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Five Good Ideas for a Budget Deal

Staff members wait to hand out stacks of U.S. President Barack Obama's proposed 2012 federal budget on Capitol Hill in Washington (REUTERS/Jonathan Ernst).

December 13 is yet another one of those self-imposed deadlines by which Congress is supposed to come up with a budget deal.  Members are working in an atmosphere where no one is very happy with the last budget deal, the across the board sequester, and yet no one is very optimistic that a “grand bargain” is feasible. In addition, there doesn’t seem to be much enthusiasm for the high-stakes drama that led to the government shut-down and near default in October.  So perhaps this week we will see a more modest budget deal.  If so, here are some favorites from the desks of Brookings’ scholars.

1) First Do No Harm

Congressional budgeting over the last three years has been out of sync with the needs of the country and conducted in a manner that has administered more hurt than salve to a struggling economy.  Sharp, ill-considered cuts in discretionary spending (the worst being the ten-year sequester) have managed to weaken economic growth in the short-term without doing anything constructive to ameliorate long-term fiscal imbalances.  A government shutdown, debt ceiling brinksmanship, gangs futilely seeking grand bargains, and blunderbuss budgeting have sustained a period of self-inflicted crises and destructive budgeting.

That makes me encouraged rather than discouraged by the modest aspirations and expectations of the current budget negotiations.  Disabling a good part of the sequester for the next two years and paying for it over a longer period of time with more rational spending cuts and revenue increases, while deferring for now heated and irresolvable party differences on tax increases and so-called entitlement cuts, is a constructive step.  If done in a timely fashion, it would give the appropriations committees time to write bills that responsibly exercise the power of the purse and defang the dreaded and unnecessary debt ceiling. 

Deficits are declining at a rapid rate, the economy is beginning to show some stronger signs of life, and health care cost increases are at historic lows.  Now’s the time for a quick, no-drama, regular-order, incremental budget agreement that allows for some smart additional funding for the next couple of years, tones down the heated rhetoric about deficits and debt, and reminds us how our Madisonian system of government is supposed to work.

                                                                                        ---- Thomas E. Mann

2) Fix Social Security

The current budget talks affect more than fiscal policy.  The American people have lost confidence in the federal government’s ability to accomplish anything of significance.  The minimal deal now being considered by the heads of the House and Senate budget committees would fulfill the doctors’ oath—First, do no harm—but would do little to restore vanishing public confidence. 

Congress needs to break the logjam in a visible way.  And it can—by fixing Social Security.  Doing so would send a reassuring signal to current and future retirees.  We would stop talking about “entitlements” and focus on the heart of the problem—health care programs and costs.  And we might bolster our confidence—and that of worried nations around the world—in our capacity to govern ourselves.

There’s no need to change the program’s basic structure, which is one of the few islands of security in today’s uncertain financial seas.

Instead, we should reform the benefits formula along the lines my colleague Elaine Kamarck has recommended while instituting a more generous minimum benefit.  We should gradually raise the cap on earnings subject to the Social Security tax until taxable wages once again amount to 90 percent of total wages.  Without making any abrupt changes now, we should index the full retirement age to future increases in longevity.  And while we’re at it, we should enroll new state and local workers in Social Security and tighten up the disability program, which faces imminent insolvency.    

None of these changes is revolutionary.  None would impose significant new burdens on middle and working-class families.  Taken together, they would make Social Security more progressive while stabilizing its finances for 75 years.  And with this issue resolved, we might be able to address our lengthening list of stalemated policy disputes.

                                                                                                ---- Bill Galston

3) Progressive Price Indexing for Social Security

One way to reduce the deficit is to reduce benefits to people on Social Security.  As it stands today every person on social security, rich or poor, gets automatic increases in their benefits.  These increases are indexed to wages, which generally rise faster than prices.  When President Obama included a qualified proposal for a “chained CPI” in his 2014 budget his own party reacted in horror and for good reason – the “chained CPI” would reduce benefits for the low-income seniors who only have social security to live on.  Needless to say, we haven’t heard much about this from the White House since the spring.

A better alternative is what’s known as “progressive price indexing.”  It is surprisingly progressive, given that it was supported by the Bush White House in 2005.  In “progressive price indexing” benefit increases are pegged to different indexes depending on the wealth of the retiree.  High-wage workers who retire would have their benefits indexed to prices but low-wage workers who retire would have their wages indexed to wages -- as they are today.  Overall, the cost of providing benefits would drop, creating some savings in the system.  But the low-wage workers, who are also most likely to have nothing but social security to live on in their old age, would receive the most generous increase in benefits.

There is an inherent fairness in “progressive price indexing.”  The Federal Government already gives everyone generous tax benefits in return for saving for retirement.  But low-income workers, by definition, have a hard time saving for retirement.  Thus they never get to take advantage of the tax provisions in the law.  Allowing a more robust increase in the benefits of low wage workers in retirement should appeal to the most progressive base of President Obama’s party while, at the same time, providing some needed revenue to the system.

                                                                                                ---- Elaine C. Kamarck

4) We Need More Spending, not Cutting

As Congress heads into yet another budget battle next week, a great deal of attention will be focused on cuts to spending.  But the history of other post-recession periods shows that the current obsession with cutting spending is unique to this recession and this Congress.  The economist Josh Bivens finds that, had we tracked normal historical experience, we would have about $800 billion more public spending and the economy would be essentially back to pre-recession health.  Moreover, if average public spending following recessions and recoveries in the 1980s, 1990s, and 2000s had been replicated, public spending would be more than 14% higher and there would be 5 million more jobs.

Low public spending is, arguably, the main reason why our economy remains so stagnant five years after the Great Recession began.  In those five years, in fact, public spending has been historically low compared to levels following other financial crises.

There will be a time in our country’s future to balance the budget.  Today, though, we must focus on creating jobs for the unemployed and generating economic growth and stability. As such, compromise ought to take the form of log-rolling – that is, the budget needs to go up across the board.  In other words, legislators out not bargain over how to cut portions of the budget, but rather over how to increase them.  Austerity cannot be the centerpiece of the Grand Compromise.  Fiscal recovery requires that all ships rise; otherwise the economy will continue to sink.

                                                                                    ---- Molly Jackman

5) Half a Sequester is the Right Way to Go

Without endorsing the specifics of sequestration, I would support any deal that carries out roughly half the budget cuts that a full sequester would impose on the Pentagon.  In other words, if under sequestration, annual defense budget cuts are to be about $50 billion, making for a ten-year reduction of $500 billion beyond the first tranche of cuts from the 2011 Budget Control Act (as well as the ongoing decline in war costs), a further scaling back in military spending of about half that amount or $25 billion seems doable.  Deeper cuts would not be wise.

My analysis does not result from a broad-level and sweeping argument about sharing the pain across government and the country.  In fact, even if we halved the impact of the sequester, our current approach would be out of whack.  The Budget Control Act as well as most of the alternatives now being considered by Congress are in my eyes badly imbalanced.  They impose most cuts on discretionary accounts (defense and international and domestic).  These are precisely the parts of the federal budget that build our futures, make our national investments, and protect our country and our prosperity.  Current thinking would doing very little about reforming entitlements or taxes.  This is the wrong way to do fiscal reform and deficit reduction; overall, we are off track in Washington and the country right now.

But half a sequester is still better than a full one.  While there are certain risks, and real pain, associated with even half a sequester (now and in the future), they are manageable.  For example, at half a sequester, we might cut the Army by almost 100,000 active-duty soldiers, going from a two-war capability to what I call a “1+2” capability (one war plus participation in two ongoing, multilateral stabilization missions).  However, a full sequester might require cuts of 150,000 troops and thereby deprive us of that 1+2 capability, even as we plan an ongoing Afghanistan mission, and seek to establish a two-state solution in Israel and the Palestinian territories that might require a U.S. role in a peace implementation force (among other possible missions I can imagine).  Meanwhile, North Korea and other large threats endure as ones we must deter by preserving the credible capacity for waging an all-out regional conflict.

Make no mistake, even doing half a sequester will be hard.  For example, it will require reforms in military compensation, base closures, and other measures that to date the Congress has resisted.  It also would require that future weapons grow in cost less than has been the historical norm for new Pentagon technology.  But even if attempting half a sequester is difficult, it is within reason.  A full sequester would not be.  So if Congressman Ryan, Senator Murray, and the Congress can find a way to halve the expected blow on the Pentagon in coming weeks, it would be a positive step forward for the country.

---- Michael O'Hanlon


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