April 17, 2014

Washington Budget Report: July 5, 2011

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Political Rhetoric Continues Over Debt Limit

The political stalemate over taxes and the debt limit continues, with President Obama saying a deal needs to be reached by July 22 to give Congress time to draft and approve the appropriate legislation before the government runs out of emergency funding measures.

The Treasury Department last week reaffirmed its estimate that without an increase in the debt limit, the emergency measures would only last until Aug 2, when the government would face default.

In a press conference last week, the President said his party had agreed to substantial spending cuts but that the Republicans had refused to “move off their maximalist position” against any new tax revenues. He also advocated changing some tax policies that largely benefit wealthy individuals and certain companies.

House Speaker John Boehner replied that the Republican-controlled House would only approve an increase in the debt limit if no tax increases were involved – the issue over which Republican negotiators walked out of earlier budget talks. Boehner  accused Obama of ignoring “legislative and economic reality.”

The Concord Coalition and other bipartisan groups have warned that the country’s fiscal and demographic challenges are so large that both spending cuts and revenue increases should be on the table.

Because of the debt limit issue, the Senate cancelled plans for a recess this week. Speculation continues over whether congressional Republicans, while opposing increases in tax rates, might agree to the elimination of some subsidies in the tax code that benefit certain corporations and individuals.

Senate Budget Committee Chairman Kent Conrad (D-N.D.) said last week that Senate Democrats had “reached an agreement” on their own budget plan and that it could be released as early as this week.

Constituents of Giffords, Tsongas, Peters and Walz Weigh Budget Choices

Hundreds of people gathered in several cities around the country last week to wrestle with the difficult decisions that are needed for the federal government to rein in future deficits while still meeting its fundamental responsibilities.

The events were hosted by the non-partisan Concord Coalition and U.S. Representatives Gabrielle Giffords of Arizona, Niki Tsongas of Massachusetts, Timothy Walz of Minnesota and Gary Peters of Michigan, along with some other local sponsors.

Two programs Thursday in Tucson, which were presented as Rep. Giffords continues to recover from injuries she suffered in a mass shooting in that city in January, included presentations by Robert L. Bixby, executive director of The Concord Coalition, and David M. Walker, former comptroller general of the United States and current CEO of the Comeback America Initiative.

Audience members at the evening program eventually broke into groups to discuss federal budget options in a popular Concord exercise called “Principles and Priorities.” The exercise is designed to help people understand the tough choices necessary to reduce the budget deficit.

Walker blamed both parties for the mistakes of the last decade, which he calls “the most fiscally irresponsible period in American history.” Bixby said that Washington would need to return to the “spirit of civility” that followed the Tucson shooting  because neither party, acting alone, could force through its own budget plan.

On Wednesday night in Concord, Massachusetts, audience members also played Principles and Priorities. Rep. Tsongas said the current debate over the debt limit “has helped focus national attention on an undeniable fact – our budget is on an unsustainable path.” Her late husband, Sen. Paul Tsongas, played a central role in establishing The Concord Coalition in the early 1990s.

Other Principles and Priorities exercises were held last week with Rep. Walz in Rochester and Winona, Minnesota, and with Rep. Peters in Berkley, Michigan.

Deficit Reduction and the Economy

An economically "sustainable" debt is one that does not rise faster than our means to ultimately pay it off.  So federal deficits as a share of our economy should ideally be no larger than the economy’s growth rate.

We must focus on two sides of the "sustainability equation," explains Diane Lim Rogers, chief economist for The Concord Coalition, in her latest column in the Christian Science Monitor.  We need to be mindful not just of what proposed spending cuts or tax increases would do to immediately reduce the deficit, but of what they would do to the economy – which in turn has a feedback effect on the deficit.

In the short term, while the economy is still recovering from recession, we should avoid cutting back too quickly or too much on high "bang per buck" spending — such as money for unemployment benefits or other safety-net programs. We should instead target current spending or tax cuts that are less effective in stimulating demand for goods and services — such as those that disproportionately benefit certain industries and  higher-income households.

As for the longer term, we should consider that some revenue increases and spending cuts are more supportive of supply-side growth than others.  For example, raising revenue by broadening the tax base (paring back “tax expenditures”) reduces the distortionary effects of the tax system on economic decisions. Increases in marginal tax rates, on the other hand, discourage labor supply and saving.

Debits & Credits

Taking the Bull by the Horns: Senators Tom Coburn (R-Okla.) and Joe Lieberman (I-Ct.) have offered an array of proposals to curb some of Medicare’s rapidly increasing costs while raising its revenue. While many of their ideas are controversial, specific suggestions like these should encourage more serious discussion of Medicare reform.

Let's Hope There's No "Artificial" Financial Panic: Trying to excuse congressional inaction on the debt limit, House Speaker John Boehner scoffed at Treasury Department warnings that the government would run out of ways to avoid default by Aug. 2. That's merely "some artificial date created by the Treasury secretary," he said. Boehner failed to offer any evidence for his skepticism or say what he thought the real date was.