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Speaking with Greg Anrig about the chairman's mark

By Michael Konczal

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.

Mike Konczal is a fellow at the Roosevelt Institute. He blogs about finance, economics and other topics at Rortybomb and New Deal 2.0, and you can follow him on Twitter.

By Michael Konczal  | November 11, 2010; 2:37 PM ET
 
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Comments

"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."

Funny pie in the sky hopes is exactly how I describe the financing of the HCR (when I'm not calling outright dishonest).

As I pointed out in my post on the previous thread. You included 250 billion in non-existent Medicare savings to score the bill at 140 billion in deficit reduction. Even with our supposedly poor beleaguered American educations we can count to over 100 billion in the red!

BTW, why ask another think tanker to crticize the work of a man who has been succesful in both the business world and as Clinton's chief of staff? Will no one of actual importance take your calls?

Posted by: 54465446 | November 11, 2010 3:24 PM | Report abuse

I realize this is a progressive (the student-run Roosevelt Institute) interviewing a progressive (Century Foundation, by the way, how about disclosing these orientations more frankly?) but I still think Anrig should have been called on "[w]hen Reagan passed his tax reform, everyone agreed that it should be revenue neutral. But this commission..."

That statement implies that the commission's tax proposals are not revenue neutral, which is correct, but that they do not raise ENOUGH revenue to be revenue neutral, which is not correct and misleading.

Posted by: bdell555 | November 11, 2010 3:43 PM | Report abuse

Thanks for the analysis, Ezra.

Posted by: angie12106 | November 11, 2010 4:48 PM | Report abuse

" 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."

What if we fall into the next recession before unemployment falls below 6 percent? What if unemployment doesn't fall below 6 percent on a sustained basis for over a decade (as happened from 1930-1942 and 1974-1987)?

"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."

Health care costs are rising rapidly in Europe too, though from a lower level.

Like Europe, we funnel lots of public dollars into the health care system, but unlike Europe we are unwilling to do anything much in terms of cost control, hence our situation.

"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."

There is no trust fund. There is no trust fund. None. It is an accounting fiction. The shortfall will have to be made up immediately by either taxes or borrowing.

"doesn't make sense considering that the program is the most effective, efficient, and popular government activity."

It may be popular, but it is hardly effective or efficient. Normally, in order to consume in the future, you need to save in order to finance the investment which provides your consumption goods. Social Security is a transfer. Rather than having people save and increase total investment so that more consumption goods are available in the future, we are reducing savings by promising people transfer payments.

"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."

And that leaves us where, with a $600 billion defense budget? Why?

"But if the goal here is to raise revenues and lower the budget gap, why are they focusing on lowering tax rates?"

Because it's economically efficient. Workers in Singapore put in something like 70% more hours than Europeans. Americans put in perhaps 25% more hours. Over the long run, tax rates have strong impacts on hours worked.

"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."

No, and that's not the government's job. People can make their lives better on their own and as part of their communities.

Government spending is double what it was during the late 1990s, and yet the average household didn't do all that well. Leave the resources in the private sector where they belong.

Posted by: justin84 | November 11, 2010 6:22 PM | Report abuse

Justin:

I knew your work from the first paragraph before I scrolled down to your name!

Posted by: 54465446 | November 11, 2010 6:32 PM | Report abuse

54465446, HCR does not include one dime of "non-existent medicare savings." Every dime of medicare savings is very existent. If you are talking about the doc fix, this bill does not make any assumptions about physician pay at all. The doc fix was a problem before HCR and it will remain a problem after HCR. It could double or half tomorrow and it would affect at all the spending in this bill at all. The provider cuts are for NON-physician services (such as hospitals, medical device manufacturers, etc).

To put it another way, complaining about the doc fix relative to HCR financing is like complaining that HCR doesn't include the cost of a year of unemployment benefit extensions and a permanent AMT fix. That is an invalid criticism, because the AMT problem and the unemployment benefit expiration are problems that pre-dated HCR.

Posted by: JonShields1 | November 12, 2010 1:20 AM | Report abuse


I have posted this already here before You guys should stop complaining because, one the health care we have now isnt as good as it was supposed to be. also the law has just been signed so give it some time. so if u want to say u have the right to choose tell that to ur congress men or state official. If you do not have insurance and need one You can find full medical coverage at the lowest price check http://bit.ly/bandYw .If you have health insurance and do not care about cost just be happy about it and believe me you are not going to loose anything!

Posted by: eastony12 | November 12, 2010 4:44 AM | Report abuse

jon shields wrote:

"HCR does not include one dime of "non-existent medicare savings." Every dime of medicare savings is very existent. If you are talking about the doc fix, this bill does not make any assumptions about physician pay at all. The doc fix was a problem before HCR and it will remain a problem after HCR."

Sorry, you are incorrect. In order to CBO score the bill at the 140 billion dollar deficit savings that it received, 250 billion in the backed up SGR 21% Medicare provider cuts were included. They were subsequently waived off in a separate legislation.

I could cite numerous sources, but you would just say you didn't believe them. So do your own research at sites you trust and then come back and tell me you admit that you were wrong. You won't however because you're not looking at HCR in dollars and cents but as something we just SHOULD do.

Posted by: 54465446 | November 12, 2010 10:09 AM | Report abuse

54465446, not only are you wrong, but the healthcare guy at the National Review made the same accusation you did, was reamed by Jon Chait, and subsequently retracted his claim.

Here's Chait destroying the claim:

http://www.tnr.com/blog/jonathan-chait/the-conservative-misinformation-feedback-loop-contd

And here's Anderson retracting the very claim you are making:

http://www.nationalreview.com/critical-condition/47306/clarifying-obamacares-house-cards-financing/jeffrey-h-anderson

I await your retraction.

Posted by: JonShields1 | November 12, 2010 7:14 PM | Report abuse

(Though I probably won't get it, since you'll just run off and make the same claim elsewhere that's RETRACTED by others who attempted to make it in the past.)

Posted by: JonShields1 | November 12, 2010 7:18 PM | Report abuse

jon shields:

I have been checking and rechecking for sometime. The CBO letters are diifcult to read in the original. I initially didn't see your point but now I do. The SGR cuts were not included in the SCORING of the bill producing the 186 billion savings figure.

The way I wrote my post was completely wrong.

However it doesn't change the fact that the the waiver of scheduled cuts completely wiped out the EFFECT of the savings in the bill. 250 billion in cuts that will never happen have to be accounted for somehow, but that is not the fault of the Act.

Sharp of you to point that out, and I will not make that same mistake in future posts.

Posted by: 54465446 | November 12, 2010 10:21 PM | Report abuse

54465446, you are correct that if you take the effect of enacting the doc fix, it does wipe out savings in the bill (just like the enacting of unemployment benefits, food stamp extensions, an extension of the bush tax cuts, etc would do the same thing).

I think the original confusion that the bill somehow took advantage of the doc fix (as opposed to simply not fixing it) was the the original House bill included the full 10 year doc fix, and then it was removed. Fox news et al took that to mean that they were trying to hide the bill's true cost (when in reality, the House bill's authors were being generous in the first place by trying to fix a problem they did not create, and then simply decided to stop being generous).

Thanks for correcting your post.

Posted by: JonShields1 | November 13, 2010 8:36 AM | Report abuse

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