This is an additional, longer-than-usual post, to provide detail on the news of the last few days. We will be back to the usual format later this week.
Former Massachusetts Governor Mitt Romney’s choice of Wisconsin Representative Paul Ryan as his running mate already has proven controversial. But virtually every authority agrees that it will put budget policy front and center in the election campaign.
The nation needs a debate about the budget. Now, apparently we will get one. Whether it will prove to be productive is another question.
This is to give you some background to put the issue and the candidate into perspective.
Some time ago, I wrote a post to explain why the Congress, beyond not taking action on the “fiscal cliff” before the election, was likely not to act in any meaningful way even in a “lame duck” session at the end of the year. Sometimes, you don’t want to be right. But congressional actions leading up to the August recess confirm that concern.
This week, the end-of-year automatic policy changes that were originally intended to steady the shaky federal budget appeared to rise in public concern. A Wednesday front-page above-the-fold Washington Post article was headlined, “For U.S., economic worries come home / ‘Fiscal cliff’ is replacing European turmoil as top threat to recovery.” The Congress debated (to the extent that its free-form discussion without specific legislation on the table is “debate”) the issue at length.
This sentiment was reinforced by Federal Reserve Board Chair Ben Bernanke’s twice-yearly monetary policy report to the Congress, and his associated testimony before the Senate and House banking committees on Tuesday and Wednesday (see here). Chairman Bernanke wrote in his prepared statement that “I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation… As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.”
CED Senior Vice President and Director of Research, Joe Minarik, discusses the state of the U.S. and global economies on CCTV’s Biz Asia America, a business program anchored by Phillip Yin covering North, South America, and Asia.
There were a couple of developments on the budget this week, coming out of the House Republican camp (pardon the pun – as will be explained in a moment). First, House Speaker John Boehner (R-OH) announced that when the nation’s debt subject to limit (that’s the technical term) reaches its limit late this year or early next, he will again demand that any legislation to raise the limit be accompanied by spending cuts of at least the same amount as the increase. Democrats, including Treasury Secretary Timothy Geithner, the unfortunate keeper of the debt, decried this as the scheduling of Train Wreck II, following on the long-running debacle of last year. Though there is no particular technical connection between the amount of a debt limit increase and the amount of spending reduction going forward – the debt is history, and future spending is, well, the future – this line in the sand has caught on with some observers. Democrats question whether round after round of spending cuts with no revenue increases is sufficiently “balanced,” and question why Republicans demand more spending cuts at the same time as they argue to repeal the most recent round of spending cuts that they demanded for the last increase in the debt limit. With the nation’s financial standing on the line in a game of chicken over default, the next encounter with the debt limit could be at least as consequential as the last.
Last week, Senate Budget Committee Chairman Kent Conrad (D-ND) put forward a budget resolution. Although on the surface this is an unremarkable event – it is supposed to happen every year, before this time – the particulars were highly unusual. They underline the degree to which the process of budgeting in Washington is stalled.
The budget resolution, as you know, is an annual outline of the nation’s overall fiscal plan. It is a “joint resolution,” rather than a law, passed by the House and Senate without the president’s signature or his formal involvement, and it does not have the force of law. In most years, its major function is to set forth a ceiling for the amount of annual appropriations that the Congress may legislate. In some years, it also can provide instructions for changes in the law that governs taxes and mandatory (or “entitlement”) spending, which can be passed in the Senate by a simple majority, without the risk of a filibuster. This year, with political control of the Congress divided, meaningful changes in tax and entitlement policy are far out of reach. And beyond that, just last August, the Congress and the President negotiated a deal to set appropriations spending levels for this year while increasing the debt limit. So in some sense, a budget resolution this year might be thought unnecessary. Even so, many Members of Congress have often repeated, “If you can’t budget, you can’t govern.” And the Congress has not completed a budget resolution for three years.
This is a rather long post. It tries to put into a clearer perspective the highly publicized impending end-of-year budget and tax events – called “taxmageddon” by some in the press. It takes the position that as imposing as these legal developments are on paper, a short-sighted Congress and White House could work their way around the consequences – but only in the near term. The budget time bomb continues ticking. What are the fundamental elements needed for a new President and Congress to take this problem on? We close with a few observations.
You surely have heard of the extraordinary budgetary events that lurk in the nation’s tax and spending law, just waiting to spring out upon us at the end of this year. The list is long, and frankly frightening.
In the previous decade, temporary laws involving hundreds of billions, even trillions of dollars became highly fashionable. Then with the financial paroxysm at the turn of the decade, the Congress and the President enacted more temporary legislation to provide near-term stimulus to the economy. The former actions were based on the assumption that robust economic growth would continue forever; the latter assumed that after the recession, the economy would bounce back vigorously. Both of these assumptions have proved wrong. So now, what were once presumed to be routine extensions or expirations of temporary laws have become major policy dilemmas.
Some see the “perfect storm” or “taxmageddon” at the end of this year as a likely occasion to take on the budget problem. This optimistic view holds that when confronted with all of these issues, elected policymakers finally will get religion and solve the problem once and for all.
I am highly skeptical – not that a change of heart should happen, but that it will, given recent patterns of behavior. But there is so much at stake that we need a clear view of the next year or so. Let’s start with an inventory of the dangling issues.
The late North Carolina Senator Jesse Helms once told a story of a defense planner in the early years of World War II, who was tasked by his colleagues to figure out how the United States could supply England. He thought for a while, and then proposed that we should drain the Atlantic Ocean and drive the provisions over by truck. When his colleagues protested that this plan was hopelessly unrealistic, the planner responded, “I’m the big picture guy. Implementation is your problem.”
There is some measure of this problem in just about every budget-deficit-reduction plan. The budget is big and complex. Many claims of budget savings are very hard to verify. Yet if the individual pieces do not pan out, the much bigger whole will break apart.
House Budget Committee Chairman Paul Ryan’s new draft budget resolution raises such concerns. Some of its major budget savings may prove unrealistic, in terms of their subsidiary consequences or whether they can be implemented at all. Or, on the other hand, they may be implemented and provide the answer to our prayers. The answer at this point is a judgment call or a forecast on the part of budget analysts, not a certainty.
When people asked Al Simpson and me why we agreed to take on the challenge of finding a solution to our nation’s deficit and debt, we originally said we were doing it for our 15 grandkids, my nine and his six. However, the more we got into the numbers, the more dire we understood our Country’s financial situation to be. We quickly realized we were not doing this for our kids, much less our grandkids, we were doing it for all of us. We realized that the fiscal problems facing our Country were enormous, the solutions would all be painful, and there simply was no easy way out.
After listening to economists and budgeters from both sides of the political aisle, it became clear to both Al and me as well as the other members of our bipartisan commission that we faced the most predictable economic crisis in history; that the fiscal path our Country was on was not sustainable; that these trillion dollar deficits were like a cancer. These deficits were going to slowly over time destroy our Country from within. And when this cancer metastasized, it would happen so quickly that no one would believe it.