Budget Policy

Ditto to what Matt and Robert Kuttner have to say about the important CBPP-led response to the Heritage-Brookings paper that advocated a fundamentally unbalanced approach to long-term deficits. One thing that struck me in reading the CBPP paper is how fundamentally centrist, if not conservative (but a sensible sort of Eisenhower conservativism, as opposed to the crazy Phil-Gramm-style economic conservativism dominant these days in DC) it is. If Brookings had actually set out to find some sort of pragmatic and centrist common ground among leading budget experts on long-term deficits, they would have written something very like the CBPP paper. That Brookings didn't write that paper, and instead ended up being captured by conservative interests, illustrates how fundamentally off-center the think-tank world inside the beltway remains.

Brad DeLong on the McCain budget plan:

You all remember the plan of the Underpants Gnomes from South Park:

1. Collect underpants.
2. ?
3. Profit!

That's the perfect analogy for John McCain's budget policy:

1. Cut taxes and spend more on the military.
2. ?
3. Balanced budget!!

In a post from April, I criticized the legendary budgeteer Alice Rivlin and other centrist DC think tankers for joining hands with their counterparts at far right think tanks like Heritage and AEI to endorse a proposal that lumped Social Security, Medicare and Medicaid together as if they were a single program (they're not, I checked) and was notable primarily for being wrapped up in conservative rhetoric about "the entitlement crisis" and federal spending being on "autopilot."

In response, a recent commenter (and Rivlin relative) takes me to task:

I think you failed to understand who Alice Rivlin is (and she happens to be in my family).

By being middle of the road you actually reach a broader audience and draw people towards solutions, rather than just railing aginst the problems.

As founder of the CBO, Alice held the front line against stockman and reagan and trickledown. For about a decade from mid-70s to mid-80's.

As Clinton's chief deficit hawk, she fought for the great achievment of Clinton's first term, the elimination of the Reagan/Bush deficit (choking off Gov't and making gov't the enemy) and creating a federal budget surplus. See Bob Woodward's first Clinton book, "The Agenda."

At the federal reserve she did yoeman's [sic] work to temper Greenspan's more GOP tendencies to acheive balance.

And later she helped turn the District of Columbia around fiscally, economically, politically and helped turn a dying city into a thriving city with a diverse and growing population moving in, not out.

Listen to a few of the elders. There is a value to experience, especially if it is not combined with blind ideology.

Ah, that last line shows that condescension lives! (Albeit not necessary of the liberal variety.)

Despite my rather diminished mental capacity and youthful inexperience, I do happen to know who Alice Rivlin is. I learned a few things during my years at the Center on Budget and Policy Priorities. But knowing who Ms. Rivlin is makes it all the more disappointing to me that she let herself get mixed up with the ideological and inaccurate conservative framing of our long-term budget problems as being due to an "entitlement crisis" involving "SocialSecurityMedicareMedicaid."

The problem we face is not "entitlements"—it's rapidly rising per capita health care costs. Facing this problem will require regulatory as much as fiscal solutions to address it, something I explained in my earlier post.

I came to this conclusion by doing just what the commenter advises, listening to an "elder." In particular, the eminent Henry Aaron of Brookings who explains in a recent research paper: "The United States confronts a public and private health care spending problem, not an entitlement crisis."

I have no problem with solutions that happen to be "middle of the road", as long as they're the right solutions to a correctly defined problem. But the proposal Ms. Rivlin signed on to gets both the solution and the problem wrong.

More generally, I'd argue that the middle of the road is increasingly unlikely to be found between the center and the far right. As Michael Lind recently wrote in the Financial Times:

Whether a Democrat or a Republican is inaugurated in January 2009, the centre of political gravity in the US is well to the left of where it was a decade ago. President George W. Bush's own contribution to the shift has been negligible. It is the result of long-term, tectonic shifts in political and economic ideology that are affecting all developed countries.

If Lind is right, and I think he is, centrists who are searching for the common ground and middle of the road will increasingly need to look left. And that will be a very good thing for our nation's future.

Writing in the New England Journal of Medicine, Robert Kuttner takes an unorthodox position on high medical costs.

Changing demographics and medical technology pose a cost challenge for every nation's system, but ours is the outlier. The extreme failure of the United States to contain medical costs results primarily from our unique, pervasive commercialization. The dominance of for-profit insurance and pharmaceutical companies, a new wave of investor-owned specialty hospitals, and profit-maximizing behavior even by nonprofit players raise costs and distort resource allocation. Profits, billing, marketing, and the gratuitous costs of private bureaucracies siphon off $400 billion to $500 billion of the $2.1 trillion spent, but the more serious and less appreciated syndrome is the set of perverse incentives produced by commercial dominance of the system.

The whole thing is worth a read and lines up with lots of what I've read on the problem. But I don't think it's the complete story. A less insidious, but still important, factor is that too many health workers don't know what the best way to treat people is. The work that Peter Orszag at CBO has done puts more emphasis on this factor as an explanation.

But both Kuttner's take and CBO's work are pretty compatible. They fundamentally agree that market failures have caused the problem and that the government needs to be a better manager of the health system. And they both contradict the deeply conservative and troublingly common view of the problem as more or less caused by too much government involvement or as the inevitable byproduct of the iron laws of demographic change. That frame suggests that the solution is to cut Medicare and Medicaid, and Kuttner and CBO are having none of it.

As for exactly how they think government should get involved, we're talking apples and oranges. But there's room for both perspectives at the table, so long as cutting public health programs is off it.

... a show on the federal budget that features the WaPo's Jonathan Weisman, conservative Brian Riedl of The Heritage Foundation, and balanced budgetist Maya MacGuineas strikes me as profoundly lacking in balance.

Here it is:

"There's a lot of games, smoke, mirrors, incomplete numbers, basically there's not much realism [in the budget] .... They're playing the usual games.''

That's from Sen. Judd Gregg, the ranking Republican on the Senate Budget Committee.

The President's FY2009 Budget comes out Monday morning. Some of the background volumes, like the Analytical Perspectives volumes, are useful for reference purposes. But the main budget volume, the one with the President's budget and management priorities, will be pretty useless this year, which got me thinking about how to recycle it. Since the budget is about the same size as a phone book, I modified the instructions for ReadyMade's Phone Book Recycle Challenge Winner:

Bush Budget Planter

1. Thoroughly moisten the budget volume, squeeze out any excess water, and place in your aluminum tray.
2. Open the budget's cover and mark the desired arrangement of seeds on the first page.
3. Drill holes about 1" deep. (A 1/4" bit works well for small seeds, while a 3/8" is better for larger ones like sunflowers.)
4. Sow the seeds in the holes.
5. Close the budget's cover to incubate the seeds.
6. Water regularly or whenever the edges of the pages look dry.
7. After a few days, your golden garden should begin to grow. Open up the cover so the sprouts can poke their heads up. Transplant to pot or flower bed according to the packet instructions.

PS: Turns out, the Administration, in a crafty attempt to prevent 2009 Bush Budget Planters from showing up en masse in Congressional and think tank offices, has switched to a mostly paperless budget distribution this year. No matter, you can still use the 2008 budget, or simply print out the cover of the '09 budget and paste it to a phone book.

In response to my post noting Michael Pollan's NYT op-ed on the Farm Bill, a veteran anti-hunger activist rightly castigated me via e-mail for failing to take issue with Pollan's implication that the bill's increase in funding for food stamps and other targeted nutrition assistance program is "lavish". Here's Pollan:

It’s an old story: the “hunger lobby” gets its food stamps so long as the farm lobby can have its subsidies. Similar, if less lavish, terms are now being offered to the public health and environmental “interests” to get them on board.

According to CBO, the changes made to the food stamp and related nutrition programs in the version of the Farm Bill that passed the House earlier this year, will cost $4.2 billion over the next five years. This may sound "lavish", but it amounts to only .03 percent of the federal budget, and about $2.67 per capita. Morover, the food stamp program was cut deeply in the mid-1990s. My guess is that the funding increase in the Farm Bill doesn't even get the program back to where it would be absent those cuts (particularly since the bill does not overturn rules adopted back then that impose special restrictions on immigrants lawfully in the US and adults not caring for children; unfair rules that don't apply to other families).

More generally, arguments against the current farm subsidy regime on the grounds "that the federal government is broke", as Pollan argues, strike me as counterproductive from a progressive perspective. Farm subsidies account for a very minor portion of federal government spending. The current subsidy regime is bad not because it's too costly in narrow federal budget terms, but because of what it spends those dollars on. We could, and should, spend much more than the current farm bill does on a broader food policy bill that includes what Pollan calls "alternative — and politically appealing — forms of farm support."

Following up on my earlier post about Timothy Westmoreland's proposal for progressive budget process reforms, OMB Watch's Matt Lewis makes an important point on their Budget Blog about how there may be a new political opening to craft budget process rules in a way that gives greater weight to what the public wants:

.... is deficit reduction still what people want from government? It reminds me of something Sen. Chuck Schumer (D-NY) said in the New York Times last week:

It's just as clear that Democrats think that the political game has changed. Pay for most workers has been growing only a little faster than inflation over the last five years, and except for the late 1990s hasn't really done well since the early 1970s. Inequality has returned to the levels of the 1920s.

''It's an economy that demands more from our workers and gives less in return,'' Hillary Clinton said in Iowa this week, on her Middle Class Express bus tour. As Charles Schumer, New York's other senator, told me earlier this year: ''In the past, the attitude was, 'Get government out of the way.' And now it's, 'Gee, I may need it.' ''

If Schumer and Clinton, two centrists if there ever were any, are correct, we need to start talking about how to change the budget process to ensure that the public gets what it wants. Once deficit reduction is no longer the public's chief fiscal goal, it seems appropriate to make the budget process facilitate spending. This paper's a good place to begin that conversation.

I think Matt is right when it comes to where the public is at, but am less certain that centrists like Clinton and Schumer are there yet. Clinton's economic plan to restore the middle class, released earlier this month on the Middle Class Express bus tour, includes this plank on fiscal responsibilty:

After six and a half year of President Bush’s fiscal irresponsibility, Hillary wants America to regain control of its destiny. She will move back toward a balanced budget and surpluses. Hillary believes that we should develop a set of budget rules similar to those we had in the 90s which required us to fund new expenditures with new revenues or cuts in other areas.

In my view, fiscal responsibility does not require balanced budgets and surpluses. Instead, and this is actually quite a mainstream view among economists, it requires keeping budget deficits at sustainable levels, around 2 percent of GDP a year. And, there is strong case to be made that reductions below that level would do more harm than good. As a nation, we face serious infrastructure, environmental and human capital challenges, challenges that all call for big investments now to ensure a sustainable and growing economy and to avoid imposing much greater costs on future generations.

That said, there is some wiggle room in the Clinton statement. She's saying she'll "move back toward a balanced budget and surpluses" rather than reach them during a potential Clinton II Administration. The next step is getting her and other centrist types to be more forward thinking about the new generation of budget rules we need to take fiscal responsibility seriously.

Alongside deficit dementia (an obsessive concern with budget deficits of any size), entitlement hysteria afflicts far too many political pundits these days. Dr. Jonathan Chait provides an important discussion of this ailment in the most current issue of TNR:

... one of the oddities of the entitlement hysterics is that they are far more obsessed with the minor problems of Social Security than with the massive problems of Medicare. Indeed, if you look closely at their dire proclamations, they inevitably follow the same pattern: They begin with an ominous summation about entitlements—thus lumping together Medicare with Social Security—then swiftly proceed to demand that Social Security be shored up forthwith.

[Tim] Russert's recent harangue at the Democratic presidential debate was a classic example. He began by warning of the crisis faced by "Social Security and Medicare" but proceeded to ask no fewer than 14 questions about Social Security, and zero about Medicare. It's as if he began fulminating against crime in the greater New York area and then immediately began demanding a large new police deployment in Chappaqua.

Should they stop being hysterical about Social Security and start being hysterical about Medicare? Well, that would be a start, but it would still elide the deeper problem. The reason Medicare is in such worse shape than Social Security is that it has to account for exploding health care costs. Their focus on demographics and greedy baby boomers is entirely misplaced. Indeed, the "entitlement problem" is mostly--three-quarters, to be precise--a function of rising health care costs.

Since you can't solve the entitlement problem without solving the health care problem, one might think that the entitlement hysterics would have gradually moved on to becoming health care hysterics. (There's also the fact that Social Security is solvent until 2041, but over 40 million Americans lack health insurance right now.) Yet this is another puzzling thing about entitlement hysteria: the sheer persistence of the obsession. It's true we have some large federal programs that are going to have to be shored up. But why do they consider this to be a matter of such unique urgency? Put aside the war in Iraq, for which plenty of people (including me) lack any confident solution. In addition to the health care crisis, there's global warming. There are numerous loosely secured nuclear sites throughout the world, any one of which could some day provide the raw material for a terrorist attack of unprecedented scale. There are numerous diseases threatening the lives of millions of Africans whose deaths could be prevented at relatively modest expense.

These other calamities have one thing in common: The consequences of inaction are permanent. Carbon released into the atmosphere can never be recovered. Africans who die from aids can't be brought back to life. And fissile material captured by terrorists can't very easily be taken back.

Compared to such disasters, the entitlement nightmare scenario isn't so nightmarish. If we do absolutely nothing to fix Social Security, then, 35 years from now, the program will have to start paying out three-quarters benefits, or we'll have to raise taxes. It's not ideal, but it doesn't keep me awake at night.

....

This law review article, by Timothy Westmoreland, provides both a useful overview of the current federal budget process and a compelling critique of what's wrong with the process, in particular its failure to take into account the future value of investments in human capital as well as non-fiscal values:

.... The Congress has blinded itself with budgets. It has hidden much of its true deficit creation and intergenerational transfers of burden behind opaque special rules. It walked away from some of its most basic promises, thwarted its ability to make long-term investments, or stopped itself from recognizing any value to the future except money.

Because of all these structural problems, the enforcement tools of the current budget process should be supplemented. The problems intrinsic to the existing policy—especially its camouflage of complex decisions as simple ones and its virtual dismissal of non-monetary values—call for change in the budget process and an enlargement of its field of vision. If routine measurements are needed to aid policy, they should include both budgetary and non-budgetary projections. If pre-commitment structures are needed to restrain the creation of fiscal deficits, they are needed to restrain the creation of non-fiscal bad legacies as well. Using new measures in health and disability (and in other fields, to the extent that such measures exist), the Congress should attend to which spending is simple present-day consumption and which is an investment with value for the future. It is not an easy course to steer, but it is the better one.

Westmoreland also puts forward a number of innovative proactive ideas for reforming the budget process. For example, here's one on PAYGO and health (apologies in advance for the acrynoms, you'll just have to read the article to find out what they stand for!):

Replicating another pre-commitment structure could also help redirect legisla- tion toward investments of future value rather than purchases of simple current consumption. For instance, imagine a PAYGO device for health standards (rather than dollar standards) that prohibit consideration of any legislation that adds morbidity, mortality, or YPLL, or that reduces QALYs. Thus, if legislation to ease air pollution standards were estimated to increase morbidity and mortality from cancer and asthma, it would have to be accompanied by legislation to provide offsetting benefits, say through increased childhood immunization. If a bill to reduce funding for lead-poisoning screening were scored as increasing developmental disabilities and thus reducing QALYs, it would have to be coupled with a disability-reducing action, such as better containment of toxic chemicals. Such a health and disability PAYGO would at least assure that new laws do not make the Nation's future health and disability status worse, just as a budget PAYGO is meant to assure that new laws do not make the Nation's future finances worse.

Conservatives have had a proactive budget process agenda for a while now—balanced budget amendment, dynamic scoring, etc—but there really isn't a proactive progressive budget process agenda. Westmoreland's article makes an important contribution in this area.

An editorial in today's NYT notes that the United States devotes relatively little, as a share of its economy, to public social expenditures:

You would think that we were living in the lap of the Nanny State. One of the most puzzling facts of the political debate is how much traction Republicans still get from their calls to cut taxes and public spending, and how timorous Democrats are in arguing against them.

The United States has long had one of the most meager tax takes in the industrial world. America’s social spending — on programs ranging from Medicare and Social Security to food stamps — is almost the stingiest among industrial nations. Among the 30 industrialized countries grouped in the Organization for Economic Cooperation and Development, only four — Turkey, Mexico, South Korea and Ireland — spend less on social programs as a share of their economy.

The data the NYT is relying on is from the OECD Factbook 2007. Here's more detail:

PS: I made the chart using the new Numbers spreadsheet program in Apple's latest version of iWork. I've only started testing it out, but so far I like what I see.

Today's WaPo has a Lori Montgomery piece titled Blue Dogs Take Aim at Record Deficits. I was just getting ready to write about how this misleading title belongs on the WaPo op-ed page rather than the editorial page, when it occured to me that Dean Baker has almost certainly written something similar and more convincing on that point than I would be able to write. A quick look at Beat the Press confirmed that he had (and at 6:34 am, a time at which I'm usually just tucking myself into bed after my typical night of clubbing):

Measured as a share of GDP, the 2007 deficit is projected at 1.3 percent. The 2008 deficit is projected to be just 0.7 percent of GDP. This is far below the post-war record of 6.0 percent of GDP reached in 1983. Even adding in the money borrowed from Social Security (which is appropriate for this purpose), the deficits for 2007 and 2008 would be just 2.7 percent of GDP and 2.1 percent of GDP for 2007 and 2008, respectively.

These deficits are arguably too high, but they are not close to be records. Readers of the Post opinion pages are aware of the editors strong distaste for budget deficits, but serious newspapers do not make things up in the news section to support their editorial positions.

It's also worth adding that the Blue Dog proposal isn't exactly news, at least that is, if by news one means information that is new or previously unknown. The Blue Dogs have been calling for pretty much the same set of budget process provisions for several years. In 2005, for example, they put out a 12-point budget process proposal that the conservatve Heritage Foundation favorably reviewed. The items mentioned in Montgomery's piece, including a profoundly dumb proposal to besmirch the U.S. Constitution with a balanced budget amendment, sound like the same old, same old from the Blue Dogs.

The latest in a series of essays published in the Nation outlining "a progressive alternative to neoliberal thinking":

....

Instead of continuing down a mistaken path that focuses on the budget deficit, proponents of a progressive economic policy should focus on increasing investment, which is key to productivity growth and full employment. Rising wages and full employment, in combination with a fairly valued dollar, create a favorable investment climate. That sets the stage for a virtuous circle of shared prosperity. Investment raises productivity, which raises wages and profits, thereby increasing demand and drawing more investment. This is the real basis of a rising tide that lifts all boats. With regard to the trade deficit, the solution is to revalue exchange rates, raise wages abroad so that foreign workers can consume more of what they produce and have countries adopt coordinated policies that stimulate the global economy. That would benefit all, and it is why labor standards must be foremost in trade agreements.

Rubinomics is not only bad economics but also bad politics. First, by arguing that the problem is a shortage of savings, Rubinomics promotes a conservative tax agenda privileging saving and profits, which primarily benefits the rich. Second, by placing budget deficits at the center of the saving problem, it sets government up as a problem and makes a case for shrinking it. Furthermore, by promising to lock Democrats into a path of fiscal austerity, it exposes future Democratic Administrations to the charge of "flip-flopping." This is because fiscal stimulus will inevitably be needed when the current unbalanced boom ends.

Public radio host Diane Rehm interviewed Robert Hormats, vice chair of Goldman Sachs, on her show yesterday. Hormats' new book, The Price of Liberty is being pitched as a history of how the United States financed previously wars—but after hearing him on Diane Rehm and reading a piece of his on Huffington Post, I gather it's simply one of the more novel ways to make the same old case for "entitlement reform."

Some of the things Hormats said in the interview stuck me as so off-base that I went back and listed to part of the interview on-line tonight just to make sure I heard right. When I was listening to the show yesterday, I was in the middle of stripping paint from an old cabinet with some heavy-duty solvent, so I didn't want to assume my head was clear. Turns out my head was clear, but I can't say the same thing for Hormats.

Here's something he actually said: "... the risk is with all this dependence on foreign capital ... if something happened to undermine confidence in the American financial system, an act of terrorism, for instance, or a major financial problem internally, a major bankruptcy or fiscal policy spun out of control as a result of entitlements in the next decade ...."

While there is good reason to be concerned about the negative impact on our financial system of an act of terrorism or a major bankruptcy, the likelihood of fiscal policy spinning out of control "as a result of entitlements in the next decade" seems about the same as the risk of, say, a new breed of unstoppable mutant ferrets overrunning our cities.

Similarly, in an interview where he noted that FDR and previous President's increased taxes on the rich to ensure to pay war-related costs, Hormats closed by suggesting a voluntary check-off box on tax forms (he suggested $5 or $10), to pay for the costs of body armor and other items. There you have it, the essence of neo-Hamiltonianism: big talk, inconsequential ideas.

PS: Dean Baker has a post today that says exactly what needs to be said about Hormats having the show all to himself:

Diane Rehm often has very good shows with guests who present clearly distinct political perspectives. However, when it comes to talking about the problem posed by the budget deficit, balance is thrown out the window. Yesterday, she had investment banker Robert Hormat present a diatribe about the need to eliminate the budget deficit. There were no alternative views presented.

In past shows, investment bankers Pete Peterson and Robert Rubin have been given the same opportunity. David Walker, the Comptroller General of the Government Accountability Office, was also given the opportunity to complain about the looming deficit disaster without any dissenting views. I suspect that there have been other solo appearances by deficit hawks, but these are the ones that I have happened to stumble on.

As BTP regulars know, the basic story is that future deficits will be easily manageable if we fix our health care system. The projections for dangerous deficits in future years are driven entirely by projections that private sector health care costs will explode. If this explosion occurs, then the economy will be devastated regardless of what we do with public sector health programs. So, the real moral of the story is that we badly need to fix the health care system, not that we have a budget problem.

Given the basic facts, it is understandable that the deficit hawks would want to appear unchallenged. But this is a bad use of public radio. If the deficit hawks don't think that they can defend their position in open debate, then they should be forced to sharpen their arguments until they gain more confidence, not given the opportunity to spew for an hour without any opposition.