When Congress returns from Spring vacation next week, the first order of business will be raising the federal debt ceiling followed closely by The Great Budget Debate over competing deficit reduction packages. The two should not be confused.
Whether you are a fan of Wisconsin Republican Paul Ryan’s “Path to Prosperity” or President Obama’s “Framework for Shared Prosperity and Shared Fiscal Responsibility” (or the bipartisan Simpson-Bowles commission report), all three call for running up an additional $7 trillion (Obama), $5.4 trillion (Ryan) or $5.3 trillion (Simpson-Bowles) before the deficit curve turns down. Try that without a credit card.
Tea party advocates who want to hold the debt ceiling hike hostage to more budget cutting should recognize this isn’t just a matter of closing a few national parks and furloughing federal workers. If the debt ceiling is not raised by July 8, the full faith and credit of The United States will go down, and so will the global recovery. “If anyone wants to push that button, I think they are crazy,” Jamie Dimon, head of JP Morgan Chase, says bluntly.
A Bi-Partisan Mess
This being the start of the presidential primary season, Republicans are working overtime to pin the budget deficit on President Obama’s out of control spending. But there is plenty of blame to go around. Since 2000, Congress has had to raise the debt ceiling nine times, seven during the Bush presidency when the actual federal debt rose from just under $6 trillion to nearly $11 trillion.
According to a study by the New York Times, the nation’s $14.3 trillion debt breaks down as follows: Roughly $5 trillion is money the government has borrowed from its own federal accounts (primarily Social Security). Another $3.2 trillion can be attributed to tax cuts, President Bush’s Medicare prescription benefit and wars in Iraq and Afghanistan initiated when Republicans controlled both the White House and Congress; $800 billion represents lost tax revenues after the 2008 economic downturn; and Obama’s stimulus spending and tax cuts accounts for another $600 billion. (The rest is a holdover from debts incurred on programs initiated before 2000.)
The Battle is Joined
There is a good amount of posturing in both the Obama and Ryan plans, and more than a little fuzzy math. Ryan says his plan will reduce the federal deficit by $4.4 trillion over the next 10 years by cutting $5.8 trillion in federal spending. Over $2 trillion of that would come from revamping Medicare and Medicaid; $1.6 trillion from slashing a host of non-military federal programs; and $1.7 trillion by pocketing the savings in federal debt interest. Obama has countered with a plan to cut the deficit by $4 trillion over 12 years with $1 trillion in more targeted cuts to domestic and military spending, another $1 trillion stemming from tighter controls on health spending and his own $1 trillion in debt interest savings.
There’s something about talking about the federal deficit in terms of trillions of dollars that both magnifies its importance – and trivializes it. The sums under discussion are so great they seem disconnected from the program cuts that will be necessary to achieve them. But there are very real differences in the Republican and Democratic approach to health care, specific federal spending curbs and, of course, taxes.
And not surprisingly, both parties are conspicuously silent on the most critical driver of federal deficits, Social Security, which now amounts to 21 percent of every federal dollar spent.
A Public Relations War
There are no easy apples-to-apples comparisons between the Obama and Ryan plan. “What we have here is a public relations war,” Robert J. Samuelson wrote in the Washington Post. “Both parties propound brands of wishful thinking designed to make it seem that they’re accomplishing more than they are.”
Nowhere is the rhetoric more shaded than in their discussion of taxes. The elephant in the room is the obvious fact there is no logical way to pare the $14 trillion deficit without increasing taxes. The Bush tax cuts and literally hundreds of tax loopholes have driven the effective tax rate to its lowest point since 1986 with most of the benefit accruing to the top 1 percent of households who now hold 35 percent of all the wealth in America and earn 20 percent of all our incomes – double their share back in 1979.
And yet Ryan’s plan for deficit reduction includes a provision to not only extend the Bush tax cuts but roll those into a revised and simplified tax code that would lower the top tax rate from 35 to 25 percent. With the accompanying elimination of many tax loopholes, he claims the lower taxes will be “revenue neutral.” In his scenario, the tax savings will be so popular they will spur enough investment in economic growth to actually increase federal revenues by $519 billion over the next 10 years.
The Ryan plan is based on a specious model designed by the conservative Heritage Foundation that has been disproved twice in the last 20 years: first, by Clinton era tax increases (in 1993) that touched off an unprecedented economic boom in the 90’s; and second, by the original Bush tax cuts (in 2001 and 2003) that turned a $1.6 trillion surplus at the end of the Clinton era into a $5.6 trillion deficit at the end of Bush’s.
For the Heritage Foundation model to work, Paul Krugman noted in the New York Times, economic growth in the United States would have to be so great that unemployment would be 2.8 percent, “a number we haven’t achieved since the Korean War.” An economy running at that level would be so hot that the Federal Reserve Board would be forced to raise interest rates to counter inflation – and wipe out most of the $1.7 trillion savings in interest expense Ryan is counting on.
On the Democratic side, Obama has proposed letting the Bush tax cuts expire on people earning over $250,000 and make other adjustments in the tax code to phase out itemized deductions for top earners. The additional income would amount to $900 billion over 12 years. But critics like David Stockman, the former budget director under Ronald Reagan, say that won’t be enough.
Higher Taxes for Everybody
“It is obvious that the nation’s desperate fiscal condition requires higher taxes on the middle class, not just the richest 2 percent,” he wrote in a New York Times op-ed piece. Stockman’s perspective is interesting. Under Reagan, he was an advocate of lower rates on capital gains as a business stimulant. Under very different economic conditions today, he views them as “an obsolete tax subsidy for the rich.”
“The nearly untaxed windfall gains accrued to pure financial speculators, not the backyard inventors envisioned by the Republican-inspired capital-gains tax revolution of 1978,” he wrote.
The gulf in the Republican and Democratic tax proposals, Stockman added, is fueling a class war with no tangible effect on the deficit. “Mr Ryan’s plan gets to a balanced budget in the fiscal afterlife (i.e. the 2030’s); the White House tactic of accumulating small-fry deficit cuts over the enormous span of 12 years amounts to the same dodge.”
The good news is that the current debate over the 2012 budget doesn’t need to resolve itself with a compromise tax solution. If President Obama is re-elected and Republicans retain control of the House in the the 2012 elections, the standoff will continue. But the Bush tax cuts are still slated to expire on January 1, 2013. President Obama could simply veto any new legislation and let taxes for both the rich and the middle class return to Clinton-era rates. That alone would solve about 75 percent of the immediate deficit problem.
Medicare and Medicaid
Fully a third of the cost savings Ryan is projecting, roughly $2 trillion, would come from changes to the Medicare and Medicaid program. Both are radical departures from the current system.
Ryan’s plan calls for turning Medicaid over to the states as block grants. His conservative premise is that giving states more leeway in setting reimbursement rates will allow them to more efficiently administer the program. But the $771 billion in federal savings he projects will more likely result in higher state taxes or lower benefits. Neither bodes well for the 53 million Americans who rely on Medicaid — mostly the poor, their children and people with disabilities who can least afford either.
Ryan also is proposing an end to Medicare “as we know it” – but only for people under the age of 55. (Don’t mess with those seniors). His replacement would be a means-tested voucher system that would give retirees a voucher worth about $7,800 in 2023 that they can use to purchase their own private insurance. Again, Ryan has faith that competition in the private insurance market will keep health insurance rates low. But at the current pace of health insurance rate hikes, the voucher won’t cover even half of the projected cost of private insurance in 2023.
New York Times columnist David Brooks gives Ryan credit for addressing the controversial issue. “The average senior citizen pays in $150,000 (for Social Security and Medicare) and takes out $450,000. That’s not sustainable,” he said on Meet The Press. But Brooks sees a critical flaw in Ryan’s approach: no ideas for controlling health care costs overall. And that’s where Obama’s plan shines.
Obama’s approach amounts to letting Obamacare do what it was meant to do. His signature health reform bill is still in the implementation stage and includes a plethora of cost control measures that have yet to be digested by the American medical system. Baked into these are $500 billion in health care savings that even Ryan’s plan assumes are real. Obama contends that further adjustments in Medicaid reimbursements can save another $100 billion.
The chief vehicle for achieving these savings is called The Independent Payment Advisory Board – once characterized as a “death panel” by Sarah Palin. The IPAB is charged with sniffing out waste and unnecessary or ineffective medical procedures, setting limits on health care reimbursements and bargaining for better health care prices. If it works as planned, the Congressional Budget Office estimates it will yield an additional $500 billion in health care savings over the next 10 years. The most effective way would be to allow Medicare to leverage its purchasing power to hold down prescription drug costs.
But the American health care system is vastly complicated, no more so than in Washington where everyone – legislators, lobbyists, health care advocates, and, yes, journalists –all have a thumb on the payment scale. As James Surowiecki observed in The New Yorker, “One person’s ‘waste’ is another person’s ‘income’––the income of doctors, nurses, hospitals, drug companies, medical-technology makers.”
If Republicans would give up the ghost on crippling the IPAB and lobbyists can be kept at bay, it could be our best hope for health care savings in the government programs and in private care as well.
Cut Spending. But Where?
The good news coming out of the release of both the Ryan and Obama budget plans is that both parties seem ready to focus on what seems to be the central issue: how much government are the American people willing to pay for? The answer requires some hard choices.
As a framework for the debate, Ryan has put forward an idea to roll back spending on domestic programs in all categories to 2008 levels and freeze it there for the next five years. If the freeze is spread equally across all departments, this would amount to a 15% across the board pay cut for all federal employees. (Not the best way to recruit the best and the brightest, Michael Kinsley noted in Politico.)
But in his zest to shave $1.6 trillion off domestic spending, Ryan has opened the door to cutting back many previously sacrosanct programs and tax loopholes: agricultural subsidies, mortgage interest deductions, ethanol incentives, job training, oil depletion allowances and offshore corporate tax exemptions among them.
Obama’s more targeted plan identifies $771 billion in “non-security” spending cuts (in other areas) and puts on the table another $400 billion in military reductions. (Ryan’s plan envisions only minimal military cuts. In fact, it adds back $100 billion to the $178 billion in unnecessary defense programs that Defense Secretary Gates has recommended canceling.)
It’s not likely conservatives or liberal ideologues will every let go of their social agendas in favor of a more rational bang-for-the-buck analysis of which programs are most cost effective. But the prospects for a grand bargain that will significantly reduce federal expenditures is greater than it has been in decades. “Some of these cuts will be painful,” Obama told an audience at George Washington University in what may be the understatement of the year.
A Football Analogy
Obama’s and Ryan’s budget plans are the goal posts at opposite ends of a field where the budget battle will play out, but the president and congressmen are not the only players on the field. Besides the grey-haired elders on the Bowles-Simpson commission, six senators – three Republicans, three Democrats – have been meeting for months trying to hammer out a compromise. The so-called Gang of Six consists of Sens. Dick Durbin (IL), Mark Warner (Va) and Kent Conrad (ND) for the Democrats, and Saxby Chambliss (GA), Mike Crapo (IA) and Tom Colburn (OK) for the Republicans.They’ve been tight-lipped about their discussions – briefing party leaders along the way – but promise to have their own budget plan when Congress reconvenes in May.
In the upcoming battle of the budget, House Speaker John Boehner will be quarterbacking the Republicans and Senate Leader Harry Reid will lead the Democrats, but the Gang of Six may be the linemen who will have to grind out the yardage at the line of scrimmage.
“I’ve been around here for 25 years,” Senator Kent Conrad of North Dakota told Time’s Joe Klein, “but I’ve never been involved in a bipartisan budget negotiation of this magnitude and significance before.”
That makes this year’s great budget debate The Super Bowl of politics in Washington –– although I should remind you that The Super Bowl is played every year.