August 23, 2014

Washington Budget Report: Sep. 6, 2011

« Back to WBR Issue List

Sign Up to receive the Washington Budget Report »


Economic Growth and Deficit Reduction

President Obama plans to speak to Congress Thursday night on ways to bolster the struggling economy while still trying to improve the nation’s long-term fiscal outlook.

In his request to address Congress, which returns this week from its August recess, Obama said he would lay out “bipartisan proposals” to create jobs, strengthen small business and put “more money in the paychecks of the middle class and working Americans” while still reducing projected deficits. Yesterday in Detroit, the President promised “a new way forward on jobs.”

A Labor Department report Friday said the unemployment rate had remained unchanged at  9.1 percent, intensifying concerns about the economic recovery.

Some news stories have talked about Washington shifting its focus from deficit reduction to job creation, as if the two goals were mutually exclusive. A new Concord Coalition video, however, emphasizes that there can be synergy between effective short-term measures to stimulate the economy and long-term fiscal reform.

“So, really, why are we stuck in this box?” says Joshua Gordon, Concord’s policy director. Instead, he says,  “we need to really be looking at this as all one thing.” He thinks the new congressional super committee has a critical opportunity to take this approach, in part because the American public “is clamoring for something to be done on both things.”

Diane Lim Rogers, Concord’s chief economist, recalls the “three Ts” of effective economic stimulus: measures that are timely, targeted and temporary. She argues against simplistic descriptions of fiscal policy, saying people should remember that “there’s good stimulus, there’s bad stimulus; there’s good deficit reduction, there’s bad deficit reduction.”

Report Highlights Need for Long-Term Reform

The administration has lowered its deficit projections from last February but cautions that further action is needed to invigorate the economy in the short term and hold down deficits in the long run.

Jack Lew, director of the Office of Management and Budget (OMB), said its Mid-Session Review “largely confirms what we already know and what the recent (Congressional Budget Office) analysis showed: We need to get back on a sustainable fiscal path and invest in long-term economic growth and job creation.”

The review, released last week, projected the 2011 deficit at $1.316 trillion, a $329 billion decrease from last February’s estimate. The latest number equals 8.8 percent of the economy (GDP), down from 10.9  percent in February.

The reasons: higher government receipts than expected, re-estimates of mandatory spending, and less discretionary spending than requested in the President’s budget.

More important than the current deficit, however, is the deficit spending that is expected to add trillions of dollars to the federal debt over the next 10 years. The promised spending cuts in the recent debt limit deal caused OMB to also lower its long-term deficit projections.

It should be remembered, however, that many of the promised long-term savings are highly uncertain. Most of them have yet to be identified.

Super Committee Gears Up

After Republicans and Democrats on the new super committee held separate discussions last week, the co-chairs announced that the full panel would hold its first meeting this Thursday. It is expected to focus on organizational issues and opening statements from the 12 committee members.

The joint committee, composed of six lawmakers from each party, was created by last month’s debt limit agreement. It is tasked with recommending $1.5 trillion in deficit reduction to Congress by late November. Sen. Patty Murray (D-Wash.) and Rep. Jeb Hensarling (R-Tex.) are the co-chairs.

A week from today, the joint committee will hold a public hearing on “The History and Drivers of Our Nation’s Debt and Its Threats.” Congressional Budget Office Director Douglas Elmendorf is expected to testify.

Last week Hensarling and Murray also announced that Mark Prater would serve as staff director for the committee. They praised Prater, who has been deputy staff director and chief tax counsel on the minority staff of the Senate Finance Committee, for his expertise and the respect he has earned from members of both parties.

The Concord Coalition has urged the super committee to aim for even more than $1.5 trillion in deficit reduction, giving careful consideration to recommendations from the President’s fiscal commission and other bipartisan groups.

Robert L. Bixby, Concord’s executive director, has also encouraged the super committee to seek wider public engagement through “two-by-two” programs in which lawmakers would visit each other’s districts to discuss possible solutions to the nation’s fiscal challenges.

Uncle Sam’s Check Is Often In the Mail

Many Americans ask why it is so difficult to rein in federal spending. Former U.S. Sen. John Danforth and Concord Coalition Executive Director Robert L. Bixby have a suggestion: “Perhaps they should look in the mirror.”

That’s because nearly two thirds of the U.S. budget consists of “transfer payments,” which are checks written to Americans, or written on their behalf for things like medical care. In 1940 such payments made up only 18 percent of the budget.

Because only a fourth of last year’s transfer payments were related to need, Bixby and Danforth write in a recent op-ed for Bloomberg Government, fiscal reform “need not devastate low-income Americans.”

The five largest transfer payment programs last year: Social Security, Medicare, Medicaid, benefits for retired federal employees and benefits for the unemployed.

Washington also paid its current civilian and military employees $447 billion last year. That number plus transfer payments totals $2.73 trillion in checks written to individuals or on their behalf. Danforth and Bixby also note that individuals receive most of the $1 trillion in subsidies that are written into the tax code.

“Responsible fiscal policy,” they say, “will depend on citizens who demand fewer benefits from their government and on politicians who focus more on the long term good of the country than on the next election.”

Tax Policy Options for Congress to Consider

Speculation continues over whether congressional Democrats and Republicans might be able to reach some sort of agreement on tax reform this fall. In her most recent column in Tax Notes, Concord Chief Economist Diane Lim Rogers reviews some of the options.

Under current law – which calls for the Bush tax cuts to expire at the end of 2012 – government revenue levels would allow deficits to come down to sustainable levels over the next 10 to 20 years, Rogers explains. While entitlement reform would also be necessary, any big changes would likely be phased in gradually and consequently take longer to have a large impact on the federal budget.

If the Bush tax cuts were again extended, as they were last year, there would still be several different routes to greater fiscal sustainability, Rogers said. Policymakers could choose to keep marginal tax rates low by broadening the tax base (consistent with fundamental tax reform goals), or they could impose higher marginal tax rates only on households at the very top of the income distribution (such as a “millionaire surtax”).

These approaches would be consistent with imposing strict pay-as-you-go rules for extending tax cuts -- rules which the congressional super committee should adopt.