Towards Fiscal Responsibility

On May 20th, the Committee for a Responsible Budget (CRFB) had an event launching its new project, US Budget Watch, (www.USBudgetWatch.org) and released their first paper, “Twelve Principles for Fiscal Responsibility.” Maya MacGuineas, President of CRFB, welcomed the audience and described the fiscal problem of one of structural deficits, an unsound Social Security system, growing health care costs, numerous looming tax issues, and unsustainable debt projections. To help get the country back on track, the project forwarded a 12-step program to help break America’s debt addiction.

The ultimate goal, she said, is to shine a spotlight on the issue of fiscal responsibility, and to help do that, she turned to the esteemed panel, handing the discussion over to CRFB Co-Chair Leon Panetta.

Panetta, a former House Budget Committee chair, OMB director, and White House chief of staff, characterized US Budget Watch as a “hopeful effort to bring the [fiscal] crisis to the attention of the American people.” He touted CRFB’s bipartisan composition, made up of former Republican and Democratic members of Congress as well as OMB, CBO and GAO leaders who served under both parties. This diverse crowd is united, according to Panetta, by a concern about the budget process and budget discipline. Regarding the current situation in Washington, he said that the concern of many members of the board was only growing. Where, while he was in Congress, both parties demonstrated a commitment to fiscal restraint; the same could not be said about the past eight years. What’s worse, the budget process established by the Budget and Impoundment Control Act of 1974, which worked well for some time, has broken down. We are now in a “borrow and spend spiral,” he asserted. As a result, we do not have the resources to deal with new problems as they arise. The Committee is worried, he said, that the presidential candidates are not taking this lack of flexibility seriously. With so many serious crises on our hands—global warming, health care, and two wars among them—the candidates must acknowledge the need for budget flexibility if they want to accomplish their priorities.

CRFB Co-Chair Bill Frenzel, a former ranking member on the House Budget Committee, spoke next, referring to all of the members of the panel as “veterans scarred in the budget wars.” He explained that CRFB has strived to work with the House and Senate Budget Committees, but, despite their hard work, recent years have produced more “fiscal inebriation than fiscal sobriety.” CRFB’s goal now is to encourage the presidential candidates to acknowledge the problem, speak to it publicly, and provide some suggestions for how they would deal with it. The ultimate goal, he said, is to create a mandate for action akin to the pressure that the 1992 presidential candidates—Ross Perot preeminent among them—generated for action to balance the budget. At present, he said, the Committee is terrified by what they see. By making this issue a priority, he concluded, the candidates can begin to improve the situation.

Chuck Bowsher, former Comptroller General of the GAO, spoke next. His chosen topic was the national debt, and, as a former accountant for the United States government, he has real expertise on the subject. With the debt projected to reach $10.4 trillion by the end of 2009, he said there would be some serious consequences. At present, we pay about $500 billion in interest per year, half of it to government trust funds and half of it to non-governmental entities. If the interest rate doubles—an eventuality that is neither unprecedented nor unlikely—those payouts also double. Moreover, with a war driving up defense costs without a commensurate increase in taxes, the result is increased deficits, and those deficits are becoming a huge problem. With a presidential election coming up, there will be a debate for the president’s mind. In this policy debate, Bowsher insisted, financial issues have to be front-and-center, especially with the dollar falling and financial institutions relying heavily on government help. The situation is dire, he concluded, and must be part of the discussion surrounding this presidential election.

Rudy Penner, former CBO director, spoke next about the tax side of the fiscal equation. He characterized Hillary Clinton’s and Barack Obama’s tax plans as “laundry lists of targeted tax benefits” complemented by a decision to continue the Bush tax cuts for all middle and lower class taxpayers. McCain’s plan, he said, was to keep all of the Bush tax cuts, while adding and elimination of the AMT and an entirely new tax system under which people can choose or not choose to pay their taxes. These plans, he asserted, seem to miss a fundamental conflict: polls suggest that most people think the current tax system is unfairly distributed in favor of the rich, while most economists recognize that the rich pay the majority of taxes. The source of this misalignment is that many wealthy individuals are able to take advantage of large tax loopholes, which allow the tax system to tax people with similar incomes very differently. While the affluent should pay more under any system, Penner suggested, taxation should also be more even within income categories. Such a situation “cries out for fundamental tax reform,” he said. Voters are wary of taxes because they view the system as inefficient at best, and unfair at worst. Fundamental reform could restore confidence, he concluded, but will require bipartisan support.

Former Congressman Charlie Stenholm spoke next on the need to reform Social Security. He argued that Social Security reform has been necessary “for quite some time,” and explained his past experiences working with Congressman Jim Kolbe (who was seated next to him) and others to reform the program. In order to fix Social Security fairly, he suggested, you must put everything on the table. When he first began working on Social Security, the congressman explained, he opposed privatization and Congressman Kolbe supported it. But rather than battle one another, they agreed to smaller private accounts as a compromise. In addition to expressing support for these accounts, Stenholm expressed his belief that the retirement age would have to be increased. He also repeated the old adage that the first rule of holes is to stop digging, and closed by arguing that nothing can or will happen in Social Security except in a bi-partisan manner.

Former congressman Jim Kolbe agreed with this point, and suggested that if there were a thirteenth principle it would be that bi-partisanship is necessary to solve our long-term fiscal problems. He explained that while it may be easy to express support for our principles, it is very difficult to implement the necessary policy changes without bi-partisan support – even if one part controls both Houses of Congress and the White House. Kolbe warned that bi-partisanship isn’t easy, since both party leaders and the media dislike it, but also expressed a sincere belief that one party cannot solve our major long-term problems alone. “People of both parties will have to endorse the type of principles we have suggested,” Kolbe closed, “and they’ll have to follow through.”

Gene Steuerle of the Urban Institute spoke next on some of the budget myths which are preventing us from embracing necessary policies. Included among these myths was the idea that deficits don’t matter, that healthcare is the only cause of our budgetary problems, that tax cuts pay for themselves, that the deficit can be eliminated by getting rid of wasteful spending, that some policies are too important to worry about paying for, and that our economy can grow its way out of our fiscal problems. Steuerle refuted each of these myths, and explained that they are all primarily excuses for not dealing with the deficit.

Bill Hoagland, former staff director of the Senate Budget Committee, was the final speaker, and focused his discussion on the principle of honesty. He said that it was a sad state of affairs when experts must expound on the merits of being honest, but pointed out the frequent use of unspecified pay-fors (termed “magic asterisks), slipping pay dates, and the use of outdated baselines. He also described more subtle gimmicks, like claiming that investments do not count as spending, and that revenue enhancements do not count as tax increases, or using unspecified reductions in wasteful spending to pay for programs. To help us avoid some of these gimmicks, Hoagland argued for budget process reform, although he warned that we need to be careful not to overcomplicate things and make them worse.

Following these speakers was a question and answer session, which MacGuineas opened by asking the panel if there was any good news. The speakers offered several bright points in the current dismal fiscal outlook, including the reinstatement of PAYGO in Congress, growing understanding from the public, and a resilient economy which can handle these problems and deal with them without collapsing.

Another notable question asked the speakers whether the panelists thought it was hypocritical that the government requires the private sector to use present value accounting – where it records its obligations as it makes them – while the government continues to use cash-accounting which doesn’t. Rudy Penner responded by stating his belief that because cash-flow deficits affect the economy directly, they are more relevant and cash-accounting is therefore acceptable. Gene Steuerle, on the other hand, asserted that long-term budgeting is as or more important than short-term budgeting, and so reforms to the accounting process might be considered.

One questioner asked, given the demand to invest and spend on so many important priorities, how we could remain fiscally responsible. Leon Panetta responded to this question by explaining that budgets are all about setting priorities, and deciding how to pay for them. Kolbe followed up by explaining that people who desire government action on important priorities should be supporting entitlement reform, since growing entitlements are crowding out other government spending, as well as general flexibility. Other panelists weighed in as well, ultimately agreeing that it is important to set priorities and make hard choices.

The panel closed with a plea for leadership, which they believed would be absolutely necessary in order to fix the tough problems confronting us.

Participants

• The Honorable William Frenzel
  Former U.S. Representative (R-MN)
  Guest Scholar, The Brookings Institution

• The Honorable Leon Panetta
  Former Director, Office of Management and Budget
  Director, The Panetta Institute for Public Policy

• The Honorable Charles Bowsher
  Former Comptroller General of the United States

• G. William Hoagland
  Vice President, Public Policy, CIGNA

• The Honorable James Kolbe
  Former U.S. Representative (R-AZ)
  Senior Transatlantic Fellow, German Marshall Fund

• The Honorable Rudolph G. Penner
  Former Director, Congressional Budget Office
  Senior Fellow, Urban Institute

• The Honorable Charles Stenholm
  Former U.S. Representative (D-TX)
  Policy Advisor to Olson Frank Weed, P.C.

• Eugene Steuerle
  Senior Fellow, Urban Institute

• Maya MacGuineas
  President, Committee for a Responsible Federal Budget
  Director, Fiscal Policy Program, New America Foundation

Related Links

• Twelve Principles for Fiscal Responsibility