Demography is destiny.
Widely attributed to Auguste Comte,
19th century French philosopher
Prediction is very difficult, especially if it is about the future.
Widely attributed to Yogi Berra,
Hall of Fame Catcher;
Actually said by Nils Bohr,
Noble Prize winning physicist
Just about everyone makes reference to the looming demographic challenge to the U.S. economy and the federal government’s finances. Many people seem to be unaware of some of the subtleties that surround our demographics. Here is a brief discussion to explain just what we are up against.
One can enunciate any number of criteria by which to judge this week’s budget resolution drafts from the House and Senate Budget Committees. But they all boil down to one: Do they help to solve the nation’s long-term budget problem?
And that is not to ask whether, if enacted, they would solve the problem. It is, rather, whether they move us toward enactment of a budget plan that will solve the problem.
By that simple, meaningful standard, the answer thus far is no; there is no reason to expect any positive movement resulting from the release of the two resolution drafts. (The House Budget Committee resolution draft was announced on Tuesday, though what was made public was a backup document, not the resolution itself. The resolution, with plenty of blanks for numbers not yet determined, came today. The Senate Budget Committee has not yet released its version; but by all accounts, the Senate resolution draft will not move us forward either.)
In fact, the lingering question is whether the net effect of all of the new paper might actually be retrograde. In this implicit, slow-moving negotiation, these two resolutions definitely are first offers, not at all best-and-final submissions. And they might even have a little of the air of insult first offers – where two sides who are obligated to negotiate for purposes of appearance go through the motions and put knowingly unacceptable gestures on the table to justify an end to the charade.
In sum, neither side will see anything that they have not seen already; and what they have seen already has not closed a deal. There is no reason to expect anything new or different going forward, barring some unexpected development.
Two weeks ago, we talked about the onset of the sequester – which applies almost exclusively to “discretionary” spending, that is, annual appropriations for federal agencies – and what it implies for both the macroeconomy and the performance of government functions.
Next week, a further development will pull that issue back on stage: House Budget Committee Chairman Paul Ryan (R-WI) will release his budget resolution for next year. As part of the deal struck within the House Republican caucus to pass the fiscal cliff bill at the turn of the calendar year, that resolution will claim to achieve a balanced budget – a deficit of zero – in the tenth year from now (that is, in fiscal year 2023). To reach budget balance that quickly – last year’s House resolution was estimated to achieve balance in 2040 – will require greater savings, and some of those additional savings likely will come from a lower path for discretionary spending than is set under current law – that is, even with the sequester.
Then, to avoid a government shutdown (that is, a lapse of appropriations for federal agencies), the Congress will need to replace the current continuing resolution before its expiration on March 27. That will highlight once more the implications of the level of annual appropriations (although its effect will be restricted to the current fiscal year – fiscal year 2013, which ends on September 30, 2013 – more on that point later).
And at some time in March or April, the President will submit his fiscal year 2014 budget. Many people will rush to see how the budget proposals compare with the House budget resolution, and in particular its FY 2023 budget balance. The President’s proposed future-year levels for discretionary spending will be an important element in determining how that comparison will look. So for yet a third time in just a few weeks, proposals for levels of discretionary spending will get at least a little air time – even though we do not yet have specialty cable channels that focus on the federal budget.
If you want a friend in Washington, get a dog. If you want to lose your friends in Washington, talk about Social Security or Medicare.
I feel free to write this post only because I have no friends left.
What’s right with Medicare: Many (probably not all) people who believe that Medicare can be – in fact must be – improved are fully aware that the program has accomplished its major objective, and is essential. They say so, clearly. No one listens, and those who recommend any change are accused of heartlessness toward their own parents (and every other elderly American), or worse. But after multiple attempts at even-handed discussion I have nothing left to lose, and completeness requires one more try at articulating the positive as well as the negative. So here is what’s right:
If left to fend for themselves, far too many elderly could not obtain health-insurance coverage, and eventually would be impoverished by out-of-pocket costs – or possibly even left without care. The Medicare guarantee changed that. Terminating that guarantee is unthinkable.
So why even broach the subject? The care that our elderly get from Medicare could be a lot better. The rising cost of Medicare is the primary driver of our long-term budget problem. A deal to fix the long-term problem is both unthinkable and impossible without reform of Medicare. And on the basis of potentially misleading information, many have come to think that we can ignore the program’s rising costs – though procrastination might come back to haunt us later.
So what’s wrong with Medicare?
Just about everybody is familiar with the bureaucratic concept of “turf.” As in, “That’s my turf.” In other words, stay off.
However, experience indicates that there is an associated bureaucratic concept which is much less widely recognized: “grass.” As in, “That’s my turf – so don’t you tell me that I need to cut the grass.”
Both “turf” and “grass” are at play in the current high-level dispute over the sequester of federal spending. It is worth a review of the bidding thus far.
The sequester was written into law in the debt-limit deal of August 2011. It was intended to be a fail-safe device in case the so-called “Supercommittee” failed to achieve its goal of $1.2 trillion of budget savings. The Supercommittee duly failed. The sequester was postponed from the beginning of this year to the beginning of this March – i.e., Friday. The two parties in Washington argue over whose idea it was, who voted for it, and whose intransigence is causing it now to appear inevitable. Those questions may be of academic interest, but not much more.
The importance of Who Shot the Federal Government As We Know It is limited because there is little dispute that the sequester is a Bad Thing. Oh, there are some who say that there is a debt crisis going on, and so we must cut something. But just about everyone recognizes that the sequester will not solve the problem. More specifically, even those who would accept the sequester with the least remorse understand two facts: First, if we do not have the sequester, the federal government’s finances will explode without fundamental reform of health care. And second, if we do have the sequester, the federal government’s finances will explode without fundamental reform of health care. The sequester will only buy time. A little.
In his State of the Union address, President Obama proposed to increase the federal minimum wage, from its current $7.25 per hour to $9.00 per hour. So, in the words of the old union organizing song, “Which Side Are You On?”
It is an easy call if you are either (a) a strict libertarian or (b) an enthusiastic advocate of the less fortunate with limited concern about the scarcity of resources. (If you belong to both of those groups, there is little advice that I can offer.) However, in between those poles of opinion, things become rather murky, rather quickly.
In fact, the opening question emphasizes that policy analysis is hard to convey using spirit-rousing songs. The reflex thought of what music would characterize analysis of this issue led me to Béla Bartók’s “Music for Strings, Percussion and Celesta,” which is typically played with two small string orchestras – divided by the percussion instruments – sitting on the opposite sides of the stage, spending about half of the piece shouting back and forth at one another. (This is not to put you off if you have not heard the piece. I enjoy it – which may be a predisposition, in that Bartók attended high school in the town where all of my grandparents were born and grew up, and at about the same time.) As in the minimum wage debate, there are arguments on both sides, and the argument often becomes quite intense.
To start with the philosophical debate, but postponing the empirical question of results: Libertarians tend to oppose restraints on voluntary agreements among responsible persons. If a prospective worker finds it advantageous to offer labor at a low wage, and a prospective employer is willing to accept that offer, there is no reason for government to interfere. Those who take the other side argue that such agreements are the result of unequal power, and facilitate injustice and abuse.
Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances.
President Barack Obama
The State of the Union Address
February 12, 2013
Many years ago, a seasoned Capitol Hill professional cautioned me about giving any questionable number to a politician. Many have fly-trap minds, and once you put something in, you never can get it out. Any nuanced but only partially understood fact, like a discount-store blowtorch, could be misused with considerable ill effect at some later moment.
This bit of wisdom comes quickly to mind when one hears the current buzz about a mere $1.5 trillion of deficit reduction over ten years ending our budget woes. Some reach that number by the roughest of arithmetic; others use more sophisticated analysis, and even provide important and subtle caveats. But the number, even though it has some limited use, already has left the corral of qualification and analysis far behind.
The simple way to reach that number is the way the President did. Three years ago, Erskine Bowles and Alan Simpson characterized our fiscal plight with a calculation that $4 trillion of deficit reduction would “stabilize the debt.” As the President noted in his remarks, some have estimated subsequent budget action to have achieved $2.5 trillion of that. $4 trillion minus $2.5 trillion equals $1.5 trillion, under either OMB (Office of Management and Budget) or CBO (Congressional Budget Office) scoring.
That little inside-Washington joke is not really a joke, however. Bowles and Simpson’s $4 trillion was derivative of many complex and controversial assumptions, and was calculated at a particular time. Let’s review the numerical spreadsheet, and its even-more-subtle and important conceptual underpinnings.
As of last week, the danger in the new Congressional Budget Office (CBO) deficit outlook released on Tuesday was that it might lull some people into a false sense of security. As it transpired, the good news was that there was so little good news that it was unlikely to distract many people from the bad news.
The headlines picked up that the deficit this fiscal year is likely to fall below $1 trillion for the first time since 2008. Those looking energetically for sunshine would point out that the deficit in 2015 under current law is projected to fall to only $430 billion – a number that would have struck terror in the heart when I was a mere lad (of 40 or so), but that today looks surprisingly reassuring.
However, that is where the good news stops.
The budget deficit is projected to rise after 2015, reaching $978 billion – just short of that $1 trillion bogeyman – in 2023. The debt relative to the economy would hit a peak of 77.7 percent of GDP at the end of 2014, then fall slightly to 73.1 percent at the end of 2018, but then climb again to 77.0 percent at the end of 2023. So at that point, debt and debt service would be piling up on one another in a potentially never-ending spiral – which would prove very painful to stop, the longer we allowed it to build its own momentum.
Of course, CBO makes clear that their budget outlook is not a prediction strictly defined, but rather a projection of what would happen if current law remains unchanged and the economy precisely follows the forecast. And that leads many folks to ask: What are the major risks (using that term neutrally, meaning reasons why it could be better or worse) to that projection? Given that the numbers are on their face troubling, is there a significant chance that we might be saved from that adverse outcome without taking action?
Next Tuesday, we will see the new budget projections by the Congressional Budget Office (CBO). It is difficult if not impossible to predict what CBO will say in a new projection. However, there have been some regularities over the years, and there may be a potential trap this time around.
Like the stock market, budget projections tend to overshoot at turning points – in this part of the cycle, appearing (with the wisdom of hindsight) too pessimistic for too long, and then snapping back fairly sharply. In terms of the economy and the budget, we haven’t had a turning point so much as a deep funk. The economy has carried the extraordinary weights of a massive housing overbuild, a once-in-a-lifetime (we pray) financial crisis, and precisely adversely timed near-identical symptoms in much of the rest of the developed world. There is some chance that as the roots of growth begin to strengthen (this week’s largely inventory- and government-driven GDP report notwithstanding), CBO’s forecast will begin to anticipate faster economic growth that will show a similar measure of apparent optimism in the budget numbers over the next few years.
And at the same time, the turn-of-the-year fiscal-cliff bill – the American Taxpayer Relief Act (ATRA) – will show a meaningful improvement in the “current policy” – as opposed to the “current law” – budget projections. The distinction, which is important mostly to people who do not have lives (some of whom may read this blog), has been for the last decade mostly whether the temporary 2001 and 2003 tax cuts were assumed to be continued (current policy) or to expire (current law). The current law baseline is the official headline number mandated in the Budget Act. However, budget wonks, recognizing that the expiration of all or even most of those tax cuts was unthinkable, watched the current policy outlook much more closely. And the expiration of even the small portion of those tax cuts omitted from the ATRA will improve that picture.
I was fortunate enough to be invited to a breakfast with House Budget Committee Chairman Paul Ryan (R-WI) earlier this week. You may have seen some stories on that conversation, primarily in the Wall Street Journal, whose David Wessel and Gerald F. Seib organized the event. (A transcript is available to those with Wall Street Journal access in two parts, here and here.) A couple of takeaways for me:
Some press reports, including an editorial in the Washington Post, had suggested that House Republicans had foresworn the old “Boehner Rule” – which dictated that there be $1 of spending cuts for every $1 increase in the debt limit. The Post said that this change was highly meritorious, because there could be serious consequences if the debt limit were subject to such uncertainty. However, Chairman Ryan made clear that the Boehner Rule is alive and well, even though it may temporarily be suspended. Chairman Ryan saw two potential ways forward – that is, toward significant deficit reduction, in fact a balanced budget in ten years. One would be bipartisan cooperation, which he did not rule out but saw as unlikely. The second was the use of rolling “fiscal cliffs,” including the expiration of continuing resolutions for annual appropriations, deadlines for sequesters, and applications of the Boehner Rule for short-term increases in the debt limit.