August 29, 2014

Commission Questions & Answers

 

Q: What is the problem a commission is needed to solve? 

A: The case for a bipartisan fiscal commission begins with the generally accepted proposition that we have a structural and unsustainable budget deficit. This problem is largely unrelated to current economic conditions, elevated war spending, and everyone’s favorite target -- waste, fraud and abuse. While these things all play a role in causing the deficit to be as high as it is now, they are not what is driving projected spending to be so much higher than projected revenues over time.  

The root of the problem is that the federal government’s three biggest entitlement programs -- Medicare, Medicaid and Social Security -- are growing faster than revenues and faster than the Gross Domestic Product (GDP). This trend is expected to accelerate. The Congressional Budget Office (CBO) projects that nearly all of the growth in federal spending by 2035 (as a percent of GDP) other than interest payments on the national debt (i.e., “primary” spending), will come from these three programs. Medicare and Medicaid account for 80 percent of that growth and Social Security accounts for the remaining 20 percent.

Specifically, between 2009 and 2035, CBO projects that:

  • Medicare will grow by 3.7 percent of GDP
  • Social Security will grow by 1.2 percent of GDP
  • Medicaid will grow by 1.0 percent of GDP
  • In total, these three programs will add 5.9 percent of GDP to federal spending by 2035

To get a sense of the magnitude of this increase consider that:

  • Current defense spending is 4.6 percent of GDP
  • Nondefense discretionary spending is 4.1 percent of GDP
  • Individual income taxes are 6.5 percent of GDP

Tax revenues are projected to grow as well, but not by nearly enough to keep pace with spending. Over the past 40 years revenues have averaged 18.3 percent of GDP. If the tax cuts of 2001 and 2003 (the “Bush tax cuts”) are extended and Congress continues to provide relief from the growing scope of the Alternative Minimum Tax (AMT), revenues would rise to 19.2 percent of GDP by 2035. If all these tax provisions expire as scheduled, revenues would rise to 22 percent of GDP by 2035. Even this scenario, however, would leave revenues lagging behind projected spending growth.  

In short, policies now in place produce a growing structural deficit that is worsened somewhat, but not caused by, temporary factors such as recession, war, and financial bailouts. This is illustrated by the Obama Administration's Mid-Session Review of the budget issued in August 2009. Even with economic recovery, reduced war spending and the phasing out of stimulus and bailout plans, deficits would remain at $700 billion to $900 billion from 2012 through 2019. As a percentage of GDP, deficits average 4.17 percent in those years, which is far above average and higher than is regarded as sustainable.  

Q: Why can’t Congress just pass legislation to deal with this long-term threat? 

A:  The numbers are not the only argument for a commission. After all, Congress does have the power to address the fiscal gap anytime it so desires. The problem is that no such desire has materialized and doesn’t seem likely in the foreseeable future. As a political matter, this is easy to understand. Closing the gap will likely require some combination of spending cuts and tax increases that can, and probably will, be used on the campaign trail against anyone who votes for them.  

This has already been made clear by commentators on the left and the right who find themselves united by their opposition to a commission because it would put things on the table that they want to have excluded. To many on the left, a commission is viewed as means to cut social insurance programs such as Medicare and Social Security. To many on the right, a commission is viewed as a means to increase taxes. 

They are both partially correct. Yet that is what makes it such a promising idea. Distasteful as it may be to partisan purists, the projected gap between spending and revenues is so big that closing it by spending cuts alone or tax increases alone seems improbable. 

Raising revenues to cover projected spending would require an increase over the past 40-year average from between one-third to one-half by 2035. 

On the other hand, if we try to keep revenues at the “historic”  level and pay for the increase in Social Security, Medicare and Medicaid by reducing spending on other programs, it would require a cut of between two-thirds to four-fifths by 2035.  

Q: Isn’t a commission ‘undemocratic’? 

A: No. Elected officials would be ultimately responsible for enacting or rejecting the commission’s recommendations. Moreover, both Cooper-Wolf and Conrad-Gregg require a supermajority vote (60 percent) for approval by the House and Senate. This is a higher bar than is set for routine legislation and adds a layer of protection against recommendations that appeal to narrow interests. Adopting the provision for public hearings in Cooper-Wolf would add further protection against “back room deals” arrived at without public input.    

Q: Should amendments be allowed to the commission’s recommendations? 

A: A “fast-track” process for congressional consideration of the commission’s recommendations need not prohibit all amendments. It should, however, prohibit unlimited amendments, which could be used as a means of indefinitely postponing action. The Conrad-Gregg bill does not allow any amendments. This may prove to be too restrictive. Members of Congress should be allowed some flexibility to amend the commission’s proposals so long as the same level of deficit reduction is achieved. Allowing limited amendments would also serve the useful function of challenging opponents to propose alternatives to the commission’s plan or the “do nothing” plan. Cooper-Wolf allows the president and the majority and minority parties of the budget committees to propose substitute plans. This would be one way to handle amendments although other methods could be considered in crafting the final rules for congressional action.