July 29, 2014

Retiring Senator Conrad's Parting Challenge

On his way out the door, retiring Senate Budget Committee Chairman Kent Conrad (D-N.D.) had a lot to say. It was a final reminder -- he called it a challenge -- from one of the Senate’s foremost deficit hawks of why deficits matter and why much more must be done to do bring them under control.

Conrad voted for the fiscal cliff deal in the early hours of Jan. 1, but he explained that he did so only because going over the cliff would risk a recession and higher unemployment. Moreover, 2 million people already out of work would have lost unemployment benefits.

And yet, Conrad said, “I hate this agreement. I hate it with every fiber of my being because this is not the grand bargain I had hoped and worked for and believe is so necessary to the future of the country.”

While Conrad and many others, including The Concord Coalition, had pushed for a deal that would start the nation down the road to a more sustainable fiscal future, the end result was “not, by any standard, a deficit reduction plan,” he said. “As necessary as it is, no one should be misled that this deals with our deficit and debt because it only makes our debt circumstances worse.”

So with the new Congress facing essentially the same problems, what happens next?

Conrad reminded his colleagues that the federal government is borrowing 31 cents of every dollar it spends. That’s better than 40 cents, as was recently the case, but is still unsustainable.

For those who argue that we just have a spending problem or just a revenue problem, Conrad noted that federal revenues are near a 60-year low while spending is near a 60-year high.

“This is a problem,” he warned, “of the relationship between spending and revenue. The gap -- much higher spending than we have revenue -- is what leads to deficits and leads to additions to the debt.”

And for those who may question why this matters, Conrad reminded them that having a debt burden in excess of certain levels, which the U.S. is now approaching, can harm the economy.

"That means we are reducing future economic opportunity for the people of our country. That is why this matters, because it will retard and restrict economic growth for our people," he said.

Moving to solutions, Conrad noted that some actions have been taken. The 2011 Budget Control Act put in place caps on discretionary spending, which is controlled through the annual appropriations process, that are scheduled to eventually bring this portion of the budget down to 5.3 percent of the economy from 8.3 percent in 2012. That would be the lowest level for discretionary spending since such records have been kept.

Even so, the spending problem has not been solved because the real budgetary pressure in the future comes from mandatory programs such as Medicare, Medicaid and Social Security, which run on autopilot. As health care costs continue to rise faster than economic growth, Medicare and Medicaid will become more expensive. And as Conrad noted, “The aging population is the primary driver of Medicare, Medicaid and Social Security cost growth.”

“There is nothing we can do about that because these people have been born. They are alive today. They are going to be eligible for Medicare and Social Security, and we are going to have to find a way to be able to afford this combined effect,” Conrad said.

One way that will not be affordable is to insist that revenues never be allowed to drift higher than the 40-year average of about 18.5 percent of GDP. Even with the more favorable demographics of past years, Conrad pointed out that in each of the five years since 1969 in which the federal budget was balanced, revenues were 19.5 percent of GDP or above.

“So those who say we have to get back to the normal revenue stream, I think miss the point,” Conrad said. “The average is not going to do it. It never has, at least going back to 1969. We are going to have to have more revenue at the same time we have more spending discipline, especially with respect to the health care accounts.”

Fundamental tax reform can accomplish both objectives, Conrad suggested, if we recognize that many popular tax breaks are essentially spending programs. At a total of $1.2 trillion annually in tax credits exemptions, deductions and exclusions (i.e. tax expenditures), “we are spending more through the Tax Code than we are through all the appropriated accounts,” Conrad noted.

The fiscal cliff deal dealt with none of these issues. It was a short-term fix to an immediate problem.

“That leaves the unresolved challenge of our time,” Conrad warned his colleagues. “Because for this nation’s future, it is critically important that the next Congress, in its early days, try to get back to doing the grand bargain, the big deal, something that would reduce our deficits and debt by at least $4 trillion over the next 10 years to stabilize the debt to begin to bring it down.”

It is regrettable that Kent Conrad won’t be on the Senate floor in the coming months to roll out his charts  and relentlessly remind his colleagues why deficits matter and what needs to be done about them.

We can only hope that he will find a way to remain involved in the nation’s fiscal debates because, as he said in his final remarks as a United States senator, “later this year we will have more opportunities to do what needs to be done.”