Around the Halls: Forging a Compromise on the Debt Limit

President Obama and congressional leaders are rushing to craft a compromise deal that will avert a government debt default on August 2. The two sides remain split over the scale of spending cuts, revenue increases and tax reforms. Brookings experts offer their recommendations and analysis on the issues, including: William Gale on debt limit basics; Ron Haskins on why Republicans had better seize the opportunity to cut a deal; William Galston on the likelihood of an interim agreement; Bill Frenzel on the urgency of increasing the limit; Robert Pozen on Social Security reform; Jonathan Rauch on why Republicans must raise taxes to shrink the government; Kavita Patel on the impact on health care policy; Tracy Gordon on how states will be affected; and Michael O’Hanlon and Peter Singer on military budgets and the deficit.

Debt Limit Basics
William G. Gale, Senior Fellow, Economic Studies

With all of the confusion surrounding the talks regarding a prospective debt limit increase and a prospective debt reduction—two issues that are almost completely unrelated in substantive terms but have been linked politically—it seems like it might be helpful to emphasize some basics.

First, the Obama administration cannot spend, tax or borrow without congressional approval. The reason there is a “debt limit crisis” right now is simple but almost never stated: the amount of money that Congress has told the administration it should spend exceeds the sum of the amount of money that Congress has told the administration it can raise in revenues plus what Congress has authorized via borrowing. It’s as if (making up the particular numbers) Congress has said the administration should spend $100, raise $60 in taxes and raise $30 in borrowing, but has not authorized the administration to raise the last $10 in any form. So the underlying issue is the inconsistency of congressional policies.

Second, raising the debt limit is a completely ordinary event, which happens in both Republican and Democratic administrations. The limit has been raised 74 times since 1962, including 10 times since 2002.

Third, raising the debt limit is about paying for past choices—it is not about resolving the future budget problems the country faces. Put differently, raising the debt limit is needed to accommodate the cost of prior congressional commitments, not to enable new or additional federal initiatives.

Fourth, the debt limit can be raised without enacting a serious fiscal reform package. A serious package would be a huge plus, of course, but the political obstacles to reaching a significant deal seem immense at this stage. Republicans have ruled out tax increases—almost every Republican member of Congress has signed the “no new taxes” pledge—and have also set the requirement that spending cuts be double the size of any increase in the debt limit. While Democrats strongly prefer not to cut spending too much, they have not signed pledges en masse the way Republicans have.

There is a lot more to say, of course, about tax reform, the unsustainability of our fiscal policy and the commonly held myths that have made this debate so lengthy and polarizing. But the two key factors at this moment seem to be, first, to do no harm—that is, to extend the debt limit—and, second, to remember that politics is the art of the possible—that is, to accept that a short-term deal that makes a small dent in future budget deficits is a constructive next step, even if it falls short of more ambitious goals.

The Budget Crisis of 2011: The View from 2021
Ron Haskins, Senior Fellow, Economic Studies

Ten years from now when analysts look back on the deficit crisis of 2011, they will cite two major causes of the long standoff that brought the nation to the brink of disaster. President Obama, who appears to be getting the benefit of the doubt from the public now, will be seen as a major cause of the crisis because he waited so long to put a specific plan on the table that included major cuts in entitlements. Even now, less than two weeks from the debt ceiling drop dead date, he still has not made public a specific plan to reduce entitlement spending. In past budget agreements, presidents have always provided leadership that has often been politically difficult given their governing philosophy and base of voters—symbolized by the willingness of Republican Presidents George H.W. Bush and even Reagan to raise taxes, something that has been far less evident during the crisis of 2011.

The second cause analysts will emphasize is the refusal by Republicans to accept a compromise deal. They will cite five reasons why the Republican position defied both reason and history. The first is that although Republicans held that the propensity of Democrats to spend money was the major cause of the nation’s deficits, the record shows that Republicans have also been responsible for major increases in spending. The Medicare Part D benefit and the wars in Afghanistan and Iraq, all major initiatives of the Republican Party, contributed in a major way to increased spending. Arguing that all three initiatives were good policy does not obviate the fact that even a dollar wisely spent increases the deficit if it is not accompanied by a dollar of additional revenue. 

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The Likelihood of an Interim Agreement
William A. Galston, Senior Fellow, Governance Studies

During the past 48 hours, negotiations over the debt ceiling have taken on the trappings of a three-ring circus. In one ring, the majority and minority leaders are working on a agreement to raise the ceiling enough to get by the 2012 presidential election. Democrats would not have to accept significant spending cuts. Not would Republicans be required to support taxes increases. But the Senate leaders’ deal is structured to ensure that Democrats, including President Obama, would have to accept 100 percent of the responsibility (and presumably the blame) for three unpopular increases in the debt ceiling.

In the second ring, we have the “Gang of Six” proposal, cobbled together by a bipartisan team of senators—three Democrats, three Republicans. This proposal represents the culmination of a lengthy, off-again on-again effort to translate the recommendations of the president’s bipartisan fiscal commission into legislation. It builds on the principle of “balance” that the president has repeatedly invoked, incorporating cuts in defense and domestic programs, changes in large “entitlement” programs such as Social Security and Medicare, and revenue increases, mostly through reducing or eliminating some of the special deductions, exemptions, and subsidies that now honeycomb our tax code.

And now, in the third ring, the newest act—the backdoor negotiations between the president and Speaker of the House John Boehner. Democrats who learned of these discussions through news leaks were not pleased. Not only had party leaders, especially in the Senate, been kept in the dark, but also the alleged outlines of the deal—spending cuts up front, revenue increases through tax reform down the road—were even less palatable than the Gang of Six approach, about which many of them had serious reservations. They vented their wrath on the director of the Office of Management and Budget. But no one doubted their real target—a president whose political interests and policy preferences appeared to be diverging farther and farther from their own.

It’s anyone’s guess what will happen next week, the last before D(efault) Day. Most observers believe that even this highly polarized political system will recoil from the prospect of imperiling the good faith and credit of the United States. And as a technical matter, it’s too late to translate any comprehensive agreement into legislative language in time to vote on it before August 2. So we are likely to see an interim agreement, either as a time-buying bridge to something larger, or as the latest but not last installment of our long-running fiscal melodrama. The rest of the world is watching the deliberations of the “world’s greatest democracy” with mounting disbelief, tinged with outright fear.

However It Is Done, the Debt Ceiling Must Be Extended
Bill Frenzel, Guest Scholar, Economic Studies 

The Debt Ceiling Chicken Game is going down to the wire. The best possible outcome, a Grand Scheme featuring entitlement cuts and a smaller portion of revenue “enhancers” to bring the debt ratio down to 60% within a decade, cannot be achieved. Congress had plenty of time, but not enough will.

Neither the Republicans, who have put no revenues on the table, nor the Democrats, whose entitlement offers have been small and fuzzy, were willing to ante up to get into real negotiations.

Any solution that avoids expiration of the debt ceiling becomes the next best choice. Avoiding default is the prime mission now. Two possibilities remain: (1) a McConnell-Reid type proposal, and (2) a short term extension tied to the Gang of Six plan. Both would prevent expiration and default.

The Gang of Six plan follows the Bowles-Simpson deficit commission proposal, but it would require a multi-step operation in which the debt ceiling would be extended for 60-90 days, while its $3.7 trillion debt/deficit reduction would be approved.

It would require a down payment on spending reductions, but leave major decisions to committees, buttressed by targets and triggers. Nobody knows whether it could pass the House, or even the Senate for that matter. Fraught with uncertainty, it is the best remaining option, but a still a long shot.

The other possibility, McConnell-Reid, is essentially a cop-out, but it dodges default. It defers fiscal decisions, which should be made now, until after the election. With default looming, it, too, could be the savior, but, again, the House is a problem.

At this point, avoiding default has to be the main goal.

 Social Security and Debt Ceiling
Robert C. Pozen, Nonresident Senior Fellow, Economic Studies

As I recently suggested, if Congress wants to enact a $3 or 4 trillion deal on the debt ceiling, it should include Social Security reform. While Medicare involves more dollars, the two parties fundamentally disagree on its structure.

By contrast, we know how to make Social Security solvent; it is a question of whether Congress has the political will to do so.

We can choose among several different packages combining three elements — slowing benefit growth for higher earners, increasing normal retirement age beyond 67, and expanding the payroll tax base. However, all of these elements involve “pain” for voters; we need a political “sweetener” to attract middle class support for Social Security reform.

The best “sweetener” would be a $250 federal match for every $500 contribution to a 401k or IRA by any worker with annual earnings below $85,000. This would provide a way for these workers to make up for most of the reduced benefit schedule that would be needed to restore Social Security to solvency.

For example, if a worker earning the median wage of $37,000 in 2011 contributed $500 to an IRA for 36 years, he would receive a match of $250 per year or $9,000 in total. If that match were invested in a balanced fund — half in US Treasury bonds and half in the S&P 500 — with a real annual return of 5.8%, that could fund (assuming a 5.8% interest rate) a lifetime annuity at retirement of over $250 per month.

Such federal matches would not take away one penny from the Social Security program; they would cost roughly $850 billion in Congressional appropriations over the next 75 years — the standard measuring period for this program. But this would be a small price to pay to eliminate the current unfunded obligations of Social Security — which exceed $13 trillion over the same period. The federal match and Social Security reform together would reduce long-term federal spending by more than $12 trillion.

Republicans Must Raise Taxes If They Want to Shrink Government
Jonathan Rauch, Guest Scholar, Governance Studies

According to the New York Times, “Conservatives have been increasingly divided over how far to go in sticking to their no-taxes principles if it means walking away from progress toward restraining the growth of government.” It’s dawning on Republicans that they can significantly shrink government, or they can hold the line against tax increases, but they can’t do both. This is progress.

Despite their anti-government rhetoric, Republicans who oppose all tax increases are Big Government’s best friend. What they are telling the public is, “No matter how much Washington spends, you’ll never have to pay any more in taxes than you do right now.” By capping the cost of government, conservatives are feeding the demand for it. When you discount something, after all, people buy more of it. What would you do if you could spend as much as you wanted at Macy’s but would never be billed more than $1,000?

Opposing all tax increases might be justifiable if it reduced the supply of government. But we have had three decades to test the so-called “starve the beast” hypothesis, and it has failed conclusively, because the beast has a credit card.  (Chapter and verse on that from me here and from Bruce Bartlett here. The IMF weighs in here.)

In fact, including tax increases in a major deficit-reduction package has a double-whammy downward effect on the size of government. First, the tax increases buy spending cuts which otherwise would be unacceptable to Democrats and liberals. Second, voters get more serious about restraining spending when they pay something closer to the true cost.

The debt-limit negotiations provide a good example of this dynamic in action. With tax increases in the deal, Republicans can get some breathtaking spending cuts, including reductions in popular entitlements. Without tax increases, entitlements continue on their merry way. If Republicans are serious about controlling government spending, they’ll strike a hard bargain but, in the end, agree to raise taxes.

 Shared Responsibility, Shared Consequences in Health Care
Kavita Patel, Fellow, Economic Studies

As the Senate, House and White House face a deficit showdown, there is no doubt that there will be shared responsibility among Democrats and Republicans alike. There will be responsibility for arriving at some compromise and given the proposals on the table, there will likely be shared unintended consequences that will reach beyond the details. In health care policy, the ones to watch closely are:

  1. Repeal of the CLASS Act – the voluntary public long-term care program certainly had flaws, but it was an important step in dealing with our country’s growing aging population and the stressors which are placed on the Medicaid system which picks up approximately 40% of the long term care costs in the United States. Repeal of this program will only result in neglecting an inevitable fiscal crisis as more seniors lean on Medicaid for costly nursing home care and policymakers scramble to consider drastic options such as catastrophic coverage for long term care, similar to those being considered in Japan, the United Kingdom and other countries facing the reality of an aging population.
  2. Funding cuts to public health, the FDA, and health research – The Bipartisan Senate Plan has a placeholder for the Health, Education, Labor and Pensions (HELP) Committee to find $70 billion in savings – this will largely come in the form of steep cuts to agencies under the HELP jurisdiction such as the National Institutes of Health, public health agencies at the Department of Health and Human Services, and the Food and Drug Administration. At a time when the U.S. needs to be the engine for innovation and biomedical competitiveness, cuts to any of these agencies will only result in delayed surveillance (monitoring our nations threat of disease and our supply of medications and health supplies to deal with those threats), programmatic backlogs (delays in processing applications, appeals and claims) and potential exposure to Americans to deadly diseases and viruses during a pandemic or natural disaster.
  3. Targeting federal health care spending at GDP+1% starting in 2020 – this is not a surprising goal; it has been cited in various forms in virtually all of the deficit reduction proposals. However, previous attempts to compel policymakers to make difficult choices have been ineffective: repeal of Gramm-Rudman-Hollings, timing a shift in program spending, and moving entities off-budget or shifting deficit targets. The result is the high likelihood for program cuts at the expense of vulnerable populations, such as Medicaid. However, cuts to programs for the poor and underserved do not remain limited to those populations; they are often met with cost-shifting to the private sector in the form of increased premiums and price negotiations. In other words, cuts to federal spending on the poor and elderly affects everyone.

Indeed, our current political system is very much in need of electric cardioversion: an electric jolt that shocks both parties into reality. It is likely that such a shock will come from voters and beneficiaries who realize that shared responsibility comes with shared consequences.

What the Federal Debt Limit Has to Do with States (and Not)
Tracy Gordon, Okun-Model Fellow, Economic Studies

Much has been written about how a failure to reach agreement on the federal debt limit would affect the economy and global financial markets. Lately, attention has turned to state and local governments. Moody’s warns that a federal credit downgrade would immediately lower ratings for 7,000 state and local issuances and possibly affect even some gold plated AAA states. At the same time, backers of a federal balanced budget amendment point to states as an example where such rules have worked.
What’s going on? Will a federal default doom state and local governments? Are states the new model of fiscal probity?

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The Real Defense Budget Questions
Michael E. O’Hanlon, Director of Research and Senior Fellow, Foreign Policy
Peter W. Singer, Senior Fellow, Foreign Policy

As Washington tries to get serious about the nation’s crippling debt and deficits, defense spending has emerged as a major focus. Though the issue is important, the quality of the dialogue has been weak–the two parties offer dueling bumper stickers, with little solid analysis.

Much of the current talk about defense budget cuts sounds surreal. On one side, Democrats are pushing for $400 billion or more in cuts. But dig deeper, and you find little White House direction or Pentagon strategy on where that number came from, nor any serious plan for how to achieve it.

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