer gave an excellent speech this morning at an event hosted by “Third Way.” (**UPDATE 11:30 pm: here is a link to a C-SPAN video that covers Hoyer’s speech and Q and A and the panelist opening remarks, but not the panelist Q and A.)  I thought he well-modeled that “third way” behavior by pointing out how the typically polarized positions on three major fiscal policy debates:  (i) stimulus vs. deficit reduction, (ii) (reducing the deficit via) tax increases vs. spending cuts, and (iii) being for extending the Bush tax cuts or against them–the notion that it has to be all one and not any of the other–is neither productive nor reasonable.  I thought he showed great courage and determination to make these statements and moves toward that middle path before leadership from the other side of the aisle shows any such willingness.

On the false claims by some politicians that one has to be either for attending to the short-term economy or for reducing the deficit (that we can’t “both walk and chew gum”), Hoyer remarked (emphasis added):

“It’s an excellent measure of someone’s seriousness to see whether they point their finger at so-called ‘out-of-control spending’ in this Congress, or whether they face the real danger to our future—the structural deficit. Overreacting to short-term deficits, while we’re still feeling the effects of recession, will send our economy back into a tailspin, put even more Americans out of work, and increase the very deficits we are trying to reduce. It’s the mistake President Roosevelt made in 1937, when he prematurely cut off recovery from the Depression—and it’s a mistake we must not repeat.
“For the sake of the millions of Americans who are still struggling, job creation must still be Congress’s top priority. But we’ve seen resistance to more justifiable efforts to create jobs with unpaid spending, and even to keep teachers at work educating our children, because of concerns about the deficit. And many Members of Congress agree with the Washington Post, when it argued in an editorial this month, ‘We’d find the stimulus-now, spinach-later argument more credible if its advocates gave some hint of where the long-term belt-tightening will take place.’ I agree. An excellent way to build support for the job creation we still need is making credible and detailed plans to tackle the long-term debt. So now is the time to start talking about a solution to the structural deficit—one we’ll be ready to put in place once the economy is fully recovered.
And on the issue of how to reduce deficits over the longer term and whether it is sensible or desirable to do it entirely with spending cuts or entirely with tax increases, Hoyer avoided taking the “opposite corner” from the one Republican plan for fiscal sustainability, explaining it this way (emphasis added):
“It isn’t possible to debate and pass a realistic, long-term budget until we’ve considered the bipartisan commission’s deficit-reduction plan, which is expected in December. I believe that Congress must take up and vote on that plan.
“To share sacrifices fairly, and to be politically viable, the commission’s proposal can only have one form: an agreement that cuts spending and raises revenue when the economy recovers.
“On the spending side, we could and should consider a higher retirement age, or one pegged to lifespan; more progressive Social Security and Medicare benefits; and a stronger safety net for the Americans who need it most. We also need the in-depth scrutiny of defense spending that Secretary Gates has demanded…I wish more of us in public life were as honest about hard budget choices as Secretary Gates. I’m also glad that Chairman Ike Skelton is directing the House Armed Services Committee to scrutinize the defense budget for cost savings…
“Raising revenue is part of the deficit solution, too. When President Clinton did so in 1993, he faced predictions of disaster—but he helped to unleash historic prosperity and budget surpluses for our country, and he did it without raising spending. So I’m glad that President Obama has made clear that everything, revenues included, should be on the commission’s table. I’m also glad that some of my colleagues in Congress are talking seriously about simplifying the tax code to raise revenue more fairly and efficiently and increase economic productivity by cutting time lost on tax preparation.
Why am I so sure that a spending-and-revenue compromise is the only plan that has a chance of succeeding? Because a spending-only plan has been on the table for more than two years. It’s Republican Congressman Paul Ryan’s Roadmap, and it was originally introduced in May of 2008. Even though I strongly oppose its severe Medicare cuts for seniors, I’ve praised Congressman Ryan for being the only one in his party to offer a solution equal to the problem. But what have we heard from his own party? Crickets. For two years. The Republican Party has run away from Paul Ryan’s plan, even though you’d expect it to rush to embrace a proposal based on spending cuts. As the Cato Institute’s Michael Tanner observed last month, ‘The Ryan Roadmap is a test, and right now the Republican Party is failing it.’
“Nevertheless, I’m still fairly hopeful that we can reach a balanced solution—in large part, because we have a history of success to draw from. In the 1980s, President Reagan and Speaker Tip O’Neill agreed on Social Security reform, and Reagan and Chairman Dan Rostenkowski agreed on tax reform. In 1990, the first President Bush agreed with congressional Democrats on a compromise to raise the top marginal tax rate and cut spending. Three years later, President Clinton enacted a similar spending-and-revenue agreement, even though Republicans unanimously said ‘no.’ What happened? Spending fell from 22% of GDP to 18%, revenues rose from 17% to 21%, and the Reagan-Bush deficits were wiped out. President Clinton and Speaker Gingrich also took our country in a more fiscally responsible direction by agreeing on the reauthorization of PAYGO. So let’s not pretend that what I’m proposing can’t be done—it was done, within the lifetime of every Member of Congress.
And finally, on the issue of what to do about the Bush (or “Bush/Obama”) tax cuts, I thought Hoyer made the strongest statement yet from any Democratic leader (in the Administration or Congress) on the need to take a “middle path”–a path neither proposed by President Obama nor even forced by the PAYGO rules as passed by the Democratic Congress and signed by President Obama (emphasis added):

“It is essential that we move from temporary extensions to permanent solutions, but we cannot consider those solutions without taking into account our long-term fiscal challenges. Permanent solutions for the estate tax, AMT, and the ‘doc fix’ should be developed in the context of the broader budget agreement that I’ll discuss shortly. And as the House and Senate debate what to do with the expiring Bush tax cuts in the coming weeks, we need to have a serious discussion about their implications for our fiscal outlook, including whether we can afford to permanently extend them before we have a real plan for long-term deficit reduction. At a minimum, the House will not extend the tax cuts benefitting taxpayers of incomes above $250,000, despite some suggestions in the Senate that they be extended along with all other Bush tax cuts. As CBO Director Doug Elmendorf recently warned, extending all of the Bush tax cuts without making any other changes in policy would put us on a path toward a publicly-held debt equal to 90% of GDP by the end of the decade, ‘territory that is unfamiliar to us and to most developed countries in recent years.’

And to that false choice (being either for the Bush tax cuts or against them), I would add the false choice that we could either only: (i) temporarily extend all of the Bush tax cuts, or (ii) permanently extend just the “middle-class” tax cuts that President Obama has proposed (permanently) extending.  I happen to believe (and I have said this before) it would be possible and desirable to push for only temporary extension of only the “middle-class” portion of the Bush tax cuts–which is still most of the tax cuts (over $2 trillion out of $2.6 trillion worth over ten years) to most of the people (actually benefitting all of the people who benefit from the current Bush tax cuts, even those taxpayers who reach the upper brackets but also pass through all the lower ones), and would provide most of the short-term stimulative benefit we could hope to get out of extending the Bush tax cuts (because it would provide immediate tax cuts that would have more “bang per buck” in being less concentrated on the rich).

And if we only temporarily extended only the middle-class portions of the tax cuts, that would be tax policy that recognizes and reconciles the need for continued short-term stimulus with the need for longer-term deficit reduction.  As I commented to CQ’s Richard Rubin, besides this “third way” or “middle path” approach to the Bush/Obama tax cuts making economic sense, I think this is not such a difficult political position for a policymaker to place oneself:

In addition to the concerns from moderates, more liberal Democrats who opposed the tax cuts in 2001 and 2003 as being fiscally irresponsible during a time of budget surpluses will have a hard time explaining why extending them amid budget deficits makes sense. The answer, said Rogers of the Concord Coalition, may be a temporary extension of the cuts that avoids raising taxes during an economic downturn and does not carry such a big price tag.

“An easier position for them to defend is maybe insisting that any extension of the Bush tax cuts be only temporary, but not permanent,” she said. “It’s not like they’re opposing the tax cuts. They’re opposing the fiscally irresponsible part of the tax cuts.”

The Washington Post’s Lori Montgomery reported on the Hoyer speech in advance of the speech.  Incidentally, I think she pretty substantially understates the cost of extending the “middle-class” portions of the Bush tax cuts when she cites a figure of “at least $1.4 trillion” out of an “about $3 trillion” cost of the full complement–suggesting opting for the Obama-desired portions only would save about half the cost.  The Congressional Budget Office’s analysis of the President’s budget published in March suggests the Obama-proposed permanent extensions of the “middle-class” portions of the Bush (2001 and 2003) tax cuts would cost $2.154 trillion over ten years, without interest costs, while the CBO’s earlier (January) budget outlook report showed the permanent extension of the entirety of the tax cuts would cost $2.567 trillion.  Even President Obama’s own budget acknowledges the upper-income portions of the Bush tax cuts that the Obama Administration is proposing to let expire would only save (relative to the full policy-extended baseline) $678 billion out of $3.097 trillion (which is where Lori must have gotten her “about $3 trillion” figure, but I’m still not sure where her $1.4 trillion figure comes from).

More later on this morning’s Hoyer speech and the excellent panel that followed and reemphasized some of these middle-path, reasonable strategies.

A Tale of Two Bosses

June 21st, 2010 . by economistmom

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I have talked about my days on the Hill here before, and I’ve referred to the members of Congress who headed the Democratic sides of the committees I worked for as my “bosses.”  But my real bosses were the chiefs of staff for those committees.

I opened up today’s Washington Post to find a story by Mary Ann Akers about one of those bosses, Wendell Primus (pictured above, from the story) who once was the Democratic staff director of the Joint Economic Committee while I was on the staff.  He has been Speaker Pelosi’s economic policy advisor ever since she’s been Speaker.  This characterization of Wendell–one of the most principled and committed persons I know–rings true with how I know him to be:

With his gray hair, reading glasses and expansive lap — perfect for story time — Primus, the top policy adviser to House Speaker Nancy Pelosi (D-Calif.), is as tenacious and cunning under the surface as he is grandfatherly and polite.

And today’s story on Wendell reminded me that last week Mary Ann’s story was on Janice Mays, who was my boss at the House Ways and Means Committee, where she’s been for 35 years!  My favorite personal story about Janice was when she offered me the job as Chief Economist and made me feel so wanted because of her warmth and charm, especially in how she kept referring to me as “Sweetie” when she would call me on the phone.  It was only after I started working at Ways and Means that I discovered that Janice called everyone “Sweetie”–including the often-hostile members of the opposing party!   (I’m convinced it’s a big part of why Janice has been so successful as Chief of Staff; that southern charm is really disarming as well as engaging.)  So I knew Mary Ann had gotten the whole scoop when she wrote this:

Unless you happened to see the framed photos of Mays with lawmakers and Presidents Carter, Reagan, H.W. Bush and Clinton — even Cuba’s Fidel Castro — you’d never know from a casual chat with her what power she wields. Mays’s Southern-accented greetings end in “sweetie,” and she’s got an infectious laugh and an understated appearance.

And Janice doesn’t like having her picture taken for stories about her (and would not take one for the Post story), so I won’t get her upset by finding and posting one of her here–even though she’d probably just say to me “Sweetie, I wish you wouldn’t have done that.”  ;)

Belated “Book Report” on Lessons from the Naval War College

June 18th, 2010 . by economistmom

A month ago I participated in a conference of mostly military officials and national security experts–I was probably the “oddest bird” there–at the Naval War College in Newport, RI.  The title and focus of the conference was “Economics and Security: Resourcing National Priorities.”  I had planned on writing about some of the things I learned much sooner than this, but then the debates over economic stimulus versus deficit reduction got pretty hot and heavy, so I was otherwise preoccupied.

And then a funny thing happened.  I began to recognize there were quite a few parallels between the other fiscal policy issues I always write about, and this particular angle that I really have never written about:  the role of defense and national security spending in achieving fiscal sustainability.

First, I think most Americans (regardless of what they think of our wars and military activity more generally) assume that cuts in the defense/national security budget would weaken our defense capabilities–that a tradeoff exists between deficit reduction and a strong defense.  But what surprised me the most at the Naval War College conference was my learning that most of these national security officials and experts, who all advocate for a strong defense, believed that if the defense budget were tightened (and all seemed to recognize that given our fiscal situation, such tightening is inevitable), the quality of defense spending would actually improve.  There was a clear message–from even those in uniform(!)at this conference–that more binding budget constraints would force national security policymakers to better prioritize.  Instead of just trying everything, they would need to put scarce dollars where they would have the most benefit.  They would find it worthwhile to eliminate wasteful spending, and improved strategic planning would become more a necessity rather than just an option.  (I realize it is troubling that the human lives at stake are not a good enough reason for better strategic planning–but even there, financial incentives at the margin matter.)

Thus, there is not a tradeoff between adequately financing the military and reducing the budget deficit.  You don’t have to be either in favor of a strong defense OR in favor of fiscal responsibility–there is no “bright line” that separates those camps.  Just like there is no “bright line” between those who are concerned about adequately stimulating the recovering-but-still-weak economy, and those who want to improve the longer-term fiscal outlook.  In fact, in both cases, the seemingly opposing goals turn out to be more symbiotic (and even synergistic) than opposing.  I’ve made the point many times regarding stimulus versus deficit reduction, but here’s a new video by the Brookings Institution’s Bill Gale that explains this very clearly.  And on defense spending, one of the experts I met at the Naval War College conference, Carl Conetta of the Project on Defense Alternatives, served on the “Sustainable Defense Task Force” which recently issued this report–which emphasizes “a set of criteria to identify savings that could be achieved without compromising the essential security of the United States.”  Coincidentally, the report opens with these two quotes from two other experts I met at the conference, the Hoover Institution’s Kori Schake and the Center for American Progress’ Michael Ettlinger:

“Conservatives need to hearken back to our Eisenhower heritage, and develop a defense leadership that understands military power is fundamentally premised on the solvency of the American government and the vibrancy of the U.S. economy.”  –Kori Schake, Hoover Institution Fellow and former McCain-Palin Foreign Policy Advisor

“A country that becomes economically weakened because it has shortchanged necessary domestic investments and carries excessive levels of debt will also eventually be a weaker country across the board.  An overall defense strategy that is fiscally unsustainable will fail every bit as much as a strategy that shortchanges the military.” –John Podesta and Michael Ettlinger, Center for American Progress

The “sustainable defense” report presents a series of options which together would save nearly a trillion dollars from the defense budget over the next ten years.  That is a lot of money, why, getting close to half the cost of the deficit-financed extensions of the Bush tax cuts that President Obama has proposed in his budget.  (I wink a little here.)

And speaking of the Bush tax cuts proposed by President Obama (a very old topic here)… At the Naval War College conference, Carl Conetta educated me on the fact that on defense spending as well, President Obama’s policy stance looks very much like that of the (immediately prior) Bush Administration.  (See this report of Carl’s and note Figure 3 on page 3.)

Finally, like their fear on speaking up about wildly-costly but politically-popular tax cuts (and being accused of being for “big government” and the “largest tax increase in American history”), politicians are reluctant to touch defense spending as something that needs to be trimmed for the sake of fiscal responsibility, for fear they will be accused of being “soft” on national security.  So like the deficit spending we do on tax expenditures that are not successful in achieving their ostensible purposes, the deficit spending we do on wasteful or redundant defense programs tends to get a free pass because of the politics.  In theory, the fiscal policy and national security experts say there’s a lot of room to spend less money more wisely–and not just spend less money but actually strengthen the economy and strengthen our national security.  In practice, without more binding budget constraints or demands from the American public for policymakers to impose such constraints on themselves, there’s no incentive to actually get it done.

On Trimming the “Extenders” Bill Without Actually Trimming the Extenders

June 17th, 2010 . by economistmom

freaky-hair-extensions

The Senate is having a lot of trouble trimming the cost of a bill intended to continue expiring tax cuts–the so-called “extenders” bill.  Trouble is, they’re not willing to actually trim the actual “extenders.”  In fact, the “extenders” are such legislatively-sacred cows that they are used as a vehicle for other policies that are (oddly) not considered as sacred–like extension of unemployment benefits or even extension of the so-called “doc fix.”  What the Senate is tinkering with right now are these hitch-a-ride attachments to the extenders bill and the various revenue offsets designed especially to help pay for the extenders.  (Note that unemployment benefits would qualify as “emergency spending” and hence are allowed to increase the deficit, and the “doc fix” is explicitly exempted from deficit-neutral/”PAYGO” requirements under the now-statutory PAYGO law.)

So the House and Senate have both complained that extending the extenders is “too expensive.”  But both the House and the Senate have yet to contemplate this:  if we’re not willing to put up with the offsets required to pay for these tax extenders, then maybe this tells us these tax extenders are not worth their cost!

My boss Bob Bixby remarked on this oddity this week on Concord’s Tabulation blog (emphasis added):

Beyond economic efficiency and political cover there are more fundamental questions. Do the extenders really accomplish their goals and are those goals worth the cost? No one really knows because no one ever asks.

The only question that comes up with regard to the extenders is how they can be offset to comply with the pay-as-you-go law. That’s an important consideration — it is certainly better to have paid for waste than unpaid for waste — but it ignores the question of whether the extenders are wasteful to begin with.

As Congress is forced to dig deeper into its bag of tricks to pay for the extenders, this exercise is prompting even some in the business community to ask whether the extenders are really worth the trouble. For example, the current bills use almost $60 billion of permanent tax increases to cover just a one-year extension of the extenders. It will require even deeper offsets in the years ahead.

Before going through this painful exercise, it would be best to look more closely at the extenders. While most of them have a laudable purpose, such as encouraging investments in new technologies or in economically distressed areas, Congress has not taken the time to examine whether they have been successful enough to justify raising taxes elsewhere or cutting other spending programs.

I think we’re now seeing some “revealed preference” in Congress on this issue.  Perhaps these tax extenders aren’t all “good enough” to justify the offsets Congress clearly isn’t willing to make.

The trouble is, not being willing to pay for things hasn’t stopped Congress from continuing to spend on them, and like other “entitlements” that seem impossible to “trim” once we’ve been promised them, these “tax expenditures” are just like a whole bunch of mini entitlement programs that grow monstrous and uncontrollable over time.  (Like the monstrous hair extensions from the horror movie, Exte, shown above… in case you were wondering.  Talk about “unruly” hair…)

[UPDATE 10:30 pm: By the way, we re-live this "trouble with tax extenders" every year, and nothing ever changes--as my post from two years ago indicates.  If you've never read my story of the House Ways and Means member who years ago very plainly explained to me why these extenders must continually be extended (instead of being made permanent or allowed to expire), check it out.]

“We Cannot Consign Our Children To This Future”

June 15th, 2010 . by economistmom

Tonight the President acknowledged that the BP disaster is more than a lesson for BP and the oil industry. It’s a lesson for all of us that we’ve known about for a long time but found it more comfortable to ignore. But even the BP tragedy/debacle isn’t enough to get even the President to really “tell it like it is.” He speaks of the need for climate change policy this way (emphasis added):

So one of the lessons we’ve learned from this spill is that we need better regulations, better safety standards, and better enforcement when it comes to offshore drilling. But a larger lesson is that, no matter how much we improve our regulation of the industry, drilling for oil these days entails greater risk.

After all, oil is a finite resource. We consume more than 20 percent of the world’s oil, but have less than 2 percent of the world’s oil reserves. And that’s part of the reason oil companies are drilling a mile beneath the surface of the ocean: because we’re running out of places to drill on land and in shallow water.

For decades, we have known the days of cheap and easily accessible oil were numbered. For decades, we’ve talked and talked about the need to end America’s century-long addiction to fossil fuels. And for decades, we have failed to act with the sense of urgency that this challenge requires.

Time and again, the path forward has been blocked, not only by oil industry lobbyists, but also by a lack of political courage and candor.

The consequences of our inaction are now in plain sight. Countries like China are investing in clean-energy jobs and industries that should be right here in America. Each day, we send nearly $1 billion of our wealth to foreign countries for their oil. And today, as we look to the Gulf, we see an entire way of life being threatened by a menacing cloud of black crude.

We cannot consign our children to this future. The tragedy unfolding on our coast is the most painful and powerful reminder yet that the time to embrace a clean-energy future is now. Now is the moment for this generation to embark on a national mission to unleash America’s innovation and seize control of our own destiny.

…and yet he couldn’t seem to bring himself to talk about the kind of climate change policy that would not only avoid consigning our children to this awful environmental future, but would also avoid subjecting our children to an awful fiscal future.  The policies President Obama mentioned sounded like vague “carrot” approaches–suggesting we ought to somehow encourage clean energy technologies (i.e., more subsidies!  more spending!)…

This is not some distant vision for America. The transition away from fossil fuels is going to take some time. But over the last year- and-a-half, we’ve already taken unprecedented action to jump-start the clean-energy industry.

As we speak, old factories are reopening to produce wind turbines, people are going back to work installing energy-efficient windows and small businesses are making solar panels. Consumers are buying more efficient cars and trucks, and families are making their homes more energy-efficient. Scientists and researchers are discovering clean-energy technologies that someday will lead to entire new industries.

Each of us has a part to play in a new future that will benefit all of us. As we recover from this recession, the transition to clean energy has the potential to grow our economy and create millions of jobs, but only if we accelerate that transition, only if we seize the moment, and only if we rally together and act as one nation: workers and entrepreneurs, scientists and citizens, the public and private sectors.

You know, when I was a candidate for this office, I laid out a set of principles that would move our country towards energy independence. Last year, the House of Representatives acted on these principles by passing a strong and comprehensive energy and climate bill, a bill that finally makes clean energy the profitable kind of energy for America’s businesses…

…except for this only hint that maybe there would be taxes involved (shhhh!..don’t say the dreaded “T” word!–emphasis added):

Now, there are costs associated with this transition, and there are some who believe that we can’t afford those costs right now. I say we can’t afford not to change how we produce and use energy, because the long-term costs to our economy, our national security and our environment are far greater.

So I’m happy to look at other ideas and approaches from either party, as long as they seriously tackle our addiction to fossil fuels. Some have suggested raising efficiency standards in our buildings, like we did in our cars and trucks. Some believe we should set standards to ensure that more of our electricity comes from wind and solar power. Others wonder why the energy industry only spends a fraction of what the high-tech industry does on research and development, and want to rapidly boost our investments in such research and development.

All of these approaches have merit and deserve a fair hearing in the months ahead. But the one approach I will not accept is inaction. The one answer I will not settle for is the idea that this challenge is somehow too big and too difficult to meet.

…yet tonight he very carefully avoided explicitly acknowledging that the best way to encourage such clean technologies would be to (shhhh!–guess what?) make dirty energy less profitable to the industry and more expensive to the consumer–i.e., to take a  more “stick”-like approach.

Like the way he talks about getting back to fiscal sustainability, the President says the one answer he will not settle for is that the challenge is “too difficult.”  But like the way the President doesn’t like to spell out exactly what sorts of policies are needed to get us back to fiscal sustainability (entitlement cuts and tax increases), he also did not utter the phrase “carbon tax” tonight–precisely the kind of policy that could save our kids from both an unsustainable environment and an unsustainable debt.

Theoretically, none of these huge policy challenges are actually that hard to solve.  In practice, the politics are just so screwed up that these huge problems (which seem to get huger by the day) seem impossible to solve.

Ezra on “Worst of Both Worlds” (Neither Walking Nor Chewing Gum)

June 14th, 2010 . by economistmom

On his Washington Post blog today, Ezra Klein basically says the same thing I did a few days ago.  The deficit hawks and stimulus lovers are so busy arguing that the other party is completely insane that they’re unable to recognize that they actually are working for the same cause (the economy, stupid)–and should be instead coming together symbiotically:

It seems we’re getting the worst of both worlds: The argument over deficits is keeping us from doing what we need to do to help the economy grow right now, but it isn’t going to be enough to get us to do what we need to do to help the economy grow later, either. And the outcome of that could be ugly: If growth is anemic when the eventual fiscal crisis does come, that’s going to make a response much, much harder.

I think policymakers need to be reminded that in keeping with the desirable “symbiotic” relationship, not all deficit-financed policies for short-term stimulus, and not all deficit-reducing policies for longer-term fiscal sustainability, are created equal.  Deficit financing a policy doesn’t automatically make that policy an effective stimulus, especially if it’s really a way of funding a longer-term entitlement or more permanent tax cut “on the cheap” (…not).  (Do you remember the “three Ts” of effective stimulus?  Timely, (well-)Targeted, and Temporary?…)  And refusing to pass extensions of unemployment compensation or other low-income support programs in the name of “fiscal responsibility” is just an excuse to shun the short-term stimulus mission altogether, because as Ezra explains, these are not the kind of policies we have to worry about as the big contributors to the long-term fiscal gap.  Unemployment compensation subsides when unemployment subsides.  But a “doc fix” and relief from the alternative minimum tax are (at least seemingly) forever.

Are You a Brilliant Budgeteer or a Deficit Dunce?

June 11th, 2010 . by economistmom

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CNN-Money’s Jeanne Sahadi developed this fun little quiz that will test your knowledge about the federal budget while perhaps teaching you something along the way.  I think it’s a great way to get people to open up a CBO report!  ;)

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