Red Ink (16 page)
Authors: David Wessel
Elmendorf, in short, is a good guide to the fiscal landscape. His tour begins with a couple of observations.
One is a demographic fact. “
We cannot go back to the tax and spending policies of the past because the number of people sixty-five or older will increase by one-third between 2012 and 2022,” Elmendorf says. As more baby boomers cross
the threshold for collecting Social Security or being covered by Medicare, spending on those programs will rise. And even hard-core spending cutters willing to talk about paring Social Security or Medicare or raising the eligibility age propose exempting those who have already turned fifty-five.
The other is a political fact that sums up the entire budget dilemma in a single sentence. “
The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services,” he has said.
The CBO’s traditional role is to take budget plans that the president and members of Congress devise and put numbers on them: what would the course of spending and taxes and deficits be if they were enacted. To that end, it also produces a Chinese menu of deficit-reducing options from which Congress can choose.
But none of that seemed to be penetrating the political debate. So Elmendorf tried a different tack. He started by projecting today’s tax and spending policies ten years out, the baseline referred to earlier. That would put the budget deficit in 2022 above $1 trillion and rising. By then, the U.S. government would be borrowing so much that the national debt, as a percentage of the GDP, would be dangerously high (over 90 percent) and still rising.
Then he asked: What would have to happen to avoid that outcome, to bring the spending and revenue lines close enough together so that the national debt would at least stop climbing, as a percentage of GDP? His answer: spending cuts or tax increases or a combination of the two that add up to $750 billion a year by 2022. Even in Washington that’s a big number.
What would it take to get to that goal? Remember, the starting point for the exercise is that Congress sticks to the caps it has set on annually appropriated defense and domestic spending. “
The country,” Elmendorf pointed out, “is [already] on track to substantially reduce the role of most federal activities, relative to the size of the economy.” Perhaps Congress will squeeze more out of defense between now and 2022, depending on the state of the world. But it’s a good bet that what it saves in defense, it’ll end up spending on domestic programs—highways or job training or disaster relief or something.
So say Congress decided to get really serious about the deficit by looking at spending on the big benefit programs that today account for 40 percent of all federal outlays: Social Security and the growing Medicare and Medicaid budgets. Say it raised the age at which the elderly become eligible for Medicare to sixty-seven (from sixty-five) and the age at which they’re eligible for full Social Security benefits to seventy (from sixty-seven). Say it shifted to a less generous formula for setting Social Security benefits and adjusting them for inflation. Say it boosted the premiums that the elderly on Medicare pay
for their coverage and made them pay more of their health care bills out of pocket. And say it limited increases in federal spending for Medicaid, the joint state-federal health insurance program for the poor, so the tab rose no faster than the pace at which private sector wages rise.
Any one of those would be a very big deal. But if Congress did all that, it would be saving about $250 billion annually by 2022. That’s a big number to be sure, but here’s the rub: all those measures combined would save only a third of what’s needed to reach Elmendorf’s budget nirvana goal. If
all
the weight is put on the big entitlement programs—Social Security, Medicare, and Medicaid—they would need to be cut by 25 percent to put the budget on a sustainable course by 2022.
Which is why the conversation inevitably turns to raising taxes alongside cutting spending.
Elmendorf’s starting point for the exercise is that all the tax cuts that Bush instigated and Obama continued are extended at the end of the year. Say Congress took Obama’s advice and let income tax rates on the over-$250,000-a-year crowd rise to pre-Bush levels. That would bring in between $100 billion and $150 billion in 2020. Say it also eliminated the federal income tax deductions for mortgage interest and state and local taxes, changes that would raise taxes on many more people. That would yield another $180 billion. Both would be huge changes, and they, too, would get Congress only about one-third of the way toward the goal. If Social
Security, Medicare, and Medicaid were shielded altogether, then taxes would have to be raised by about one-sixth. That’s a big tax increase.
Put all the spending cuts and the tax increases on this shopping list into the deficit-reduction basket, and there still would not be enough money to bring the deficit to sustainable levels by 2022. Elmendorf’s list of options is hardly exhaustive: if Congress let
all
the Bush tax cuts expire, raising the taxes of almost everyone who pays income taxes, it would, by CBO estimates, come close to hitting the target. But the point is clear: small changes will
not
suffice.
That’s not to say that the nation’s fiscal problem is unsolvable. The proliferation of reports by bipartisan commissions illustrates the mix of significant, but manageable, policies that could arrest the rise in the federal debt over the next decade. Most of them raise some taxes by eliminating deductions, credits, loopholes, and exemptions; cut the defense budget; restrain spending on health and other benefits; and spread the pain widely while trying to shield the poorest Americans. Yet the polarization of the American political system has left it, so far, unable to choose between Barack Obama’s approach to reducing the deficit or Paul Ryan’s. Neither side has enough votes to prevail, and neither is willing to compromise on some amalgam that might spread the pain and that both can live with. This is the crux of the issue: the deficit widens, the debt grows, the interest burden gets heavier, the voices grow even
more shrill as the budget burden is passed to future generations, and nothing gets done.
“
I used to tell the students that we are either governed by leadership or crisis,” Leon Panetta said in a recent interview. “And I always thought that if leadership wasn’t there, then ultimately you rely on crisis to drive decisions. In the last few years, my biggest concern is that crisis doesn’t seem to drive decisions either. So there goes my theory.”
CHAPTER 1: SPENDING $400 MILLION AN HOUR
1
“broken promises”: Paul Ryan press release, February 13, 2012.
http://budget.house.gov/News/DocumentSingle.aspx?DocumentID=280066
2
“I have a soft spot”: Interview, Jack Lew.
3
“The purpose of power”: Tim Weiner, “Old-Time Democrat Tries to Weave a Budget Tapestry,” Public Lives,
New York Times
, November 8, 1999.
http://www.nytimes.com/1999/11/08/us/public-lives-old-time-democrat-tries-to-weave-a-budget-tapestry.html
4
Eleven days after: “Paul Ryan: Rebel Without a Pause,”
Wisconsin Policy Research Institute,
July 2010.
http://www.wpri.org/WIInterest/Vol19No2/Schneider19.2p2.html
5
“I do believe”: Jennifer Rubin, “Making the Case for Free Markets and Profit,”
washingtonpost.com
, January 12, 2012.
http://www.washingtonpost.com/blogs/right-turn/post/making-the-case-for-free-markets-and-profit/2012/01/11/gIQAX9zVrP_blog.html
6
“It cost me”: Ezra Klein, “Rep. Paul Ryan: Rationing Happens Today! The Question Is Who Will Do It?,”
washingtonpost.com
, February 2, 2010.
http://voices.washingtonpost.com/ezra-klein/2010/02/rep_paul_ryan_rationing_happen.html
7
One liberal group: Paul Ryan Wheelchair Commercial, The Agenda Project, May 17, 2011.
http://www.politifact.com/truth-o-meter/statements/2011/may/25/agenda-project/throw-granny-cliff-ad-says-paul-ryan-plan-would-pr/
8
“Byrd droppings”: Mary Agnes Carey, “How the Senate Will Tackle Health Care Reform,”
Kaiser Health News,
March 21, 2010.
http://www.kaiserhealthnews.org/Stories/2010/March/22/Senate-health-bill-whats-next.aspx
9
CHIMPS: Jim Monke, “Reductions in MandatoryAgriculture Program Spending,” Congressional Research Service (Washington, D.C.: May 19, 2010).
http://www.nationalaglawcenter.org/assets/crs/R41245.pdf
10
As humor columnist: David Wessel, “Deficit Dilemma: How to Dig Out,”
Wall Street Journal
, October 15, 2009, A2.
http://online.wsj.com/article/SB125554787267585505.html
11
“In 2009, for the first time”: Interview, Eugene Steuerle.
12
The United States spends:
http://milexdata.sipri.org/files/?file=SIPRI+milex+data+1988–2010.xls
13
Yet in a CNN poll: CNN Opinion Research Poll, March 11–13, 2011.
http://i2.cdn.turner.com/cnn/2011/images/03/31/rel4m.pdf
14
Wages and benefits: Office of Management and Budget,
Fiscal Year 2013 Analytical Perspectives
(Washington, D.C.: Government Printing Office, 2012), Table 11–4.
15
4.4 million workers: Ibid., Table 11–3.
16
Where does the rest of the money go?: Office of Management and Budget,
Historical Tables
(Washington, D.C.:
Government Printing Office, 2012), Tables 11–3, 12–1.
http://www.whitehouse.gov/omb/budget/Historicals
17
“It’s the things:” Interview.
18
The heart of federal health care spending: Congressional Budget Office,
Long-Term Budget Outlook
(Washington, D.C.: Government Printing Office, 2012), Figure B-1.
http://www.cbo.gov/doc.cfm?index=12212
19
The Medicare prescription drug benefit: David Wessel, “Tallying the Toll of Terrorism on the Economy from 9/11,”
Wall Street Journal
, September 1, 2011, A2.
20
“You can’t fix”: Interview at WSJ CEO Council.
21
wiped out $7 trillion:
http://www.newyorkfed.org/research/staff_reports/sr482.pdf
22
“At one point”:
http://cybercemetery.unt.edu/archive
/cop/20110401232213/http:/cop.senate.gov/documents/cop-031611-report.pdf
23
only $470 billion: U.S. Department of Treasury, “Troubled Asset Relief Program (TARP)—Monthly Report to Congress,” April 10, 2012.
24
As of December 2011: Federal Housing Financing Agency,
Conservator’s Report on the Enterprises Financial Condition, Fourth Quarter 2011.
http://www.fhfa.gov/webfiles/23879/Conservator%27sReport4Q201141212F.pdf
25
for families in the very middle: Congressional Budget Office, “Trends in Federal Tax Revenues and Rates,” December 2, 2010, 2.
http://www.cbo.gov/publication/21938
26
Nearly half of American households: Rachel M. Johnson et al., “Why Some Tax Units Pay No Income Tax,” Tax Policy Center, July 27, 2011.
http://www.taxpolicycenter.org/publications/url.cfm?ID=1001547
27
less than a third of the populace: Bureau of the Census, “Income, Poverty, and Health Insurance Coverage in the United States: 2010,” September 2011, 23.
http://www.census.gov/prod/2011pubs/p60–239.pdf
28
government at all levels: Organization for Economic Cooperation and Development,
Revenue Statistics 2011
(Paris: OECD Publishing, 2011), 19.
29
All these tax breaks: Office of Management and Budget,
Fiscal Year 2013 Analytical Perspectives,
“Estimates of Total Income Tax Expenditures for Fiscal Years 2011–2017,” Table 17–1.
30
U.S. government borrowed: Office of Management and Budget,
Historical Tables,
Table 8–1.
31
“A lot of us”: Interview, Erskine Bowles.
1
“This country cannot”: Leon E. Panetta, Speech at the Commonwealth Club of California, October 23, 2009.
http://www.5min.com/Video/CIA-Director-Calls-Deficit-a-Threat-to-National-Security-516897448
2
“a dangerous experiment”: Testimony, Leon E. Panetta, Senate Committee on Government Affairs, January 11, 1993.
http://www.archive.org/stream/
nominationofleon00unit/nominationofleon00unit_djvu.txt
3
“I’ve become very eclectic”: Interview, Leon Panetta.
4
A natural politician: “The Defense Secretary: Leon Panetta,”
60 Minutes,
January 29, 2012.
http://www.cbsnews.com/8301-18560_162-57367997/the-defense-secretary-an-interview-with-leon-panetta/?tag=contentMain;cbsCarousel
5
Every week: 2011 Annual Report of the Boards of Trustees
of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 11, 2011, 51.
https://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf
6
Back then, the entire output: Louis Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?,” MeasuringWorth, 2011.
http://www.measuringworth.com/usgdp/
7
Until Congress created:
United States Government Manual,
1945.
http://www.ibiblio.org/hyperwar/ATO/USGM/Executive.html
8
“The first requirement”: Herbert Stein,
The Fiscal Revolution in America: Policy in Pursuit of Reality
(Washington, D.C.: American Enterprise Institute Press, 1996), 33.
9
About 70 percent: Office of Management and Budget,
Historical Tables
(Washington, D.C., Government Printing Office, 2012), 7.
10
“The federal budget”: Stein,
Fiscal Revolution in America,
14.
11
“Too often”: Quoted in Stein, 44.
12
“Spending,” Stein wrote: Ibid., 54.
13
Largely because of: Bureau of the Census, “District of Columbia—Race and Hispanic Origin: 1800 to 1990,” Table 23.
http://www.census.gov/population/www/documentation/twps0056/tab23.pdf
14
In a move with: Philip R. Dame and Bernard H. Martin,
The Evolution of OMB
(Washington, D.C.: privately published, 2009), 9. Also see Franklin D. Roosevelt, Exec. Order No. 8248: Reorganizing the Executive Office of the President, September 8, 1939.
http://www.presidency.ucsb.edu/ws/index.php?pid=15808#ixzz1maeq2AWc
15
“Never again”: Stein, 54.
16
“In three short years”: Governor Mitch Daniels’s Republican response to the 2012 State of the Union, January 24, 2012.
http://www.speaker.gov/News/DocumentSingle.aspx?DocumentID=276315
17
“From the mid-1930s”: Interview.
18
“My dad used to”: “The Defense Secretary,”
60 Minutes,
transcript, 2.
http://www.cbsnews.com/8301–18560_162-57367997/the-defense-secretary-an-interview-with-leon-panetta/?tag=contentMain;cbsCarousel
19
“I had read about”: Leon Panetta Interview, Conversations with History, Institute of International Studies, UC Berkeley, May 22, 2000, 243.
http://globetrotter.berkeley.edu/people/Panetta/panetta-con2.html
20
Frank Lichtenberg estimates: Frank R. Lichtenberg, “The Effects of Medicare on Health Care Utilization and Outcomes,” January 2002.
http://www.nber.org/chapters/c9857.pdf
21
It’s a living laboratory: David Wessel, “Medicare Cures: Easy to Prescribe, Tricky to Predict,”
Wall Street Journal
, June 30, 2003, A1.
22
“the man who blew”: Leon E. Panetta and Peter Gall,
Bring Us Together: The Nixon Team and the Civil Rights Retreat
(New York: J. B. Lippincott Co., 1971).
http://www.amazon.com/Bring-together-Nixon-rights-retreat/dp/B000CKH9Q
23
Congress hasn’t finished: Gregory Korte, “Congress Looks at Ways to Fix Budget Process,”
USA Today
, October 4, 2011.
http://www.usatoday.com/news/washington/story/2011-10-03/congress-examines-budget-process/50647934/1
24
But in a city riddled: David Wessel, “Man Who Wounded Health Care Effort Could Also Save It,”
Wall Street Journal
,
July 23, 2009, A4.
http://online.wsj.com/article/SB124829913479973605.html
25
“who can grasp”: Philip G. Joyce,
The Congressional Budget Office: Honest Numbers, Power and Policymaking
(Washington, D.C.: Georgetown University Press, 2011), 20, 388.
26
“Congress would have a bill”: Ibid., 20.
27
“on the explicit grounds”: Hali J. Edison, “An Interview with Alice Rivlin.”
http://www.cswep.org/rivlin.htm
28
“schmoozy”: Peter Suderman, “The Gatekeeper,”
Reason,
January 2010.
http://reason.com/archives/2009/12/08/the-gatekeeper/singlepage
29
“Elmendorf … is the stone-faced banker”: RJ Eskow, “Elmendor vs. Orszag: A ‘Teachable Moment’ … for Geeks and Nerds,” July 28, 2009.
http://www.huffingtonpost.com/rj-eskow/elmendorf-vs-orszag-a-tea_b_246672.html
30
“In the end, everyone”: Interview, Douglas Holtz-Eakin.
31
“To a degree”: Allen Schick,
The Federal Budget: Politics, Policy, Process
(Washington, D.C.: The Brookings Institution, 2000), 19–20.
32
for the first time: George Hager and Eric Pianin,
Mirage: Why Neither Democrats nor Republicans Can Balance the Budget, End the Deficit, and Satisfy the Public
(New York: Times Books/Henry Holt, 1997), 97.
33
“Well, you know”: Ronald Reagan, quoted in Bruce Bartlett, “ ‘Starve the Beast’: Origins and Development of a Budgetary Metaphor,”
The Independent Review,
Summer 2007, 11.
http://www.independent.org/pdf/tir/tir_12_01_01_bartlett.pdf
34
“If you insisted”: David Stockman,
The Triumph of Politics
(New York: Harper & Row, 1986), 53.
35
“Two Santa Claus Theory”: See Jude Wanniski, “Taxes and a Two-Santa Theory,”
National Observer,
March 6, 1976.
http://capitalgainsandgames.com/blog/bruce-bart lett/1701/jude-wanniski-taxes-and-two-santa-theory
.
36
“At that point”: Interview, Leon Panetta.
37
The Reagan tax cut was gigantic: Office of Tax Analy-sis, “Revenue Effects of Major Tax Bills—Updated Tables for All 2010 Bills.”
http://www.treasury.gov/resource-center/tax-policy/Documents/OTA-Rev-Effects-1940-present-6-6-2011.pdf
38
“If the American political system”: Richard Darman,
Who’s in Control? Polar Politics and the Sensible Center
(New York: Simon & Schuster, 1996), 79.
39
“$200 billion a year”: Steven R. Weisman, “Budget Tie-up: Reagan at the Crossroads,”
New York Times,
April 20, 1983.
40
the budget deficit averaged: Office of Management and Budget,
Historical Tables
(Washington, D.C.: Government Printing Office, 2012), Table 1.2.
41
“A significant tax cut”:
http://globetrotter.berkeley.edu/people/Panetta/panetta-con0.html
42
“the six most destructive words”: Colin MacKenzie, “How Bush Blew It,”
Globe and Mail,
November 4, 1992, A1.
43
“a borrow, bailout, and buy-out binger”: Leon Panetta, speech to the National Press Club, January 17, 1989, in
Congressional Record,
January 20, 1989.
44
“Both Democrats and Republicans”:
http://globetrotter.berkeley.edu/people/Panetta/panetta-con0.html
45
“The American people”: “Budget Plan Nears Vote in House,”
Chicago Tribune,
October 28. 1990, C17.
46
The vote tally:
http://www.govtrack.us/congress/vote.xpd?vote=h1990-528
47
“For Democrats”: Interview, Leon Panetta.
48
“undermined”: Andrew Rosenthal, “The 1992 Campaign: Breaking Tax Pledge Hurt His Credibility, President Tells ABC.”
New York Times,
June 26, 1992.
http://www.nytimes.com/1992/06/26/us/the-1992-campaign-breaking-tax-pledge-hurt-his-credibility-president-tells-abc.html
49
“The record shows”:
http://www.thefiscaltimes.com/Articles/2010/06/25/A-Budget-Deal-That-Did-Reduce-the-Deficit.aspx#page1
50
“The Soviet Union”: Interview, Robert Reischauer.
51
“I think the most dangerous threat”: Craig Whitlock, “Former Deficit Hawk Leon Panetta Now Fights Budget Cuts as Defense Secretary,”
Washington Post,
November 3, 2011.
http://www.washingtonpost.com/world/national-security/leon-panettas-mind-meld/2011/10/26/gIQAhtU4iM_story.html
52
“We talked”: “Conversations with History,” Institute of International Studies, University of California, Berkeley, 2000.
http://globetrotter.berkeley.edu/people/Panetta/panetta-con0.html
53
The deficit came down even faster:
http://www.cbo.gov/ftpdocs/103xx/doc10392/1993
_09_14reischauertestimony.pdf
54
In 1995, the IRS counted: David Wessel, “The Wealth Factor: Again, the Rich Get Richer, but This Time They Pay More Taxes—Their Deductions Are Cut, and That Pesky Levy for Medicare Adds Up—a Big Break on Capital Gains,”
Wall Street Journal,
April 2, 1998, A1.
55
“You know … does it really hurt”: U.S. House of Representatives, Committee on the Budget,
Hearings on President Clinton’s Fiscal Year 1995 Budget Proposal,
February 4,
1994, serial no. 103–18 (Washington, D.C.: Government Printing Office, 1994), 42, 45.
56
“In the time that I’ve been in Washington”:
http://www.pbs.org/newshour/bb/white_house/january97/panetta_1-17.html
.
57
“We know big government”: State of the Union address, January 23, 1996.
http://clinton4.nara.gov/WH/New/other/sotu.html
58
“Leon [Panetta] and John Kasich”: Interview, Jack Lew.
59
“Gingrich wanted to do it”:
http://www.usnews.com/news/politics/articles/2008/05/29/the-pact-between-bill-clinton-and-newt-gingrich
60
“Why would we go back”: Interview, Grover Norquist.
61
“[T]he highly desirable”: Testimony of Alan Greenspan, Senate Budget Committee, January 25, 2001.
62
“a feeding frenzy”: Alan Greeenspan,
The Age of Turbulence: Adventures in a New World
(New York: Penguin Press, 2007).
63
“misjudged the emotions”: Ibid., 222.
64
“policies that could”: Testimony of Alan Greenspan, Senate Budget Committee, January 25, 2001.
65
$3.3 trillion:
http://www.cbo.gov/ftpdocs/121xx/doc12187/ChangesBaselineProjections.pdf
66
the government spent more:
http://cboblog.cbo.gov/?p=3058
67
“The era of big government”: David Wessel, “Capital: Small-Government Rhetoric Gets Filed Away,”
Wall Street Journal,
September 8, 2005, A2.
68
In 2011, it was 5 percent: Office of Management and Budget,
Historical Tables
, Tables 8.2 and 8.4.
69
By 2010, the
annual
tab:
https://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf
, 9, 34.
70
“[A]fter Democrats”: “Remarks by the President on Fiscal Policy,” April 13, 2011.
http://www.whitehouse.gov/the-press-office/2011/04/13/remarks-president-fiscal-policy
71
“would never again permit”:
http://www.scribd.com/doc/18757758/Pa-Nett-at-Ask-Force-Testimony-October-2007