January 13, 2010 | Backgrounder on Budget and Spending
Abstract: The federal budget of the United States is on a disastrous course. Entitlement spending threatens to drive up federal spending in the next decades to an unprecedented proportion of gross domestic product. A budget commission, in conjunction with other steps, may be needed to jolt the legislative process into addressing the looming fiscal crisis, but the Conrad-Gregg commission as proposed is fatally flawed. Instead, a bipartisan budget commission must include the American people fully in the discussions and must not override appropriate protections for the minority in Congress.
After enacting or proposing a surge of new spending and taxes during the past 12 months, the Obama Administration and the Hill leadership are suddenly focused on finding ways to tackle the startling long-term federal deficit. By the end of January, the mounting national debt will require the Senate to pass an increase in the federal debt limit to avoid a default. This must-pass action is an opportunity to attach legislation to the debt increase to alter the budget process and begin to tackle the problem.
Senate Budget Committee Chairman Kent Conrad (D-ND) and Ranking Member Judd Gregg (R-NH) have authored legislation (S. 2853) that would create a bipartisan commission to propose a package of steps that would be given fast-track authority in both houses. They and others want this legislation attached to any debt limit increase.
While a commission of some form, in conjunction with other steps, may be needed to jolt the legislative process into addressing the looming fiscal crisis, the Conrad-Gregg commission has fatal design weaknesses. Among them are the following:
The Fiscal and Legislative Problem We Face
The federal budget of the United States is on a disastrous course. As the baby-boom generation retires, the rapid growth of the Medicare and Social Security entitlements, combined with increases in the Medicaid entitlement and other programs, will drive up federal spending in the next decades to an unprecedented proportion of gross domestic product (GDP).
While proponents of the health reform legislation claim that their bills will slow the growth of Medicare, many of their proposed savings are politically inconceivable, such as a 20 percent cut in physician fees in 2011. Moreover, the reform would spend the supposed savings plus new taxes on a new health entitlement, so the net effect of reform will be to increase the future rate of entitlement spending.
If nothing is done to slow spending, the result will be either a sharp increase in deficits and debt or--to avoid that scenario--a massive increase in taxes. According to William Gale of the Brookings Institution, even if we assume that health reform has no net impact on the long-term budget deficit, public debt as a proportion of GDP will surge past its 1946 record within 20 years and then continue to rise rapidly. Closing the fiscal gap, says Gale, would take major tax increases or a new value-added tax (VAT) of 15-20 percent. Either scenario would have severe effects on future U.S. economic growth.
Regrettably, Congress for many years has proven incapable of addressing the autopilot growth of federal entitlements. In fact, under both Republican and Democratic control, Congress has proven unable to enact and sustain significant steps to slow down their growth. There are several reasons for this, from an annual budget process that is not compelled to show the public--let alone deal with--the long-term fiscal situation to the general reluctance of politicians to curb popular government benefits.
A wide spectrum of fiscal analysts has jointly called for changes in the congressional budget process to address the political and procedural obstacles to constraining the rapid growth of entitlements. These analysts have proposed several steps, including:
Opportunities and Dangers in a Commission
To be sure, proposing a commission designed to jump-start or fast-track the legislative process is an admission that the normal procedures of Congress are failing. It would be far better for American democracy if lawmakers were to make the tough decisions needed to restrain the dangerous long-term growth in spending and debt.
Yet political will may not be enough, given the built-in procedural and political incentives in the budget process that favor unsustainable entitlement promises. That has led some to argue for changes in the Constitution to curb the power of lawmakers to spend and tax. It has led others, including some proponents of constitutional curbs, to propose procedural steps including a commission.
A review of the history of fiscal commissions raises an understandable objection to creating a commission: It would simply become a vehicle to "solve" the problem by raising taxes rather than truly curbing spending. Indeed, given the current make-up of Congress and the executive branch, there is good reason to believe that the primary intent of the majority would be to secure some minority support to finance existing or even new spending with new taxes instead of building bipartisan support for real reductions in entitlement spending. Since a chronic long-term increase in projected spending as a proportion of GDP is the cause of the fiscal problem, not any decrease in future taxes as a proportion of GDP, a commission that resulted in tax increases that simply took the pressure off spending control would be a double disaster.
An understandable response to this concern is to say that a commission must be instructed by statute to rule out any tax increases. While solving the immediate concern, this position would make it politically impossible for any commission proposal to gain bipartisan agreement. In the same way, conservative support would collapse if liberals ruled out in advance any consideration of structural Medicare reforms or Social Security personal accounts.
Could a commission be structured in a way that might receive bipartisan support while avoiding the worst fears of both conservatives and liberals? In principle it could, but it would need to contain at least the following features:
The membershipand procedures of the commission would need to make it impossible, in practice, for the commission to propose either tax rate increases or entitlement changes that would endanger vulnerable Americans. The membershipof the commission and the proportion of the membershiprequired to endorse a key recommendation must enable liberal and conservative members to block features that are unacceptable to them.
Of course, effective blocking-minority status for these members might result in gridlock, but not necessarily. Conservatives have traditionally argued that certain tax rate reforms and simplification, and some tax cuts (such as capital gains rate reductions), would produce increased revenues as a byproduct of faster economic growth. Many liberals agree that the growth of middle-class entitlements threatens to crowd out programs for the poor. Thus, a win-win agreement could be possible within the constraints of a blocking minority on the commission.
There would need to be alternative official projections of commission proposals. The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) are currently the official "scorekeepers" of fiscal legislation, but each uses assumptions and methodologies that are criticized by many on each side of the aisle. Moreover, these scorekeepers work under constraints imposed mainly by the congressional budget committees. Alternative assumptions and methodologies can make huge differences in projections over 50 or 75 years, and there will never be agreement on the assumptions and methodologies that should be used for long-term projections.
To achieve bipartisan agreement on how a commission proposal should be scored, an alternative would be to allow the minority and majority to use at least one additional public or private body to estimate the consequences of a commission proposal. This would permit, for example, a projection using full dynamic scoring techniques. These alternative projections would need to be included in the official estimates that are used to guide legislation enacting the commission's proposals.
The American people must be brought fully into the commission discussion and must determine the outlines of the commission proposal. A backroom commission of the kind that Congress frequently produces is not appropriate for addressing major entitlements and should be considered unacceptable. The only way to obtain broad agreement on a package of changes and for future Congresses to sustain them over time is to engage the American people fully in the conversation and allow them to achieve their own consensus. This requires a different approach from what is traditionally used in commissions.
In particular, the commission process must have two stages. First, over a period of many months, the commission should provide the American people with background information on the long-term budget picture facing the nation, together with a range of options for addressing the underlying problem. It should foster a national conversation about the options and seek a consensus on the approach the country should take. That consensus should determine the outline of a bipartisan course of action. In the second stage, the commission should develop a legislative package in keeping with the outline and present it to Congress.
The Problems with Conrad-Gregg
The proposal that comes closest to incorporating these requirements has been introduced in the House (H.R. 1557) by Representatives Frank Wolf (R-VA) and Jim Cooper (D-TN). The same bill (S. 1056) has been introduced in the Senate by Senators George Voinovich (R-OH) and Joseph Lieberman (I-CT). However, this proposal is not under active discussion in the Senate.
Regrettably, the Conrad-Gregg legislation does not contain some critical features and has additional design problems. Among the problems with Conrad-Gregg are:
Not the Right Approach
The debt ceiling vote offers a rare opportunity for the legislative "planets to align" such that lawmakers feel compelled to amend the budget process to force themselves to make tough decisions. Therefore, when the opportunity arises, it is crucial that Congress takes the right action. However, so far, Members of Congress have shown little interest in using this opportunity to put into place real transparency by making the long-term fiscal situation prominent in the budget process. Nor is there interest, so far, in applying a real long-term budget to the major entitlements so that they must truly compete for resources with other major priorities, such as defense.
The only proposal currently in play as an amendment to an increase in the debt ceiling is a fiscal commission. Regrettably, the version of a commission that is under serious consideration is fatally flawed.
Stuart M. Butler, Ph.D. , is Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.
Alan J. Auerbach and William G. Gale, "An Update on the Economic and Fiscal Crises: 2009 and Beyond,”The Brookings Institution, September 2009, at http://www.brookings.edu/papers/2009/06_fiscal_crisis_gale.aspx (January 12, 2010).
See Joseph Antos et al., "Taking Back Our Fiscal Future,” The Brookings Institution and The Heritage Foundation, April 2008, at http://www.heritage.org/Research/Budget/upload/takingbackourfiscalfuture.pdf (January 12, 2010).
See Donald B. Marron, "Understanding CBO Health Cost Estimates,”Heritage Foundation Backgrounder No. 2298, July 15, 2009, at http://www.heritage.org/Research/HealthCare/bg2298.cfm.
See Stuart M. Butler, "Bipartisan Entitlement Commission Needed to Control Spending and Debt,” Heritage Foundation WebMemo No. 269,November 16, 2009, at http://www.heritage.org/Research/Budget/wm2698.cfm.