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CBO: A Sustained Loss in Revenue That’s Largely Spending In Disguise

January 26th, 2011 . by economistmom

Today the Congressional Budget Office released their budget and economic outlook report.  Since last August, the outlook for the ten-year budget deficit has deteriorated by $1.4 trillion (see Table A-1 on pages 106-7).  Note that more than 100% of the deterioration is due to revenue losses; projected federal revenues over the (fiscal years) 2011-20 period declined by $1.9 trillion–a net $713 billion due to recent legislation (the lame-duck deficit-financed tax cuts), but a larger $958 billion due to negative revisions to the economic forecast and the interaction of those economic changes with our less-than-adequately-robust-or-resilient income tax base.

And as the CBO highlights in their revenue chapter (see the box on pages 96-97 of the report), reductions in revenue don’t usually correspond to declines in the size of government, because most “tax cuts” are of the “tax expenditure” variety that are more appropriately characterized as spending programs in disguise.  As CBO explains it:

["Tax expenditures"] are similar in some ways to government spending. Like spending programs, tax expenditures provide financial assistance to particular activities, entities, or groups of people. They are more similar to entitlement programs than to discretionary spending because they are not subject to annual appropriations and any person or entity that meets the requirements can receive the benefits.

Reducing the Debt Without Raising Taxes and Without Cutting Benefits

January 26th, 2011 . by economistmom

I think the President’s speech was inspired, but not specific enough to be inspiring.  I noticed he managed to talk about fiscal responsibility and the need to follow through on the recommendations of his fiscal commission, without making any of the necessary hard choices actually sound that hard.  Nowhere will you find the phrase “raise revenue” (let alone the dirtier word “taxes”) or “cut benefits” (let alone “entitlements”).

CNN’s Jeanne Sahadi wrote this piece that emphasizes the same major complaint: no specifics.  I wrote the remarks below for Jeanne last night, part of an online panel of experts who gave their quick reactions to the speech.  (**UPDATE 12:30 pm: here’s the link to those reactions.)

For most of his State of the Union speech, President Obama made promises for additional federal spending and tax cuts, motivated by the ongoing needs of our still-struggling economy. It was only toward the end of his speech that he reiterated his commitment to fiscal responsibility. He proposed a five-year freeze on non-security discretionary spending, which he says would save around $400 billion over the next ten years. But this amounts to a mere 6 percent reduction of projected deficits and a less than 1 percent reduction in total federal spending.

As the President’s own fiscal commission made clear, any real solution will have to involve cuts to defense and national security spending as well, and reforms to the largest mandatory spending programs, Social Security and Medicare. At the same time, recognizing that it will be nearly impossible (as well as undesirable) to cut benefits across the board in order to “flat line” entitlement spending, the President’s commission recognized that additional tax revenue–above the historical average and above current policy extended–will be needed. Everything in the federal budget needs to be put on the deficit-reduction table.

While the President acknowledged his commission’s message on the need for major reforms to these major programs, he avoided mentioning that these involve tough policy choices about whose benefits will be cut and whose taxes will be raised.

The President sounded committed on the general principle of fiscal responsibility but is still not courageous enough to spell out to the American people what exactly that will require. If he does not take the lead on that difficult conversation, and instead continues the easier practice of promising and following through on more deficit spending, there is very little hope that we will see the kinds of policy changes that are needed to put our nation back on an economically sustainable path.

Listen to Your Former CEA Chair, Mr. President

January 21st, 2011 . by economistmom

Some reporters have already started to ask me what I hope to hear in the State of the Union address President Obama will deliver next week.  I can’t really express my wishes any better than Christina Romer, the President’s former Council of Economic Advisers Chair, did in her New York Times column last weekend.  In particular (emphasis added):

Instead of knowing what is coming, I can write about what I hope the president will say. My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit.

I am not talking about two paragraphs lamenting the problem and vowing to fix it. I am looking for pages and pages of concrete proposals that the administration is ready to fight for. The recommendations of the bipartisan National Commission on Fiscal Responsibility and Reform that the president created are a very good place to start.

The need for such a bold plan is urgent — both politically and economically…

So what should the president say and do? First, he should make clear that the issue is spending and taxes over the coming decades, not spending in 2011. Republicans in Congress have pledged to cut nonmilitary, non-entitlement spending in 2011 by $100 billion (less if recent reports are correct). Such a step would do nothing to address the fundamental drivers of the budget problem, and would weaken the economy when we are only beginning to recover.

Instead, the president should outline major cuts in spending that would go into effect over the next few decades, and that he wants to sign into law in 2011.

Respected analysts across the ideological spectrum agree that rising health care spending is the biggest source of the frightening long-run deficit projections. That is why the president made cost control central to health reform legislation. He should vow not just to veto a repeal of the legislation, but to fight to strengthen its cost-containment mechanisms

The fiscal commission recommended that military spending — which has risen by more than 50 percent in real terms since 2001 — grow much more slowly in the future. It also proposed thoughtful ways to slow the growth of Social Security spending while protecting the disabled and the poor. And it recommended caps on nonmilitary, non-entitlement spending.

President Obama needs to explain that while these cuts will be painful, there is no way to solve our budget problem without shared sacrifice. At the same time, he should give a ringing endorsement of government investment in infrastructure, research and education, which increases productivity and thus improves both our standard of living and the budget situation over time. And, following the fiscal commission, he should ensure that spending cuts not fall on the disadvantaged.

Finally, the president has to be frank about the need for more tax revenue. Even with bold spending cuts, there will still be a large deficit. The only realistic way to close the gap is by raising revenue. Some of it can and should come from higher taxes on the rich. But because there are far more middle-class families than wealthy ones, much of the additional money will have to come from ordinary people. Since any agreement will have to be bipartisan, Congressional Republicans will have to come to terms with this fact as well.

AGAIN, the fiscal commission has made sensible proposals. It recommended broad tax reform that lowers marginal tax rates and cuts tax expenditures — deductions and exemptions for mortgage interest, employer-provided benefits, charitable giving, and so on. Such tax reform cannot be revenue-neutral — it needs to increase tax receipts. But it can make the system simpler, fairer and more efficient while doing so…

I’m hoping Christina Romer has some inside information on this and not just wishful thinking.  We’ll soon find out!

The Pay-for-Hardly-Anything-As-You-Go Rule

January 20th, 2011 . by economistmom

mary-tyler-moore-tossing-beret

In this week’s Washington Budget Report, which the Concord Coalition puts out weekly (sign up for it here!), Concord’s Cliff Isenberg explains how the bottom line on the official PAYGO scorecard for fiscal year 2010 bears little relationship to what actually happened to the federal deficit and debt (emphasis added):

An OMB report concludes that exemptions in the PAYGO law have been used for legislation adding hundreds of billions of dollars to the deficit. PAYGO generally requires legislation affecting direct spending or revenues to be offset, though last year’s law included costly exceptions for several revenue and spending priorities.

OMB’s official scorecard shows that legislation subject to PAYGO and enacted since last February would save $55.2 billion over 2010-2015 and $63.7 billion over 2010-2020. However, when adjustments for loopholes such as emergency designations and exemptions are taken into account, the same laws would increase the deficit by $899.4 billion over 2010-2015 and by $820.1 billion over 2010-2020.

Both parties are guilty of weakening PAYGO with loopholes, whether it is the new House rule excluding revenues or the exemptions in the PAYGO law signed by President Obama. OMB’s report is a timely reminder that these exemptions add to federal deficits that are already unsustainable. Congress should end the exemptions and return to a classic PAYGO rule that simply pays as you go.

CQ’s “Budget Tracker” newsletter on Monday elaborated on these exemptions, which don’t exactly sound like unusual cases but rather business as usual:

Such exclusions include legislation to prevent cuts to Medicare physician reimbursement rates, extend middle-class tax cuts and estate and gift tax rates, and continue alternative minimum tax “patches,” as well as any legislation designated as an “emergency” and some measures that would produce budget savings. A total of 10 enacted laws included policies exempted from PAYGO, with $545.1 billion in costs over 10 years being exempted because they had received an emergency designation. OMB says that one law alone accounted for a total of $894 billion in costs that were exempt from PAYGO: December’s tax cut-unemployment compromise (PL 111-312) which extended for two years all the Bush tax cuts (including those for the wealthy) and the estate tax at levels favored by Republicans, extended for one year unemployment benefits for the long-term unemployed and provided a one-year payroll tax reduction to all workers, and provided additional tax breaks for businesses. (All the other PAYGO exempted legislation produced a net of $10.2 billion in uncounted savings.)

An analogy that immediately popped into my (quirky) mind when I read this was that it’s like failing one’s French language exam but then lucking out because your teacher drops that test grade and instead gives you lots of extra credit for that very impressive book cover you made (to cover your French textbook) with magazine cut-out pictures of the Eiffel Tower, croissants, and French fries.  And somehow you end up with an (official) “A” for the course.

(Not a total exaggeration about what “counts” in middle and high school classes these days, by the way.)

(And tell me if you “get” the photo above and any possible connection to the content of this blog post.)

How Tax Cuts Can Grow, Not Shrink, Government

January 18th, 2011 . by economistmom

Here is one of my favorite presentations from the Tax Policy Center/Loyola Law School conference I participated in last Friday:  the Tax Policy Center’s Donald Marron and Eric Toder explaining how tax expenditures can reduce revenue but grow government at the same time.  They show how adding “spending-substitute tax expenditures” to the definition of government spending more than doubles the measured size of government (see charts #18 and 19).

If only Tea Partiers could grasp this, then they might realize the logical inconsistency between their desire for more tax cuts, a lower deficit, and smaller government.  And if conservatives who want smaller government begin to realize that raising more revenue by reducing tax expenditures (broadening the tax base) would actually shrink government, and at the same time liberals who want the rich to pay higher taxes begin to realize that reducing tax expenditures would actually raise revenues in a progressive manner, then I think we would have a recipe for bipartisan consensus on one of the smartest ways to reduce the deficit.

Hi, from 36,000 Feet–Again

January 13th, 2011 . by economistmom

I’m over Missouri now, about to fly into Kansas, on my way to Los Angeles for this Tax Policy Center-Loyola Law School conference on tax expenditures tomorrow.  (I’m flanked by daughters #2 and 3, flying on my favorite way to travel to the west coast:  Virgin America–which I’ve blogged from before, albeit a couple thousand feet lower.)

Here are my presentation slides I’ll be speaking from tomorrow.  I’ll report on the rest of the conference later this weekend.  My daughters and I will be taking a little detour to San Francisco, just for fun, before we head back home.

The Problem With Opposing a Debt Limit Increase Without Opposing the Policies That Breach the Debt Limit

January 13th, 2011 . by economistmom

Hmmm….. According to a Reuters/Ipsos poll released this week:

The U.S. public overwhelmingly opposes raising the country’s debt limit even though failure to do so could hurt America’s international standing and push up borrowing costs…

Some 71 percent of those surveyed oppose increasing the borrowing authority, the focus of a brewing political battle over federal spending. Only 18 percent support an increase.

Yet from the same poll (emphasis added):

Only 24 percent say the country can afford to cut back on education spending, a likely Republican target, and 21 percent support cuts to law enforcement.

With the Pentagon fighting wars in Afghanistan and Iraq, 51 percent supported cutbacks to military spending.

Less than half, 45 percent, support an expected Republican effort to pare environmental enforcement.

Some 53 percent support cutting the budgets of financial regulators like the Securities and Exchange Commission, in spite of the widespread consensus that a lax regulatory atmosphere contributed to the devastating financial crisis of 2007-2009.

And 47 percent support cutbacks to national parks, which were shuttered for several weeks during the budget battles of 1995 and 1996.

Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program.

Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection.

I wonder:  is that supporting cutting back on “tax collection”–as in administrative and enforcement costs–or cutting back on taxes collected (i.e., taxes, period)?…

The Concord Coalition has updated our issue brief on the debt limit, which explains that holding the line on the debt limit would not literally stop the policies that increase our debt; it would simply cause us to default on our (still increasing) debt:

Approval of a debt limit increase is necessary to maintain the full faith and credit of the United States government. Failure to approve an increase would not be an act of fiscal responsibility, unless it can be said that deadbeats are fiscally responsible because they refuse to pay their bills. It would result in the United States defaulting on the commitments it has already made, including Social Security, Medicare and veterans benefits, vendor payments, tax refunds, student loans and interest payments on outstanding debt.

The consequences for government finances, the economy and financial markets would be dire as investors would no longer be able to count on U.S. bonds being the “safest investment in the world.” Delaying action on an increase until the last possible moment, forcing Treasury to utilize extraordinary measures to avoid a default, is unnecessary and irresponsible.

Unlike budget enforcement mechanisms such as statutory spending caps or the pay-as-you-go (PAYGO) rules for entitlement expansions and tax cuts, the debt limit places no restrictions on specific tax and spending decisions. If deficits result from these policy decisions, or if the economy fails to grow as projected, the debt limit must be increased to prevent a default on the government’s obligations.

Moreover, no plausible set of policy options have been proposed, nor do they exist, for preventing a breach of the current limit.

In other words, instead of holding the line on the costs of government spending, choosing to not increase the debt limit would dramatically raise the cost of maintaining our ongoing commitments by turning “safe” Treasuries into “risky” ones that would command higher interest rates.

One Month’s Rent for One Night at the Vet Hospital

January 10th, 2011 . by economistmom

taco-at-hospital1-0108111

My dog, Taco, a (speculated) chihuahua-dachshund-miniature pinscher mix dog I adopted in the fall of 2009 (as an estimated 8-month-old pup), came violently ill late last week from something that was delicious to him but ended up effectively “poisoning” him.  (The circumstances under which he got himself into that situation were beyond my control and will not be elaborated on here.)  I rushed him to the emergency vet late Friday night after he had very uncharacteristically refused food for over a day and couldn’t even hold down any water.

The emergency facility I took him to was incredible.  State-of-the-art technology, the best of trained veterinarians–and even a coffee bar in the waiting room(!).  Taco stayed overnight hooked up on IVs to rehydrate and medicate him, and was subjected to a battery of tests to rule out more serious conditions.  I received regular, comprehensive updates over the phone and also by email.  By Saturday afternoon, I was able to visit him (that’s when the photo above was taken), and by Saturday night–a bit less than 24 hours after his admission–he was able to come home with me.

The bill was a real shocker for me.  Nearly exactly equivalent to one month’s rent (which in the DC area isn’t very cheap).  And I don’t carry “pet health insurance.”  Was it worth it?  Of course.

I’ve explained how the health care market when it comes to demand for the care of one’s loved ones does not exactly follow economic theory, where one is supposed to compare marginal benefits with marginal cost.  In the case of health care for our loved ones, we ask what is the marginal cost?  And then, can I come up with that money?  I suppose that implicitly, we are saying the marginal benefits to us are infinite or at least priceless.

And as long as there are rich enough people around who willingly pay for these health services–even pet health services–out of their own pockets, then reforming health care even in the most efficient ways will not necessarily reduce overall health care costs as much as we might hope.  Health care is not like any other market.  There will always be a ton of demand for health care even when the out-of-pocket prices aren’t held artificially low by subsidized health insurance.

Why Republicans Really Want to Repeal Health Reform

January 6th, 2011 . by economistmom

So, House Republicans have titled H.R. 2, their bill to repeal the health reform law passed last March, “The Repealing the Job-Killing Health Care Law Act.”  Except the health care reform bill wouldn’t likely kill jobs, according to this analysis by the Center on Budget and Policy Priorities.

Meanwhile, CBO has explained that just as they had scored the health reform law as reducing–not increasing–the deficit (which by the way would mean that it would eventually raise national saving, grow the economy, and create jobs), repealing the (nevertheless so-called “job-killing”) health reform law would actually increase the deficit.

So what are the real reasons why Republicans want to repeal health reform?  I have my guesses:

  1. They think most Americans dislike health reform. This is the companion to why policymakers were so quick to extend and deficit-finance the Bush tax cuts–not because there was any evidence that the Bush tax cuts were wonderful for the economy (oh, to the contrary), but because they believed that Americans (or more specifically those Americans who vote) loved the Bush tax cuts for whatever inexplicable reasons.
  2. They don’t want to expand publicly-funded health care. The health care reform act did in fact do more to expand health coverage than to directly reduce the costs of existing programs.  It does mean “bigger government”–or as CBO puts it, expands the “federal budgetary commitment to health care.”  But it did more than pay for that expanded coverage by the spending cuts and tax increases in the same law, which is why CBO scored it as reducing, not increasing, the deficit.  Which leads to…
  3. They didn’t actually want the kind of health reform that would reduce the deficit–not this way at least. As CBO’s latest analysis of this repeal bill explains (emphasis added):

PPACA and the Reconciliation Act also included a number of provisions to reduce federal outlays (primarily for Medicare) and to increase federal revenues (mostly by increasing the Hospital Insurance payroll tax and imposing fees on certain manufacturers and insurers); in March, CBO and JCT estimated that those provisions unrelated to insurance coverage would, on balance, reduce direct spending by about $500 billion and increase revenues by about $410 billion over the2012–2019 period.

What Republicans really oppose about the health reform law is the tax increases that do most of the deficit reduction in the law.  These aren’t just random tax increases, though.  These are the kind of tax increases (or reductions in health insurance tax expenditures) necessary to bring out-of-pocket health costs more in line with true economic costs, to reduce the excess demand for health care that drives up the market price of health care.  It’s not that Republicans oppose the idea of making health care markets more efficient.  It’s probably that they don’t like the idea of any kind of tax increase, and especially not the kind of tax increase that would be paid disproportionately by higher-income households, who they emphasize are the “engine of economic growth” in our economy–you know, the “job creators.”

So that’s how this bill to repeal the health reform law becomes characterized as a way to eliminate a “job-killing” law, and how the proposal is really perfectly consistent with the Republican supply-side ideology that says that tax increases, no matter of what variety, hurt the economy and reduce jobs, and deficits, if they come from tax cuts rather than spending increases, don’t matter.

What Has to Be on the Budget-Cuts Table? Everything.

January 5th, 2011 . by economistmom

Even defense spending, even tax expenditures.  I did this opening segment of Tuesday’s PBS Newshour broadcast, with my 12-year-old son Johnny watching me in the makeup room and from the “green room”–which made it all the more special.  One of my standard favorite lines I didn’t get to squeeze in about the politicians’ take on fiscal responsibility and reducing the deficit:  “It seems like a good idea…until you get right down to it”–i.e., it’s always easier in abstract theory than in specific practice.

As both Jim Horney (of the Center for Budget and Policy Priorities) and I emphasize in the interview, everything should be on the budget-cuts table, and in fact, many in Congress like to use that line.  But then you listen more carefully and you find Republicans taking revenue increases and defense/national security cuts off the table, and Democrats taking most other types of spending off the table (whether for short-term or longer-term reasons), and you soon realize that what’s really left on the “bipartisan deficit-reduction table”–at least within the current Congress–is really close to nothing.  And that’s a huge problem: the contrast between what non-politician budget experts from both the left and the right agree on, and what Congress can’t agree on.

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