1:32 p.m. – I walked over to Jackson Place just in time to catch Bowles, Simpson and Reed walking out.
I asked Bowles if he had directed any of his comments about the severity of the nation’s fiscal crisis to members of the commission who said they didn’t want to see cuts to education, health care, infrastructure, and a few other large sectors.
Bowles said he “wanted to emphasize that is is going to be harder to do the things they want to do” if the nation’s deficit and debt are not brought under control.
Simpson was more blunt: “Whatever you love in America you won’t get unless we get this under control.”
Simpson was also adamant that Obama’s new health bill is going to be part of the commission’s discussions.
“Yes! Everything is on the table,” he said.
Bowles said that the working group meetings every Wednesday will be closed to the press, and that the monthly meetings of the full commission will be open to media.
And I got the names of the commission staff that I missed: Conor McKay has come over from the Democratic Leadership Council, the organization that Reed himself leads; Meghan Mann has come over from the Office of Management and Budget (she will be budget director Peter Orszag’s eyes and ears); and Marc Goldwein has joined the staff from the Committee for a Responsible Federal Budget.
Reed said more staff will be added later.
12:45 p.m. – Co-Chair Erskine Bowles ended the meeting with a final speech. He said the key to the commission being able to make progress and be successful is “all about trust.”
Bowles’ comments were a pretty clear endorsement of Paul Ryan’s perspective, rather than Schakowsky’s or Becerra’s. But Bowles also made clear that tax increases are going to be part of the package of solutions the commission will likely offer.
“I think Representative Ryan said it best: this is the most predictable economic crisis in history that we face,” Bowles said.
“We’re in autopilot right now,” he said. “If we don’t fade up to the rising deficits and debt, we will face an economic crisis.
“We all get it. Now do we have the courage to do something?”
Bowles said the debt “s like a cancer … that is going to destroy our country from within. It’s as plain as day.”
“What is really hard is the solution,” he said.
Bowles said he wants to protect the social safety net, make America more competitive globally, and keep the country fro being negatively impacted by any tax increases.
He also said that the commission is “not going to solve this simply by waste fraud and abuse” or ” “just by limiting foreign aid.”
He said changes to entitlements, military spending, discretionary items (ie favored spending programs that may not be working) and revenue (ie tax increases) will all be on the table.
“We have to face up to that,” he said.
It is key, Bowles said, to “educate the American people.”
And he addressed comments by lawmakers such as Schakowsky and Durbin, when he said that “there are going to be no jobs out there if we don’t get this debt under control.”
“There’s going to be no money for education, infrastructure” and other spending items mentioned by Democrats on the commission, “if we don’t get this debt under control.”
“Paul Ryan is right,” Bowles said.
But he, like Simpson, said that the commission must “agree on a set of numbers,” and said they want to use figures from the social security commission and medicare commission, and from the CBO.
Bowles then described how the commission will be structured.
The next meeting on will be on May 26 from 9 a.m. to 11:30, and it will be held on Capitol Hill instead of at the White House. In between, working groups on mandatory spending, discretionary spending and revenue reform will meet every Wednesday.
The full meetings will be held every month. The other dates are June 30, July 28, September 29, November 10 and the final meeting will be on December 1.
Bruce Reed, the commission’s executive director, then introduced the commission staff. But fittingly, my live stream, having finally worked for much of the last 90 minutes, suddenly froze again.
12:39 p.m. – Outgoing SEIU President Andy Stern began with this: “I love this country.”
But he warned that America is in danger of losing its ability to give people the futures they’ve long come here for.
“Everywhere but in Washington DC Americans realize that something is profoundly different,” he said. “America is not clearly going to be the dominant super power in the long run.”
He said we are currently in a third economic revolution, from a national economy to a global economy.
America “has no plan,” Stern said.
“Team USA needs an economic plan and I think that’s what we’re here to do,” he said.
“We need to have job growth and wage growth” in the short term, Stern said, to get out of the current problem.
Stern said he has recently met all the Republican members of the commission and has known all the Democrats for a while.
Stern then went through a laundry list of what ideas he likes. He said he likes Gregg’s idea to simplify the tax code, and he said corporate income taxes are too high and the loopholes are too big. He mentioned a number of others.
He said the U.S. “economic engine” must be restored.
12:36 p.m. – Spratt said the country faces a “grave fiscal threat.”
“How long will the world’s greatest debtor be able to remain the world’s greatest superpower?”
Further, Spratt said: “Who will tell the people?”
12:22 p.m. – Former OMB Director Alice Rivlin spoke for the first time. She was followed by Paul Ryan.
“We have before us the most predictable economic crisis” Ryan said.
He cited debt crises like Greece and said “we are kidding ourselves” by saying that can’t happen to the U.S.
Ryan said that health care is an unavoidable part of the problem.
“Our fiscal trajectory was bad and now it’s getting worse,” Ryan said, blaming the president’s health bill expansion of coverage to 30 million plus.
“If you look at the math of this, spending is the culprit … that is what’s driving this.”
Jan Schakowsky spoke next. She said the commission is not made up of bean-counters or actuaries.
“Balancing the budget and reducing the debt are not ends in and of themselves,” she said.
“We can’t afford to skimp” on education, health care, infrastructure and one or two others, she said.
“While we’re committed to freeing our children and grandchildren from … debt, we must be just as committed to insuring that they are not ignorant, sick or uninsured.”
“I’ve heard enough sanctimonious comments about entitlements from some of the most entitled,” she said.
She also said Wall Street is to blame for causing the problems the country is facing.
The commission is not facing a “Mission Impossible,” she said.
Ryan, seated to her right, appeared to be straining to keep a straight face.
12:15 p.m. – Jeb Hensarling said that the 9/11 Commission and the BRAC Commission give him hope that this commission will be successful, but said he has other reasons to be pessimistic.
“These commissions tend to fade into obscurity and I do have some concerns over the design of this one,” he said.
Majority of the commission appointed by Obama and congressional Democrats.
Hensarling said spending is “the disease” and the deficit is “the symptom.”
He said future Americans will be limited to “small, timid dreams” if the U.S. does not fix this problem, and speculated that the 21st century will be known as belonging to China.
Hensarling suggested the commission consider caps on government spending that he has proposed in Congress, as well as Paul Ryan’s plan for making the entitlement system solvent.
12:11 p.m. – Ann Fudge, former chairman and chief executive of Young and Rubicam, General Mills & Kraft, spoke for the first time. She is, incidentally, the only African-American on this 18-member panel.
“We are here to serve our fellow Americans,” she said.
The biggest service they can offer, she said, is to help the American public understand the problem.
12:07 p.m. – Dick Durbin said it’s not just about quantifying cuts in spending and focusing on taxes, but thinking about the nation’s future.
China is America’s “greatest competitor,” he said, and they have a plan and strategy that they are executing.
He then criticized tax policies that he said have favored the “well off” and growing disparities in income.
“I don’t believe this commission is a trojan horse for a VAT tax .. it’s the musings of a few right wing TV shows.”
Durbin aid the commission shouldn’t be a venue for the “greatest hits” of criticisms of the health bill.
He closed by saying conservatives have to “open their minds” to the problem of the poor and that “bleeding heart liberals” need to keep in mind the requirement that America be competitive in the world.
12 p.m. – David Cote, CEO of Honeywell, said the root cause for failure in business or gov’t is when they lose the ability to coalesce to make tough decisions.
Cote said he has “high hopes” to do a “good deed” that helps the economy.
Mike Crapo said that the American people have figured out the problem for a long time because the math is simple: “We are spending far more than we are bring in in revenue.”
He ably ticked off the list of all the consequences if no solutions are found.
“The American people understand it and they want us to get past the politics,” he said. “A significant portion of the solution will be found on the spending side of the ledger.”
11:55 a.m. – Kent Conrad told a story about a Chinese official telling a colleague that America is going to become a second-tier power because it doesn’t have the will to fix its fiscal problems, and said he hopes that’s not true.
The commission will have to recommend “dramatic changes on spending and changes on revenue,” Conrad said.
11:45 a.m. – Baucus and Becerra spoke second and third.
Baucus talked about a tax gap, productivity gap and spending gap. The tax gap is a $345 billion shortfall in understated income or overstated tax credits. The spending gap is fraud and waste, such as $25 billion in medicare payments made in error every year. The productivity gap is the amount of private sector efficiency not being utilized by the government.
He also said that cutting Social Security benefits or raising Social Security taxes will be harder than people think.
Becerra said Americans “wont be afraid to eat their vegetables” if Washington is clear why they must.
“What kind of nation do we want to be: we can balance our budget but if we sacrifice education our children, China will overtake us much faster than we would expect.” He also talked about upholding defense expenditures but I missed that quote.
Becerra talked about a “jobs gap.” He also knocked those who are against government and said those people should try to run government more efficiently.
Camp was fourth speaker. He cited the national debt as being $12.9 trillion. He said both parties have created the problem. He also came back to his criticism that the health care law has made the problem worse.
“When we say everything is on the table does that include the new health care law?” he asked.
And maybe I missed it, but I think Camp was the first one to raise the issue of the Value Added Tax.
Given the unemployment rate at 10 percent, Camp said, “it’s difficult to imagine asking them to pay on top of everything else .. a national sales tax.”
“Washington has borrowed enough from the American taxpayer. It’s time for us to show that we can responsibly handle the people’s money by getting spending under control,” he said.
11:35 a.m. – Penner and Reischauer are excused and commission members begin five-minute statements.
Alan Simpson is first. He gave, unsurprisingly, a fairly remarkable speech.
He began by talking about the ways he’s already been criticized: “covering the president’s fanny,” was one.
But he said he has always been at odds with “the extreme wing of my party.”
“I have never been their favorite,” Simpson said, citing his belief that abortion is “an intimate and personal” issue and his support for gay rights.
He exhorted the commission not to let critics affect them.
“Never let them distort who you are as a person,” he said. “If you can’t forgive a person it’s like letting them live in your head rent free.”
“Here is my naive vision: that maybe, just maybe, we can all agree on where we are,” he said. “I think we might get there by using honest figures and honest facts.”
Simpson said it would be “a remarkable first step: for us to say, look i don’t know where we’re going, I have no idea where we’re going, but I will agree that those are the figures .. those are the things we face.”
“The American people have always been smarter then their politicians. They know that something is terribly wrong,” Simpson said, charging that both parties have “done nothing” to fix the country’s fiscal crisis.
Simpson said that when he was in the Senate, he was told by constituents to “bring home the bacon.”
“The pig has died,” he said. (That may be the line of the day).
“The confectionery store window will closed and an evil witch with a boil on her noise will be serving the candy counter,” Simpson said, continuing the metaphor.
Lastly, he said that any thing the commission recommends “will be met with howls of anguish …. get ready for it.”
“The extreme right and extreme left will savage our final product,” he said.
But Simpson asked commission members to think of themselves as “American citizens” first and to summon their patriotism.
“This might be the last best hope to right this listing ship of state of ours,” he said.
11:20 a.m. – Senate Budget Committee Kent Conrad spoke about how five percent of Medicare recipients use 50 percent of the money.
Conrad said this is because the five percent are the chronically ill with multiple serious conditions. “We do a poor job of coordinating care,” he said.
On the revenue side he said the government only collects 80 percent of what is owed and if that was fixed it would “dramatically fix the structural deficit.”
Penner said that the difficulty with collecting taxes goes back to the tax code’s complexity.
Reishchauer said the structure of health insurance payment system is “fragmented” and that makes it hard to coordinate care.
Rep. Dave Camp, Michigan Republican, said care is being coordinated within Medicare Advantage, which is one of the major programs being cut back under ObamaCare.
Camp asked Penner about his simplified tax system, which has two tax brackets: 15 and 25 percent.
Camp also said that health spending has been “exacerbated” by the Obama health plan, citing the CMS report issued last week.
Reischauer said the CMS memo was talking about overall health spending, not just the government portion, and that expanding care does increase national health expenditures “from covering 30 million more people.”
11:15 a.m. – House Budget Committee Chairman John Spratt, South Carolina Democrat, asked about changes to Medicare and Social Security.
Reischauer said they should index the program to adult life expectancy and make the payments more progressive according to annual income. He also said the changes should be phased in for future recipients and not necessarily current recipients.
Penner said there is a “strong argument” that the commission should look closely at social security because the problems and ways to fix them are more clear than on health spending.
11:12 a.m. – Senate Majority Whip Dick Durbin, Illinois Democrat, spoke next. Again the live stream froze, so I missed his question. But based on what I caught of Penner’s answer, it sounded like Durbin was asking about the Swiss Cheese nature of the tax code, taking aim at all the exemptions and deductions.
Durbin’s follow up was about whether growing income disparities should be considered in what the commission recommends. Penner appeared to turn the question around on Durbin and use it to talk about the need to reform entitlements.
Penner said he gets $20,000 a year from social security: “I like it but I find it very hard to rationalize.”
11:08 a.m. – Rep. Jeb Hensarling, Texas Republican, spoke next. I didn’t catch much of his question thanks to the in and out White House live stream, which froze for another 30 seconds.
Hensarling asked Penner in a follow up if his projections show the U.S. being the highest taxed country “on earth.” Penner said yes if you include state and local burdens.
11:02 a.m. – Rep. Paul Ryan, Wisconsin Republican, spoke next, asking Reischauer and Penner about his comments on moving Medicare toward a voucher system. His questions seemed designed to simply get both to say his plan is possible. Ryan did not speak for long.
Xavier Becerra, California Democrat, brought up the $700 billion TARP bailout, blaming it on Bush as “deficit spending.”
“For us to really tackle all the problems we have, we really have to look beyond just what we categorize as the federal budget don’t we?” Becerra said.
Penner: “Well as terms as the other fish in the sea, there’s this great big shark called health, and we just can’t avoid it.”
I then lost the live stream for about 30 seconds so I didn’t catch what came next.
Reischauer said there are lots of “sardines” – places where government money gets wasted – but they are “hard to catch.”
He said another big “shark” is the growing amount of interest on the national debt being paid by the government.
10:59 a.m. – Rep. Jan Schakowsky, Illinois Democrat, told Penner and Reischauer that many of the cost problems are in the private sector, which I think was a reference to insurance company rate hikes.
Reischauer said the question is whether insurance rates have risen higher than profit margins in the health care industry as a whole.
“I think the answer is it has not been great. I’m not here to defend insurance companies but i think the problem goes much deeper than their behavior,” Reischauer said.
10:46 a.m. – Reischauer again says Americans will have to accept higher taxes. I again fail to get the exact quote. Blame Mike Riggs.
Reischauer spoke at some length about Medicare costs and the fact that it’s unknown if and how Obama’s health care law will significantly reduce health care costs.
Reischauer said the debt to GDP ratio could is not as important as having a credible set of policies to signal to markets that the U.S. will be able to pay its debts.
Sen. Judd Gregg asks the first question, commenting that there is about $66 trillion of unfunded liabilities in Medicare, Medicaid and Social Security, and asked Reischauer if he was saying that the health care law had made it harder to find ways to make the system more efficient.
Reishcauer said it’s “unlikely” that a Medicare voucher system would be “desirable” and suggested a tax on high-end plans.
Penner said he thinks “we really do need to think radically” on the health side.
“Some how or another we’ve got to get more control over the budget than we do in this open-ended system,” Penner said.
Baucus spoke next. He said ObamaCare is going to move away from fee for service care and toward paying for outcomes, which he said will reduce overall costs.
10:40 a.m. – Reischauer begins by saying that “few Americans understand the degree of the problem.”
The commission should make public persuasion and raising public awareness part of its mission, he said.
Spending cuts will have to affect programs that most care about, and taxes will have to be raised on large swaths of the American people, he said.
Here is Reischauer’s prepared statement:
Statement of Robert D. Reischauer *
to the National Commission on Fiscal Responsibility and Reform
April 27, 2010Co-chairmen Bowles and Simpson and members of the Commission, I appreciate this opportunity to discuss the challenges this Commission faces as it crafts a package of specific measures that will meet the medium- and long-term goals laid out in the President’s Executive Order of February 18, 2010. I do not have to tell you how daunting your task is, nor explain to you the risks our nation faces if we do not begin to put the federal budget on a sustainable path.
Recently the public has shown increasing concern over large deficits and the growth of federal debt. But it is clear that few Americans fully understand the seriousness of the problem, the consequences of inaction, or the degree of sacrifice required to ensure that our children and grandchildren enjoy, as we have, an economy that provides rising incomes and expanded opportunities. Thus, the Commission’s first task should be to make a clear and convincing case that:
• Significant adjustments in our current spending and tax policies are unavoidable.
• If we do not begin these adjustments soon, our economy’s vitality will gradually be sapped, our ability to chart our own course in this increasingly unstable world will erode, our government’s capacity to meet crises and address emerging priorities will be constrained, and our dependence on foreign creditors and their influence on our policies will grow. The longer we delay, the greater the risk of catastrophic economic consequences.
• The magnitude of the required adjustments is so large that spending cuts will have to affect programs we all care about and benefit from and revenue increases will have to come from a wide swath of Americans. In other words, raising taxes on the rich or corporations, closing tax loopholes, eliminating wasteful or low-priority programs, and prohibiting earmarks simply won’t be enough.
• And, finally, the sooner we start addressing the problem the less wrenching the adjustments will have to be and the more control we—as opposed to market forces, foreign creditors or, in the extreme scenario, international agencies such as the IMF—will have over the timing, size and composition of these unavoidable adjustments.
Having analyzed federal budget issues over the last four decades and participated in several efforts to reduce the deficit, let me offer four pieces of advice.
• First, don’t waste time looking for silver bullets or new approaches that hold out the promise of painless sacrifice. There are none to be found. The Congressional Budget Office, the Government Accountability Office, past presidential budgets, and think tanks, university researchers and interest groups have put forward hundreds of proposals for moderating spending growth and enhancing revenues. Use these, selecting the specific measures that, when combined into a single package, best meet the nation’s economic, social and political needs.
• Second, don’t take any category of spending, specific program or revenue option off the table until you have finished crafting a complete proposal. A particular option that may look very unappealing at the start of your deliberations could turn out to be a critical piece of the puzzle before you are done. Our past experience suggests that successful deficit reduction efforts are balanced and extract sacrifice from all of the major budgetary “food groups”—taxes, fees and charges, entitlements and discretionary spending.
• Third, don’t assume that budget process reforms—that is new procedures for making decisions about spending and revenues—can substitute for or create political will. The solution to our fiscal problems will not be found in a balanced budget amendment to the Constitution, line item veto or beefed up rescission authority for the President, a joint rather than concurrent budget resolution, biennial budgets, discretionary spending caps or strengthened PAYGO rules. History has shown that if lawmakers do not want to rein in spending or raise taxes to curb deficits, no procedural reforms can make them do it. Congress and presidents have had no qualms about eviscerating or evading procedural requirements that have proven too politically costly. At most, such reforms can stiffen the backbones of lawmakers so they stay a course that has already been enacted or provide some modest political protection to those who are already committed to deficit reduction.
• Fourth, stay focused on the ultimate objective of the effort—ensuring the healthy growth, competitiveness and stability of the nation’s economy over the long run. This implies that spending programs and provisions of the tax code that rigorous, objective analyses have shown contribute significantly to the economy’s long-run growth potential should, if possible, not be scaled back. Of course, this is easier said than done because many programs and tax breaks claim, without hard evidence of their comparative effectiveness, to be growth promoting. But many programs that do enhance economic growth could be restructured in ways that would deliver more bang for the buck.
Let me conclude with some observations about tax burdens, entitlements, health care costs and the appropriate long-run fiscal goal.
Many observers have pointed out that revenues have averaged roughly 18 percent of GDP over the post WW II period. From this they deduce a natural law of American budgeting and assume that, going forward, revenues should be held close to 18 percent of GDP and spending should be constrained to no more than a couple of percentage points higher. That combination would achieve sustainability, that is, keep the debt to GDP ratio from rising. But since the mid 1970s, keeping revenues around the 18 percent of GDP level clearly has not been enough to keep our debt from growing faster than our economy. Looking forward, it is unlikely that spending can be held to 20 percent to 21 percent of GDP unless we are willing to fundamentally rethink the entitlement commitments the federal government assumed in the mid 1930s, the mid 1960s and in 2010, or to downsize significantly our defense capabilities, or to eliminate virtually all of the of the federal government’s traditional non-defense activities. In short, to achieve fiscal sustainability we are going to have to accept higher tax burdens than we have enjoyed in the past. The challenge will be to adopt those revenue enhancing measures that are most compatible with economic growth and equity.
Getting on a sustainable budget path over the long run will also require measures to moderate the growth of entitlement spending, but such measures are unlikely to contribute significantly to reduced deficits during the next five or even ten years. Because most entitlement spending goes to retirees and vulnerable individuals who have limited ability to either absorb benefit reductions or compensate for any cuts by working more, changes in benefits must be phased in gradually over many years. While there may be some short-run scope for reducing the implicit subsidies enjoyed by upper income elderly, the amount of deficit reduction that might be garnered this way over the next decade is quite modest.
Most of the fiscal imbalance projected for the future derives from the expectation that health care expenditures will continue to rise more rapidly than the rate at which the economy will grow. It is thus natural to look at ways to curb the growth of federal health care spending which is concentrated overwhelmingly in the Medicare and Medicaid programs. However, this will be very difficult to do over the next decade for three reasons. First, under the Patient Protection and Affordable Care Act (PPACA), Medicaid costs will rise significantly because the program plays the primary role in expanding coverage among low-income populations. While a recent report from UnitedHealth concludes that significant savings are possible in the program, realizing them would require adopting effective coordinated care for Medicaid’s regular population and community-base/coordinated care for Medicaid’s long term care beneficiaries. Effective coordinated care is unpopular and difficult to do well.
Second, under the PPACA Medicare spending has already been reduced significantly, so much so that the Chief Actuary of Medicare has warned that beneficiaries may face access problems in the future if the required reductions in payment updates are adhered to. While the health reform act contains many promising demonstrations and pilot projects designed to test incentives and organizational changes that might slow spending growth, it will be more than five years before the results from these experiments can inform policy.
Third, the growth rate of the costs of the government’s health programs can not be reduced for any significant period below that of private sector without creating access problems, inferior care for beneficiaries or burdensome cost shifting onto the private sector. For this reason system-wide reforms and incentives are the only way to rein in the growth of Medicare and Medicaid costs over the long run. It will take time before we know which measures can be effective at holding down system-wide cost growth.
Finally, while the medium-term mission spelled out in the President’s Executive Order—propose recommendations that balance the primary budget by 2015—is specific, the long-run mission—achieve fiscal sustainability—is less clear. Some may argue that you should strive to balance the unified budget by some date certain. Others will say, as several independent groups have recently recommended, that the goal should be to stabilize the debt to GDP ratio at some specific level like 60 percent or 70 percent. There is no need to strive for a balanced unified budget. Modest deficits are consistent with a gradual reduction in the debt to GDP ratio—this is what happened between 1946 and 1974 when deficits averaged 0.6 percent of GDP and the debt to GDP ratio fell from 109 percent to 24 percent.
Stabilizing the debt to GDP ratio is an appropriate goal but whether the target is 60 percent, 70 percent or even 90 percent is less important than enacting a credible package of policies that can achieve the goal. Everything else equal, a lower debt-to-GDP ratio is better than a higher figure. But setting a target that is too ambitious could prove counterproductive if the public regards the necessary spending cuts to be too deep and the tax increases too large and elected leaders respond by abandoning the effort. Attaining fiscal sustainability is likely to require several major efforts over the next decade or two. Nevertheless, it is important that we start the journey now by enacting some significant deficit reduction measures that will send financial markets a clear signal that no longer will we behave as if American exceptionalism means on the fiscal front that the United States can avoid the unavoidable.
10:28 – Rudolph Penner and Robert Reischauer — both former directors of the Congressional Budget Office — are the next speakers.
Penner says “far more significant policy changes than the American people are used to” are needed.
He says entitlement spending is growing at a rapid clip while the tax burden has remained about the same for about 50 years.
At some point Penner started talking about Paul Ryan’s idea to move Medicare to a voucher system. But then the live stream froze.
Suffice to say, Penner’s presentation has gone straight into very dense policy detail. So from the get go, this commission meeting has moved quickly through different speakers who have all spoken in fairly substantive detail on complex budget and spending policies.
“A basic point screams out of our analyis,” Penner said, arguing that no matter how big you think government should be (he described himself as a fiscal conservative) “there are enormous benefits” to simplifying the tax system.
Here is Penner’s prepared statement:
CHOOSING THE NATION’S FISCAL FUTURE
Statement of Rudolph G. Penner
Institute Fellow – The Urban InstituteBefore the The President’s National Commission on Fiscal Responsibility and Reform
April 27, 2010The views expressed are those of the author and do not necessarily the views of the trustees, executives, or staff of the Urban Institute.
Mr. Bowles, Senator Simpson and other members of the commission, I would like to thank you for this opportunity to testify on our nation’s fiscal future. The commission faces a formidable task. The budget is on a ruinous path and getting off that path involves far more significant policy changes than the American people are used to.
Three programs – Social Security, Medicare, and Medicaid – constitute considerably more than 40 percent of spending in a normal year and all are growing faster than the economy and tax revenues. At the same time Congress has kept the overall tax burden remarkably constant between 18 and 19 percent of the GDP for most of the past 50 years. The combination of three large rapidly growing programs and a constant tax burden inevitably implies a growing deficit if spending for other government spending programs is held to a constant share of GDP. As the deficit increases, the national debt grows faster and faster, and interest on the debt becomes a budget problem in itself. In reasonable projections, the debt passes 100 percent of the GDP in the late 2020s and 200 percent shortly after 2040 under the unrealistic assumption that interest rates and the rate of economic growth remain constant in the face of rapidly growing deficits. It is, however, highly unlikely that world capital markets will tolerate that sort of fiscal profligacy for a long period of time. The market for our debt would collapse long before 2040.Because of the fickleness of financial markets, it is difficult to predict exactly when a crisis might hit the United States. If one examines fiscal crises in other advanced countries, they have been set off by very different events in different places. In Sweden in the early 1990s, problems began with a financial crisis which quickly caused a recession much more severe than our recent downturn. Plunging tax revenues and soaring safety net expenditures revealed that their budget was in a disastrous state in the short run and things did not get better in the long run because of rapidly growing long-run spending commitments – a situation somewhat more severe quantitatively than that now faced by the United States, but very similar qualitatively. In response, Sweden launched a remarkable series of fiscal reforms, including an ingenious Social Security reform that is being emulated around the world. In Australia and New Zealand, foreign exchange crises provoked fiscal crises and stimulated major reforms. Recently in Ireland, their unsustainable economic boom and a huge housing bubble came to an end abruptly and revealed a dire fiscal situation in the long run that they are fixing with remarkable speed. In Greece, the fiscal house of cards came tumbling down when the government admitted that it had been lying about the fiscal outlook.
It is difficult to point to a single fiscal indicator that signals that a crisis is imminent. The crises described above occurred with a wide range of debt-GDP ratios. Investors look at a wide variety of variables to try to determine how serious a country is about fixing their fiscal problems in the long run. As I travel abroad, I am pleased to find that foreigners are often more optimistic than Americans about us fixing things without a crisis. Or to quote Winston Churchill, “You can count on Americans to do the right thing after they have tried everything else.”
Even if we avoid a crisis for a good long time, the large deficits projected in the future will drain away domestic savings that could be better used to finance productive investments in the United States. Without those investments, labor productivity will be lower, wages will be lower, and living standards will be lower than they need be. The fall in investment is mitigated to the extent that we can borrow from foreigners, but then more of future U. S. income has to be devoted to paying interest and dividend abroad and that also reduces future U. S. living standards.There are many indications of long-run problems in the 2011 budget just issued by the administration. Spending for Social Security, Medicare, Medicaid and interest already equal almost 70 percent of revenues in 2011. Although the absolute level of the deficit declines from 2010 to 2014, it rises thereafter according to CBO estimates and its growth accelerates as a share of GDP after 2018. The debt in the hands of the public rises from 53 to 90 percent of GDP between 2009 and 2020. The interest bill more than quadruples over the same time period.
Many groups and committees have warned of the possibility of a budget-related crisis and described the harm done to our economy by large deficits. John Palmer of Syracuse University and I recently co-chaired a committee on our fiscal future organized by the National Academies of Science and Public Administration. It was financed by the MacArthur Foundation. The membership of the committee spanned a wide range of ideologies. The committee report has the usual diagnosis of our budget problems and a warning about a potential crisis if we do not change policies. However, our report is unique in that it contains a rich range of policy options that can be used to achieve fiscal stability.First, fiscal stability was defined to mean that the debt-GDP ratio should be stabilized. The Congress should set an explicit target for the debt-GDP ratio and not exceed it. Given an explicit target, the American people could judge how well the Congress and administration are doing in their pursuit of fiscal responsibility. The committee further determined that a prudent target would hold the debt to 60 percent of GDP. That ratio should be achieved by 2022 and we should begin implementing the necessary policies by 2012. If the nation experiences good fortune while holding the debt to this level, it would be wise to lower the target further.
Admittedly, the choice of 60 percent as a target is a matter of judgment. The committee had to balance the risks of choosing a higher target against the political difficulty involved in getting to something lower. A higher debt-GDP target means running higher deficits. For example, if the GDP grows at 5 percent per year, a 60 percent target implies holding the deficit to 3 percent of GDP whereas an 80 percent target would imply a deficit of 4 percent. The higher ratio means that the draw on domestic saving would be one-third higher and the economic harm done, as described above, would be one-third higher. A higher debt-GDP ratio also raises the risk of a total meltdown in the bond market. All this suggests that it might be much better to choose a target for the debt-GDP ratio considerably lower than 60 percent. However, when the committee looked at the policy changes necessary to keep the ratio as low as 60 percent, it concluded that it would be politically implausible to choose a much lower target.
Our policy options were grouped into four packages. In one, the committee asked what spending restraint would be necessary to stabilize the debt-GDP target at 60 percent while avoiding significant tax increases. That is to say, the total tax burden is maintained close to its historic level between 18 and 19 percent of GDP. That package is called the low spending option. At the other extreme, the committee estimated what tax increases would be necessary to finance currently promised Social Security, Medicare, and Medicaid benefits while other programs grew as determined by current law. There did eventually have to be some slow down in health costs in this package or ultimately the health programs would consume the whole of the GDP. But such a slowdown could be put off for a long time.
Two middle paths were also delineated. They differed primarily in the degree to which benefits were maintained for the elderly population. In the path that was relatively generous to the elderly, spending on infrastructure, research and other types of spending had to be constrained while in the other middle path non-elderly spending could be treated more generously.
The four packages were put forward for illustrative purposes only. The numerous policy options contained in those packages could be put together in an infinite number of combinations and we do not claim to have considered every policy option ever suggested.
In the package that avoided any significant increase in the tax burden, the rate of growth of Social Security benefits was held to the level that could be financed with the current payroll tax structure. At the same time the actuarial deficit facing the Social Security system was also cured. That required accelerating by 5 years the speed with which the full retirement age reaches 67 and indexing it to longevity thereafter, reducing the indexing of initial benefits for the top 70 percent of earners, and switching to an experimental price index that has been developed by the Bureau of Labor Statistics and that is expected to grow more slowly in the long run than the current index. In assessing such a package, it is important to differentiate an absolute reduction in the purchasing power of benefits compared to today’s level from a reduction in the rate of growth of benefits. Although the package seems severe, it would more than maintain the purchasing power of today’s level of benefits for all but the most affluent. It would, however, reduce replacement rates considerably below the levels promised by current law.
The rate of growth of health spending in the low spending option had to be held to that caused only by the aging of the population. That is to say, all other causes of excess health care cost growth had to be wiped out.
Two types of cost reducing options are described in our health chapter. One set includes options whose effects on health costs can be estimated by CBO with some degree of confidence. These are options such as increasing Part B and D premiums, increasing the eligibility age for Medicare, and reducing provider reimbursements. The other set involves options whose effects are so difficult to assess that CBO does not provide estimates. These include such initiatives such as using information technology more extensively to track patients and coordinating the treatment of chronic diseases. It would probably involve using every option mentioned in the chapter to some degree to achieve the health spending target of the low spending path. To the degree that the options with an uncertain effect actually worked, the scoreable options could be implemented less painfully.The new health plan adds to the Federal health budget, raises the tax burden, and changes the mix of Medicare and Medicaid spending from that used in our committee’s baseline. It contains some uncertain cost containment options, but not enough, in my view, to fundamentally alter the long-run budget problem created by growing health costs. Indeed, the addition of significant health costs to the budget makes it even more urgent to adopt rigid controls.
My own view – not that of the committee as a whole – is that we shall never reliably control the cost of Medicare and Medicaid so long as they have an open-ended budget. Medicare law defines an eligible population and specifies the treatments that they can be given while excluding very few procedures. Then, the government pays for the cost of any eligible that walks in the door. The total cost can only be controlled indirectly and is difficult to forecast with precision.
In contrast, the universal coverage systems of Canada and the United Kingdom work on fixed budgets. In Canada every hospital must work on a fixed budget and physicians are limited as to their gross income. Strong political pressures make it almost impossible to keep the growth of the fixed budgets down to the level of GDP growth, but nevertheless the fixed budgets impose some restraint compared to our open-ended budget. The rationing methods that go with the fixed budgets in Canada and the U. K. are anything but transparent.
A different approach to a fixed budget and one more amenable to American practices would use a voucher system to provide Medicare, similar to one suggested by Mr. Ryan. The voucher would be used by the elderly and disabled to buy insurance and the value of the voucher would vary inversely with income. It might or might not vary with geographic location and age and it could be combined with changes in insurance regulation to do such things as outlaw the use of pre-existing conditions. Medicaid could be put on a fixed federal budget by shifting to a block grant.Our low spending option also implies severely constraining all other spending. The low spending defense path would allow the Pentagon to maintain current personnel policies, but would allow very little investment in new weapons systems. Although it would allow small foreign interventions, nothing as large as the current effort in Iraq and Afghanistan would be possible. All other nondefense spending would have to be lowered considerably below today’s share of the GDP.
In the package that attempts to maintain current law benefits, that is to say, the high spending option, two different financing mechanisms are considered. In one, the existing income tax system is the primary source of additional revenues and all rates are raised proportionately until the top rate hits 50 percent. That happens by 2020. We did not think it prudent to consider a top rate above 50 percent because of the inefficiencies and inequities inherent in the current system.
After the top rate reaches 50 percent, a value added tax of slightly less than one percent is imposed. The value added tax rate must be raised gradually and it reaches 7.7 percent by 2040.
In the other financing approach, the income tax is radically reformed. Almost all tax deductions except those encouraging saving would be eliminated; the employer-provided health exclusion would be capped. The earned income tax credit and child credit would be retained and there would be two rate brackets, 10 and 25 percent. The standard deduction and size of the tax brackets would vary with the demand for revenues and would be smallest for the high spending path in which the top bracket starts at $44,950. The initial structure of the simplified tax for 2012 was chosen to emulate the distribution of the tax burden under the current system. It would become gradually less progressive over time, but the Congress could easily amend that if it wished by making small changes in the rate structure and standard deduction.The simplified tax structure results in rapidly growing revenues over time even before considering its beneficial effects on economic growth. Part of the reason is that the capping of the health exclusion becomes more valuable because of the rapid growth in health costs. The revenue growth is so rapid that the simplified tax could finance the highest spending path with minor tax rate increases through 2020 and rates could be reduced after that.
Besides requiring large increases in income tax revenues, the high spending scenario would necessitate a doubling of the Medicare HI tax and considerable increases in the Social Security payroll tax. The payroll tax cap would be gradually raised until it covers 90 percent of earnings; the payroll tax rate would be raised from the current 12.4 percent to 12.7 percent in 2012 and then in steps to 14.7 percent by 2080; and there would have to be a second tier tax beyond the base that would not earn extra benefits. It would start at 2 percent in 2012 and gradually rise to 5.5 percent in 2060.By 2040 the tax increases required by the high spending option would raise the overall Federal tax burden by 50 percent compared to the 17.7 percent of 2008 and it would continue to rise after that. I know of no state and local budget projections that go out as far as Federal budget projections, but it is safe to say that if state and local tax burdens are added for comparability, the U. S. total tax burden, which is now considerably below the OECD average, would be higher than today’s OECD average by mid-century and within a few years after that we would be the highest taxed nation on earth.
The intermediate package that has the lower spending path would solve two-thirds of Social Security’s long-run financial problems by cutting benefit growth and one-third by raising payroll tax rates. Solving Social Security’s long-run financial problem also helps lower the unified budget deficit along the way. In this intermediate package, Medicare and Medicaid spending is allowed to grow to 7.2 percent of GDP by 2030 compared to 6.5 percent in the low spending package. Spending, other than that for interest, Social Security, Medicare and Medicaid totals 8.9 percent of GDP compared to 6.8 percent in the low spending path and 10.8 percent in 2008. The increase is devoted to defense and domestic spending on things like research and infrastructure.
The intermediate path with the higher spending devotes a large portion of the spending increase to Social Security, Medicare, and Medicaid. All other non-interest spending is lower than in the first intermediate path.
If revenues for the two intermediate paths are raised using the current income tax structure, the top rate never has to exceed 50 percent. Consequently, there is no need for a value added tax. Of course, a value added tax could be used with any of the four packages to lower the income tax rates necessary for fiscal sustainability. Tax rates in the simplified tax could eventually be lowered below 10 and 25 percent while providing sufficient financing for any of the three lowest spending paths.Although no one believes that changes in the budget process can ensure that the Congress makes the difficult choices necessary to attain fiscal sustainability, our committee felt that there were some reforms that could help the Congress deal with the problem. The main deficiency in the current process is that it is too shortsighted. Most of the effort is concentrated on formulating the budget for the next fiscal year. If the Congress set a long-term goal for the debt-GDP ratio, it would be forced to pay more attention to the long-run impact of policy decisions and it would provide a benchmark for judging whether policies were moving toward sustainability.
Although CBO and OMB make long-run budget projections, those of CBO are produced separately from the Budget and Economic Outlook, which plays an important role in today’s process. OMB’s long-run projections are provided deep in Analytic Perspectives and few readers get that far. We believe that long-run projections should be fully integrated into the main budget documents. Other documents may also be helpful. Australia produces a report every three years examining the effect of budget policies on different generations. Apparently it provokes much public discussion that draws attention to the effect of policies in the long run. In addition, it may be useful to require the president to report every year on the long-run fiscal health of the nation.The committee discussed how long-run budget targets might be enforced. Automatic triggers present one option. An automatic sequester of spending was used to enforce Gramm-Rudman-Hollings, but it was not well designed. A trigger cannot impose too much political pain or else Congress will change it. But it should be demanding enough to encourage the adoption of more rational policies.
Conclusions
The following conclusions are my own and I know that not all members of the Academies committee would share them. It seems to me that a basic point screams out of our analysis. Regardless of how big you want government to be, there are enormous advantages to be derived from greatly simplifying our income tax system. You can increase fairness, however perceived. You can greatly increase economic efficiency by significantly lowering marginal rates and you can thereby create an environment conducive to economic growth. Moreover, you can design a structure that produces a rapidly growing stream of revenue without imposing inordinate pain.There are equally beneficial structures that could be devised that are different from ours. For example, you could move the tax burden more toward consumption and ease the burden on saving and investment. But even a pure income tax would be much more efficient than our current mess. This is also a particularly propitious time for reform. The alternative minimum tax should be fixed permanently; we have to decide what to do about the Bush tax cuts; corporate taxation is in severe need of reform; and we certainly should settle the estate tax question.
As for the proper size of government, we all have our own views about that. I like to think of myself as a fiscal conservative, but I find it hard to imagine a majority vote for the smallest government example put forward by our Academies committee. But I would sure work hard for something like the second smallest.
Getting back to our committee, I would like to thank its members for the hard work they put into producing our report and also thank the very able staff led by Stevens Redburn who made it all possible. A diverse set of ideologies was represented on the committee, but the group was very congenial and all debates were rational. Few committees are that pleasant. I hope that yours has as much fun.
10:25 a.m. – Orszag is speaking about a credit crisis that spikes the nation’s interest rates up and says action must be taken to prevent such a scenario.
He says “significant changes” to policy are needed to further reduce the deficit and debt.
“The options to further reduce the deficit may not be popular but they are necessary … there is no easy way forward except through bipartisan cooperation.”
Here is Orszag’s full statement:
Testimony of Director Peter R. Orszag – As Prepared for Delivery
First Meeting of the National Commission on Fiscal Responsibility and Reform
Tuesday, April 27, 2010
Washington, DCChairman Bowles, Chairman Simpson, and Members of the Commission, thank you for inviting me today to testify about the country’s fiscal trajectory. Thank you also for your service on this important Commission.
The President formed the National Commission on Fiscal Responsibility and Reform because he believes that the path to fiscal stability begins with bi-partisan cooperation. If we allow the policy positions that divide us to prevent us from taking action, projected medium- and long-term deficits will threaten the health of our economy and the living standards our people enjoy. Sustained, growing long-term deficits will increase our reliance on creditors from abroad, reduce investment in our labs, factories, and businesses, and weaken confidence in the federal government’s creditworthiness. Simply put, it may be easier to ignore long-term problems, but we will pay a severe price if we do. With that in mind, the task before you is critical and considerable, and the Administration looks forward to working with you as the Commission seeks solutions.
As you begin this process, it is important to understand the current fiscal trajectory, and that is the topic of my testimony today.
Short-Term Deficits
At the beginning of 2009, the budget deficit for that fiscal year already stood at 9.2 percent of GDP—higher than in any year since World War II and nearly triple the deficit from the year before.
We also faced a serious recession—one that had the potential to become the second Great Depression. In light of that immediate emergency, the overriding economic priority of the Administration became to boost economic growth to prevent the economy from falling off the proverbial cliff. Doing so meant temporarily sustaining higher budget deficits —bringing them to roughly 10 percent of GDP in 2009 and 2010.
As economists from across the political spectrum have said, when the economy is weak, increases in government spending or reductions in taxes are precisely what one needs to boost economic growth and job creation. During an economic downturn, the key to economic growth is increasing the demand for the goods and services the economy could produce with existing capacity, and these moves do exactly that. Raising taxes or cutting spending to reduce the deficit during a recession would be counterproductive, because they would diminish or eliminate the stimulative effect.
That is why it was necessary to enact the American Recovery and Reinvestment Act (Recovery Act) at the beginning of last year and additional measures since then, to further increase short-term demand for goods and services and encourage job creation. Although there is still more work to be done especially to boost job creation to address the unacceptably high levels of unemployment that will persist for some time, the economy is back from the brink and growing at a healthy pace. And, it is clear from the data that the Recovery Act played a critical role in rescuing the economy and putting it back on track.
Medium- and Long-Term Deficits
As the economy recovers, deficits switch from being beneficial to harmful, and the focus must therefore shift to reducing the projected medium- and long-term deficits. Under current policies, our projected deficits amount to about 5 percent of GDP in the second half of this decade—much higher than would be prudent or sustainable.
Exacerbating the problem are the long-term trends that we face—as the combination of rising health care costs and an aging population will, if historical trends continue, drive up costs in the federal government’s three largest entitlement programs: Medicare, Medicaid, and Social Security.
What happens if we fail to address these medium- and long-term deficits?
Large budget deficits will have two effects: First, they will lead to a crowding out of private capital, reducing the funds available to finance domestic investment—and, as a result, elevating interest rates economy-wide. Second, they will require increased borrowing from abroad to finance that domestic investment. Either way, budget deficits reduce future national income—either because the nation does not have as much productivity-enhancing capital in the future or because we owe larger liabilities to foreign creditors.
To put this in more tangible terms, if we take no action, anyone needing access to credit—from entrepreneurs seeking new funds to invest in their businesses to families seeking to finance the purchase of a home—will eventually have to compete with growing demand from the federal government for scarce capital, and the Nation as a whole will end up the poorer for it.
Unsustainable budget deficits could also generate adverse effects on the economy that are both larger and more sudden than a gradual crowding out of private capital and rise in foreign borrowing. Although interest rates on government debt remain historically low, substantial deficits projected far into the future could cause the market to rapidly lose confidence in the government’s creditworthiness, producing a spike in interest rates and fundamentally disrupting economic activity more broadly. The best way to minimize the probability of such a crisis is to take action as soon as possible.
Role of the Fiscal Commission
Recognizing the fiscal future that we face, the Administration has taken significant action to address both the medium- and long-term deficits. The President’s Budget includes more deficit reduction than proposed by a President in any budget in over a decade; by 2015, it would cut the deficit from 5 percent of GDP if current policies are continued to 4 percent of GDP—or by about $230 billion in that year alone. Furthermore, the comprehensive health insurance reform we have just enacted represents an unprecedented effort to address the forces underlying rising health care costs, and is projected to lower future deficits by more than $100 billion in the first decade and by more than $1 trillion in the next.
In addition to these measures, the President has created this Commission because the only way to solve the remainder of our fiscal challenge is to do so in a bipartisan fashion. The Commission is charged with recommending measures to reduce the deficit to about 3 percent of GDP by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers—a key measure of fiscal sustainability. The Commission is also tasked with proposing policies to meaningfully improve the long-run fiscal outlook.
Achieving both these goals will require significant changes in policy that build on what we have accomplished so far. The options to further reduce the deficit may not be popular, but they are necessary. Success will require a commitment from both parties to engage in constructive and honest dialogue, recognizing that there is no easy way forward except through bi-partisan cooperation.
In that spirit, I look forward to working with you in the weeks and months ahead, and I, again, thank you for your service.
10:21 a.m. – I missed most of Bernanke’s statement. Peter Orszag, the president’s budget director, is now speaking. Thankfully the live stream seems to be working better now.
The Fed has Bernanke’s complete statement, as prepared for delivery, up on its website. Here it is:
Chairman Ben S. Bernanke
At the National Commission on Fiscal Responsibility and Reform, Washington, D.C.
April 27, 2010Achieving Fiscal Sustainability
I am pleased to be here today at the first meeting of the National Commission on Fiscal Responsibility and Reform. The President has assigned Chairman Bowles, Chairman Simpson, and their colleagues the very substantial task of charting a path to fiscal sustainability for the United States. The deliberations of this commission are especially timely because some of the fundamental sources of long-term fiscal imbalances are no longer distant forecasts, but instead are unfolding in the here and now.
The task of developing and implementing sustainable fiscal policies is daunting, but meeting this challenge is absolutely essential. History makes clear that failure to achieve fiscal sustainability will, over time, sap the nation’s economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.
Long-Term Fiscal Challenges
Our nation’s fiscal position has deteriorated appreciably since the onset of the recession and the financial crisis. The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the costs of policy actions taken to ease the recession and steady financial markets. As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years.
However, even after economic and financial conditions have returned to normal, in the absence of further policy actions, the federal budget appears set to remain on an unsustainable path. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time. Moreover, as debt and deficits grow, so will the associated interest payments, an obligation that in turn further increases projected deficits. Unfortunately, we cannot grow our way out of this problem. No credible forecast suggests that future rates of growth of the U.S. economy will be sufficient to close these deficits without significant changes to our fiscal policies.
Among the primary forces putting upward pressure on the deficit are rapidly rising health-care costs and the aging of the U.S. population. Federal spending for Medicare and Medicaid has increased substantially as a share of our national income over the past several decades, spurred both by the rising number of beneficiaries in these programs and by ongoing increases in spending per beneficiary. Under policies in place prior to the recent enactment of the health-care bill, budget projections showed that spending for Medicare and Medicaid would roughly double as a share of national income over the next two decades and would continue to rise significantly further in subsequent years. At this point, the effects of the recent legislation on federal health-care spending over the long term are uncertain, in part because they depend importantly on implementation. But we do know that continued increases in health-care costs at the rate seen in recent decades, together with the aging of the population, would put enormous pressures on the federal budget in coming years. Controlling health-care costs while still providing high-quality care to those who need it will be critical not only for budgetary reasons, but for maintaining the dynamism of the broader economy as well.
The aging of the U.S. population will also strain the Social Security program, as the number of individuals expected to be working and paying taxes into the system is rising more slowly than the number of people projected to be receiving benefits. This year, there are about 5 individuals between the ages of 20 and 64 for each person aged 65 and older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. The projected fiscal imbalances associated with the Social Security system are notably smaller than those for federal health programs, but they still are significant and thus present an important challenge for policy.
Elsewhere in the budget, noninterest spending for programs outside of Medicare, Medicaid, and Social Security has comprised roughly half of total outlays over the past couple of decades. These expenditures support national defense and homeland security, education, transportation, and income-security programs, along with many other activities. The commission will have the difficult job of weighing the economic, social, and other benefits of these programs and comparing the implications of cuts in these areas against other means of closing the fiscal gap.
Choices regarding Medicare, Social Security, and other spending programs cannot be made in a vacuum but must be combined with decisions about how much revenue the government will raise and how it will raise it. No laws are more basic than the laws of arithmetic: For fiscal sustainability, whatever level of spending is chosen, revenues must be sufficient to sustain that spending in the long run. At the same time, economic vitality is enhanced when taxes are not excessive and are collected through a system that is economically efficient, equitable, and transparent. At present, a broad consensus exists that the U.S. tax code does not satisfy these criteria and is in need of reform. I suspect that it is too much to ask the commission to review the tax code in detail, but a full picture of our budgetary dilemma will require attention to the strengths and weaknesses of our current system of raising revenue.
The Path to Fiscal Sustainability
The ultimate goal of the commission’s efforts should be to put us on a path to fiscal sustainability. One widely accepted criterion for sustainability is that the ratio of federal debt held by the public to national income remain at least stable (or perhaps even decline) in the longer term. This goal can be achieved by bringing spending, excluding interest payments, roughly into line with revenues. Unfortunately, most projections suggest that we are far from this goal, and that without significant changes to current policy, the ratio of federal debt to national income will continue to rise sharply. Thus, the reality is that the Congress, the Administration, and the American people will have to choose among making modifications to entitlement programs such as Medicare and Social Security, restraining federal spending on everything else, accepting higher taxes, or some combination thereof.
Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high. Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth–and might even put the current economic recovery at risk. To the extent that higher debt increases our reliance on foreign borrowing, an ever-larger share of our future income would be devoted to interest payments on federal debt held abroad. Moreover, other things being equal, increased federal debt implies higher taxes in the future to cover the associated interest costs–higher taxes that may create disincentives to work, save, hire, and invest. High levels of debt also decrease the ability of policymakers to respond to future economic and financial shocks; indeed, a loss of investor confidence in the ability of a government to achieve fiscal sustainability can itself be a source of significant economic and financial instability, as we have seen in a number of countries in recent decades.
Neither experience nor economic theory clearly indicates the threshold at which government debt begins to endanger prosperity and economic stability. But given the significant costs and risks associated with a rapidly rising federal debt, our nation should soon put in place a credible plan for reducing deficits to sustainable levels over time. Doing so earlier rather than later will not only help maintain the U.S. government’s credibility in financial markets, thereby holding down interest costs, but it will also ultimately prove less disruptive by avoiding abrupt shifts in policy and by giving those affected by budget changes more time to adapt.
Conclusion
The path forward contains many difficult tradeoffs and choices, but postponing those choices and failing to put the nation’s finances on a sustainable long-run trajectory would ultimately do great damage to our economy. I thank the members of the commission for their willingness to serve and urge them to demonstrate to the American people that serious, well-intentioned citizens can come together to craft credible and sustainable solutions to our budgetary challenges.
10:12 a.m. – Federal Reserve Chairman Ben Bernanke gets right to it with opening remarks. He is speaking about the budget deficit being unsustainable and how the U.S. cannot grow its way out of the hole it is in.
Again, the White House live stream that is the only way to view this meeting (again they promised this would be open to the press) continues to freeze so I am only getting bits and pieces of what is said at this point.
10:10 a.m. – Alan Simpson wastes no time in providing some color.
“The moment we appeared the cry went up, ‘They’re stalking horses for taxes,'” Simpson said.
Well, he said, “we’re stalking horses for our grandchildren.”
10:07 a.m. – The commission is about to start its meeting. The members are seated at plain brown tables in a U shape in a conference room at the White House Conference Center.
This is an annex building across Lafayette Park from the White House, outside the gated grounds, in a complex called Jackson Place. Of note, this is also the room that the White House press corps worked and held press briefings in 2007 when the Brady press room was being renovated.
On another note, the White House promised that this meeting would be open to the press. But yesterday I was told that only a small “pool” of reporters would be allowed in the room, and that the meeting would be live streamed on the White House website.
So I am watching this at www.whitehouse.gov/live, but the stream is repeatedly freezing, making it very hard to keep up with what is being said. Is that open to the press? Maybe technically, but not in a way that makes this meeting as open as possible.
Here is the full list of commission members:
* Erskine Bowles, commission co-chair
* Alan Simpson, commission co-chair
* David Cote, chairman and chief executive of Honeywell
* Ann Fudge, former chairman and chief executive of Young and Rubicam, General Mills & Kraft
* Alice Rivlin, former OMB director under Clinton, Fed Reserve vice chair
* Andy Stern, outgoing president of SEIU
* Dick Durbin, Senate Majority Whip, Illinois Democrat
* Max Baucus, Senate Finance Committee Chairman, Montana Democrat
* Kent Conrad, Senate Budget Committee Chairman, North Dakota Democrat
* Judd Gregg, ranking member, Senate Budget Committee, New Hampshire Republican
* Mike Crapo, Idaho Republican
* Tom Coburn, Oklahoma Republican
* John Spratt, chairman of the House Budget Committee, South Carolina Democrat
* Xavier Becerra, vice chair of House Democratic Caucus, California Democrat
* Jan Schakowsky, Energy and Commerce Committee, Illinois Democrat
* Dave Camp, ranking member, House Ways and Means Committee, Michigan Republican
* Paul Ryan, ranking member, House Budget Committee Wisconsin Republican
* Jeb Hensarling, Texas Republican
10:02 a.m. – President Obama spoke for several minutes in the Rose Garden, with co-chairs Alan Simpson and Erskine Bowles flanking him.
“We have an obligation to future generations to address our long term structural deficits which threaten to leave our children and grandchildren with a mountain of debt,” Obama said.
The two themes of Obama’s remarks were that Washington has failed to deal responsibly with its budgets and has not made hard choices required for fiscal discipline, and that he is not going to comment over the next several months on what policies being considered by the commission he favors and which he opposes.
“We’re not playing that game. I’m not going to say what’s in. I’m not going to way what’s out. I want this commission to be free to do its work,” Obama said.
9:33 a.m. – While much of Washington and the nation’s attention will be fixed on the congressional hearing with Goldman Sachs executives, I’ll be keeping track of the first meeting today of President Obama’s fiscal commission.
They are meeting to consider what many believe is the nation’s biggest challenge: the federal budget deficit, the national debt and runaway entitlement spending that is going to bankrupt the nation.
The commission, which was created by executive order after Congress failed to authorize one that would have had the power to issue recommendations requiring a vote, can only offer their suggestions to Congress as advice.
They are required to report by Dec. 1.
President Obama speaks about the commission in the Rose Garden before visiting with the group at the start of their meeting. I wrote earlier this month about how many have low expectations for the commission.