THE CONCORD COALITION

POLICY FORUM

“RESPONSIBLE FISCAL POLICY AND THE AMERICAN POLITICAL SYSTEM:
CAN THIS MATCH BE MADE?”

PANEL:

“MAKING SAUSAGE DURING AN ELECTION YEAR –

WHAT'S GOING ON IN THE KITCHEN?”

moderator:

charles bowsher,

former comptroller general of the United States

Speakers:

Douglas holtz-eakin, director,

Congressional budget office

g. william hoagland, budget liaison,

office of the senate majority leader

Tom kahn, minority staff director,

house budget committee

robert bixby, executive director,

the concord coalition

 THURSDAY, JUNE 24, 2004

Transcript by:

Federal News Service

Washington, D.C.

MR. BOWSHER:  I'm Chuck Bowsher.  I'm the former Comptroller General of the United States, the head of the General Accounting Office (GAO).  I'm going to serve as the moderator of this panel.  I also served, from 1967 to 1971 as Assistant Secretary of the Navy for Financial Management. At that time, I had the budget shop under my jurisdiction and we had a very large budget shop. So I've always had great respect for those who are really into the budget process.  It's a very important process in the American government system.  And that's basically what our panel is all about here today: to try to discuss what's going on in the current debates and discussions on the fiscal year 2005 budget.

I thought it would be good if we started with the director of the Congressional Budget Office on my right here, Doug Holtz-Eakin, and give him five minutes to give us a little background as he sees it and then we'll just move through the thing and I'll go with Bill Hoagland on my left here.  Next, Tom Kahn is on his way, I am told, and if he gets here he'll go next, and Bob Bixby representing the Concord Coalition will be our fourth.  And then what we'd like to do is get a lot of questions from the audience.  In other words, we're all going to try to hold our remarks to about five minutes and then see if we can answer some of the questions that you have. 

So, Doug, I'd like to turn the mike over to you.

DOUG HOLTZ-EAKIN:  Thank you.  I will be brief and I will tell you some things you already know, and I will focus my attention on 2050 as opposed to 2005.  I know others will address the near term.  That has gotten most of the attention in the press: what will happen over the next couple of years? Certainly the CBO baseline, which shows fiscal year 2004 deficits north of $400 billion and then a path of diminishing deficits that stay north of $200 billion, is meritorious of some discussion. But past the next five years we see the pressures that will begin to arise in the long-term budget outlook, and let me just remind everybody of the inevitability about coming to some fundamental decisions about tax and spending policy in the United States.

The combination of an aging population and rising healthcare costs will mean that Medicare, Medicaid, and Social Security will claim an increasing share of GDP. Precise projections of that share are of course impossible, but the trajectory is such and the timing is such that it is meritorious of our fundamental attention. 

As we documented in our 2003 long-term budget outlook, unless taxes reach unprecedented levels in the United States, the current fiscal policy is simply unsustainable in a numerical sense, and rising debt would have corrosive and potentially contractionary effects on the economy.  The rising taxes necessary to finance these spending levels would also have impacts on the economy. It may be the case that fiscal policy would be sustainable if somehow healthcare costs grew slower than the past, but that would still require taxes higher than the typical 18 percent of GDP that we've seen in the United States.  If we stick to 18 percent of GDP as the tax burden that the American population is willing to bear, then we simply must restrict entitlement growth, and our reading of the situation in that report was that while faster GDP growth would be helpful, it's unlikely that we'll grow our way out of this problem. 

In short, some fundamental fiscal policy decisions are approaching and the topic of this panel presumably is whether those kinds of fiscal policy decisions can be made in the political context.  Now, much of the current focus this year has been on the rules associated with the budget process and the near term deficit Ύ issues of discretionary caps and pay-go that Ned Gramlich talked a great deal about. And as Ned mentioned, there is an interest in moving the same kinds of institutions into the budget process to address longer term economic or budgetary problems.  The basic idea is to use some sort of present value accounting or accrual accounting to move from the future into the present the credit for undertaking restrictions in the growth rate of government spending. 

Now, I think we can stipulate that it is necessary and desirable to undertake these kinds of moves, but I want to flag some of the issues involved in trying to move this kind of an institution into the budget proces and into the politics.  Among the issues that arise is that the movement to accrual accounting – our present value style mechanisms – by definition gets rid of timing and I would suggest that, from my short time in Washington, timing is everything in a political setting. To adopt institutions that are deliberately devoid of timing is to give up information that is important to policymakers. 

Our projections show that Medicare and Medicaid will become bigger and rise sooner than Social Security will. To move Social Security and Medicare into some sort of parallel present value accounting will give up that information.  Accrual accounting also implies the suggestion, by giving you a number – a shortfall now calculated over a long period in the future - that you need to fix the problem now. Historically, most attempts to address these kinds of issues have involved phased-in approaches that had timing both in the policy response and in the problem. To go into some sort of accrual system, I think, gives that up.

It's also the case that much of this measure really tries to import into the government sector private sector accounting. That transplantation is probably not appropriate.  The government really is different than the private sector.  Its greatest assets are its ability to tax and the notion of an unfunded liability in the presence of the sovereign power to tax is a very difficult conceptual chasm to bridge. So it's not obvious that that's a successful route either from the political point of view or from the conceptual point of view. 

As someone who would likely have to supervise this, I want to echo some of the things Ned Gramlich said about implementing this.  There are some very serious practical problems involved in computing these measures.  What will be the growth rate of healthcare costs in the year 2030?  It's a reasonably hard question and I'd suggest that the uncertainties surrounding that is something that's sensible to think hard about.  It's also the case that one would have to choose discount rates, productivity growth, all the kinds of things that lead to a fair amount of uncertainty about these projections. 

In a report that we put out on Social Security recently, we tried to display the range of uncertainty about the future path of that entitlement program simply from the economics and the demographics: the eight variables that are embedded in that analysis.  The range of uncertainty is quite large.  The basic message is not changed, but the range of uncertainty is important and that's only from those sources alone.  There are many others you could bring into it.

And it also, I suggest, may not solve the problem in and of itself.  One could easily imagine games where taxes were increased 75 years from now in a way that did not change the current accrual measure one bit.  It would simply raise the stakes on the kinds of pressures associated with the current budget process where classification of items into outlays and taxes and getting the budget integrity right is a struggle to begin with.  To do it over longer horizons, I think, would make it harder yet.

And it raises the question: what problem would we solve?  Ned said it very clearly.  Is it the case that we need more information about these long term issues?  I hope not, but certainly it could be provided if necessary.  Would it in fact constrain congressional and administration actions in a way that would bring things into balance automatically?  Highly unlikely.  The Constitution suggests that you can't do that and I think the reading of history is it won't.  Or, will it incentivize Congress and the administration Ύ appropriately Ύ by giving credit in the present for reductions in future budgetary pressures?  That's clearly the goal and the question is whether this is the best vehicle to do it. 

There are other vehicles to move things through time.  Political decisions are fundamentally built along lines where there are agreements, and a political consensus to take care of long term budget problems would move credit in the same way that a rigid rule would. Having a party affiliation there, where that was in fact rewarded, has the same mechanism as does a rigid rule, so politics could take care of this problem in and of itself. 

There's another thing out there which Ned left out, correctly I think, because there's a vote soon, and that is financial markets move information through time as well. What has been missing from the current debate, unlike years past, has been the active warning signals from bond and currency markets that the future problems will have ramifications in the present.  If that were to happen, that would also change the incentives in the present and that may be the single best tried and true way to address this problem.

I'll stop there and I'd be happy to take questions later.

MR. BOWSHER:  Okay.  Thanks, Doug.  Our next speaker is Bill Hoagland.  Everyone that's followed the budget process for many years knows Bill.  He was with the Budget Committee here at the Senate and recently he's gone to the office of the Senate Majority Leader and serves as the budget liaison person there.

Bill, it's a great pleasure to have you with us today.

G. WILLIAM HOAGLAND:  Thank you very much.  As the one person on this panel representing the majority in the United States Senate and the Majority Leader, I can tell you I've wrestled with this assignment to discuss the fiscal year 2005 budget.  Fellow staffers out there know the sensitivities of staff sitting up here in a public forum talking about these very sensitive issues, particularly in this charged environment we're in right now. So I've struggled with what I can say, what I should say, what I could say, and what I would like to say – (laughter) – and in my world can, should, would, could – they're all mutually exclusive today.  (Laughter.) 

I think the path least likely to cause the majority leader, my boss, concern and consternation would be to try to stick as best I can to the facts and with a little trepidation if you'll allow me I'll try to give you at least one staff person's outlook on how this year might unfold at the end.  And, Tom, I'll appreciate knowing how you think it will unfold too.

So what can I say about the fiscal year 2005 budget factually?  I'm going to talk about '05.  I'm not going to go beyond '05.  Not exactly profound, of course.  All of you in this room know that budgets are constructed and put together in both a political and an economic environment. As it relates to the political environment, no surprises here.  This is – at least from the media's perspective - a highly charged presidential and congressional election cycle.  John Zogby wrote earlier this year that we're looking at the most partisan election in years.  We're looking at a 1790s election, which is if the other side wins, it's Armageddon in America. 

I would note, however, that some scholars recently from Harvard and from Stanford in a book called “Culture War: The Myth of a Polarized America,” concluded that our basic differences have actually been shrinking over the past two decades and that this polarized nation is largely a myth created by people such as ourselves inside the beltway shouting at each other.  They conclude that most voters are still centrists, willing to consider a candidate from either party, but that they rarely get the chance since the parties have become more polarized. 

This is more than just an academic exercise from my perspective.  Pew Research did a poll here recently and the registered voters in the red and blue states, when they were asked to categorize the parties, put the two parties at the extremes: liberal and conservative.  But when they were asked to categorize their position, they were squarely in the middle – moderate middle.  And I think this dichotomy may help explain the difficulty we seem to be having recently in finding a consensus on spending and tax issues.  Party loyalty pulls outward, constituents back home pull inward. 

Nonetheless, it's a fact on the political scene.  Every member of the House is up for election.  One-third of the United States Senate is up.  Nineteen Democrats – Senate Democrats are up.  Fifteen Republicans are up.  Five open seats on the Democratic side.  Three open seats on the Republican side.  Add to this the Democratic leader and the Democratic whip, Mr. Daschle and Mr. Reid, are in cycle.  Is there any surprise that seeking political advantage for future control of this institution has made it very, very difficult to find a consensus on fiscal issues?

Finally, the other clearly obvious fact, the sitting junior senator from Massachusetts in this institution is challenging President Bush for his office. And while unknown today -- but shortly to become known, I am sure – it's also possible that another sitting United States Senator could be also running with Senator Kerry later this fall. So my conclusion on the political environment is that finding consensus on major legislative items this year was preordained from the very beginning to be extremely difficult.

As it relates to the economic environment, I'm not going to spend a lot of time here.  I think the facts are out pretty much.  Tom can dispute some of the facts, but I'll just basically say I think even neutral, nonpartisan sources have observed that efforts to portray the economy today in terrible shape or as President Bush being the Herbert Hoover of his era are not only misguided, but simply untrue.  I had a lot of facts here; in the interests of time, I'll just skip over them.  I'll just simply say that tomorrow morning we get the final first quarter GDP figures.  I think that you could expect them to be in the 4.5 – 4.6 range.  That's 10 consecutive quarters of growth.  I think we can look to a strong economy for the rest of this year. It's not to suggest that there aren't economic issues going forward that will challenge the country, as Doug has hinted, but narrowly focused on the FY 2005 budget cycle, this year economic growth is firm and sustainable. 

Now, on the budget process within this very charged political and economic environment.  Again the facts: we passed a budget here in the United States Senate in record time this year – fiscal year '05 budget back on March the 12^th, by a vote of 51 to 45.  There were four absent Democrats. One Democratic senator voted for it.  One Republican senator voted against it – Senator Lott; quite frankly, not for any substantive reason.  Senator Lott would agree with me on this.  It wasn't substantive; it was the fact that he told me that if we had to vote past 9:00 he wasn't going to vote for it and he didn't want to be here that late and that's why Senator Lott voted against it.  But it was very narrow and one might look at that as a very polarizing vote.

In the House, it passed over there back on March the 25^th, by a vote of 215 to 212 – extremely tight.  No Democratic votes.  Ten Republicans voting against it.  Again, a very polarizing vote.  We had a conference report on the resolution.  It was adopted in the House back on May the 19^th with a three-vote margin again.  No Democratic congressman supporting it.  I think it's fair to say that a budget engenders some fairly strong emotions and once again another polarizing vote.

The House proceeded to deem that budget resolution, for purposes of enforcement in the House. It is a fact that here in the United States Senate we have not yet been able to agree to the conference agreement simply because we don't have the votes yet. We can't even get to the point of 50/50 with the Vice President breaking the tie. We're continuing to work.  We haven't given up on it.  To the staffers that are here that follow this very closely, we can continue to work on this up to the end.  I think the Leader and Chairman Nickles are continuing to formulate some other options.  I really can't go into it, but as you all know, this has come down to only one issue that prevents us from adopting the conference report.  It's a very narrow issue of a Senate-only rule known as pay-go that established a 60-vote point of order in the Senate against revenue measures unless they are offset by reductions in other direct spending or increases in other revenues, and the question of how long that provision should be in effect.

I should also note as a fact that pay-go rules do not reduce the deficit.  It simply, if enforced, keeps a forecasted deficit from worsening.  In many ways, I think this issue could find a simple compromise.  It should be found, but it is a very polarizing issue for some in the Senate Republican conference. As reflected in the president's budget, which was submitted earlier this year, tax cuts need not be offset, and for some this is a matter of very high principle.  A pay-go rule applied to taxes could jeopardize the extension of expiring tax provisions in the future for these individuals.  Others have suggested that this strongly held position of principle could have the effect of sacrificing the budget process on the alter of future unspecified tax cuts.  For others in the Senate Republican conference, it is equally a matter of high principle that  Ύ at this time of projected deficits Ύ in the future tax cuts should jump at least as high as direct spending – the 60-vote hurdle. So the issue is not about the current fiscal year with this.  It is about the future and budgets yet to be prepared.

Procedurally, we can move to this at any time and we will continue to as new options are looked at.  I would say, look to the bright side.  Think of the current situation in the Senate as having de facto a biennial budget and appropriation process.  (Laughter.)  The drafters were so wise 30 years ago to set up a system where the current operating budget resolution remains in effect, and for all practical purposes that is what we are doing.  You have a chart in your handouts that shows you the 302B's that the House has adopted by their deemed budget resolution and the de facto 302B's that are here in the Senate, and that's how we are proceeding.  We need to proceed on.

FY 2005 302(b) Allocations
Budget Authority, in Millions of Dollars

1)      CBO estimate for FY 2004 (baseline) June 2, 2004.
2)      SAC estimate.

Source: Staff of Senate Majority Leader 6/2004

So let me try to wrap this by telling you what is the likely outcome.  I think the topic was the outcome – like the outcome in the congressional kitchen this year.  I'm not sure this is the best analogy, but maybe it's scrambled eggs headed towards an omelet.  Maybe not pretty, but at least functional and life-sustaining.  Again, a couple of facts: on average over the last seven years, the Senate has spent 45 days each year considering appropriation bills.  Let me repeat that: 45 days on average in the U.S. Senate.

We may – we may begin considering the first appropriation bill later today – maybe.  Good chance we won't, but maybe we will.  Also, as of today there are 35 days left before the beginning of the new fiscal year on October 1^st.  Majority Leader Frist truncates this even further down.  He says we have six weeks, we vote three days a week, we have 18 days left in his world.  And all of those days, by the way Ύ to the chagrin of Chairman Stevens of the Appropriations Committee Ύ will not be allocated to appropriation bills.  Other issues remain on the leaders' agenda: class action, extension of expiring tax provisions, maybe a conference report on FSC/ETI [corporate tax bill], an energy bill maybe, a transportation bill maybe, and continuation of confirmation of judges and ambassadors – one today, I hope – former Senator Danforth.

So three final facts: one of the charts shows that historically, since the budget act came into existence 30 years ago, in an election year the Congress has averaged 3.8 appropriations bills sent to the president for his signature before the beginning of the fiscal year – 3.8.  Historically, since the budget act came into existence, that number has averaged just slightly less than that in lame duck presidential years – about three appropriation bills.  Finally, since the budget act came into existence, we have had seven lame duck sessions, but there have only been two lame duck sessions in a presidential election year: 1980 with President Carter departing, and not too long ago in 2000 when Congress met with the presidential election still undecided. 

(Click on image below for full sized chart. Requires Adobe Acrobat Reader)

So what's the likely outcome in this truncated, politically volatile setting?  The straight answer is: who really knows?  But here's one possibility: we will try in the United States Senate to finish a defense appropriation bill before we leave for the Fourth of July recess.  Maybe this evening – I doubt it.  Maybe Friday, maybe Saturday, maybe Sunday, we'll try.  The Senate has also reported a homeland security appropriation bill in full committee.  We will take that up as soon as we finish class action coming back after the Fourth of July recess. The Senate Appropriations Committee will continue to work to get all the bills reported at least from the full or subcommittee in July depending on the actions in the House. The House could finish off almost all of its appropriation bills off the House floor except for three by the end of July. 

This is my speculation; nothing's locked in stone here, fellow staffers – in the defense appropriation bill conference, if we get there with the House, it is possible that a simple CR might be considered and included in that conference report.  Just for the record, if you were to take the defense appropriation bill that the President requested that we're working on and if you were to do a CR on everything else, interestingly enough you come out at the $814 – $815 billion figure; the level that we are restricted on under last year's biennial budget appropriating process.

Finally, the three expiring tax provisions could be included in a tax bill that's already in conference.  We still have a kiddie credit that is still in conference.  Technically in the Senate, since we're still operating under last year's biennial budgeting/appropriating, we still have $900 billion in room for tax cuts.  Not reconciled, but that was assumed last year, so there's plenty of room if we stay under last year's budget resolution.  Nearly $700 billion still available under pay-go under last year's resolution, so we can continue to proceed on.  Of course, those tax bills are subject to filibuster and 60 votes and not reconciliation, but it can move forward. 

So for some concerned fiscal policy groups like the Concord Coalition, maybe the failure of congress to move forward on key legislation in these remaining days may be good news.  The longer we wait to reduce taxes or increase spending, the longer a strong expansion can grind away at the cyclical deficit. 

And finally, not my desire I can assure you and not maybe the leader's either, but I think that the likelihood of an eighth lame duck session in the last 30 years – only the third one in a presidential year, is very, very high, returning probably to unfinished business on corporate taxes [FSC/ETI], highways, welfare, and individual appropriation bills.  So depending on the November 2^nd outcome, an interesting lame-duck session could be in store particularly for the fiscal policy groups and for us here. And if I were you, I would not make any extended travel plans to any warm islands in November and December. 

And so what is it that I want to say?  That'll just have to wait until after the election this fall.  Okay?  (Laughter.)

MR. BOWSHER:  Okay.  Thanks, very much, Bill.  You've given us a good indication, I think, of what the near future might look like here. 

It always reminds me when I hear the words “continuing resolution,” of when I was at the Pentagon and John Chaffee was the new Secretary of the Navy after the election in '68. He was surprised when he found out that we were going to change the fiscal year of the federal government and he said to Frank Saunders, who was a new assistant secretary of the Navy – he had been a staff person on the Appropriations Committee – Frank, why are we changing the fiscal year?  We got all the states finally on June 30?  And he said all the universities, a lot of the programs that we have to interface with are on June 30, why are we changing it to September 30?  And Frank said, because we're going to get rid of these continuing resolutions.  (Laughter.)  And I don't think we've ever even come close.

Let me now turn to Tom Kahn here, minority staff director of the House Budget Committee.  Tom, we'd like to hear your views on this.

TOM KAHN:  Thank you very much.  First of all, I want to apologize for being late.  Today the House is taking up a budget process reform bill.  The House is going to consider 19 different amendments.  The Rules Committee met until very, very late last night and then met again at 7:00 this morning.  Out of the 19 amendments, only one Democratic amendment was made in order and 18 Republican amendments, which I guess probably reflects the balance of the House in terms of Democrats and Republicans of 18 to one, but it kind of gives you a flavor of the partisanship and sort of the unfortunate direction that I think the House has gone in -- I think less in the Senate. 

I am very, very humbled and honored to be on a panel with some really distinguished people like Chuck Bowsher and Doug Holtz-Eakin and Bill Hoagland, who I have to say -- although we don't always see eye-to-eye -- I think is one of the smartest and most decent folks anywhere in Washington. We worked as partners together on the 1997 balanced budget agreement along with Jim Horney and Bill Dauster and some other folks who are in the audience.  It would be nice if we could go back to that as a pattern, and I'd like to talk a little bit about that.

The title of this program is “Responsible Fiscal Policy and the American Political System: Can This Match Be Made?”  The short answer is, yes, it can be made.  It has been made, but unfortunately it's not going to be made this year, which is consistent with what Bill said. 

I'd like to address four different points and I've got some posters that are in your handout. The minority staff of the budget committee can't pass resolutions, but we can make posters, so we are very good at doing that.  (Laughter.)  The four points I'd like to address, and some of this is ground that has already been covered and some of it I'm not sure has, but in any case, I think it bears repeating.  Firstly, how bad is the deficit?  Secondly, how did we get here?  Third, can the system work as it has in the past in fixing the deficit?  And finally, how do we get back onto that path?

The first poster I'd like you to take a look at is the one called “backsliding into deficit” because I think it's a valuable reminder that in the 1990s when Bill Clinton became president he inherited a deficit of $290 billion and by 2000 we had a surplus of $236 billion. That has now slid back to a deficit for 2003 of $375 billion.  Last year's deficit of $375 was the biggest in American history, and although we don't know what the '04 budget will be – it will probably be improved over what OMB predicted in February – it will still be the biggest in American history. But our real concern is not necessarily with the deficit this year or last year because we understand some extraordinary costs in terms of the war on terrorism and the recession.  The real concern is the long-term deficit.  It's where we're projected to go.

(Click on image below for full sized chart.)

The CBO, Doug's office, projected that the baseline deficit for the next decade would be $2 trillion.  The president's budget as rescored by the Congressional Budget Office predicted $2.7 trillion over the next 10 years.  And again, it's the 10 years – it's that trend.

Looking at these numbers reminded me of something Mark Twain once said.  He was asked what he thought of Wagner's music.  He thought for a minute and he said, it's not as bad as it sounds.  And I think in terms of the deficit, it's really the reverse.  It's far worse than it sounds and worse than it looks, and the reason for that is the second poster, entitled “more accurate estimate shows even bleaker budget outlook.”  The Bush budget, as predicted by OMB, is the red line and it only goes out to 2009.  The green line is what we estimate based on more realistic assumptions about budget policy.  And what the red line reflects is what the president's budget omitted and what Doug [CBO] was not allowed by convention to include.  The Bush budget, in fact the CBO baseline, does not include anything to fix the so-called alternative minimum tax, which is well north of a half a trillion dollars.  It does not include Social Security reform, which is going to be hugely expensive.  It does not include the president's policies on defense costs over the next decade and beyond. 

(Click on image below for full sized chart.)

So the picture is far worse than it looks.  Now, how did we get to these deficits of $3 trillion?  How did we move from surpluses of $5.6 trillion to deficits of $3 trillion over the next decade?  The war was part of the reason; homeland security, recession, but there are other things going on that I think bear examination.  The third chart I'd like you to look at is entitled “the $3.8 trillion tax agenda.”  And again these are 10-year numbers and what we have done is aggregated all of the tax cuts that President Bush has proposed, have been enacted, and have been called for. Over the next decade the cost of it is – and we do include the alternative minimum tax – is $3.7 trillion.  That's not small change in any economy.

(Click on image below for full sized chart.)

Another driver has been defense costs, and I'm sorry this is such a complicated chart: “defense increases during the Bush administration.”  I won't subject you to going through the painful details of it other than to say that what we did is start out with the defense budget in 2001 when President Bush was inaugurated.  We then examined his defense requests, his policies not just for the five years but for the second five years, and we have not included the costs of the war in Iraq beyond 2004. Even without Iraq, but simply assuming the President's policies, the delta – the difference between the baseline and what the President's policies call for – is almost $1 trillion in extra defense.  Now that may be a good outcome – that may be a good goal.  It may be too much money.  Maybe it's not enough money, but we need to understand how we are projecting deficits that are so large of a trillion dollars in defense costs and tax cuts.

(Click on image below for full sized chart.)

Now, the second point I'd like to address is – the third, perhaps – how has the system worked?  Has it worked?  And the answer of course is yes.  We were able to control the deficit in 1990, 1993, and 1997, both the process and the substance.  How did it work and why did it work?  There were several key elements. The first is that everyone was at the table.  Secondly, everything was on the table.  And third, there was presidential leadership – presidential leadership willing to make some tough decisions, some tough proposals.  In 1990, President Bush's father convened a bipartisan group of Congress and they hammered out a budget deal.  They cut the deficit by $500 billion over several years.  That cost President Bush his job.  He was not reelected, but it was a very good policy.

Then in 1993, Bill Clinton and congressional Democrats put a balanced budget proposal together that reduced the deficit by $500 billion.  It cost Democrats control of the House and the Senate in 1994, but it was a very good outcome in terms of the budget.  And then in 1997, President Clinton and a bipartisan group in the Congress hammered out a deficit reduction deal which helped put us on a path towards no deficits and actually surpluses.  Admittedly, there were a lot of other reasons why we were able to get back to surpluses.  Certainly the technology – the stock market's growth and productivity, but clearly those three budget agreements helped put us back on the path.

(Click on image below for full sized chart.)

Now, what are we missing this year in terms of those key elements which got us to those deficit reductions into surplus?  I don't say this to be biting; I don't say this to be harsh, and Bill is right: it is a partisan atmosphere right now in Washington, but we need presidential leadership.  We need leadership at the top that's willing to say, by God, we are going to start reducing the deficit.  We're going to start making some tough decisions and we're going to knock heads together until we get a deal.

Unfortunately, the President's budget called for triple digit deficits for the next five years and his budget stopped after five years.  There were no numbers beyond five years.  And his budget did not include a whole range of expenses that we all know we're going to confront, starting with the cost of the war in Iraq, the alternative minimum tax that I mentioned before, and other proposals such as going to Mars.  So let us hope that whoever is inaugurated president in 2005 will get us back on that path.  Vice President Cheney was quoted as saying, reportedly, that Reagan proved deficits don't matter.  Let's hope that's not true and let's hope that won't be the byword of the next four years.

Secondly, not everything was on the table.  The fact is that, unlike throughout the 1990s, the President proposed and the budget resolution called for one-sided pay-go – only spending, not revenue.  Well, the deficit is equal to the difference between revenue and spending.  The deficit is not equal to the difference between spending and spending.  So if we really want to get our hands around the deficit, we have got to look at revenue as well as spending.  The budget process bill that's coming to the floor today in the House of Representatives – except for one amendment, revenue is not even in order.  The Blue Dogs, who I think everybody would acknowledge are a very responsible, thoughtful group of conservative members in the House were not allowed to even offer their amendment on the House floor today.

Finally, the issue of is everyone at the table?  And unfortunately, and I don't say this to sound petulant, but Democrats have never been included in the past three years in any real discussions about helping to craft and put together a package.  The fact is, at least right now, as my boss John Spratt likes to say, Democrats don't have a majority.  We can't pass a budget, but we can provide political cover to the majority in making those tough decisions. 

So what's the future?  Let's hope we can get back onto this path of deficit reduction.  The stakes are far too high, and as Americans and people who truly care about the long term, we really don't have any alternative. 

I'm happy to stay and answer some questions.  Thank you.

MR. BOWSHER:  Thanks very much, Tom.  Speaking of everyone at the table, I would like to point out that we did invite Josh Bolten, director of OMB, to be here and he decided not to do that.  I sound like “60 Minutes” now, but I did want to point that out.  (Laughter.)

Our last panel member is Bob Bixby, who has done an outstanding job for us at the Concord Coalition over these last few years as executive director and we'd like to get Bob's viewpoint.

ROBERT BIXBY:  Thank you very much, Chuck.  First, I want to thank the other panelists for taking time out of their day to be here, particularly Bill and Tom and Doug.  I know Doug has to testify later on today and Bill and Tom are involved in important things going on – real legislation rather than ruminating on the problems of the budget, and I very much appreciate them being here. Also, I want to give a special thanks to Bill Hoagland for getting our room. As happens when you do events on the Hill, sometimes things change and our original room had to be used by the committee. So we had to scramble at the last minute to come up with a room, and Bill was able to get this room for us, and I very much appreciate that. 

And my thanks to the Energy Committee and Senator Domenici for allowing us to have the room this morning because they need it for a hearing this afternoon.  Perhaps that sort of bipartisan cooperation can carry forward into larger things if you start with small things first.

From the perspective of a deficit hawk, I guess I can take some comfort from gridlock breaking out again because gridlock was very helpful in the ‘90s – late ‘90s in particular.  And there are certainly signs – some encouraging signs of gridlock breaking out again.  (Laughter.)  I guess Bill and I have sort of a bizarre view of what's encouraging – what's good news, but you take what you can get. 

When you look at things like the budget resolution, the appropriations squeeze, the highway bill, the corporate tax bill, the maneuvering – machinations some might say – on the debt limit, the budget process bill coming up in the House today: all of these things are related to the fact that the deficit is back and it's being recognized as a serious problem.  It reflects, I think, a growing realization that we can't ignore the deficit.  We can't let it grow higher.  We can't even leave it where it is. 

The President, to his credit, proposed a deficit reduction target in his budget this year, cutting it in half over five years.  Senator Kerry has adopted a similar goal in his budget framework on the campaign trail.  One can argue about whether either has a credible plan for getting there or whether or not that's an ambitious enough goal, but at least the tanker is beginning to turn in the direction of getting back to plans for deficit reduction. 

What Governor Gramlich reminded us of this morning is very, very important: we are at the end of that period where we can excuse the deficit as a cyclical matter. He mentioned that the recovery is well under way and it's important to concentrate on long-run fiscal policy, and that means bringing the deficit back under control.

Well, so much for the good news, if gridlock is good news.  If there is a consensus that we have a problem, there's certainly no consensus on what to do about it, particularly on some basic questions like: is spending too high?  Are taxes too low?  Is the 10-year outlook serious?  Is the long-term outlook serious?  And can budget process changes help to address whatever problems we do have?

I think the answer to all of these questions is probably yes; my point being that there's no one-size-fits-all solution to our short and long-term problems.  What's needed is some ideological flexibility and a firm eye on the long-term sustainability of whatever fiscal policy path we adopt because ultimately, as Concord is always reminding people, budgeting is a stewardship responsibility.  The decisions that we make today affect not just the here and now, but the economic wellbeing of future generations. That's how we like to look at the budget Ύ not as a green eyeshade issue, but with a moral component as well. 

How are we doing on that?  Well, probably not very good.  I'd like to tie together the short term and the long term problems because they raise different issues and they might be addressed in different ways.  The challenges, in some ways, are different.

I, too, have some handouts here. I don't necessarily want to do a chart talk, but if you look at where we are now and where we're going, which is what I've tried to do, there are many different ways of measuring the budget deficit. I think we all agree that regardless of how big the budget deficit is this year and however we may want to manage it, the real crucial question is: where are we headed?  In the chart that I prepared, I used the CBO's standardized deficit measure and went back over time. On that basis, we have actually tied for the third largest deficit over that 40-year history. The standardized deficit attempts to take out temporary factors, cyclical factors, and today's deficit it is fairly high by historical standards. 

(Click on image below for full sized chart.)

But the question, then, again is where are we going?  Concord has looked at different policy scenarios.  Our current projection is about a $4.8 trillion deficit over 10 years. Others have slightly smaller figures.  Others, such as Ed McKelvey who is here from Goldman Sachs, have a lightly higher figure.  But the basic point is that under reasonable assumptions about tax and spending policy, we are probably looking at deficits for as far as the eye can see and they're fairly substantial.  And these take place despite the assumption of a growing economy.  We're not assuming that the economy is not going to continue to grow.

(Click on image below for full sized chart.)

Now, if we look at the 10-year outlook, you can see that revenues have gone down to a level where they have seldom been before, particularly in recent years, down to around 16 percent of GDP, which is really very low by historic standards.  You'd have to go back to the 1950s to get revenues as a percentage of GDP that low.  And of course that was before we had Medicare and Medicaid, before Social Security became as much of a take on the economy as it is now.  Trying to fund a 21^st century government on 1950s level revenues is proving to be difficult and that's why we've got a structural budget deficit.

Current spending as a percentage of GDP is not particularly out of line.  It's around 20 percent. Tom's got a chart in here too that shows revenues and spending as a percentage of GDP.  I think over the last 50 years, the average is something like 18 percent of GDP for revenues and 20 percent for spending, but of course you can adjust that by taking various years. 

(Click on image below for full sized chart.)

The point is that we could look at the short-term situation and look at the revenue line and the spending line and say, as the next chart does, that if we let the tax cuts expire, you'd get revenues back up to about 20 percent of GDP by the end of 10 years and you'd balance the budget. 

(Click on image below for full sized chart.)

Interestingly enough, when the Concord Coalition did a zero deficit plan several years ago, we had to pick a level of GDP where we wanted to balance revenues and spending. The first plan we did in 1993 balanced at 20 percent of GDP.  I don't think we'd pick that number now because if we did we'd have to do it all on the tax side. I don't think that would be a politically acceptable plan, so we'd be somewhere in between.  But my point is that a balanced budget plan that has revenues on the table certainly is not something that would be – that should be - considered out of line based on historical data.

The next chart shows a very different story, however, which is the long-term.  My thanks to the General Accounting Office for this gruesome and scary scenario. It shows discretionary spending growing with GDP and all tax cuts extended.  It holds revenues at 17.7, close to 18 percent of GDP.  The spending line ratchets up very sharply as the boomers begin to retire and qualify for Social Security and Medicare.  The population begins to age and as you look at how we address the long-term term problem, the desirability of revenue increases drops because to increase revenues in pace with the increased expenditures would bring revenues way out of line with anywhere that they've been before. 

(Click on image below for full sized chart.)

When looking at the long-term chart, it doesn't mean that revenues shouldn't be part of the long-term fix, but it is saying that even if it's revenues that are out of line with historic standards right now, when you look to the future it's the spending path that's way out of line, and that of course is driven by the boomers' retirement and the entitlements. 

The next chart is the GAO's haircut chart – haircut chart.  That's hard for somebody from Boston to say, by the way.  If I said it the way that I would naturally say it, you couldn't understand what I had just said.  (Laughter.)  Basically, this shows what happens to interest costs if you follow that earlier chart. This demonstrates that deficits matter.  It shows that you can't just look at revenues; you can't just look at spending and say let's forget about deficits – who cares about such an abstraction?  Deficits are not an abstraction.

If you don't worry about the bottom line, what happens is that, aside from draining national savings and other bad influences on the economy, you get this enormous buildup of net interest so that in this scenario, by 2040, all of projected federal revenues are taken up by interest payments.  Obviously, that's not going to happen.  This is a truly unsustainable scenario, but it shows the consequences of going forward without making changes. 

(Click on image below for full sized chart.)

The final chart that I have is good news and bad news.  It shows what happens to the debt if we continue that GAO scenario on taxes and spending.  Debt held by the public goes up to 350 percent of GDP; over that, actually close to 370 percent of GDP by 2040 -- obviously an unsustainable scenario, which is why the chart doesn't go out beyond that. The model just won't allow it. 

But the more interesting thing actually is the smaller line, the one that looks sustainable and manageable -- the darker one.  That assumes that discretionary spending increases with inflation.  This is the baseline extended scenario, which assumes discretionary spending only grows at inflation over the next 40 years and that all of the expiring tax cuts expire. I don't think either result is likely or politically realistic. But even under that scenario, by 2040, debt as a percentage of GDP is over 100 percent.  It's about where it was at the end of World War II, but instead of fighting the Nazis or something we'll be paying boomers' entitlement benefits. It's a very different reason to be running a debt at 100 percent of your economy. 

(Click on image below for full sized chart.)

So we really do have some very, very difficult choices to make to avoid these long-term scenarios and the fact that this year Congress is turning its attention back to issues of deficit reduction is a very positive thing.  I do think that all options must be on the table.  I think that's feasible not just for doing a plan economically, but politically. 

We're going to have to make some very, very difficult decisions about the two things nobody wants to talk about: revenue increases – oh, call it tax increases – and entitlement cuts.  And we're going to have to do both -- easy for me to say.  I'm not running for anything.  But that's what we're going to have to do. If we take things off the table or if we promote free lunch options – say we're going to grow our way out of this sort of thing – you're never going to be able to get the political consensus we need to make those hard choices.

That's why Concord has been advocating – maybe it's been a pain in the neck to Bill – applying paygo to both taxes and spending this year. We really think that that sort of symmetry is needed politically as well as economically to have some sort of feasible plan going forward.

So, Chuck, that's my take on what's going on in the kitchen.

MR. BOWSHER:  Okay. Thanks very much, Bob.  I think we now should ask the audience to come up with your questions, and why don't you just address it to whichever member of the panel you'd like to start with.

Q:  (To Bill Hoagland) Could you elaborate on your comments about a continuing resolution? How would that work? How long would it extend?

MR. HOAGLAND:  Well, again, that's just a staffer speculating on one way to get through this year. As to the length of the CR, given that I expect that we'll be back here in a lame duck, it would probably take us maybe into December – up until the end of December.  Outside chance that a CR might carry you all the way to next February too, and we would – if we come back in a lame duck session and we're working on appropriation bills, then it would be peeling out of that CR.

How does that work?  That works the magic of things happening in conferences out of whole cloth and with sufficient numbers of votes to pass that conference agreement as you're trying to go out of here to go to Boston or New York or something like that at the end of July.  Pressures do build.  So that's just an option that people are thinking about and maybe talking a little bit about.

MR. BOWSHER:  Rudy?

RUDY PENNER: It seems to me there's some danger that the debate over process will drown out the debate over substance.  I don't think it's been emphasized enough that the Budget Enforcement Act was there to enforce a broadly agreed to agreement from 1990 to 1993 and frankly I don't see how it could possibly work unless we had some sort of agreement in place and we don't even have a budget except for your “biennial budget.”

MR. BOWSHER:  Tom, you want to go first?

MR. KAHN:  I could not agree with you more.  There's really no secret, and I tried to make that clear in my remarks, on the process that worked throughout the 1990s and got rid of – helped – it was not the only reason, but it clearly was an important reason why we got from deficits as far as the eye could see back into surplus. 

And, you know, there's something kind of curious about, for example, the fact that the House of Representatives today -- starting in about five minutes, and I'm going to have to, unfortunately, probably slip out – is going to be consuming about 12 hours of debate on the House floor with 19 different amendments to the budget process ranging from an automatic continuing resolution to joint budget resolution to biennial budgeting to new commissions -- only one amendment, by the way, on extending pay-go to tax cuts as well as spending. 

But that the House would be taking up all of this time studying all of these provisions when the Congress for the first time – well, I won't be partisan – when the Congress has failed to pass a budget resolution conference report. We need to start out by enforcing the rules we have on the books and it's quite clear – it's quite simple how we got where we were and we need to go back on that path.  This is not a Republican issue or a Democratic issue or an urban issue or a rural issue; it really is a national crisis of moral proportions because this debt and this deficit is going to eat us alive, and we somehow need to find the center once again, so I agree with you.

MR. HOAGLAND:  I was going to just simply say I don't know how many times over the last many years I have quoted you directly, Rudy Penner, as saying the problem is not the process, the problem's the problem.  And from my perspective, and with all due respect to this long list – and this is where – these are the kinds of things that get me in trouble – the long list of these things that I see on the table here quite frankly will not have any impact from my perspective.  And quite frankly, I think it's time for budget geeks and gurus and people who follow this to start thinking outside – I hate that term – outside – outside these options. 

I'm beginning – maybe it's just because of the vantage point of sitting over in – over there under the dome having a different perspective on it than I did in this building many years, that it's not just the budget process. 

            Q:  (Off mike, inaudible) …. I'd like to hear the reaction of the other panel members to Bob Bixby's chart showing the unsustainable trend under the GAO scenario. Do you think that's accurate Ύ the way it looks now? We may not all agree on this, but could we agree on these lines to put in front of the public to show what we think this is going to look like.

            MR. BOWSHER: You want to comment, Bill?

            MR. HOAGLAND:  I think Doug ought to –

            MR. BOWSHER:  Doug.  (Laughter.)

            MR HOAGLAND :  Let me just cite one of Doug's numbers before he does it.  I don't disagree there is a problem out there, but I really am nervous about pinpointing these kinds of estimates five, ten, fifteen years out. And Doug, correct me if I'm wrong, your estimate for the fiscal year 2009 deficit was $258 billion.  But then in your fan chart, there's an equally likely probability – 50/50 chance – that that deficit could be $584 billion, or a surplus of $50 billion.  There is so much uncertainty, and I will just simply say, again, as you look to the next decade – and let's just lay it on the table -- there is a lot of uncertainty in the world today, and I am very nervous about pinpointing these kind of estimates. 

Now, I'm not suggesting the trend isn't right, and I know the aging – it's not the aging issue, by the way.  It's the cost of health care that's driving these numbers.

            MR. KAHN:  Can I just respond to that?  And then I'll give it to you, Doug.

            MR. BOWSHER:  Doug will get his chance.  

            MR. KAHN:  Bill, of course, is right – that the one thing you can be sure of is that these deficit projections will be wrong.  They will either be too high or they will be too low.  But there are a couple of things – one thing we should keep in mind that is certain.  The baby boomers are going to retire.  That is a demographic fact that is not wrong and the costs will then multiply many times over.  So, one way or another, we really are facing a very, very risky time – a very serious, worrisome time ahead in terms of deficits. 

The other thing – and, again, I hate to go down this road because it, sort of, revisits history, but I do think it merits mentioning. In 2001, there was a very aggressive and successful push to pass a $1.5 trillion tax cut.  And when that was promoted, we were told that we would have surpluses of $5.6 trillion and that those surpluses, over ten years, would be sufficient to return money to the American people, and still protect the Social Security surplus and pay down all the debt.  It's a little – for us – a bit disorienting only three years ago to have been told that we could promise tax cuts on these ten-year surpluses and some in the administration are now saying, 10-year surpluses are meaningless and even five years are meaningless.

            MR. BOWSHER:  Doug?

MR. HOLTZ-EAKIN:  I will reveal my fundamentally wimpish character and agree with everybody.  (Laughter.)  On the numbers, the CBO baseline is, I think, a very striking tribute to the budgetary consequences, to the politics, of gridlock because what it says is if you do nothing – if that's really the future, politically, and I don't know -- over the first five years of the baseline, discretionary spending is restrained at the rate of inflation and the deficit gets cut in half Ύ as a fraction of GDP.  Over the second five years of the baseline, the tax cuts and the AMT, and all these other things that are politically in play progress forward and you hit balance. 

All right, we have a $15 billion deficit ten years out and come back to the uncertainty associated with that.  But what I tried to say at the outset is the politics of gridlock cannot survive if you just keep rolling forward.  The healthcare costs -- which are the problem -- plus the retirement of the baby boom generation, the structure of those integral programs make it impossible to run that gridlock scenario forward and have revenues rise enough.  Even if they rise to 25% of GDP, they will not rise enough to match the spending increases.  So that's the – I concur with the basic scenarios there. 

Now, is there enormous uncertainty?  Absolutely.  You are right about the fan chart.  Even five years out, there's tremendous uncertainty so we shouldn't think about targets, we should think about risk management, where do we want to have the center of that distribution, knowing it's going to be wrong.  And going forward, these long-term budget projections are subject to enormous uncertainty.  Two equally plausible scenarios for the future of healthcare costs yield Medicare and Medicaid being either 11 % of GDP – half the size of the current federal government -- or over 20% of GDP – larger than the current federal government.  So there's an enormous certainty out there but the trends in the long term, I think, are the central issue.  There's no question about that. 

MR. BOWSHER:  I would just like to make one comment myself and that is it seems to me like this defense area is also becoming a tremendous driver.  When you think about Ύ like Paul Wolfowitz was saying, we might be in Iraq for ten years Ύ which I doubt myself, but we have a situation here that the defense budget is going up.  And just to give you a comparison back, you know, McNamara was a great secretary of defense for the first four years, and he had his budget at $40 billion.  When he went into the war, it went to $80 billion, and I can tell you, when we were looking at the 1969 requests from the services, it was a $120 billion.  Why was a difference between the 80 and the 120?  It was because a lot of different programs had been starved to pay for the war, and I think that some of that's going on right now. 

So, I do believe that this defense driver is going to get – depending on events, of course – to be much bigger.  I believe – I certainly agree on the healthcare as the number one -- it has turned into be the number one, but I think defense is coming back much stronger than what we saw two or three years ago before we went into the war.

Okay, I think we had better quit at this point. I want to thank the panel members. As Bob said, they are all very busy.