In a couple words: “not good.” A Marketplace radio interview of me aired on Wednesday morning, whittled down from close to a half hour recording of my conversation with Steve Chiotakis. As a result, I probably sound like a simple naysayer–complaining about how politicians are loathe to talk in any detailed way about how they’d reduce the deficit, but not offering up any specific ideas myself. I notice I get that complaint a lot in the comments people leave, so over the next several months I’m going to make a conscious effort to feature more specific ideas for deficit reduction–whether my own (which I really have discussed before) or those of other experts. My sharing some of these specific policy ideas here will be a good companion to the Concord Coalition’s Fiscal Solutions Tour (which on Thursday is in New Hampshire). So stay tuned for ideas on how to not just raise taxes, by the way.
As my boss, Bob Bixby, notes, we’ve just started a new fiscal year (FY2011) last Friday, but we didn’t exactly get to “party like it’s 2010″ (when expensive policies are scheduled to expire). Seriously, a few years ago I had a lot of faith that we would have enacted some meaningful reforms by now, especially on the tax side given the “action forcing event” of the scheduled expiration of the Bush tax cuts. But “change” has been minimal on the fiscal policy front, even with changes in who’s in charge.
Bob came up with this great list of (fiscal) New Year’s Resolutions, Concord Coalition-style:
[I]t seems like a good time to make some New Year’s resolutions. Here are a few suggestions:
- First, the President’s bipartisan fiscal commission should resolve to overcome partisan differences and produce a plan for long-term deficit reduction.
- Second, the President should resolve to make deficit reduction the main focus of his Fiscal Year 2012 budget, allowing for a phase-in period as the economy recovers.
- Third, Congress should resolve to pass a budget resolution next year, something it failed to do this year. And that resolution should contain a realistic strategy for reducing the deficit, including discretionary spending cuts, phased-in entitlement reforms, revenue increases and an enforcement mechanism to back it up.
- Fourth, the media and the public should resolve to keep the pressure on politicians to produce solutions that add up. No more “fuzzy math” evasions should be tolerated on the campaign trail or in the halls of Congress.
- And finally, the public must resolve to accept that sacrifices will be required to ensure a more prosperous future. Don’t blame the politicians for failing to make responsible choices if they are only rewarded at the polls for making irresponsible promises.
If these resolutions are made and met, we might have more reason to cheer when the next fiscal new year comes around.
The paper I was invited to write for a spring conference (the William B. Ruger Chair Workshop on “Economics and Security: Resourcing National Priorities”) at the Naval War College has been published. (Right after attending the conference I had written only about what I learned about defense/national security spending.) The entire monograph can be found here, and my paper appears on pages 81-88. Some of my favorite parts (leaving aside my never-ending rants about the Bush/Obama tax cuts):
As parents, many of us baby boomers make “investing” in our kids a priority in our household budgets. We pay for our kids’ music and dance lessons, team sports, and after-school academic enrichment and health-promoting (fitness) programs. We make sure they go to the doctor and dentist regularly, and we even pay to give them perfectly straight teeth as a warm-up to paying for college. And we pay for tutoring and test-preparation classes and encourage them to do their best with their studies in the hopes that they will get into a good college that we can manage to pay for and will turn out to be a “good investment.” What makes all of our parental efforts worthwhile isn’t always measured in purely monetary terms, but all of us certainly hope that we help set our kids on a path to a high “quality of life.” And I think most of us hope that our kids’ lives will be of even higher quality than ours have been.
That is why any parent should be particularly concerned about the budget outlook: it directly undermines all of our personal efforts to provide for our kids and set them on that good path. We contradict ourselves if on the one hand we are saving for our kids’ college educations but on the other hand are clamoring for more deficit-financed tax cuts or benefits for ourselves.
I consider myself a “deficit hawk,” but I certainly don’t think the goal should be a perfectly balanced budget with a zero deficit in every year. Running a debt can be valuable, because it can allow us (whether as a society or as a family) to achieve a higher standard of living than what is possible if relying on current income alone, particularly when the borrowing makes possible investments that increase future income. But if we borrow too much and use it to buy things that do not increase our future income, we can get into an economically “unsustainable” situation where the burden of the debt we carry grows faster than our income—and we cannot keep up. (Examples from the family budget: borrowing for college is less worrisome if college boosts future income; borrowing to buy a home is not a problem if the interest rate will not “balloon” in the future and if the home’s value is expected to rise; borrowing for a flat-panel TV because you don’t have a job right now to pay for it . . . not so smart!)
Advocating for “fiscally responsible” government is not the same thing as arguing for a smaller government. Often people who say they want a smaller government really don’t want a smaller government; they just want lower taxes. The “right” size of government from a fiscally responsible perspective is that which we are willing to pay for in taxes. And the “right” level of taxes is that which is adequate to cover the cost of the government programs we deem worthwhile.
Americans have lost sight of this connection between the government we desire and the taxes we are willing to pay, because we have become too accustomed to persistent budget deficits as the norm, and too often our political leaders mislead us into thinking that there are no budget constraints and that deficit financing is “free.”
Those who argue for lower taxes often claim that the historical evidence shows that taxes are not the problem, spending is, because the level of federal taxes as a share of GDP has been around 18 percent of GDP over the past forty years and is projected to remain at or above that level under either current law or even current policy extended. But maintaining a level of revenues consistent with the past proves nothing about their adequacy for the future.
Certainly we must do all we can to control the growth in government spending, however, particularly where higher spending does not translate into higher-quality goods and services. On health care reform, we must learn from the demonstration projects and improve the flow of information in the health care market so that wiser public and private decisions can be made and wasteful spending eliminated. But the longer-term challenge will not be solved by cutting only the spending that is genuinely or even sounds like “waste, fraud, and abuse.” Tough choices on what kind of health care the public sector can subsidize and for whom (in other words, decisions about how to “ration” publicly provided health care) will have to be made. Because those choices are tough both economically and politically and will likely take a long time to both be implemented and to make a difference, health care and entitlement reform cannot be our only strategies to close the fiscal gap. Tax policy has to be a big part of the solution, too…
And my conclusion:
Conclusion: Moving from “Budget Scolds” to “Fiscal Inspirers”
As an economist and a mom, I believe that getting our nation back on a fiscally sustainable path is one of the most important ways we can ensure a bright future for our kids. To encourage this, fiscal policy experts need to do more than present the numbers and charts that warn of a scary but hypothetical future for the U.S. economy as a whole. We need to bring the issue down to the level of the family in order to make it immediately relevant to people right now. We need to remind parents that as they are working hard every day to provide for their kids, they need to demand that their politicians do the same for all our kids. Public education and engagement are crucial to not just sound an alarm but create a movement to promote fiscal responsibility as a duty to our kids and grandkids and make the “crisis” salient now. Instead of allowing our leaders to perpetuate the irrational notion that everything will be fine without having to make any tough choices, we need to tap into the inherit optimism of the American people to prove that what Paul Tsongas said (as he started the Concord Coalition in the early 1990s) was and still is right—that “we are better than what we are being asked to be by our leaders.”
OK, we’re done waking people up to the problem of the unsustainable fiscal outlook; it’s time to get down and dirty now into the business of talking about the not-so-easy solutions. And in a campaign season, no less!
Today the Concord Coalition and the Peter G. Peterson Foundation, with the help of some of our fiscal policy friends who represent diverse political perspectives, embarked on the sequel to the “Fiscal Wake-Up Tour”–which we’re calling the “Fiscal Solutions Tour.” We had a “kick off” of sorts today at the National Press Club (link to Concord summary and video here).
You’ll be hearing more about the Fiscal Solutions Tour over the course of the next few months as we make several stops all over the country. Talk about raining on the politicians’ (campaign) parades!
(Graphic above from Washington Post online: Should Congress extend the Bush tax cuts?)
It’s a big “rag on the Bush tax cuts” week in the Washington Post–I think because this is one of the biggest looming issues Congress and the Administration will be coming back to after August “recess.”
It began with Ruth Marcus’ column on Wednesday, where she wrote:
…Which takes us back to the matter of whether it would be risky to let any of the Bush tax cuts expire. As a practical matter, Democrats and Republicans agree that the cuts should remain in place, at least temporarily, for families making less than $250,000 a year. That’s a debatable point. Former Federal Reserve Board chairman Alan Greenspan, whose blessing was responsible for propelling the tax cuts forward in the first place, said recently that Congress should let them lapse.
The real disagreement is over extending the high-end tax cuts, and on this even some supposedly fiscally responsible Democrats — I’m talking to you, Kent Conrad — have gone wobbly. The no-new-taxes-now crowd cautions against raising taxes in a recession — a fair point, except that there are more efficient ways to spur the economy than giving more money to those least likely to spend it. Alternatively, they cite — and inflate — the supposed impact on small business of raising the upper-end rates.
This would be more convincing if the Republican line were something other than “no new taxes, ever.” The economic and fiscal circumstances may change, but the prescription remains the same. And the patient is too ill to tolerate another dose of this quack medicine.
And in the Sunday paper (already available online as of Friday), the Bush tax cuts are the focus of the “5 Myths” series as well as “Topic A.” Bill Gale of the Brookings Institution writes about “5 myths about the Bush tax cuts”. My favorite myths of the five are #1 (on the tax cuts as “stimulus”) and #5 (on the effect of the tax cuts on the longer-term fiscal outlook)–because Bill argues there’s not much to “love” in either case:
1. Extending the tax cuts would be a good way to stimulate the economy.
As a stimulus measure, a one- or two-year extension has one thing going for it — it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can’t just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.
Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don’t spend as much of their income as lower earners. In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck…The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation…
5. Continuing the tax cuts won’t doom the long-term fiscal picture; entitlements are the real problem.
One theory holds that the country’s long-term budget shortfall is “just” an entitlements problem, the result of rising costs associated with growing Social Security rolls and increased health-care spending (via Medicare and Medicaid). Republicans like this idea because it plays down tax increases as a potential solution. Democrats like it because it makes the recent health-care package seem like even more of a triumph.
But it just isn’t true. The deficits we face over the next decade reflect a fundamental imbalance between spending and revenue, one that goes beyond entitlements. Based on projections by the CBO, Alan Auerbach of the University of California at Berkeley and myself, among others, even if the economy returns to full employment by 2014 and stays there for the rest of the decade, the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020. That’s already the highest rate since just after World War II — and Medicare, Medicaid and Social Security aren’t expected to hit their steepest spending increases until after 2020.
According to these same projections, the yearly deficit would rise to 6 to 7 percent of GDP by 2020. The Bush tax cuts would account for a significant chunk of this, considering that in each year they are in effect, the revenue lost because of them amounts to nearly 2 percent of GDP.
Compounding the problem: By increasing the government’s debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.
And under this Sunday’s “Topic A,” it seems that no matter where fiscal policy economists fall on the ideological spectrum, it’s hard to find one who thinks permanent extension of all of the Bush tax cuts is a good idea. My response (just because this is my blog):
DIANE LIM ROGERS
Chief economist at the Concord Coalition and blogger at EconomistMom.com
President Obama will find it very difficult, if not impossible, to simultaneously keep two major policy promises: maintain the generously defined “middle class” portions of the Bush tax cuts and begin to restore fiscal sustainability by reducing the deficit to 3 percent of gross domestic product by 2015.
At the same time, current economic conditions suggest a continued need for deficit spending to assist in the recovery. Even if the Bush tax cuts are far from the most effective form of additional fiscal stimulus we could come up with, it may be all we can get right now, politically.
So one way Obama can avoid simply rubber-stamping the Bush tax cuts — and turning the policy he has labeled “fiscally irresponsible” into his own — while saving face on his promises would be to temporarily extend only those portions of the cuts he has proposed to permanently extend in his past two budgets. A one- or two-year extension would buy time for the economy to further recover, while providing policymakers with a realistic deadline to permanently reform the tax system to raise adequate revenue in a more efficient and equitable manner — in other words, to come up with a tax plan Obama would be proud to put his name on.
And in the informal survey of readers conducted on the page with Ruth’s column, as of Saturday 6 pm, 57 percent of respondents (out of nearly 1000) said we should let all the Bush tax cuts expire as scheduled. (Snapshot above.)
UPDATE (Saturday night): Stephen Colbert’s take on the issue. (Thanks to Len Burman for calling this to my attention via Facebook.)
The Tax Policy Center’s Howard Gleckman astutely observes that the “jobs-creating, loophole-closing tax [extenders] bill does little of either.” He notes the irony in claims that these temporary-but-perennial tax cuts (more formally referred to as the extension of “expiring tax provisions”) are fiscally responsible and good (even “essential”) for the economy:
The Joint Committee on Taxation estimates that extending the expiring provisions would reduce federal revenues by $32.5 billion over 10 years. But keep in mind these tax subsidies would all expire—on paper at least—over just a year or two. A more accurate 10-year estimate of the revenue loss (assuming the tax breaks eventually are continued throughout the decade) would likely approach $200 billion…
[W]hile nearly all of the cost of extending the 70 expiring provisions occurs in 2010 and 2011, 90 percent of the revenue to pay for these goodies would not be collected until 2012 and beyond. It isn’t hard to imagine that much of this money will never materialize, either because the law will be changed or because very smart lawyers will figure ways around it. The overall bill, including the new spending, would add about $140 billion to the deficit. It is hard to be too cynical about tax extenders that have reached a state of near-immortality. But the least Congress could do is to call this annual rite what it is: Continuing tax loopholes, not closing them.
And speaking of the deficit-financed extension of expiring tax cuts being twisted around and artistically re-characterized as “fiscally responsible,” let’s bring up my favorite issue–or more accurately, “peeve.” I consider the “mother of all tax extenders” the proposed extension of most of the Bush (2001 and 2003) tax cuts, which is the single most costly deficit-financed policy proposed in President Obama’s budget. This week the Pew Charitable Trusts issued a report (”Decision Time: The Fiscal Effects of Extending the 2001 and 2003 Tax Cuts”) that puts the cost of extending the Bush tax cuts in better perspective. The report notes how the deficit-financed permanent extension of these tax cuts (even “just” most of them as proposed by President Obama) would add significantly to the federal debt, bringing it to more clearly “unsustainable” levels of around 80 percent of GDP in just ten years–and highlights the fact that allowing (just) the top-end rate brackets to expire (continuing tax cuts in full for those with incomes under $250,000) barely saves money relative to the cost of extending the entirety of the Bush tax cuts. Another way the Pew report highlights how costly the Bush tax cuts are is to point out how hard it would be to pay for the extension of the tax cuts by reducing government spending; for example, one way to pay for extending “only” the Bush tax cuts that President Obama proposes to extend would be to cut all mandatory and discretionary federal spending by 5 percent. (If you want to extend all the Bush tax cuts, you’d have to cut all federal spending by 7 percent.)
The Pew report also suggests that you could make the extension of the Bush tax cuts not so much a “mother of a” tax extender by extending them for only two years, rather than permanently. But then of course you get back to Howard’s fundamental question: is there really such a thing as a fiscally-responsible (inexpensive and truly “expiring”) tax extender?
The Pew report doesn’t really provide any estimates that the CBO budget outlook hadn’t already provided; it just more clearly highlights the significance of the policy choice the Obama Administration will make about the Bush tax cuts. Concord’s “plausible baseline” uses the CBO numbers on expiring tax provisions another way, to show that under a fiscally “worst-case” scenario where all expiring tax provisions currently on the books (including stimulus tax cuts) are permanently extended and entirely deficit financed, these tax cuts would add $6.3 trillion to the ten-year (2010-20) budget deficit, which under current law (assuming all expiring tax provisions actually expire as scheduled) is “just” $6.0 trillion.
So this is a huge deal–this proposed permanent extension of most of the Bush tax cuts. As this hilarious Onion story suggests, it is like a “sprouting leaf of spinach.” How so?
After nervously clearing his throat, Motley was heard to ask, “Wherefore is the National Debt like a sprouting leaf of spinach?” When a glowering Obama demanded the answer, Motley stated, “For it shall rapidly grow into something our children cannot bear.”
Of course, it didn’t pay for Bush spending policy, either, but the point is there’s even more of a disconnect between the revenues raised under the Obama-proposed Bush tax policy extended and projected Obama-proposed spending.
The above video clip from CNN’s IOUSA Solutions special (simply titled “Federal taxes fall short of spending” and featuring me on the panel and my boss Bob Bixby in the film) makes this simple point: There’s a huge gap between spending and revenues, and no one solution, and in fact no “simple” solution (such as trimming only the defense budget or cutting only “waste, fraud and abuse”) will suffice. And on the eve of the dreaded “Tax Day”, this should remind us that revenues, i.e., Taxes, will (unfortunately) have to come up. But again, as only one part of the not-so-easy solution.
(Oh, and by the way, despite this story in yesterday’s Washington Post, I do think that gap between spending and revenues is still “huge”–even if it turns out to be “only” $1.3 trillion and not the Administration’s originally forecasted $1.6 trillion. That was yet another way in which the Obama Administration seems to be continuing the federal budget practice of the prior Administration in ways I just don’t “get.”)
If you’re not too busy watching golf or your own kid on the Little League field (that’s where I’ll be on Saturday), please tune in to CNN for the “Your $$$$$” show on either Saturday at 1 or Sunday at 3. From the “All Things CNN” blog, here’s the scoop:
This weekend, CNN’s Your $$$$$ will feature sections of I.O.U.S.A.: Solutions – America’s Debt Crisis, a groundbreaking and timely documentary that takes on what some say is the biggest problem facing our country – the national debt. In this follow-up film to the original documentary I.O.U.S.A. featured on CNN last year, the dire debt situation is explored from all angles. Your $$$$$ co-host Christine Romans moderates a panel that not only covers all viewpoints, but spans across generations. I.O.U.S.A.: Solutions is a documentary directed by Patrick Creadon, produced by Christine O’Malley, and presented by the Peter G. Peterson Foundation.
Panel guests include: Pete Peterson, Founder and Chairman of Peter G. Peterson Foundation, Co-Founder and Chairman Emeritus of The Blackstone Group and former U.S. Commerce Secretary; David Walker, President and CEO, Peter G. Peterson Foundation and former U.S. Comptroller General; Bill Bradley, former U.S. Senator and Managing Director, Allen & Company LLC; Amy Holmes, Independent Conservative and Co-Host, Talk Radio Network’s “American Morning News;” Diane Lim Rogers, Chief Economist, The Concord Coalition and Blogger, Economistmom.com; Maya Maguineas, President, Committee for a Responsible Federal Budget and Director, Fiscal Policy Program, New America Foundation; Joe Johns, CNN Correspondent; Jeanne Sahadi, Senior Writer, CNNMoney.
CNN Your $$$$$ - I.O.U.S.A.: Solutions - America’s Debt Crisis will be 2 hours 1 – 3 pm (ET) on Saturday and 3-5pm (ET) on Sunday!!!!!!
I was in NYC today, taping the CNN special on the new sequel to IOUSA the movie, called “IOUSA Solutions”–produced again by husband-wife team Patrick Creadon and Christine O’Malley. I was certainly the least famous person on the studio panel which was comprised of Bill Bradley, Pete Peterson, David Walker, Maya MacGuineas (president of Committee for a Responsible Federal Budget), Amy Holmes (conservative talk radio host), and CNN’s Joe Johns and Jeanne Sahadi. Christine Romans was the host, and she did a wonderful job. (She’s expecting son #3 by the way!) Not sure why I was invited, but it was fun, and I didn’t even feel tempted to kick Amy Holmes under the table, by the way.
The two-hour special is supposed to air on CNN this Saturday at 1 pm EST and Sunday at 3 pm EST, “barring breaking news” as the producer puts it. I will keep you posted.
The photo is of me with my post-CNN-taping hair and makeup, self-captured on my webcam on my ride back to DC on the Amtrak–that’s the “on track” reference. I think CNN’s NYC studio does better hair and makeup than their DC studio. Or maybe I’ve gotten more fond of the very heavy makeup because I realize it really does make one look younger. My appearance in the CNN studio is quite the contrast to how I look in the actual documentary (where I have maybe one sentence, about the Bush tax cuts, of course), where I had gotten only a few hours sleep the night before and was being interviewed at Concord–where we don’t exactly keep a makeup artist. Maybe you’ll see what I mean later this week.