Speaking with Greg Anrig about the chairman's mark
In order to better understand the chairman’s mark on deficit reduction released yesterday, I spoke with Greg Anrig, vice president of policy and programs at the Century Foundation. What follows is a transcript of our conversation, slightly edited for length.
Q: Erskine Bowles and Alan Simpson, the deficit commission's co-chairs, released a chairman's mark of their deficit reduction proposal yesterday. What are the big concerns about the federal deficit, and what is this commission trying to do?
A: The main concern everyone has in looking at the federal budget picture is the forecast that shows a rising debt-to-GDP ratio over the next 10, 20 or 30 years. So by the 2020s, the size of the federal debt will be larger than the economy and will then continue to be growing indefinitely into the future.
One important fact in looking at the current situation, though, is that we are still facing very serious economic problems in the here and now, with unemployment at 9.6 percent and most forecasts showing little prospect of robust job growth. So you have this situation where this commission, and other commissions, are releasing austerity plans at a time when we haven't emerged fully from the Great Recession. Should we really be focusing on cutting government spending or instead putting our energy toward figuring out how to get out of the hole we are in first? Maybe we could create a trigger mechanism so that once we clearly emerge from the slump – after unemployment falls below 6 percent or so for a sustained period -- then we could put in place deficit reduction measures.
Why is the deficit exploding? And what's the time frame on it?
The main driver, the one that has been repeated throughout the health-care debate, is medical costs. If health-care costs were rising at the same level as they are in other countries, the scenario with soaring debt-to-GDP ratios wouldn't be occurring at all. We would have a much better forecast ahead of us. But the expectation is that even under the new legislation, for the foreseeable future, health-care costs are going to continue to rise much faster than GDP growth.
We also suffered a severe drop-off in revenues due to the Great Recession. Obviously it would have been better during the Bush years, when the economy was growing modestly, had they not cut taxes so significantly. That, along with big increases in defense spending, escalated deficits during a period when we should have had surpluses, or at least declining deficits. So we already had a very wide budget gap heading into this recession.
As I see it, the government largely does four things: Social Security, health care, defense and everything else. How does this proposal approach Social Security?
It's important to distinguish Social Security from health-care spending. Unlike health care, Social Security is not the driver of the long-term budget challenge. Its payroll taxes combined with trust fund income will be more than sufficient to finance benefits in full until 2037. At the same time, Social Security is by no means overly generous. The average benefit is about $14,000 a year. Compared to other countries, we are 25th out of 30 in the level of past earnings replaced by Social Security. To focus on cutting those modest benefits, which are already scheduled to decline somewhat, doesn't make sense considering that the program is the most effective, efficient, and popular government activity. If we are going to focus on the closing the relatively modest long-term gap in Social Security’s finances, which isn't a significant contributor to the overall budget deficit, there are a lot of better ways to go about it on the revenue side. Raising the retirement age, which the commission proposes, is an unnecessarily large, across-the-board benefit cut.
How does it approach health-care spending?
Conservatives in Congress right now are focusing on repealing the recently enacted health-care legislation. Looking at the chairs’ proposals on health care, it’s encouraging that they aren't looking to rescind any major parts of that bill, which includes a lot of provisions aimed at controlling costs. Actually, a lot of what is included in the proposal is to strengthen and build on some features of the health care bill.
In terms of the long-term picture, though, there's a lot of hand-waving about savings we can get. They say that health-care costs won’t be allowed to go above 1 percent of GDP, but they don’t explain how that would actually happen or specifying how to make it happen. Still, they are counting that assumption in their long-term budget savings estimates, which isn’t really legitimate. So there's a mix of relatively modest proposals that would build on the existing health-care bill in reasonable ways along with pie-in-the-sky hopes for controlling health-care costs in the long term.
The commission made a big deal of everything being on the table. Was the defense and military budget ultimately on the table?
They did a fair amount on defense, saying they are going to reduce military spending by roughly $100 billion in 2015 and offering some legitimate suggestions for doing that. So they did take it seriously. It doesn’t seem likely that those ideas will take hold politically, but that's true of pretty much the whole plan.
As for the “everything else” category, I noticed that the proposal really hits hard on government workers. There's ample evidence that government workers are underpaid in cash (though they receive good benefits) relative to if they were working in the private sector, yet they come under pressure in this proposal.
Those kinds of items don't generate a ton in savings, but I’m sure they find it a politically useful talking point to say "We are going to eliminate 250,000 non-defense service and staff contractors." Well, which are you going to eliminate and what do they already do that's useless? It does fire up a certain group of people. But we get better government when the people it employs have skills and experiences relevant to the job at hand.
The other side of the balance sheet is increasing revenues. How does the proposal approach that?
They have several approaches to tax reform and consider major reform as opposed to tweaks to the existing tax system to be a priority. They look back to Reagan-era tax reform, which eliminated and curtailed a wide variety of tax breaks and deductions in exchange for lower tax rates. But if the goal here is to raise revenues and lower the budget gap, why are they focusing on lowering tax rates? When Reagan passed his tax reform, everyone agreed that it should be revenue neutral. But this commission is supposed to be closing the budget gap and ought to be emphasizing loophole elimination over tax rate reduction.
If there is ever going to be any kind of agreement between Republicans and Democrats on meaningful budgetary changes, it's probably going to be in the realm of tax expenditures, which are loopholes designed to encourage certain behaviors. The chairs combined bad ideas, like cutting the earned income tax credit, with good ones, like ending the tax-favored treatment of capital gains and dividends. That last item in its own right could be a huge source of revenue, and there is also a strong set of arguments in favor of doing it. Investment tax breaks are costly, add complexity to the tax code, tend to benefit the already wealthy, and don’t obviously help the economy. If you are looking at targets from a progressive point of view, there's a lot to work with there.
Independent of the numbers, what's the vision of government embedded in this proposal?
That's the fundamental problem. There’s a long list of cuts designed to lower the deficit, but together they don't demonstrate how American society will improve and do better. We've had an extensive period of time where U.S. households haven’t fared well economically. Instead of focusing exclusively on the deficit, it would be far more useful to figure out how to get our economy growing and productive again, which would benefit all taxpayers and in turn would strengthen the long-term fiscal picture. If we can get our workforce fully engaged in more productive activities, make our health-care system more efficient, educate people more effectively and rebuild infrastructure so that it isn't falling apart, those things would make us fiscally much healthier.
Just proclaiming as this proposal does that federal revenues shall not exceed 21 percent of GDP, when we have an aging population and difficult-to-repair health-care system, is consigning the country to interminable austerity. We need to get back to the balanced relationship between government and the private sector that produced broadly shared prosperity during the post-World War II era.
By the way, the Century Foundation, the Economic Policy Institute, and Demos are collaborating on a budget blueprint of our own, which we will release the week after Thanksgiving. We will show that it’s possible to rebuild the economy, protect social insurance programs, and significantly improve the long-term budget outlook in ways that help rather than hurt average families. You can find that at the Our Fiscal Security Web site.
| November 11, 2010; 2:37 PM ET
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