Why I support the Boehner bill
If you’d like a quick summary of the Boehner plan, please read my earlier post.
I support the Boehner bill and hope House Republicans will vote to pass it.
First I’ll flag what I like about the substance of the bill.
- As initially drafted it would cut spending by $850 B over the next decade. That’s not chump change. I expect this number will soon go up to $900 B – $1 T. Update: New version is $917 B in spending cuts over 10.
- It has statutory discretionary spending caps and a sequester to enforce them.
- It does not raise taxes.
- It raises the debt limit, as we must do.
It also tees up House and Senate floor votes on the Balanced Budget Amendment, but that is not my priority. A BBA would take years to enact, and we cannot wait that long to fix the underlying math problem.
I support the Boehner bill for the following reasons:
- It cuts spending and it doesn’t raise taxes. That is an improvement over current law.
- There is nothing in the bill that I dislike. That’s a rarity.
- It is better than the Reid bill, which is the next most likely alternative to become law if the Boehner bill fails.
- It tees up this battle again in 4-6 months, providing another opportunity and keeping the pressure on to cut spending.
- It creates a process that keeps our underlying fiscal policy problems front-and-center for the foreseeable future rather than punting them into 2013.
- I can see no viable alternative strategy to enact a stronger bill.
Some conservative Members of Congress are opposing the bill because they think it does not do enough. While $850 B – $1 T of spending cuts is a medium-sized deficit reduction bill relative to historic practice, I agree that it is far from sufficient to solve our underlying budget problems. In that respect it is a step in the right direction, nothing more.
I agree with the complaint that the Senate Democratic majority has abdicated its legislative responsibilities over the past two years, passing neither budget resolutions nor spending bills.
I also agree with many conservatives who complain the Administration has hid the ball on its cash and debt-management options, and I think the August 2nd deadline is a soft one. While the Administration’s public posture is one of flexibility and compromise, its negotiating approach has exacerbated conflict at every opportunity.
And I agree with the conservative complaint that, since neither the Boehner bill nor the Reid bill solve our underlying fiscal problem, neither is likely to significantly improve the chance of avoiding a downgrade by the ratings agencies. That is a huge deal for me, but other than accepting the President’s proposed tax increases (which I wouldn’t do), I don’t see any way to avoid it, so we are stuck for the moment with whatever the rating agencies decide. I will set aside my concerns with the rating agencies for another day.
If I could strengthen the Boehner bill further, my top priority would be to increase the depth and breadth of spending cuts, and especially get savings from the Big 3 entitlement programs. In the process reform world my priority would be the “Cap” portion of “Cut, Cap, and Balance.” I strongly support the 20% of GDP spending cap in that bill.
But I don’t have a viable strategy to enact such an improved bill, and, as best I can tell, neither do those conservatives who oppose the Boehner bill. I think it is a mistake to oppose a bill that improves on current law if you don’t have both a better policy and a strategy to achieve it.
First let’s establish that “Fight harder” and “Communicate your message better” are cheers rather than strategies. Cut, Cap, and Balance is a good policy, it is not a strategy. If you disagree with what Speaker Boehner is doing, present another strategic option, which is more than just a policy or a cheer.
As best I can tell, the strategy of those on the right who oppose the Boehner bill is to keep saying no to everything until, somehow, a Democratic majority Senate and the President agree to Cut, Cap, and Balance. I would happily support such a strategy if I thought it could work, so it’s important for me to detail my strategic concerns.
The “just say no until they cave” strategy is based on a concept that makes sense to me. Why should conservative House and Senate Members bend to “legislative reality” as defined by the President and Senate Democrats? Why shouldn’t it be the other way around?
The problem in this case is the implementation. The “just say no” strategy is predicated on the assumption that, if no agreement is reached, the policy and political consequences of passing the President’s August 2nd deadline will place greater relative pressure on Democrats than on Republicans, and that this pressure difference will be so great that it causes the President and Senate Democrats to accede to policies they had previously rejected.
I think this assumption is flawed for several reasons.
- The President controls the policy levers in a cash crunch. If the debt limit were not increased and a cash crunch occurred, the President would control the mechanics of which spending gets slowed down. That gives him options to control the damage in ways that maximize his relative advantage. LBJ would have done it district-by-district.
No, we would not technically default. Team Obama would figure out which non-debt payments to slow down and how to use that to maximize pressure and blame on Republicans. Technical default has always been a scare tactic and a red herring, but the policy and political damage of other cash slowdowns can nonetheless be quite severe in the hands of someone using it to maximize his own leverage in a negotiation.
- The President has the bully pulpit.
- Months of conservative threats have defined who is responsible if there is a crisis in August. A few vocal conservative Members have argued for months that default isn’t so bad, that they are willing to risk a cash crunch in early August, and that they don’t believe Secretary Geithner’s August 2nd deadline. This has been quite effective. It shifted the leverage and ensuing negotiations enough so that this week only the President is talking about tax increases and he sounds odd doing so. Markets and Washington alike are afraid that conservatives might actually tempt fate and prevent a debt limit increase, and that fear has created leverage to produce the current legislative situation.
The downside of this tactic is that if the deadline passes without legislation, you can’t turn around and blame the other guy for whatever damage occurs in August. For months the President has been saying “August 2nd is a deadline,” while a vocal faction of Republicans has been saying “No, it isn’t.” If conservatives vote no, Congress does not act, and bad things happen after August 2nd, those Republicans will get the blame because they assigned it to themselves over the prior few months.
4. Conservatives are focusing on whether they can withstand the heat of such a crisis, rather than whether the President and Congressional Democrats can.
The potential negotiating advantage comes from the relative pressure applied to the two sides. A conservative / Tea Party Member may say “I am not afraid of what happens after August 2nd if there’s no legislation,” but that’s not what matters most. If the President and Congressional Democrats are not afraid of this scenario because they think they can blame Republicans for it, then the strategy provides no leverage and is worthless. I think that’s the case, especially because of reason #3.
5. Congressional Leaders of both parties cannot allow their Members to “go on vacation” with the situation unresolved.
This is a crass detail, but I think the conservative strategy of “just say no” would also require that Members of Congress stay in Washington, saying no, through August and into September. The only thing that would anger the public more than the current situation would be if Congress took a month-long vacation without enacting a law. Maybe these conservative Members are prepared to force their leaders to cancel August recess, but I haven’t heard any of them say that so far.
For all these reasons, I think the “just say no until they cave” strategy cannot provide so much greater relative pressure on the President and Senate Democrats that they would suddenly accept a bill they hate. In addition, the strategy poses significant downside policy risk as well as political risk for Republicans. Nobody really knows what August would look like in the scenario in which Congress fails to act, and tiny-probability-really-bad outcomes become moderate-probability-really-bad outcomes. I would be willing to weigh that cost against the strategic benefit of getting a huge policy victory, but only if there were a strategy I thought could work. Without it, you are just taking unnecessary and dangerous risks with no benefit.
The Boehner bill cuts spending and doesn’t raise taxes. I hope House Republicans decide to support the Boehner bill, lock in those spending cuts, and then go for more in the next round.
(photo credit: Office of the Speaker)
Quick summary of the Boehner bill
Here’s a quick-and-dirty summary of the Boehner bill, as it stood on Tuesday afternoon. Note that parts are being reworked to increase the size of the spending cuts, so this is already a bit out of date.
- As initially drafted, CBO projected the plan would cut spending by $850 B over the next decade. That is less than was anticipated, so the Speaker is retooling the bill to meet his dollar-of-spending-cuts-for-dollar-of-debt-increase principle. I think his new goal is $1 T of spending cuts over the next decade. Update: The new version cuts spending $917 B over 10 years.
- These savings come from discretionary spending cuts and a bit from student loans.
- It would create statutory caps on discretionary spending and a sequester to enforce those caps.
- The Secretary of the Treasury would be authorized to increase the debt limit by $900 billion upon enactment.
- It would create a new Joint Select Committee of 12 members of the House and Senate, with three each appointed by Boehner, Pelosi, Reid, and McConnell. The committee’s goal is to reduce the deficit by $1.8 T over the next decade, and to produce a bill that would “significantly improve the short-term and long term fiscal imbalance of the Federal Government.”
- IF seven members of that committee recommend legislation by November 23rd of this year, then that legislation enjoys an expedited “fast track” legislative process in the House and Senate, with votes in both bodies required by December 23rd of this year.
- If that fast track legislation resulting from the new committee is enacted into law and it reduces the deficit by more than $1.6T, the Secretary of the Treasury can raise the debt limit by another $1.6 T.
- The House and Senate would be required to vote on a Balanced Budget Amendment in the fourth quarter of this year (I’m still a bit confused at how a law can require a vote).
- The bill contains no tax increases.
Without too much trouble you can see the conceptual outline of “Cut, Cap, and Balance” within this bill.
I hope this is helpful.
(photo credit: Talk Radio News Service)
President Obama says no to a bipartisan debt limit plan
Last Friday the President said:
So here’s what we’re going to do. We have now run out of time. I told Speaker Boehner, I’ve told Democratic Leader Nancy Pelosi, I’ve told Harry Reid, and I’ve told Mitch McConnell I want them here at 11:00 a.m. tomorrow. We have run out of time. And they are going to have to explain to me how it is that we are going to avoid default. And they can come up with any plans that they want and bring them up here and we will work on them. The only bottom line that I have is that we have to extend this debt ceiling through the next election, into 2013.
Yesterday there was a tentative agreement among Speaker Boehner, Senate Majority Leader Reid, and Senate Minority Leader McConnell on the outline of a bill to increase the debt limit and cut spending.
This tentative agreement would increase the debt limit by about $900 B to $1 T, enough to make it into the first quarter of next year, packaged with a bit more than $1 trillion of spending cuts, discretionary caps, and no tax increases. There would be a second debt limit extension next year that would go into 2013, upon action of a joint committee of Congress that would make recommendations for further deficit reduction.
While this is inconsistent with the President’s Election Day demand, a debt limit increase that lasted into next year would be routine based on historic practice.
Senate Majority Leader Reid took this to the White House yesterday and the President rejected it. Leader Reid left that meeting and said publicly that Senate Democrats would instead pursue a different plan that would increase the debt limit by $2.7 trillion, enough to get into 2013. Leader Reid says his plan would cut spending by at least $2.7 trillion (I am skeptical).
It appears the three key Congressional leaders on both sides of the aisle reached a tentative agreement yesterday and the President blew it up.
The President and his advisors have said two things that are consistent but separable:
- the President opposes an extension that would not go past Election Day; and
- such an extension could not pass the Senate because of Democratic opposition.
Assuming that Leader Reid did not bring to the President yesterday a proposal that he opposed, the second no longer appears to be true.
Administration officials from the President on down continue to warn us of the grave consequences if Congress does not act before an August 2nd deadline. Last week the President increased his demands of Speaker Boehner on taxes, knowing that doing so would cause negotiations on a big deal to collapse. Yesterday the three key Congressional leaders tried to act on a bipartisan basis and the President stopped them.
I expect House Republican Leaders to turn the tentative Boehner-Reid-McConnell outline into a bill and try to pass it on the floor in the next couple of days. That’s exactly what they should do.
Update: The House implementation of this would, I expect, also result in House and Senate votes on a Balanced Budget Amendment in the fourth quarter of this year. They’ll have 10 years of discretionary caps with a sequester to enforce them. You can see the outlines of “cut, cap, and balance” without looking too hard. It looks like they’ll also get at least a dollar of spending cuts for each dollar of debt limit increase. I never thought they’d get that.
(photo credit: White House Photo by Lawrence Jackson)
Are short term debt limit increases unusual?
In his remarks to the press Friday, the President insisted that any debt limit extension be “through the next election, into 2013.” That’s a bit more than seventeen months. He has threatened to veto a shorter term increase.
How does that compare to historic practice? Using OMB data I looked at two timeframes, the last twenty years and the last thirty years. I drew an arbitrary distinction of one year as my dividing line between a short-term and long-term extension.
Over the last thirty twenty years Congress and the President have acted 44 times to increase the debt limit.
Ten of those 44 times lasted more than a year. The other 34 were for less than a year.
(Update: Over the last twenty years, 8 of the 17 increases lasted more than a year.)
Over the past (roughly) 20 years, the U.S. government spent 18% of its time, or more than 3 and a half years, operating under a debt limit increase that lasted for less than a year.
The average period between increases was 333 days (almost 11 months), and the median was 131 days (just over four months).
If we look at the last thirty years, our average moves toward smaller and more frequent debt limit actions by Congress. The U.S. government spent more than 10 of the past 30 years operating under debt limit increase statutes that lasted less than a year.
You could argue things are different now – it’s more difficult for Congress to act, and the spending and deficit problems we face combine with legislative uncertainty around the debt limit deadline to create undesirable financial market pressures.
A debt limit extension of three, six, or nine months would be routine based on historic practice.
If you’d like to examine the source data yourself, please see OMB’s historical table 7-3.
(photo credit: Joe Lanman)
Why the Obama-Boehner talks fell apart
Budget talks between President Obama and Speaker Boehner fell apart yesterday after the Speaker called the President and said he would instead negotiate directly with Senate Leaders Reid & McConnell.
The President spoke to the press within the hour to begin framing the collapse of the negotiations. He reinforced his theme that he was the reasonable, flexible party willing to compromise to get a deal.
I just got a call about a half hour ago from Speaker Boehner who indicated that he was going to be walking away from the negotiations …
… And so the question is, what can you say yes to? Now, if their only answer is what they’ve presented, … — if that’s their only answer, then it’s going to be pretty difficult for us to figure out where to go. Because the fact of the matter is that’s what the American people are looking for, is some compromise, some willingness to put partisanship aside, some willingness to ignore talk radio or ignore activists in our respective bases, and do the right thing.
And to their credit, Nancy Pelosi, Harry Reid, the Democratic leadership, they sure did not like the plan that we are proposing to Boehner, but they were at least willing to engage in a conversation because they understood how important it is for us to actually solve this problem. And so far I have not seen the capacity of the House Republicans in particular to make those tough decisions.
The President positioned himself as the aggrieved party, trying to understand what went wrong:
It is hard to understand why Speaker Boehner would walk away from this kind of deal.
I actually think it’s quite easy. The President backtracked in private negotiations this week, demanding bigger tax increases after the Gang of Six, including three conservative Republican Senators, released a plan that raised taxes more than the President had previously demanded.
Today’s press stories treat this as a detail. It is instead the key to understanding why the talks fell apart.
Here are some primary source materials for reference:
- video and transcript of the President’s press briefing;
- excerpts and video of Speaker Boehner’s statement and his Dear Colleague letter.
Recent history of the negotiations
First we’ll look at total levels of taxation.
This gets a little tricky, because Republicans and Democrats frame tax numbers differently. These negotiations assumed a gap between current law taxation and current policy taxation of $3.5 T over 10 years.
- Last weekend the White House was willing to, from their perspective, reduce revenue at least $2.8 T relative to current law. That’s about $700 B higher revenues than current policy. That number would be a ceiling for revenues.
- Tuesday the Gang of Six proposed their budget plan. The Gang’s plan would reduce revenues $1.5 T relative to current law, which (using these baselines) means $2 T higher revenues than current policy. That means the Gang of Six proposed $1.3 T higher revenues than the President had been demanding privately. The Gang of Six includes three conservative Republican Senators.
- After the Gang of Six offered their plan, the President backtracked from his position last weekend and increased his demand. Late this week the President was willing to reduce revenue by at most $2.4 T relative to current law. Using CBO’s numbers, that’s about $1.1 T higher revenues than current policy, and $400 B higher than last weekend. That number would be a floor for revenues.
Last week the President increased his tax demand by $400 B and changed a ceiling for revenues into a floor. (Technical note: My numbers are $100 B off from the $800 B and $1.2 T numbers publicly discussed. This doesn’t change the story and the backtrack amount is still $400 B.)
Next let’s look at tax rates. The President and the Speaker were negotiating certain parameters that would be agreed to for a future tax reform:
- As of last weekend, the President was willing to support three individual tax rates, and the top rate would be less than 35 percent. Team Obama also agreed that the difference between the top individual and corporate rates would be limited.
- After the Gang of Six released their plan, the President’s team backed away from this position.
- In addition, Team Obama suddenly insisted that refundable tax outlays (for the poor) not be reduced by tax reform.
Again, the President retreated from an earlier position on taxes as a result of the Gang of Six introducing their plan. On total tax revenues, tax rates, and refundable outlays, the President increased his demands last week.
The Speaker’s statement today reinforces this description of recent history:
The discussions we’ve had broke down for two reasons. First, they insisted on raising taxes. We had an agreement on a revenue number – a revenue number that we thought we could reach based on a flatter tax code with lower rates and a broader base that would produce more economic growth, more employees and more taxpayers, and a tax system that was more efficient in collecting the taxes that were due the federal government. Let me just say that the White House moved the goalposts. There was an agreement, until the President demanded $400 billion more, which was going to be nothing more than a tax increase on the American people. I can tell you Leader Cantor and I were very disappointed in this call for higher revenue. Second, they refused to get serious about cutting spending, and making the tough choices that are facing our country on entitlement reform. Listen, that’s the bottom line.
The President’s statement does not explicitly confirm that the President “moved the goalposts,” but is consistent with it, and he cited the Gang of Six four times, wrapping his arms around their position.
In addition, what we sought was revenues that were actually less than what the Gang of Six signed off on. So you had a bipartisan group of senators, including Republicans who are in leadership in the Senate, calling for what effectively was about $2 trillion above the Republican baseline that they’ve been working off of. What we said was give us $1.2 trillion in additional revenues.
Press reports today say Presidential advisors confirmed that the President increased his demand for more revenues last week.
In addition, the President and the Speaker had open disputes about how much to save from Medicaid, and about an automatic mechanism to force Congress to act on the entitlement and tax provisions. The President wanted a provision that would “decouple” tax rates if Congress failed to act, allowing top tax rates to increase while extending the other tax rates. Republicans would hate this outcome and would therefore have an incentive to legislate the deal. The Speaker insisted that if this automatic hammer decoupled tax rates, it also had to repeal the individual mandate from the Affordable Care Act (ObamaCare), to create roughly equal legislative pressure on both sides of the aisle.
Negotiation tactics, framing & strategy
While it is an aggressive tactic, there is nothing “wrong” with moving backward in a negotiation. It is likely to anger the counterparty, and it usually reduces the chance of getting a deal. But sometimes conditions change, as they did this week, and one party feels his position is strengthened and thinks he can demand more.
That appears to be the case here. The three conservative Republican Senators who supported a high level of taxes changed the President’s perception of what he could demand on taxes, and especially what he could publicly defend as reasonable if negotiations fell apart. So he backtracked and increased his demand.
At the same time, this has important consequences for those trying to understand why negotiations fell apart.
- It shows the President was willing to risk not getting a deal for what he perceived as an improved chance of getting better than his bottom line on taxes. The President’s increased private demands on taxes contradict his public claim that he has been doing everything possible to get a deal.
- The President said, “It is hard to understand why Speaker Boehner would walk away from this deal.” No it’s not. The deal the President offered him got worse over the course of the past week.
- Imagine the Republican reaction if word had leaked out that the Speaker and Leader Cantor had agreed to a worse tax position than the President had offered them one week prior. There is no way they could take that risk, and the President had to know that. The President made a new demand he had to know Republican Leaders could not possibly accept. The President toughened his position knowing it would cause the talks to fall apart, yet feeling comfortable that he had a stronger rhetorical position explaining the collapse.
- The Gang of Six’s efforts have been characterized by some as a shining example of bipartisanship that showed a path forward toward a budget compromise. But because the Gang’s plan was left of the President on taxes, the President backtracked and caused negotiations to collapse. The Gang of Six’s substance and timing helped kill whatever remaining short-term chance there was for a big budget deal.
President Obama used the Gang of Six’s plan as an exit strategy. He backtracked on taxes, knowing this would force the Speaker to abandon negotiations, and knowing he could use the Republican Senators in the Gang to argue from a position of increased rhetorical strength in the ensuing debate. It’s a clever strategy but it belies the President’s public posture.
It seems the President’s own questions should be asked of him:
And so then the question becomes, where’s the leadership? Or, alternatively, how serious are you actually about debt and deficit reduction? Or do you simply want it as a campaign ploy going into the next election?
(photo credit: Luis Miguel Justino)
Why I oppose the Gang of Six plan
If you’d like to understand the details of the Gang of Six plan, please read my (quite long) earlier post.
I strongly oppose the Gang of Six plan. I think it is absolutely terrible fiscal policy.
First I’ll flag a few things I like in the plan.
- I support making a technical correction to CPI, even though it would result in higher revenues.
- Repeal of the CLASS Act is great.
- It’s good they included medical malpractice reform.
That’s it. Others right-of-center are salivating at the low marginal income tax rates described in the plan, both for individuals and corporations. I think those low rates never materialize, for both arithmetic and legislative reasons, and explain why below.
I make a lot of assertions in the following argument. For backup, please see my earlier explanatory post, which contains links to the Gang’s source documents.
Here are 17 reasons why I oppose the Gang of Six plan.
1. It provides no discretionary spending totals.
Discretionary spending is 37% of the budget next year. The Gang of Six plan does not specify discretionary spending totals. How can I support (or even evaluate) a budget plan that promises to cap 37% of spending but doesn’t tell me at what level, next year or for nine years thereafter?
2. It cuts defense spending while hiding the ball on nondefense spending.
The only discretionary spending number provided is $866 B in defense (security) discretionary savings over the next 10 years. I care about the discretionary spending total and about the balance between defense and nondefense. I am open to defense spending cuts, but not if I’m not told what the plan does to nondefense spending as well. How can I support or evaluate $866 B of defense appropriations cuts when I am not told whether the plan cuts, holds harmless, or even increases nondefense appropriations?
3. The promised deficit reduction is both overstated and less than is needed.
Their $3.7 trillion of claimed deficit reduction is bogus. It includes an unspecified amount of savings from a future legislative fast-track process that would require further Congressional and Presidential action if health spending growth exceeds a certain target.
The Gang’s plan also uses at least three different baselines in different parts of the document. Combine that with the absence of discretionary spending totals and I have no confidence in their $3.7 trillion deficit reduction number. It is easy to solve this problem – I guarantee Chairman Conrad has a table of numbers that shows these calculations. All he has to do is release that table.
Even if I did believe it, this amount of savings won’t cover CBO’s projected $5.4 trillion of net interest costs over the same timeframe. In fairness, other plans face this same problem. We need much more deficit reduction (through spending cuts).
4. It is a huge net tax increase.
The Gang of Six plan would increase taxes by $2.3 trillion over the next 10 years relative to current policy. That’s roughly a 6.5 percent increase in total taxation.
Put another way, the Gang of Six plan raises taxes $830 B more than would President Obama’s February budget.
To those who like the promise of low statutory tax rates – the benefits of low marginal rates are far outweighed by the increase in average effective rates. This is a massive hidden tax increase.
5. It’s a far worse trade than Bowles-Simpson.
The fundamental trade of the Bowles-Simpson group was higher net taxation in exchange for (huge long-term spending reduction, especially in entitlements + fundamental structural entitlement reform + pro-growth tax reform).
The Gang of Six plan drops the first two elements of that trade, the huge long-term spending reductions and the structural entitlement reforms. It instead purports to offer pro-growth tax reform in exchange for much higher net tax levels. It offers trivial spending cuts, no flattening of long-term entitlement spending trends, and no structural reform to the Big 3 entitlements. That is a terrible trade, and far worse than Senators Durbin and Conrad agreed to in Bowles-Simpson. Why did the Republicans in the Gang take a deal far worse than Bowles-Simpson?
6. It trades a permanent tax increase for only a temporary respite on spending.
The plan proposes permanent increases in net taxation levels in exchange for a temporary slowdown in spending. The entitlement spending line would be shifted ever so slightly downward – there would be no long-term “flattening of the spending curve.” The Gang tries to address that through a poorly-defined process to slow health spending growth that offers no specific policy changes and promises only to “require (future) action by Congress and the President if needed.” That sounds awfully familiar (see: Medicare funding trigger, turned off by Democrats in 2009).
The consequence of this would be kicking the can down the road. Deficits would be smaller for the next 5-10 years while the higher tax levels offset entitlement spending growth. But since the plan does nothing to flatten the curve of Social Security, Medicare, or Medicaid spending, 5-10 years from now we will be right back where we are now, but with higher levels of taxation. We will again face huge and growing future deficits, driven by unsustainable entitlement spending growth.
Then we’ll repeat this game all over again. Raise taxes once again to buy another decade or so. The Gang of Six plan raises taxes and hands off an unsolved entitlement spending problem to the next generation.
We need a solution that caps total government spending at some share of GDP. Cut, Cap, and Balance sets a limit of 20% of GDP, which I like. Bowles-Simpson raised taxes and moved toward a spending cap (but not far enough). The rumor at the time was that the Bowles-Simpson group was working toward a 21% cap. The Gang of Six plan raises taxes but does nothing to change the underlying spending trends. I hate the tax increases in Bowles-Simpson, but at least it moved in the direction of a permanent spending fix.
7. It’s an unfair deal on CPI.
A CPI fix raises revenues and cuts spending. I’d like to use the higher revenues to cut tax rates. Those on the left would like to spend the deficit reduction from slower Social Security spending growth on their priorities. I think the legislatively balanced way to do CPI is to do neither. All the fiscal benefits of a CPI correction go to deficit reduction. Treat it like it is – as a technical correction to more accurately measure inflation. It is not a policy change and therefore none of its effects should be mitigated. By increasing Social Security spending on low-income beneficiaries, the Gang of Six plan breaks this fair pain-all-around compromise in favor of one side’s policy preferences.
8. It precludes structural reforms to Medicare and Medicaid.
The Plan says “while maintaining the basic structure of
This plan doesn’t even include the modest Medicare eligibility age increase proposed by Sen. Lieberman and endorsed by the President.
9. It does almost nothing to slow health spending growth, and even the $115 B of additional health savings are bracketed.
The Biden group agreed to $203 B of health savings over 10 years. That is pitifully small compared to what is needed.
The Gang of Six plan includes two numbers for health savings: $202 B and $85 B. It appears they are trying to sell two incompatible numbers: they tell Republicans it’s $202 B, and Democrats it’s $85 B. The documents literally show both numbers with no explanation or clarification about which one binds.
10. It leaves the core trillion dollar ObamaCare health entitlement in place.
This problem is not specific to the Gang’s proposal, but it’s another reason for me to oppose it. Why are we talking about raising taxes and cutting defense spending at the same time that we are creating a new trillion health entitlement promise?
Yes, repealing the CLASS Act is good, but it’s far from sufficient.
11. It makes it harder to do Social Security reform, drops the specific Social Security reforms of Bowles-Simpson and increases Social Security spending.
The Gang’s plan sets up two new procedural barriers to Social Security reform. A Social Security plan cannot be considered in the Senate until and unless the rest of the Gang’s plan has passed the Senate. And 60 votes would be needed not just to break a filibuster, but to vote aye on final passage. Both changes make Social Security reform procedurally harder than it is right now.
The Gang claims the Bowles-Simpson mantle on Social Security reform, yet contains none of the specific Social Security reforms from Bowles-Simpson:
- raising the Social Security eligibility age;
- slowing future benefit growth for high earners; or
- raising the cap on taxable wages.
I hate the last one, but the Gang plan include none of these specific reforms. Sorry, guys, correcting the CPI for a technical flaw and erecting two new procedural hurdles does not count as Social Security reform.
The only specific Social Security policy change the Gang proposes is to increase spending on poor people. The program is going broke and is already in a cash flow deficit and they are increasing entitlement spending.
12. It sets the wrong bar for Social Security reform and tilts reform toward tax increases.
There are two ways to measure whether you have reformed Social Security: “75-year actuarial balance” and “cash flow balance.” The Trustees report both. Bowles-Simpson said their Social Security reform had to meet both tests.
The Gang’s plan sets 75-year actuarial balance as the only test. This is the easier bar, and this way of measuring reform tilts the playing field toward short-term patches and tax increases. It’s a repeat of the “permanent tax increases for temporary spending changes” problem I describe above. The only way to guarantee a permanent (or even long-term) solution on Social Security is to require a reform plan meet the cash flow balance test (as well as the easier 75-year test).
The Gang’s metric instead will lead to Social Security “reform” that will incrementally tweak benefit spending growth, combine that with a big tax increase, and appear to solve the problem for “75 years.” Then 10-15 years from now we’ll be back in cash flow deficit and we’ll repeat this all over again, only from a higher starting point on taxes. This has happened before, several times.
13. It locks in the net tax increase, then hopes to deliver on the stated tax reform policies.
Procedurally the Gang’s plan would be turned into a budget resolution that can only commit the Senate to a total level of taxation, one that is way too high. After the budget resolution has been passed, then tax reform legislation would move (the plan says “within six months.”) If you are tempted by the promised details of tax reform, remember that those details would be negotiated after the Senate had already committed to a $2.3 trillion tax increase.
Even if I could swallow a $2.3 trillion tax increase, which I can’t, I don’t trust the tax reform process enough to take that risk. The plan offers no procedural guarantees to prevent the tax policies described within it from being ignored by the Senate Finance Committee.
By the way, good luck legislating tax reform that raises taxes $2.3 trillion more revenue than current policy. You’ll create so many more losers than winners that it will be impossible to round up the votes. Even revenue-neutral tax reform is extremely hard because the losers scream more loudly than the winners.
14. It undoes most of the benefits of last December’s tax policy battle.
The keep-taxes-low crowd won a significant battle last December when a bipartisan majority of the Congress passed and the President signed a two-year extension of the Bush tax rates. Despite months of intense campaigning by the President, and a press corps that accepted the framing of “letting the Bush tax cuts expire,” the votes in Congress supported a current policy baseline perspective. Despite the rhetoric from the left, Members voted to prevent tax increases.
By framing a $2.3 trillion tax increase as a $1.5 trillion tax cut, the Gang’s plan concedes this hard-fought intellectual ground and makes it easier for those who want to raise taxes even further to achieve that goal. Switching from a current policy to a current law tax baseline biases future legislation toward tax increases.
15. It sets up a tradeoff between marginal income rate cuts and capital tax rates.
The tax reform described in the Gang’s plan is silent on capital taxation. Side conversations suggest the Gang agreed to but did not put on paper a 20% rate for capital gains and dividends. From a pro-growth perspective, lowering marginal income tax rates by raising capital taxation rates is a bad trade. And both the numbers and politics suggest that much of the higher revenues raised from “eliminating tax breaks” would come from higher tax rates on capital rather than scaling back even more popular tax preferences for homeownership, charity, and health insurance.
Lowering the corporate income tax rate is nice, but you get more growth bang for the buck by allowing immediate expensing of investment. If depreciation is treated as a tax expenditure and the lower corporate rates are paid for in part by lengthening depreciation schedules, that will slow growth, not accelerate it.
16. The rate cuts are overpromised because the Gang overestimated the revenue that would be raised from reducing tax expenditures.
I strongly support scaling back or even eliminating most if not all tax preferences. I’d go much further than I could ever get support for from elected Members of Congress. But I want to use the revenue raised from eliminating those tax expenditures to cut rates, not to make spending cuts smaller as the Gang’s plan does.
The Joint Tax Committee warns us that the revenue raised by eliminating a tax preference is less than the measured “tax expenditure,” and often far less, because of the incentive effects. It appears the Gang far overestimated the revenues that would be raised from eliminating tax preferences, and therefore are promising marginal rates they cannot deliver. Those who are attracted by the low promised rates for individual and corporate income should understand that if the revenue raised from eliminating other tax preferences is insufficient, the actual rates in reform will be higher. And that’s assuming you trust a Senate Democratic majority process to deliver the unenforceable tax policy promises described in the Gang’s plan.
Tax experts I trust tell me they can’t see how you could design a tax reform that hits the revenue targets promised (even with a +$2.3T revenue increase) and get statutory rates as low as promised. The revenue raised from “reforming” these preferences won’t be enough to lower rates that much, and repeal the AMT, and move to a territorial system, and reduce deficits.
17. The plan proposes a deficit trigger mechanism that might include automatic tax increases.
The President proposed a version of this – a trigger that would guarantee that future deficits do not exceed a given target. The Gang’s target is procedurally weaker but still dangerous. I hate big future deficits but hate as much any process which makes it easier to raise future taxes to address those deficits. The Gang’s trigger is ambiguous on this point, and the legislative language would be drafted by the Senate’s Democratic majority.
Like many others, I am attracted to Members working across the aisle and breaking the natural partisan divide. For me, the substance trumps that, and the substance of this plan is simply terrible.
Jim Capretta and Charles Blahous have also commented on the Gang of Six’s plan.
(photo credit: Graham White)
Understanding the Gang of Six plan
In this post I will try to describe and explain the Gang of Six plan. In a separate post (coming soon) I will describe my views on the plan. I can’t explain the plan without incorporating some judgment, but I’ll try to separate most of my personal policy views into the follow-up post.
The Original Gang of Six consists of Democratic Senators Conrad (ND), Durbin (IL), and Mark Warner (VA), and Republican Senators Chambliss (GA), Coburn (OK), and Crapo (ID). Senator Conrad is Chairman of the Senate Budget Committee. Senator Durbin is the #2 Senate Democrat, the Whip.
Press coverage of the Gang’s plan has been substantively weak. Most of it covers only the Gang’s top line substantive message and the political back-and-forth surrounding it. I’m going to try to supplement that by putting some meat on the bone.
Friendly warning: this is somewhat of a monster post. It is both longer and more detailed than I would like it to be, but I’m aiming it primarily at policy insiders who I think want that additional detail and analysis. Lay readers may find a few parts of it to be tough sledding. The mainstream press is giving you not enough detail. Here I’m erring on the other side. I will, in my follow-up post, provide a shorter and far more judgmental summary of what’s going on in this plan.
To their credit, the Gang of Six (G6) released three documents that provide significant descriptive detail and numbers. I will therefore begin by giving you what the Washington insiders already have: the Gang of Six’s documents, so you can see for yourself.
The Gang of Six plan is designed in three legislative parts. Part 1 is “a $500 B down payment” that would presumably be implemented quickly/immediately through a bill. Part 2 contains the bulk of the plan’s deficit reduction, and would require enactment of at least two more pieces of legislation, a budget resolution followed by a reconciliation bill. Part 3 is a process for considering Social Security legislation that would, if successful, be combined with the reconciliation bill from Part 2 after both had passed the Senate.
The Gang’s plan says nothing about increasing the debt limit. It would be natural to package Part 1 with a debt limit increase, but they stay silent on that point. I think that ambiguity is reasonable in the current legislative context — it allows them flexibility and keeps the issues somewhat separate. This is a deficit reduction plan, not a debt limit increase plan.
Part 1 of the Gang’s plan consists of several components:
- Caps on discretionary spending at unspecified levels through FY15 (that’s for four fiscal years, FY12-FY15, but without any actual numbers);
- A significant technical correction to the way inflation is measured through the Consumer Price Index;
- Two Social Security spending increases to partially mitigate the effects of the CPI change on low-income beneficiaries;
- repeal of the CLASS Act, a new long-term health care benefit created in the Affordable Care Act (aka it’s part of “ObamaCare”);
- some knicks and knacks like freezing Congressional pay and selling some government assets; and
- unspecified budget process reforms.
As I describe in further detail below, the absence of numbers for proposed discretionary spending is a huge gaping hole. It’s impossible to evaluate a budget plan if you don’t know what it’s proposing for spending that comprises 30% of the federal budget.
The CPI correction is a big deal — it would result in slower spending growth, mostly with reduced Social Security Cost of Living Adjustments (COLAs), as well as higher taxes, resulting from a slower indexation of income tax brackets. CBO says the technical change (moving to “a chained CPI”) would on average reduce measured inflation by about 0.25 percentage points. There’s a debate about whether the higher revenues constitute a “tax increase” or not. I fall on the “not” side as long as the technical correction is applied to everything, but this is a judgment call.
The Social Security spending increases are clearly a legislative bargain with someone on the Left who was concerned about the effects the correction would have on lower-income Social Security recipients.
Repeal of the CLASS act is a big deal. This is the little-discussed but hotly disputed new long-term care insurance benefit in the Affordable Care Act. Spending hawks are concerned the cost of this benefit will explode in the long run. Repeal is a big deal fiscally, as a health policy matter, and politically.
Part 2 of the Gang’s plan describes a budget resolution. This is unsurprising given that Gang member Conrad is Senate Budget Committee Chairman. Minor note: all three documents use the same language and presentation formats as Chairman Conrad’s traditional presentations, strongly suggesting that he controlled the paper. Like a budget resolution, the Gang’s plan sets numeric targets for categories of spending and sets up legislative processes that would govern the development of legislation dealing with specific policy details. In this respect, the Gang’s outline is traditional and fits within the normal confines of the regular budget process, albeit 4-5 months later than normal. If there were a broad consensus supporting the Gang’s plan, it would be normal process to turn it into a budget resolution and then a reconciliation bill.
I think of Part 2 in three subparts: numbers, recommended tax policies, and process changes.
Part 2A: Numbers
- Mandatory spending would be cut by either $328 B over 10 years, or $445 B over the same timeframe. The $117 B difference is confusing — the document provides two different numbers for savings from Medicare and Medicaid that differ by that much. Sen. Coburn has been quoted as saying the Gang “added another $115 B in health savings” in recent days. I think that’s this figure, but the document includes both numbers. That suggests to me the document is trying to have it both ways — include the higher figure that Sen. Coburn likes, and the lower figure that I presume Democrats prefer. One of the graphs shows the additional $117 B in health savings, but lightly shaded, again allowing the Gang to sell it both ways to different constituencies. This ambiguity detracts from the plan’s credibility and is important.
- A significant policy detail is that the Judiciary Committee would have to get savings from medical malpractice reform.
- Revenues would be set at a level that over the next ten years is $1.5 trillion lower than current law, but $2.3 trillion higher than current policy. I will explain this in further detail below.
There are a couple of significant little phrases in the document: Medicare and Medicaid would be reformed “while maintaining the basic structure of these critical programs,” and the plan “would maintain the essential health care services the poor and elderly rely upon.” The first is a rejection of structural reforms like those proposed in the House Budget plan or in Ryan/Rivlin, as well as a rejection of block granting Medicaid or converting it into a low-income voucher program. The second is vague and could be interpreted to mean almost anything. Since Democrats are in the Senate majority, they would be the ones interpreting both sets of language as legislation implementing the Gang’s plan is drafted.
In effect, you should think of this language as meaning the Gang’s plan commits to achieving Medicare and Medicaid savings through incremental programmatic changes rather than structural reforms.
You can compare the $328 B or $445 B of proposed mandatory savings to the Biden group’s $423 B figure. Democrats in the Biden group were willing to go higher if taxes were increased, as they are in the Gang’s plan.
Part 2B: Recommended tax policies
The plan would require the Senate Finance Committee to report tax reform legislation within six months. That tax reform legislation would have to hit the revenue levels described above, and would also have the following tax reform policy parameters (with a caveat):
- Individual rates would be in three brackets: 8-12%, 14-22%, and 23-29%;
- AMT would be repealed
- “Reform, not eliminate, tax expenditures for health, charitable giving, homeownership and retirement, and retain support for low-income workers and families;”
- “Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries;”
- Corporate income would be taxed at a single rate between 23 and 29%;
- Corporate income earned overseas would operate under a “competitive territorial tax system.”
There’s an important process point here. It’s pretty clear to me that the Gang’s plan is written to be implemented through a traditional budget resolution process. If I’m right, then the above tax reform parameters are non-biding and close to meaningless. A budget resolution cannot constrain the Senate Finance Committee and force it to change taxes in a particular way. Its only power is to set the numeric total for how much revenue is collected. A budget resolution could include all the above conditions, but the Finance Committee could ignore them without consequence (and traditionally has). Procedurally the Senate would first commit to the new revenue levels, and then later work on the details of tax reform.
That means that either the Gang would have to find another way to commit the Finance Committee to abiding by these principles, or risk the committee doing different tax policies that would collect the total amount of revenue required by the budget resolution. Several members of the Gang are also Finance Committee members, but if Chairman Baucus decided he wanted higher marginal income tax rates than described above, for instance, I don’t see how this plan could prevent him from doing so.
Another important detail left unspecified is the capital gains & dividend tax rate. Back channel conversations suggest the Gang agreed on 20% for both, up from 15% now, although this is left unspecified in the Gang’s plan.
Part 2C: Process changes
- Part 1 of the plan would establish discretionary spending caps for four years, through FY15. Part 2 would set caps through the end of the 10-year budget window in FY21, but again the numbers aren’t specified.
- The Gang’s plan would create an unspecified “trigger” mechanism if debt-to-GDP does not stabilize after 2015. The language makes it sound like a fast-track legislative process rather than an automatic sequester.
- The plan also creates a process to “require action by the Congress and the President” if total federal health care spending per beneficiary grows faster than GDP + 1%. The details of this process are similarly unspecified.
The triggers are important but not super-strong. If you want to guarantee a fiscal outcome like stable debt-to-GDP or health spending growth slower than some rate, you need to put an automatic mechanism into law that forces that outcome whether or not Congress acts. Creating an expedited legislative process to encourage Congress to fix it still relies on Congress to do the right thing in the future. That’s often an uncertain bet.
This has an important consequence. I understand the “$3.7 trillion in savings” cited by the Gang is based in part on this second health care trigger. In other words, they assume that total federal health care spending per beneficiary will grow no faster than GDP + 1%. But they don’t specify the policies to achieve that goal, and they set up an unspecified legislative process to make hitting that target a little easier but far from certain. This means that a significant share of the $3.7 trillion savings are not real. If you want to claim savings from capping government health spending growth, you either have to make the policy changes now or actually cap it. You can’t just say “We’ll set a goal for Congress to hit in the future.” You don’t get to count that as saving money, and the Gang does.
Part 3: Social Security process
- The Gang’s plan would “consider Social Security reform, if and only if the comprehensive deficit reduction bill has already received [60 votes].” While the Gang describes this as including Social Security reform in their plan, the “only if” means it is instead a new procedural barrier to reform. In effect, it says that SS reform may not be considered until and unless Part 2 has passed the Senate.
- It sets “75-year actuarial balance” as the test for measuring Social Security reform. This is a significant policy choice I will describe below.
- It would set a 60-vote threshold for passing Social Security reform in the Senate. While there is in practice already a 60-vote threshold since a minority could filibuster a Social Security bill they didn’t like, this slightly raises the bar by requiring 60 votes not just to vote to shut down a filibuster, but also to vote aye on final passage. This is therefore another new procedural hurdle to passing Social Security reform.
- If the Senate completes Part 2 and Part 3, the two bills would be combined and sent to the House as a single bill.
The big question here is what the Gang can legitimately claim on Social Security reform. Unlike both the House-passed budget, the President’s February budget, and the President’s late-Spring budget speech, the Gang’s plan actually talks about Social Security. But they are counting a technical correction to CPI, plus Social Security spending increases, plus the above process, as moving forward on Social Security reform. That is an unusual claim to say the least.
Deficit reduction
The Gang says their plan would reduce deficits by $3.7 trillion (or maybe $3.6 trillion, depending on that ambiguous additional $115 B of health savings) over 10 years “under CBO’s March baseline.” To be blunt, I don’t believe this number. The Gang’s documents use three different baselines as bases for comparison for different elements of the plan. They don’t specify how much they want to spend on 30% of the budget, and they count savings from a weak legislative process change on health care. To me these are flashing red lights suggesting someone is trying to hide the ball. The Gang’s charts purport to compare the Gang’s plan with the Bowles-Simpson recommendations, but they leave out the Social Security portions of Bowles-Simpson, distorting the comparison.
Until more numbers or detail are provided I suggest treating this number as an assertion rather than a fact. A reporter who writes “The Gang of Six plan would reduce the deficit by $3.7 trillion” is being insufficiently skeptical.
The discretionary holes
- The Gang’s plan proposes $866 B in savings from “security” (aka defense) discretionary spending. They don’t say compared to what. This is a particular challenge right now, because how you measure the savings depends on what you assume as a starting point for expenditures in Iraq and Afghanistan. This baseline measurement question is not particular to the Gang’s plan. Everyone faces it.
- More importantly, the Gang’s plan specifies neither discretionary spending totals nor how much would be spent (or saved) from nondefense discretionary spending. The traditional battle is that Republicans want to cut nondefense and increase defense, and Democrats the reverse. The Gang’s plan provides some detail on defense (with the above caveat), but says nothing about total discretionary spending or whether the Gang’s plan would increase or cut non defense appropriations.
The first of these could be pretty easily clarified. The second is more of a gaping maw than a hole. It is a critical area of ambiguity in one of the most hotly disputed questions in any budget plan. I don’t see how a Member of Congress could make a judgment about a plan without knowing how much it’s going to spend on appropriations, as well as the defense/nondefense balance.
Tax cut or tax increase?
The “Bush tax rates” have been in effect since 2001. Congress has “patched” the Alternative Minimum Tax every year for a long time so that it doesn’t suddenly hit millions more tax filers. But the Bush tax rates are scheduled to expire January 1, 2013, and the AMT again needs to be patched. This creates a massive difference between current law on taxes and current policy on taxes.
- Current law: Income tax rates increase January 1, 2013, with significantly higher revenue coming into the government from that point on. The AMT patch expires as well, affecting millions more taxpayers and adding another huge chunk of revenue for the government. The same is true for the estate tax.
- Current policy: The tax rates now in effect (aka “the Bush tax cuts,” or maybe now “the Bush-Obama tax cuts” since President Obama extended them last December) stay where they are forever, and the AMT continues to be patched. These principal components of tax policy do not change in 2013 or thereafter. Future government revenues collected will be roughly the same as they are this year, accounting for differences in economic growth.
Congressional Republicans have been using a current policy baseline to describe tax policy changes. Congressional Democrats have been using a current law baseline. The White House has used a hybrid (don’t ask).
CBO says the difference between current law taxes and current policy taxes over the next decade is about $3.8 trillion over the next decade. Interest effects are another $750 B more.
The Gang’s plan would result in revenues that would be greater than current policy but less than current law. So whether this is a tax cut or a tax increase depends on your “baseline” (starting point) for comparison.
- The Gang says “If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion.” CBO scores relative to current law, and this phrase is key.
- That means the Gang’s plan is a $2.3 trillion tax increase relative to current policy.
- House Budget Chairman Paul Ryan measures current policy a little differently than CBO, I think, so he comes up with a $2.0 trillion tax increase relative to current policy.
This tax baseline question also critically affects the “ratio” measurement commonly used to describe deficit reduction plans. The Gang is claiming most of the deficit reduction comes from spending cuts. That’s using a current law baseline for taxes. If you instead use current policy, the Gang’s plan relies principally on tax increases for its deficit reduction. I can’t tell you that ratio because I don’t believe their aggregate deficit reduction number, nor do I have sufficient detail to understand their discretionary spending numbers.
Social Security measurement
There are two commonly discussed ways to measure a Social Security reform plan. They are called “75-year actuarial balance” and “cash flow balance.” The first test is easier to meet and tilts the reform playing field toward tax increases. The Bowles-Simpson framework said Social Security reform had to meet both tests, including the harder cash flow balance test. The Gang’s plan sets 75-year actuarial balance as the metric for measuring reform.
Congratulations. You made it through a heavy post and now, I hope, understand the Gang of Six’s budget plan. Thanks for reading.
(photo credit: Kinya Hanada)
Understanding Cut, Cap, and Balance
Sometime this week the House of Representatives will consider Rep. Jason Chaffetz’ H.R. 2560, the “Cut, Cap & Balance Act.”
We are entering the arcane world of budget process, so this could be tough sledding. I will do my best to distill the essential elements and simplify it.
The key to understanding this bill is that it focuses on government spending, rather than on taxes or deficits. The bill would achieve significant deficit reduction through cutting and limiting spending, and all of its mechanisms use spending rather than deficit targets.
Surprise, surprise: the bill consists of three parts.
- Cut – The bill provides specific numbers to limit both discretionary and mandatory spending for FY12. These numbers would drive further Congressional action this year or else force a Presidential sequester. (I explain a sequester below.) The intent of this section is to force Congress and the President to cut spending immediately.
- Cap – The bill would establish a new enforceable limit on total federal spending as a share of the economy. The new caps are designed to phase federal spending down to just below 20% of GDP by FY17 and then hold it there through the end of a 10-year budget window in FY21. Put more simply, this is a new enforceable aggregate spending cap.
- Balance – The bill would increase the debt limit by $2.4 trillion after the House and Senate have passed a Balanced Budget Amendment (of a certain type).
What is a sequester?
A sequester is an automatic across-the-board proportional spending cut written into law and implemented by the Office of Management and Budget (OMB). It is usually combined with some kind of budget target and designed as a backup measure to force legislative action to hit that target.
Example
Imagine there are 10 government programs that spend $50 each. Congress passes and the President signs a law that includes a spending target of $490, a deadline of December 31st, and an across-the-board sequester.
If new laws are not enacted by December 31 to reducing spending to $490, then the sequester kicks in. OMB cuts all 10 programs by whatever percentage is needed to hit the target. In this case, each $50 program is cut by 2%, to $49, to hit the aggregate spending target.
If the new law were to exempt five of the 10 programs from the sequester, then the remaining programs would be subject to a 4% cut to hit the same spending target.
If Congress doesn’t like the results of an anticipated sequester, they can and should enact a new law before December 31 which hits $490 in a different way. They could cut one program by 20% ($10) and leave the other 49 programs untouched, for example.
Types of sequesters
There are discretionary sequesters which apply to programs that face annual appropriations.
There is a mandatory sequester, which is designed to apply to mandatory/entitlement spending.
Or you could do a spending sequester which applies to both discretionary and mandatory spending.
In March the President floated the idea of a sequester that would raise taxes as well as increase spending.
The challenge: exemptions
The hard part of designing a sequester mechanism is rounding up the votes for a bill that includes an automatic across-the-board cut. Members of Congress will say, “I support your spending target, and I support the hammer of creating a sequester, but I can’t vote for it if the sequester would cut X. Give X an exemption from the sequester and I’ll vote for your bill.”
The exemptions to the sequester are the key that shapes subsequent Congressional negotiations. If your spending priorities are exempted from the sequester, then you have less incentive to cut a deal after this new law is in effect. You have leverage in the negotiations.
In addition, Members expose themselves to political risk when they vote for the creation of an across-the-board sequester. This is why all mandatory sequesters enacted so far have exempted Social Security, even though Social Security is the largest component of mandatory spending.
The spending limits in Cut and Cap
I support the numeric spending targets in the Cup and Cap sections. For me the most important number is “below 20% of GDP” in the cap section. I think that’s the right target, and it is the primary reason I support this bill.
For comparison:
- Federal spending in the 50 years preceding the Obama Administration averaged 20.2% of GDP.
- Federal spending in 2009 hit an all-time post-WWII high of 24.7%
28.5%of GDP. - Under the President’s original budget, it would be 23.6% this year, 22.7% in 2013, and then begin a steady climb to 24.5% of GDP at the end of the decade in 2021. Since the President didn’t provide detail with his second round budget, I can’t provide parallel figures for that.
- The 23.6% figures means federal spending will be 15% larger, measured as a share of the economy, then it has historically been.
Those extreme spending shares are the result of several factors: higher automatic stabilizer payments in a weak economy, government actions like stimulus laws and ObamaCare, and long-term entitlement spending trends that build gradually over time.
Anticipating the replies from my left-of-center friends, yes, I am willing to make whatever changes are needed to the big 3 entitlements to stay within this cap. I would rather change the nature of future government benefit promises than see the private sector shrink.
The sequesters in Cut and Cap
Most Members of Congress complain that automatic sequester mechanisms include programs they don’t want to cut. I have the opposite complaint – the sequesters in this bill exempt too much. In particular, both the mandatory sequester in the Cut section and the across-the-board sequester in the Cap section exclude Social Security, Medicare, military personnel, and interest costs. While military personnel costs would rank high on my list of spending priorities, I think the best sequester mechanisms apply to all non-interest spending.
In particular, we need to address spending trends in the big three entitlements. By exempting Social Security and Medicare from the sequester, this bill makes it that much harder for Congress to bite the bullet and make needed changes in both programs. It is easy to understand the legislative necessity that drove this decision, but it’s a big policy mistake nonetheless.
At the same time, these sequester mechanisms are much better than past ones enacted into law, which exempted hundreds of programs from the across-the-board cut. A well-designed sequester is not supposed to be the mechanism that cuts spending. It is supposed to be the forcing mechanism that convinces Congress to make decisions to cut spending. If you exempt too much, then the incentive placed on Congress is even weaker.
Debt limit – Balanced Budget Amendment
It is important to understand that the debt limit increase in this bill is not just tied to any Balanced Budget Amendment to the Constitution, but to one which meets certain parameters. The BBA must not just guarantee a balanced budget. It must also limit spending as a percent of GDP as in the Cap section of this bill, and it must raise the legislative bar for tax increases to a two-thirds vote of both the House and Senate.
It might therefore be more appropriate to think of this as a “Balanced Budget through Spending Cuts Amendment.”
I support balancing the budget through cutting spending rather than raising taxes. I don’t feel strongly either way about whether or not this should be enshrined in the Constitution. I lean a little against, because I hate messing with the Constitution.
All that is irrelevant, however, because even if this kind of BBA did pass both Houses of Congress, it would take many years for three-fifths three-fourths of the States to ratify it as an amendment to the Constitution. Federal budget problems are upon us now – we can’t wait for a Balanced Budget Amendment to be ratified. While this part of the bill is useful to make a point, I fear it serves as a distraction from actually cutting spending.
Since Congress will not pass a Balanced Budget Amendment through both Houses in the next two weeks, and since this section makes a debt limit increase contingent upon such passage, I have a big problem here. That problem is solved as long as some other bill becomes law soon to increase the debt limit.
Summary of my views on Cut, Cap, and Balance
I recommend supporting this bill even with its significant imperfections. I place enormous value on the creation of an enforceable cap on total government spending.
Good
- Focuses on the problem I think needs to be solved: too high and too rapidly growing government spending;
- Cuts spending 2012 and creates a sequester to enforce those cuts;
- Caps federal spending below 20% of GDP and phases down to that over a few years;
- Creates a sequester mechanism to force spending cuts to hit those levels;
- The mandatory spending sequesters are far broader and therefore superior to those enacted in the past; and
- The form of the Balanced Budget Amendment, which would drive spending cuts rather than tax increases, is good.
Bad
- The sequester exempts too much, and in particular it exempts the two largest entitlement spending programs, Social Security and Medicare. If enacted, this bill might make it legislatively harder to reform these two programs. That’s a huge problem.
- While it appears to increase the debt limit, it sets conditions that won’t be met in time. This problem is solved as long as some other bill becomes law soon to increase the debt limit.
- I lean against amending the Constitution, even for a Balanced Budget Amendment whose form I like. And the legislative reality means time spent on a BBA could be better spent trying to cut spending.
No bill is perfect. In my view, the good far outweighs the bad in this bill.
(photo credit: Alan Bedenko)
The substance of the budget negotiations
It appears the primary action on budget negotiations has shifted from the White House to a discussion between Leaders McConnell and Reid. Still, the White House discussions appear to be continuing, and even if they fall apart, the positions of the various parties are still important.
Piecing together information on a moving target from several sources, here’s my best interpretation of where things stood as of late Thursday / Friday. I believe this is consistent with most reporting from major news sources. I think it’s also somewhat more detailed, at least compared to anything I have seen so far. If knowledgeable insiders wants to suggest corrections to what I describe below, please email me.
There are three levels of negotiations:
- The Biden group: VP Biden, Budget Director Jack Lew, Treasury Secretary Geithner, and NEC Director Sperling, negotiating with House Majority Leader Cantor, House Minority Leader Pelosi, Senate Majority Whip Durbin, and Senate Minority Whip Kyl;
- Discussions between the Speaker and the President about a possible Grand Bargain; and
- A new round of discussions between Senate Minority Leader McConnell and Senate Majority Leader Reid.
I explained Leader McConnell’s proposal last Thursday, but cannot provide any additional detail on the substance of his negotiations with Leader Reid, such as whether they are thinking of including some or all of the agreed-upon savings provisions from the Biden group.
I will therefore focus on my admittedly imperfect understanding of the substance of the Biden group negotiations and the Grand Bargain discussions.
The Biden group
This negotiation appears to be working under a least common denominator principle. Only those policy changes that all parties agree to are included. This kind of approach results in a smaller package and less savings the more people and the wider the perspectives you include in the negotiation, so it’s unsurprising that this is a modest package.
As I understand it, the most recent least common denominator of that group includes:
- $203 B in health mandatory savings over 10 years. All of this is spending cuts (technically, reductions in the rate of spending growth). I think that “health” here includes only Medicare and Medicaid, with maybe a few billion savings from cutting a bell or whistle attached to the Affordable Care Act (aka ObamaCare). Of this $203 B in savings, $195 B comes from traditional cuts in how much the government pays a doctor, hospital, or other health provider for a given service. The other $8 B comes, I think, from changes that more directly affect beneficiaries (maybe a smidge more means-testing or higher copays, these amounts are small enough to likely be trivial in their effect).
- $220 B in other mandatory savings over 10 years. I understand that one quarter of this ($55 B) comes from policy changes that would look to an average person like a spending cut. The other $165 B are real policy changes that involve policy pain to certain constituencies, but to the average person they don’t look like spending cuts. Higher fees on Fannie & Freddie, on defined benefit pension plans, on aviation, and telecommunications spectrum and property sales all fit in this box because they are technically user fees rather than tax increases.. This is real deficit reduction and these are not gimmicks. Even though they are technically classified as spending cuts, you cannot conclude that they actually reduce government spending or the size of government (good luck figuring that one out – it’s an accounting convention).
- $1,050 B ($1.05 trillion) in discretionary savings over 10 years. I understand this is a $2 B cut in the topline for next year (FY12) relative to FY11. After that, the topline would be allowed to grow at 2/3 the rate of inflation. The savings figure is (apparently) calculated by subtracting the resulting amounts from a baseline under which spending grows at the rate of inflation.
- No change to how CPI is calculated, as was apparently discussed as part of a Grand Bargain.
That totals $1.473 trillion of savings over 10 years. I use a 20% rule-of-thumb for interest savings over this timeframe, meaning I assume almost $300 B of interest savings would result from these amounts of direct policy changes. If that’s right, you’re looking at a ballpark of just under $1.8 trillion of savings over 10 years.
As with any measure of deficit reduction, you have to be careful about the baseline. Unfortunately, I don’t know the discretionary baseline they’re using here, and in particular what it assumes for war costs in Iraq and Afghanistan. This makes me skeptical about the $1.05 trillion number until I get clarification.
This package is, I understand, smaller than it was earlier last week. I understand the Biden group had been circling around about $330 – $350 B in health savings and about $260 – 330 B in other mandatory savings. I am told that Democrats pulled items off the list throughout the week, insisting they were conditional on Republicans agreeing to tax increases, resulting in the above position late in the week.
This would explain the “$2 trillion” number you hear coming from the President and Congressional Democrats. I understand the White House / Democratic position to be a package that would score as about $2 trillion of spending reductions plus interest savings contingent upon Republicans agreeing to additional tax increases. If Republicans are unwilling to raise taxes, than it appears Democrats are in the ballpark of about $1.75 trillion of spending reductions plus interest savings as described above.
This means the narrative of Democrats insisting on tax increases as part of a deal, and Republicans refusing those tax increases, applies not just to the Grand Bargain discussions, but also to the more modest results of the Biden group.
The President’s position in a so-called Grand Bargain
I don’t know the details of the Speaker’s position in the so-called Grand Bargain discussions, but I think I understand the President’s position in those talks. It includes the following on the spending side:
- all of the above from the Biden group (including, I think, the larger health and other mandatory savings amounts);
- plus an additional $150ish B of discretionary savings over 10 years, for a total of about $1.2 trillion relative to an inflation baseline (with the same caveat as above);
- plus making technical corrections to the Consumer Price Index as a measure of inflation, which would slow the growth of future Social Security COLAs and increase future income tax revenues;
- plus raising the Medicare eligibility age to match scheduled increases in the Social Security age;
- plus [a little?] more means-testing and higher copayments in Medicare, and maybe some Medigap reforms;
on the tax side, I understand the President’s proposal would:
- make permanent the bottom four income tax rates and other tax relief provisions not for “the rich,” preventing tax increases scheduled for 2013;
- allow the top two individual income tax rates to increase in 2013;
- increase total government revenues by about $1 trillion over the next ten years (again, I’m skeptical because I don’t know the baseline here); and
- include some form of commitment to future comprehensive tax reform, with specific parameters that I don’t yet know.
(photo credit: White House by Pete Souza)
Understanding the McConnell debt limit proposal
Coming two full days after Leader McConnell released his proposal, this post may be too late to do much good. Most of Washington seems to have processed the idea and is now fiercely debating it. Still, I found the press coverage of the Leader’s proposal to be generally confusing and inadequate, so I hope this helps clarify things for anyone who was confused by other explanations.
I will try to stay neutral as best I can in this post.
The core concept
The debt limit now works as an only if proposition: the debt limit is increased only if Congress votes affirmatively to authorize an increase. Increasing the debt limit therefore requires a majority of the House and Senate to cast a difficult aye vote, plus a Presidential signature. The McConnell proposal would invert this into an unless proposition: the debt limit would automatically be increased unless Congress voted to stop it. And by changing the key vote to a veto override, you would need only 1/3 of either the House or Senate to take a tough vote to allow the debt limit to increase.
In exchange for this significant increase in Presidential authority, the President would take most of the political heat for the debt limit increase, and he would be required to propose difficult spending cuts of an equal or greater amount.
How it would work
- Before August recess, the House and Senate would pass the McConnell proposal and the President would sign it into law.
- As soon as it became law, the President could ask Congress to increase the debt limit by $700 B.
- The President would have to simultaneously submit a plan to cut spending by more than $700 B.
- The Presidential request and submission would trigger an immediate $100 B increase in the debt limit, thus giving the Administration the ability to make it into September without having to slow down cash outlays for benefit checks or anything else.
- The President’s $700 B debt limit increase request would be automatically approved unless Congress blocked it. To block it, a majority of the House and Senate would vote to disapprove. That resolution of disapproval would go to the President, who would presumably veto it. If more than 2/3 of the House and Senate overrode the President’s veto, then the $700 B request would be denied and the original $100 B authorization rescinded. This resolution of disapproval would be governed by “fast track” legislative procedures so it couldn’t be delayed, amended, or filibustered.
- If either the House or Senate voted down the resolution of disapproval, or if 1/3 or more of the House or the Senate sustained a Presidential veto, then the $700 B would be automatically authorized. In other words, the President knows he will get his $700 B as long as (a) he submits his spending cuts and (b) he knows he can get 1/3 of the House or the Senate to sustain his veto, should it be necessary.
- This process would be repeated in the fall of 2011 and again in the summer of 2012, with the President authorized to ask for an additional $900 B each time, again matched by a greater amount of spending cuts. The President could begin this process only when Treasury was within $100 B of the debt limit.
- The authority would expire in early 2013, around the end of this Presidential term.
The biggest area of confusion
The McConnell proposal does not guarantee that spending will be cut. Congress would consider the debt limit resolution of disapproval and the President’s proposed spending cuts separately. The process is designed to bring the debt limit resolution of disapproval to a rapid vote. Congress could, however, do anything it wants (or nothing) with the President’s proposed spending cuts. The McConnell proposal guarantees that spending cuts will be proposed, and it guarantees a swift resolution to the debt limit increase. It does not guarantee any legislative conclusion on spending cuts.
Likely results
If the McConnell proposal were to become law, I would expect the following results:
- All four debt limit increases would happen: $100 B in late July / early August, another $600 B in September, another $900 B in the fall of 2011, and another $900 B in mid-2012, for a total of $2.5 trillion between now and the end of 2012. If revenue forecasts hold up, that should get through the remainder of this Presidential term.
- Press attention would initially focus on the President’s request. He would bear much of the political responsibility for the debt increases, as intended by the McConnell proposal.
- Most Members of Congress, from both parties, would vote for the resolutions of disapproval (i.e., to disapprove the debt limit increase) each time. There is a high likelihood the President would have to veto each resolution of disapproval, then muster 1/3 of the House or Senate to sustain each veto. I assume he would be able to find the votes to sustain, possibly from both parties.
- The President would, as “required” (see below), make his three spending cut proposals. There would be lots of back-and-forth over whether his proposals were real and/or legitimate.
- Congressional action on the spending cut proposals is difficult to predict, but I wouldn’t hold out high hopes for these proposals to provoke significant legislative action. They would, however, create pressure for the President to be more specific than he has been up until now.
Nuances
- The McConnell bill does not increase the debt limit. It authorizes the President to increase the debt limit, as long as Congress doesn’t prevent him from doing so. Thus, you as a Member of Congress could vote for the McConnell bill, then vote for the subsequent resolutions of disapproval, and honestly say that you never voted to raise the debt limit. Yet the debt limit is much more likely to be increased, given the lower success hurdle of just sustaining a veto. This political logic is core to the proposal.
- This mechanism would work exactly like the TARP funding mechanism enacted in September, 2008. That TARP funding mechanism was modeled after a longstanding provision in law that governs Congress’ ability to disapprove regulations implemented by the President with a resolution of disapproval. If you are familiar with either the Congressional Review Act process (for regs) or the TARP “tranche” process, this is close to an exact copy.
Legislative & political logic behind the proposal
Under current law the debt limit does not increase unless enough Members of Congress votes “aye.” Under McConnell, the debt limit increases as long as not too many Members vote “no.” In a strange way, Members of Congress would like this vote – it would be a “free” opportunity to demonstrate they are opposed to a debt limit increase by voting no. The President (and Congressional leaders who feel a responsibility for the result) would only have to find 1/3 of the House or the Senate to take a tough vote, rather than now, where they have to find a majority in both the House and the Senate.
More fundamentally, the McConnell amendment would shift authority, power, and responsibility for a debt limit increase from the Legislative Branch to the Executive Branch. Usually the two branches of government fight to maximize their power relative to the other. Here, the Congress would be saying, “Too hot for us – you deal with it.”
This is a time-limited proposal with a specific partisan configuration in mind. All $2.5 T of debt limit increases would technically be the result of Presidential action, not Congressional action. This may explain why Democratic leaders are saying nice things about McConnell’s idea – it lets their Members off the hook just as it lets Republicans off the hook. President Obama would politically “own” the debt limit increases.
In addition, it would require (with a caveat) the President to make specific legislative proposals to cut spending deeply (note that McConnell requires “spending cuts,” rather than “deficit reduction”), something he has so far been unwilling to do. The President and his team assert that his spring budget speech and his recent closed-door negotiations constitute specific and credible proposals, while Republicans (including me) argue he has been vague and has been claiming credit for more deficit reduction than he has actually proposed. The McConnell amendment would force the President to propose spending cuts to get his debt limit increase, creating a more level playing field in an environment in which House Republicans have voted for specific pain while everyone else has basically ducked. At the same time, it’s difficult to limit the President’s ability to propose gimmicks and call them spending cuts.
The economy is weak and President Obama is taking the brunt of the blame for that. I think Leader McConnell is concerned that if the debt limit is not increased, the President will attempt to assign responsibility for that Congressional inaction and any subsequent economic bad news to Republicans. He could argue that Republicans’ irresponsibility on the debt limit is the cause of economic weakness. The McConnell proposal would preclude this scenario.
An important detail
It is difficult to draft a Constitutionally acceptable provision to require the President to make a proposal to Congress. In the past, the Executive Branch has argued that similar provisions are not legally enforceable, so there could be a concern that the President would ignore this requirement and fight it in court.
I think this could be rectified by a separate Presidential letter committing him to abide by this provision whether or not he’s required to do so. Since the McConnell proposal will pass the Senate and become law only if the President finds it acceptable, such a letter could be negotiated as a suspenders to the belt of the legislative language.
Initial reactions
This is the fascinating part. The New York Times and Wall Street Journal editorial pages both endorsed the McConnell proposal, for different reasons. That is astonishing.
POLITICO reports that many House Republicans were furious with the proposal, and that some Senate conservatives are also not onboard. The proposal could not pass the House today, but then I don’t think any debt limit proposal could pass the House today.
The National Review editorial board opposes it, preferring a debt limit increase be packaged with spending cuts. At the Weekly Standard, Bill Kristol and Stephen Hayes oppose it, while Fred Barnes supports it (I think). Leader McConnell should be pleased, in that he has support from a number of outside conservatives who, for instance, attacked Republican leaders during the spring Continuing Resolution battles.
Key Democrats, including Senate Majority Leader Reid and Senator Schumer, are signaling that they are open to Leader McConnell’s idea. It is unlikely they would be doing so without at least a private nod from the White House.
Evaluating the plan
Key to understanding the McConnell proposal is the current legislative context. Leader McConnell emphasizes that he intends this proposal as a backup plan, to be pursued only if everything else fails. Congressional Democrats are reportedly open to the idea, which means it has at least a moderate chance of becoming law. This means that, at the moment, it is the only plan that can make that claim. The question is not, then, whether or not you like the proposal. Instead, I think the relevant questions are:
- Are you willing to allow the Congress to recess for August without the debt limit being increased?
- If not, what other alternative can become law?
Those conservatives who answer the first question yes will probably be unsatisfied by any proposal, I think. If you are not afraid of the effects (policy or political) of Congressional inaction, you have no incentive to consider any compromise.
The other obvious alternative, assuming there is no big deal, would be to package a small, short-term debt limit increase with a similarly-sized package of spending cuts (say, $200-$300 B). I won’t be surprised if that idea starts to gain traction soon as an alternative to McConnell’s proposal
(photo credit: Gage Skidmore)