Fiscal Policy: The Latest From New America

CRFB Projects a One Trillion Dollar Deficit

Fiscal Policy — Mon, 10 Nov 2008 17:59:00 -0500

The fiscal year 2009 deficit could reach over one trillion dollars, according to an analysis by the Committee for a Responsible Federal Budget (CRFB). This deficit would be more than twice as large as the 2008 deficit of $455 billion and would represent a post-war record both in nominal terms and as a share of GDP.

"These numbers are simply astonishing," said Maya MacGuineas, president of CRFB. "Of course we can't try to balance the budget right now when the economy is in such turmoil, but when the deficit has that many zeros, you have to ask yourself how we let things get so bad. If a trillion dollar deficit isn't a wake-up call for the need for fiscal responsibility, I don't know what is."

The Committee for a Responsible Federal Budget's analysis begins with the Congressional Budget Office's (CBO) baseline estimate of a $438 billion deficit. It adds $160 billion for costs for since-passed legislation, including an AMT patch, business and clean energy tax breaks, disaster relief, additional discretionary spending, and emergency loans. We assume $62 billion in lower revenues and higher costs from slower economic growth and $150 billion in on-budget bailout costs. We also assume the passage of a $200 billion stimulus package.

Leon Panetta, CRFB co-chair and former Chief of Staff to President Clinton, suggested that these deficit numbers will have real implications for the next President. "Senator Obama is being handed an immense challenge which could impact many of his campaign promises," warned Panetta. "Recall that President Clinton had to drop his plans for middle-class tax cuts in his first year due to fiscal concerns - and he faced deficits of well under $300 billion."

The actual FY 2009 deficit could differ significantly from CRFB's trillion dollar estimate depending on how CBO budgets for the $700 billion Troubled Asset Relief Program (TARP), which could recoup much of its costs over time. CRFB assumes that the program will be accounted for primarily based on the expected net cost to the government (similar to the Federal Credit Reform Act standards), as the Congressional Budget Office has suggested it would likely do; however, the Treasury Department is considering accounting the first $250 billion - spent on the purchasing of bank equities - on a cash basis.

The costs of the foundering economy may also differ. CRFB assumes the cyclical effects on revenue and spending in 2009 will be similar to those of past recessions, while CBO (in September) predicted they would not be as severe, and some analysts are predicting they will be considerably worse. Furthermore, the actual price of stimulus legislation is far from certain. House Democrats have been discussing a $150 billion stimulus package with $60 to $100 billion passed immediately, while President-elect Obama has suggested a $190 billion plan-though those costs could be spread over more than a single year. There is also serious discussion about plans reaching $300 billion or more. Without comments on whether it is warranted, we believe the momentum is moving in the direction of a larger package.

Total borrowing will be much greater than the estimated one trillion dollars in light of various bailouts which require new capital but are not budgeted for on a cash basis.

"Borrowing this much money may be unavoidable given current economic conditions," said former Congressman Bill Frenzel, co-chair of CRFB. "The government's top priority over the next year must be to stabilize the financial markets and the economy. But we can't just borrow a trillion dollars and call it a day. We must tie any stimulus plan to a credible plan to put the budget on the path to recovery, so that we aren't laying the foundation for the next economic crisis stemming from excessive government debt."

See below for the complete release, including a breakdown of CRFB's analysis.

Fiscally Responsible Stimulus

Fiscal Policy — Mon, 10 Nov 2008 17:50:00 -0500

In light of the current state of the economy, it appears likely that Congress will pass another stimulus package...

The Committee for a Responsible Federal Budget recognizes that there is a strong enough risk of a prolonged recession that a fiscal stimulus package may well make sense. Given the many risks associated with a significant downturn, it makes sense to err on the side of caution in determining whether more stimulus is appropriate. Assuming Congress proceeds with plans to offer some type of stimulus package, CRFB offers three recommendations.

1) The package should be designed to accomplish economic, not political, objectives. There is already a good deal of momentum behind the idea that there should be another stimulus package and the size of this package seems to be growing by the week. It is critical that this not become a political package filled with Members' favorite items or unrelated spending and tax initiatives, dress up as stimulus.

Congress has a poor recent track record on this point: the September $700 billion dollar package included tens of billions of dollars in unrelated giveaways like tax breaks for sales of wooden arrowheads and a credit for turning chicken waste into jet fuel. The package also included more substantive measures like the $80 billion patch on the Alternative Minimum Tax, which never received the full and open debate it deserved because it was rushed through as part of an emergency spending measure. If Congress passes a second stimulus proposal, CRFB urges it to pass a "clean" bill that is free of unrelated provisions and political bargaining chips.

2) Borrowing should only be used for temporary measures. Pay-as-you-go (PAYGO) rules need not apply to temporary fiscal stimulus-in fact, any short-term or immediate offsets would defeat the purpose of fiscal stimulus, which relies on deficit spending to help boost aggregate demand and GDP.
However, if the federal government borrows too much, it risks creating serious long-term damage to the nation's economy. While deficits can stimulate growth and encourage consumption in the short-run, they stifle long-run growth by crowding out investment. Interest payments also crowd out other areas of the budget, and present a particularly worrisome situation if they are growing faster than the economy. If the new debt associated with the stimulus becomes permanent, we will pay interest on that borrowing indefinitely in return for temporary employment and consumption gains. The long-term fiscal picture is already quite bleak; and it would be a mistake to make the situation worse by prolonging stimulus policies and borrowing past the window of need.

Accordingly, CRFB strongly urges Congress to make all parts of any stimulus package temporary. The stimulus should not include outlays or tax cuts that extend beyond the period in which they are expected to mitigate the effects of an economic downturn. Permanent policies developed to encourage economic growth, such as fundamental tax reform or investment spending on areas such as energy, infrastructure and research, should be evaluated on their own merits and paid for rather then deficit-financed. Part of the stimulus agreement should be that Congress will find corresponding offsets for any tax or spending policies that are passed as part of a stimulus package, but have costs beyond the period when the economy is in recession.

3) The creation of a mechanism to address fiscal imbalances should be included with any stimulus package. We strongly recommend that any stimulus package include a mechanism to help start the process of addressing the nation's long-term budget imbalances. As the economy struggles to gain its footing, it is not the time to implement the types of policies-raising taxes and cutting spending-that will be necessary to re-balance the country's short- and long-term budget. But a stimulus package should put in place the mechanism to begin crafting a longer-term budget plan. This could take the form of a Members Working Group, or a Task Force to present recommendations that could be implemented once the economy has stabilized. Such an action would send an important signal to markets and our creditors that the current economic crisis is not being viewed as an excuse to borrow endlessly without a credible plan to pay down the debt in the future.

Read the full PDF below.

Guide to Health Care Policy: The 2008 Presidential Election

Fiscal Policy — Fri, 31 Oct 2008 07:56:00 -0400

One of the most pressing issues facing policymakers in the United State is rising health care costs. Cost growth is putting ongoing stress on the budgets of families, employers, and governments. The U.S. already spends $2.2 trillion a year - 16 percent of GDP - for health care. Nearly a third of this comes from the federal government.

Health expenditures are projected to nearly double to $4.3 trillion in a decade, at which point they will represent nearly one-fifth of the economy. According to the Congressional Budget Office, by 2030 they could consume a third, and by 2080 nearly half of GDP.

As health care costs grow, there will be considerable pressure on the federal government's budget. Medicare, which offers retired Americans hospital insurance (Part A), physicians' services insurance (Part B), and a prescription drug plan (Part D), is expected to grow faster than any other single part of the budget as health care costs rise and the population ages. Likewise, Medicaid, which offers insurance for poorer Americans jointly with the states, and the State Children's Health Insurance Program (SCHIP), which works with states to insure children in low-income families who aren't eligible for Medicaid, will see their costs go up. Together, these three programs are expected to rise from 4.2 percent of GDP today to 8.1 percent in 2030 and 18.5 percent in 2082. That would be above the historical average of tax revenue raised to finance all government spending.

The rising cost of private insurance also affects the government's finances because compensation paid in the form of health insurance is not subject to taxation. As health insurance grows as a share of compensation, this "employer exclusion" costs the government more in lost revenues. In 1993, the exclusion resulted in $46 billion in forgone revenue from the income tax. Last year, that number was $106 billion. By 2011 it will be $145 billion.

Despite the amount the federal government spends on health care, there are nearly 46 million Americans without insurance and rising costs threaten to grow the rolls of the uninsured. Furthermore, there are many areas of our health care system where the quality lags behind other nations even as we pay a higher price.

The three inter-related issues - cost, coverage, and quality - dominate the health care debate. While there is little agreement about how it should be done, most Americans agree that something is needed to improve the current system.

Senators McCain and Obama have each proposed a set of reforms to the current health care system. But even accounting for the savings that could be achieved in Medicare, Medicaid, SCHIP, and the employer exclusion, both plans would come at a considerable cost to the U.S. Treasury.

Guide to Tax Policy: The 2008 Election

Fiscal Policy — Wed, 29 Oct 2008 10:58:00 -0400

The next president will have to address fiscal imbalances within the government and a dramatically rising federal debt. National debt has been on a more or less steady rise since 1974 when, after a steady decline from the massive debt accumulated during WWII, it hit a low of 33.6 percent of GDP. Total national debt was more than $10 trillion at the start of fiscal year 2009.

This rising debt is driven by entitlement growth, resulting from demographic changes and rapidly rising healthcare costs. An aging population, especially in light of the retirement of the Boomers, is projected to increase Social Security payments from 4.3 percent of GDP today to 6 percent in 2030. More significantly, Medicare and Medicaid are expected to grow from just over 4 percent today, to 18.5 percent of GDP by 2082. This level will exceed the average level of federal revenues over the past 50 years. Even under the most optimistic economic growth assumptions, revenues will not come close to keeping up with this spending growth.

Under reasonable assumptions, non-interest federal spending will climb to 35 percent of GDP by 2082, while revenue will reach 21 percent. This would leave a 14 percent of gap that would have to be made up for with additional borrowing. Interest on this debt is projected to reach 40 percent of GDP, resulting in the government being 75 percent of the economy.

This crisis may seem to be decades off, but the next president will need to make some choices about how to deal with them in the near term. The longer we wait, the worse these problems become and the more painful the reforms must be to maintain economic stability. At present, the 75-year fiscal gap, which measures the amount that the federal government either would have to cut spending or raise taxes immediately to stabilize the debt-to-GDP ratio over the next 75 years, is 6.9 percent of GDP under realistic assumptions.

The Congressional Budget Office has said that marginal tax rates would have to rise significantly to cover the entire shortfall using only individual and corporate income taxes. The 10 percent rate would have to rise to 25 percent, the 25 percent bracket to 63 percent, and the 35 percent bracket to 88 percent. Those numbers provide a clear indication both that these problems will need to be addressed in the near future, and that the solution will likely require a compromise that includes both spending and taxing changes.

Many analysts and policymakers believe that the tax system also suffers from structural problems that require fundamental reform. Some point to the complexity in the current system, which contains nearly $1 trillion in tax expenditures that often fail to achieve their stated goals. Others point to problems with the corporate income tax, which is among the highest statutory rates in the world.

Many economists believe the current tax code discourages saving and investment and advocate moving toward a consumption tax. Some argue that our tax system should be modified to better encourage or discourage certain types of consumption such as energy, healthcare, or education. Finally, many have distributional concerns over the current tax system, arguing that it either does too much or too little to redistribute income between groups.

But regardless of whether the concern is distribution, complexity, fairness, incentive structures, or economic viability, there is a growing consensus that the current tax system is in need of fixing.

Because of outstanding tax issues, specifically the expiration of the 2001/2003 tax cuts and continued expansion of the AMT, the next president and Congress will have no choice but to address tax policy. As they confront these specific issues, they should also focus on the broader question of how much we want our government to spend, and how we will raise the appropriate revenue to finance that spending.

To make an informed election decision, voters should be aware of the fiscal implications of each candidate’s tax proposals. In the following voter guide, US Budget Watch attempts to shed light on these often-complex policies.

Guide to Social Security: The 2008 Presidential Election

Fiscal Policy — Tue, 28 Oct 2008 09:17:00 -0400

Social Security is the single largest government program. In 2007, the program cost $585 billion and provided benefits for roughly 50 million retirees, dependents, survivors, and disabled workers. It is financed primarily through the payroll tax -- a 12.4 percent tax on wages up to $102,000. The tax is split equally between employees and employers. The remaining revenues come mainly from the taxation of Social Security benefits for wealthier recipients.

Next year, the program’s surpluses will begin to decline precipitously. The Social Security Trustees have repeatedly warned that the program is on an unsustainable path and that the system will begin running cash deficits in 2017. The trust funds have claims on government revenues sufficient to pay promised benefits until 2041, but redeeming the trust fund assets will require the government to raise taxes, cut government spending, or borrow. To finance promised benefits, payroll taxes would have to be increased from 12.4 percent today to around 16 percent in 2041 and increase gradually after that. Alternatively, benefits could be cut across the board by roughly 22 percent by 2041, and modestly cut on regular basis thereafter.

Changes will have to be made to Social Security. Ignoring the problem and pushing the necessary changes to a later date — as has been done in past years — only makes them more painful. Although there are hundreds of proposals to address Social Security’s long-term gap, most fall into two basic categories: cutting benefits or raising taxes.

The following table synopsizes the proposals and positions of both presidential candidates on reforming Social Security. For the full text of this paper, please see the PDF copy attached below.

	Barack Obama's Social Security Proposals	John McCain's Social Security Proposals
Tax Increases	Proposes a payroll surtax of 2-4% for individuals making over $250,000 a year. Has not specified the tax base or whether there would be corresponding benefits.	States "everything should be on the table" but has expressed strong opposition to raising taxes to increase revenue for Social Security.
Benefit Cuts	States "everything should be on the table" but has also argued that "cutting benefits is not the right answer."	Would be willing to accept necessary benefit cuts as part of a compromise plan and would consider reducing Social Security's Cost of Living Adjustments (COLAs).
Retirement Age	Does "not believe it is necessary or fair to hardworking seniors to raise the retirement age" and has stated that he would not do so.	Considering a plan that would increase the normal retirement age to 68 from the scheduled age of 67.
Private Accounts	Argues strongly against privatization. Supports implementing "Automatic Workplace Pensions" outside of Social Security.	Supports "add-on" retirement accounts, but not "as a substitute for addressing benefit promises that cannot be kept."
Bipartisanship	Advocates for taking a bipartisan approach to reforming the system. Argues that to reform Social Security, "we should approach it the same way Tip O'Neill and Ronald Reagan did back in 1983."	Points to the 1983 deal between President Reagan and Speaker Tip O'Neill as a model for reform, stating: "I'll reach my hand out to the Speaker of the House Nancy Pelosi. I'll reach my hand out to Harry Reid."
Resolve to Act	Is "committed to ensuring Social Security is solvent and viable for the American people, now and in the future." States "it is common sense that we are going to have to do something about [it]." Does not mention Social Security frequently on the campaign trail.	States he will "submit a plan to save Social Security... and I'll ask Congress to do the same.... no more kicking the can down the road... no more hoping that a future generation of leaders will have the courage we lack." Does not mention Social Security frequently on the campaign trail.

Guide to Stimulus Proposals: The 2008 Presidential Election

Fiscal Policy — Sun, 26 Oct 2008 12:36:00 -0400

Background

The United States is in the midst of an economic crisis. Financial institutions are failing, the credit markets are frozen, and global stock markets have experienced large-scale losses. This crisis has also had significant effects on the "real" economy. Home values have tumbled, consumption has dropped, and jobs are disappearing.

During economic downturns, the government regularly takes actions to try to combat the effects of the decline. Most of its actions fall into one of four categories: monetary stimulus, fiscal stimulus, targeted stabilization, and economic relief.

Monetary stimulus involves the Federal Reserve Board ("the Fed") reducing interest rates, making it cheaper to borrow. The Fed is able to act quickly (economists refer to this as a short inside lag), and decisions are made by economists who can implement policy free of political or administrative considerations. But monetary stimulus has a long "outside lag," meaning it takes a while to work its way through the economy.

With fiscal stimulus, the government uses its power to cut taxes and spend in order to boost consumption, which in turn increases sales, employment, wages, and profits. Some of this stimulus occurs through "automatic stabilizers," as tax revenues are inevitably lower and unemployment and other benefits are inevitably higher during an economic downturn. Other fiscal stimulus requires action from Congress - such as the passage of tax rebates or new spending. Once put in place, fiscal stimulus can have a fast impact on the economy (it has a short outside lag), but it generally takes politicians a long time to put together a stimulus package, and when they do, it is often filled with "fiscal pork" - politically popular items that do little to stimulate the economy.

Targeted stabilization aims to boost economic performance by focusing on the immediate causes of an economic downturn. The goal is not to address structural problems, such as low levels of capital investment or insufficient educational attainment, but to prevent crises in certain sectors of the economy from spilling over into other areas of the economy. Although this strategy has the advantage of being more targeted, it carries the risk of misdiagnosis, and can easily be subject to political abuse. Unlike fiscal stimulus, this method of shoring up the economy does not require running deficits.

Finally, economic relief helps individuals and businesses to weather an economic downturn. The goal in this case is not to boost the economy as much as to mitigate the impact of the downturn on certain segments of the population. Many policies can simultaneously stimulate the economy and offer economic relief.

A number of measures have already been taken to address the current downturn. Since last September, the Fed has dropped the federal funds rate from 5.25 percent to its current rate of 2 percent. This past spring, the Fed twice took the unusual step of dropping the rate by 75 basis points (0.75 percent), rather than the normal 25 or 50 basis point reduction.

Additionally, Congress passed a $168 billion fiscal stimulus package in February that included tax rebates, spending on veterans and seniors, and "bonus depreciation" for businesses. This was followed by an $8 billion extension of unemployment benefits and a housing bill, which included over $16 billion in home buyer tax credits, $4 billion in targeted grants to communities hit by high foreclosure rates, and loan guarantees for some homeowners facing foreclosure. The bill also authorized the Treasury Department to loan money to or buy stock from Fannie Mae and Freddie Mac - the private Government Sponsored Enterprises (GSEs) which managed the secondary mortgage market. The Treasury has since taken over both of these institutions (and agreed to buy up to $100 billion of stock in each) to ensure that they remain solvent. To stabilize the housing sector and promote market liquidity, the Treasury has also agreed to purchase $10 billion mortgage-backed securities and allow Fannie Mae and Freddie Mac to purchase an additional $144 billion in securities. The Fed has also offered special loans and guarantees to a number of financial firms, including Bear Stearns, AIG, and J.P. Morgan.

So far this year, the Federal Deposit Insurance Corporation (FDIC) has had to cope with the failure of 15 banks, costing the FDIC insurance fund approximately $11.5 billion. The FDIC also increased the maximum insurable amount from $100,000 to $250,000 per account. As a further measure to shore up the banking system, the Fed announced that it will dramatically increase the amount of term auction loans it offers to $900 billion this year.

More recently, Congress approved a $700 billion "rescue package" for financial firms, which was designed to purchase "toxic" mortgage-backed securities and resell them as the market recovered. So far, $250 billion of the $700 billion has been dedicated to buying bank equity to improve banks' liquidity. The Treasury has not yet announced how it will spend the other $450 billion. In September, Congress approved long-term, low-interest loans to auto manufacturers and part suppliers totaling $25 billion dollars. Finally, the Fed has agreed to purchase up to $540 billion of commercial debt paper from money market mutual funds.

(Table of recently-enacted policies available on pdf version of report.)

Campaign Proposals

Both Senator McCain and Senator Obama have put forth proposals to strengthen the short-term economy, which they argue would complement their long-term economic policies. These proposals take the form of fiscal stimulus, targeted stabilization, and economic relief. Many have direct budgetary implications, although some are regulatory. Some of these proposals are meant to be enacted before the next president takes office, while others are meant to be sustained over a longer time period.

Senator McCain

In January, Senator McCain recommended cutting in the corporate tax rate, introducing new expensing rules that would allow companies to deduct the value of equipment up front, and making the research and experimentation tax credit permanent, to create a more favorable business and investment climate. In May, McCain proposed a "gas tax holiday," which would have suspended the 18.4 cents per gallon gasoline tax and the 24.4 cents per gallon diesel tax between Memorial Day and Labor Day of 2008, but would have expired by now. Currently, Senator McCain is supporting the following initiatives.

Purchase Distressed Mortgages - $0 (Part of the already passed $700 billion package)

Senator McCain supports a HOME plan to address the rising number of foreclosures. Under the plan, qualified individuals who purchased their homes after 2005 would be allowed to replace their sub-prime adjustable-rate mortgages with a 30 year fixed-rate mortgage guaranteed by the Federal Housing Administration (FHA), with the rate reflecting historical norms and the current market value of the home.

Senator McCain has also unveiled a Homeownership Resurgence Plan under which the government would purchase mortgages from creditworthy individuals living in their homes. According to his campaign, these mortgages would be replaced with FHA-guaranteed fixed-rate mortgages at terms manageable for the homeowner. The plan would cost $300 billion, but this money could come out of the $700 billion appropriated for the bailout. Senator McCain also supports the efforts of groups like NeighborWorks America that provide mortgage assistance to homeowners in their communities.

Strengthen Student Loan System - Cost Unknown

In order to address short-term liquidity concerns in the student loan system, Senator McCain has proposed a Student Loan Continuity Plan. Although he has not offered many specifics, according to his campaign he would ensure that the federal and state governments are prepared for possible loan problems, and would expand "lender of last-resort" capabilities while cracking down on troublesome private lenders.

Temporarily Cut Capital Gains Rates - $10 billion

Senator McCain would cut the top rate on long-term capital gains from 15 percent to 7.5 percent in 2009 and 2010 in order to encourage individuals to invest, which would in turn help support the stock market and other asset markets.

Offer Relief to 401(k) and IRA Holders - $36 billon

Senator McCain supports a number of measures designed to help individuals with IRA or 401(k) retirement accounts. Senator McCain proposes establishing a new flat 10 percent tax rate for the first $50,000 withdrawn from these accounts by retirees in 2008 and 2009. At the same time, he would suspend current rules that require individuals to begin withdrawing money from their retirement accounts once they reach age 70.5.

Eliminate Taxes on Unemployment Benefits - $6.5 billon

Senator McCain would exempt unemployment benefits from taxation for 2008 and 2009. This exemption would apply to all unemployed workers making less than $100,000 a year.

Allow Greater Deduction of Capital Losses - Cost Unknown

Under current law, individuals are allowed to deduct from their income taxes up to $3,000 a year in capital losses. Senator McCain would temporarily allow individuals to deduct up to $15,000 of capital losses for the years 2008 and 2009.

Reduce Energy Prices - N/A

Senator McCain supports a number of other measures to reduce the cost of energy products in the short term. He proposes lifting the federal moratorium on drilling for oil and natural gas in the Outer Continental Shelf and would direct the Department of Defense to work with states to develop the infrastructure to drill for fossil fuels in the OCS. Although it could take a decade or more before these oil and natural gas resources would be available, the McCain campaign has argued that drilling, along with other measures of his energy plan, would reduce current prices by signaling to "oil producing countries and oil speculators that our dependence on foreign oil will come to an end."

Senator McCain would also address oil speculation, which can have the effect of driving up the current price of oil. He has supported ongoing efforts in Congress to investigate the precise impact of energy futures markets on the price of oil, and has vowed "swift punishment" where abuses are found. He has also called for regulatory reform for the oil futures market.

Finally, Senator McCain would reform the laws governing ethanol in gasoline, arguing that they have artificially driven up both the cost of gasoline and the cost of food. To reduce the cost of both of these commodities, he would roll back rules requiring corn-based ethanol as an additive to gasoline, eliminate subsidies on domestically produced ethanol, and repeal the current tariff on imported sugar-based ethanol.

Senator Obama

Prior to the passage of the stimulus package, Senator Obama proposed a broad economic stimulus program. His $75 billion plan would have offered each worker a $250 tax rebate ($35 billion), offered Social Security recipients a one-time $250 supplement ($10 billion), established a fund to help families avoid foreclosure ($10 billion), offered relief to state and local governments ($10 billion), and extended unemployment benefits ($10 billion). The plan called for an additional $45 billion in rebate checks if the economy continued to do poorly.

Senator Obama voted for the congressional stimulus package that passed. He later proposed a second stimulus plan, which would have included $20 billion in stimulus checks and $30 billion for unemployment expansion, foreclosure assistance, and aid to state and local governments. Since the passage of the bills addressing unemployment insurance and foreclosure assistance, both of which Obama supported, he has modified his stimulus proposal several times, changing and adding a number of provisions. His current plan calls for the federal government to do the following:

Provide Tax Rebates - $65 billion

Senator Obama supports an "emergency energy rebate" of $500 per worker or $1,000 per family. Although he has not provided all the specifics, his campaign states that the rebate would be modeled after the "Making Work Pay Credit", which phases in for those earning less than $8,000 a year. He would also extend these expedited tax credits to retired seniors.

Senator Obama planned to pay for these rebates through a five-year windfall profit tax on oil companies when the cost of a barrel of oil exceeded $80 (with oil prices as high as $140 per barrel, this was expected to fully finance the tax rebates). Given the recent drop in oil prices to well below $80 a barrel, his campaign now says that the rebates should be issued even in the absence of revenues to pay for them.

Create a State Growth Fund - $25 billion

Senator Obama would create a state relief fund to prevent states from having to make significant spending cuts or tax increases, which could exacerbate an economic downturn. According to his campaign, more than 29 states face deficits totaling around $50 billion, and because most have to balance their operating budgets, many have begun cutting spending. Included in these funds would be money to counteract high heating costs. Senator Obama has also called for the creation of a Treasury Department mechanism that could loan directly to state and local governments having difficulty accessing credit to cover expenditures - a move similar to the Fed's recent purchasing of short-term commercial debt paper.

Create a Jobs and Growth Fund - $25 billion

Senator Obama would increase infrastructure investment by $25 billion to create jobs and stimulate long-run economic growth. The plan would focus on ensuring that those projects currently in progress were not sidelined due to revenue shortfalls and were fast-tracked where possible. Specifically, his plan would focus on two areas. First, it would replenish the Highway Trust Fund so that current projects to improve roads and bridges would not be stopped or slowed because of funding shortfalls. Second, the plan would fund and fast-track school repairs, especially those aimed at improving energy efficiency.

Provide Assistance for Small Businesses - $5 billion

Senator Obama would employ a number of measures to support small businesses. First, he would allow the Small Business Administration to make direct fixed-rate loans to small businesses though its Disaster Loan Program. Second, he would expand the SBA's loan guarantee program by temporarily eliminating fees for borrowers and lenders. And finally, he would extend current tax rules, which allow companies to deduct their first $250,000 in qualified expenses for one year.

Implement Incentives for Job Creation - $40 billion

Senator Obama would offer a $3,000 per employee tax credit to corporations for every additional full-time employee hired during 2008-09. The tax credit would be enough to offset the cost of payroll taxes to the company for the first $50,000 paid to each new employee.

Offer Relief to 401(k) and IRA Holders - Unknown

Senator Obama would temporarily suspend rules that impose a tax penalty on early withdrawal from a 401(k) or IRA plan, allowing workers below retirement age to withdraw up to 15 percent or $10,000 (whichever is less) from their retirement accounts. At the same time, he would suspend rules that require individuals to begin making withdrawals from their IRA or 401(k) accounts at age 70.5 and would exempt withdrawals, up to the minimum required amount, from taxation.

Help Laid-off Workers - $10 billion

To assist unemployed workers who have difficulty finding new jobs in a weak economy, Senator Obama proposes extending unemployment benefits for an additional 13 weeks and temporarily suspending taxes on these benefits.

Provide Relief for Mortgage Holders - $12.5 billion

Senator Obama would mandate a 90-day moratorium on foreclosures for companies participating in the Troubled Assets Relief Program (TARP), provided the homeowner was "making a good faith effort" to pay his mortgage. In addition, Senator Obama would ask the Treasury Department and the Department of Housing and Urban Development to more aggressively pursue revisions in the terms of some mortgages, and propose new legislation to reform the bankruptcy code so judges can redefine mortgages on primary residences. Finally, he would fast-track his Universal Mortgage Tax Credit proposal, which would provide a refundable tax credit to taxpayers who do not itemize equal to 10 percent of their mortgage interest payments.

Reduce Energy Prices - N/A

Senator Obama has made a number of proposals designed to reduce energy costs. He would crack down on excessive energy speculation and increase transparency in the oil futures market, in part closing energy industry market loopholes. He would tap some of the oil from the U.S. Strategic Oil Reserve. And he would encourage domestic oil production by requiring oil companies to develop the land they have leased but are not drilling on, or otherwise forfeit their leases.

Extend Additional Loan Guarantees to Automakers - $4 to $7.5

Senator Obama has called for doubling the amount of loan guarantees to the auto industry, from $25 billion (which Congress recently passed) to $50 billion. These loans would be focused on helping the auto industry "retool" by producing more fuel-efficient cars and developing new battery technologies, among other changes. Senator Obama would also speed up implementation of the first $25 billion in loan guarantees.

See the full paper outlining these plans below.

The Energy Security for American Families Initiative

adminn — Tue, 23 Sep 2008 08:11:00 -0400

Financing the Productive Economy: The Heartland Development Bank

Economic Growth — Thu, 18 Sep 2008 01:24:00 -0400

Infrastructure and Economic Opportunity

Throughout American history, infrastructure investment has played a critical role in economic development. As the nation moved west, the building of canals and turnpikes, followed by construction of railroads, expanded the field of economic opportunity. Later, investment in electricity and telephone networks facilitated the development of vast expanses of the American landscape that had previously been left behind. More recently, the national interstate highway system and now the continuing build-out of broadband telecommunications networks have enabled the de-clustering of many business endeavors that were once confined to large central cities.

Infrastructure is one of the basic building blocks of economic opportunity, as illustrated in Figure 1. The standard infrastructure package of the economy includes highways, airports, harbors, utility distribution systems, railways, water and sewer systems, and communications networks.

In today's network-centric, innovation driven economy infrastructure also includes university and lab facilities, technology and training centers, export processing facilities, and research parks. These infrasystems - integrations of facilities, technology and advanced socio-technical capabilities - have emerged as key drivers of innovation and the locus of future higher-value industries and higher-paying jobs.

The Heartland Opportunity

Long written off by much of the national media the American Heartland of America has been displaying new signs of life. Made up of thousands of rural small towns and hundreds of second and third tier cities scattered across America, the Heartland represents the vast regions outside the metropolitan areas. Many retain strong ties to agriculture, forestry, mining or fishing but many also have made a steady and successful diversification to globally competitive manufacturing, energy information and other service industries.

Heartland communities outside the major metropolitan areas possess many underutilized assets. These include, in many places, relatively low housing costs and a good business climate, quality schools, a reasonably educated and productive workforce, and available land and other resources for expansion. Recently the resurgence of the Heartland has also been bolstered by strengths in both energy and agriculture.

Infrastructure bottlenecks, however, are putting a damper on the Heartland's forward economic motion. Surging agricultural exports are exposing inadequacies in the country's railways, highways and waterways that carry grain to feed the world. Those bottlenecks are costing farmers, shippers and consumers millions of dollars.

This dire situation is mirrored in the energy sector. Much ballyhooed plans to harness wind and solar power face severe limitations due to a power grid that cannot bring renewable energy from its sources to potential customers. Many transmission lines are simply inadequate for the amount of power companies would like to push through them. As a result many of the windiest places, particularly in the Great Plains, cannot move their energy to the more populated cities where the demand lies.

Rural regions and second and third tier cities in the Heartland cannot bear the financial weight of these investments themselves because they are often financially stressed due to a limited tax base, the high costs associated with size and scale, and difficulties of a population that is in many areas is aging and in others being rapidly increased due to in-migration.

America, the world's most advanced continental nation, could be on the verge of a great resurgence, much of it based in regions largely unacknowledged by many pundits, academics and the media. What is needed now is an infrastructure strategy to make it happen.

Infrastructure Investment Key to the Heartland's Growth

Of course, the Heartland's infrastructure problems are not unique. According to the American Society of Civil Engineers, the United States needs to invest $1.6 trillion in infrastructure improvements in the next few years. There is a need for a greater national commitment to meet these needs. Yet often in the debates about infrastructure, the needs of the heartland --- so out of sight and mind to policy makers and pundits alike --- are often ignored.

Spurred in part by the increase in calls for action on infrastructure investment, Congress has begun to propose new funding structures and agencies to deal with the perceived shortfalls in funding. Senators Dodd and Hagel have introduced bipartisan legislation (S. 1926) calling for the creation of a National Infrastructure Bank (NIB). The NIB would be an independent government agency modeled after the FDIC, with an initial endorsement to issue bonds totaling up to 60 billion dollars. Focusing on transportation infrastructure, Sen. Wyden or Oregon has introduced legislation (S. 2021) that calls for 50 billion dollars in infrastructure bonding through the issue of "Build America Bonds." In the House, there have also been moves towards proposing new solutions, including the introduction of the National Infrastructure Development Act of 2007 (H.R. 3896) that calls for creating an infrastructure development corporation capable of using leverage to make loans and to issue and sell debt securities.

Federal resources alone are not going to meet the nation's infrastructure needs. For that reason, here and elsewhere around the world, cash-strapped governments are viewing private investment as an increasingly important piece of the infrastructure investment puzzle. Concurrently, banks, pension funds and other private investors are considering infrastructure as a new, long-term asset class that offers a combination of hard assets and visible long-term earning streams.

This confluence of circumstances has given rise to a new set of private infrastructure funds that have attracted billions of dollars and Euros from individual and institutional investors alike. In an 18-month period leading up to 2007, nearly 160 billion dollars was directed for infrastructure investment funds, including 120 billion dollars in newly created funds. This trend has continued into 2008, with investment banks and institutional mangers now able to leverage somewhere between $400 and $500 billion in buying power.

A key question is whether the new private infrastructure investment vehicles or the assets of a federally sponsored bank will find their way to the Heartland. There is a danger that these funds will remain concentrated in the large metropolitan areas like their private venture capital and federal urban development program counterparts.

The Heartland Development Bank

In order to capitalize on emerging economic opportunities and to rebuild America's productive capacity in energy, agriculture and manufacturing enterprises we propose the creation of the Heartland Development Bank. The Bank is envisioned as a $10 to $25 billion source of financing for infrastructure development projects. The Bank would serve as a lead lender on projects of economic significance in the Heartland and leverage considerable co-investment from the private and public sectors.

Comparable models include the Inter-American Development Bank (IDB) and California's Infrastructure and Economic Development Bank (I-Bank). The IDB is the oldest and largest regional development bank which now serves as the main source of multilateral financing for economic, social and institutional development projects as well as trade and regional integration programs in Latin America and the Caribbean. California's Infrastructure and Economic Development Bank (I-Bank) finances public infrastructure and private investments that promote economic growth, revitalization of communities and the enhancement of the quality of life throughout California.

Following the IDB model, the Heartland Development Bank's capital would be subscribed by investors including states and the federal government, banks, private investment funds, local and regional development organizations, corporations, and other development-interested groups. Non-Heartland members outside the region could subscribe to the fund and benefit by having preferred status as suppliers of goods and services for HDB-financed projects.

The Bank's resources would include callable capital, and paid-in capital from HDB members, as well as reserves and funds borrowed in international markets. The Bank could be structured so that only 5% percent of the $10 billion is paid-in. The remaining 95% is callable capital to be based on the implementation of approved projects in need of financing.

Unlike earlier periods of infrastructure expansion, which were often uniformly national or regional in scope, today's infrastructure --- and more particularly infrasystems --- needs related to economic development are often closely tied to the specific circumstances pertaining to a particular local or regional economy. Since federal resources alone will most certainly be unable to meet the entire need, local and private resources must be mobilized to the greatest extent possible. For these reasons, the investment strategy of the Heartland Development Bank may be most successful if it focuses on the many thriving regional growth centers in manufacturing, agriculture, energy and advanced services that have emerged across the country.

Public Private Investment in the Heartland Development Bank

Infrastructure provision and development in America is poised to jump to the front of the policy agenda over the next several years. With the election of a new President, new priorities and objectives are sure to be set regarding infrastructure investment. In addition, a major new transportation funding bill will be introduced in the coming year, to be accompanied by a major push for all kinds of infrastructure, at the congressional level.

While the rest of the world has been expanding the use of private finance through public private partnerships (PPP) for decades, the United States has remained somewhat behind the curve. Limited use of such PPPs has a long history in the United States, going back to the canals and railroads, but new and useful models need to be developed. Faced with numerous challenges, including a soft economic outlook, and a downturn in property values, governments require innovative new options for the provision of infrastructure vital for economic growth. In many cases, the most viable option for such communities will be to draw upon public-private financing partnerships for new projects.

Infrastructure has been aptly characterized as the new competitive imperative. The full competitive potential of the Heartland cannot be fully realized, unless there is intelligent public policy and public and private investment to catalyze it and make it happen. By investing in a vital heartland, America will help develop the kind of productive economy necessary to improve the lives and prospects of a rapidly expanding population.

Joel Kotkin is Senior Fellow at the New America Foundation. Delore Zimmerman is President of Praxis Strategy Group.

Promises, Promises: A Fiscal Voter Guide to the 2008 Election

Fiscal Policy — Wed, 20 Aug 2008 23:37:00 -0400

The United States faces serious fiscal challenges. Large budget deficits have returned, and shifting demographics along with growing health care costs are putting intense pressure on the long-term federal budget outlook. Over time, sustained deficits will weaken the economy and adversely affect the American standard of living.

The two major political parties' presidential candidates are campaigning on a lengthy list of policy initiatives, most of which would have significant impact on the federal budget. While not all of these proposals will become law, they do reflect the candidates' values and priorities, and the policies each candidate is likely to pursue once in office. In addition to these new initiatives, a number of outstanding tax and budget issues exist that will need to be addressed, such as which of the 2001 and 2003 tax cuts should be made permanent, how to fix the Alternative Minimum Tax, what to do about growing entitlement spending, how to control health care cost growth, and how to pay for the wars in Iraq and Afghanistan. The next president will face difficult fiscal challenges. It is therefore critical that voters understand the potential budgetary impacts of the candidates' plans.

US Budget Watch's report, Promises, Promises: A Fiscal Voter Guide to the 2008 Election--with a newly updated section (10/31) on the candidates' healthcare proposals--will help voters find their way through the thicket of policy proposals put forward by the likely Republican candidate for president, Senator John McCain, and the likely Democratic candidate for president, Senator Barack Obama. It presents a capsule summary of the candidates' major policy proposals and includes an estimate of the likely fiscal impact of each proposal. The guide is not intended to express a view for or against either candidate or any specific policy proposal.

See the full report in the PDF below. (Updated 10/31/2008)

Kids' Share 2008

Fiscal Policy — Mon, 23 Jun 2008 02:00:00 -0400

Children are a declining priority in the federal budget -- a trend that shows no signs of stopping. In 2007, the federal government paid out $2.7 trillion through spending programs and disbursed roughly another $1 trillion through the tax code. Rapidly expanding entitlement programs -- Medicare, Medicaid, and Social Security -- and the country's defense system consumed the largest shares of the budget, while spending on children remained essentially stagnant and did not keep up with growth in the economy.

Our second annual Kids' Share report on the state of the children's budget looks comprehensively at trends in federal spending and tax expenditures on children. Again, we determined how much the federal government spent on children and how programs for children fared against other national priorities in the federal budget. We also explored how future budget planning will affect children.

This report echoes what we found in our Kids' Share 2007 report -- the amount spent on children's programs is waning. And neither relatively slower growth in the economy in fiscal 2007 nor changes in party control of Congress affected this trend.

Kid's Share Fact Sheet: How Children Fare in the Federal Budget

Historically, children have not been a priority.

From 1960 to 2007 federal spending on children rose from just 1.9 to 2.6 percent of GDP. Spending on the big three entitlement programs -- non-child portions of Social Security, Medicare, and Medicaid -- nearly quadrupled from 2.0 to 7.9 percent of GDP.
Children’s share of domestic federal spending -- spending that excludes defense, non-defense homeland security, and international affairs -- declined from 20.2 to 16.2 percent from 1960 to 2007.

Last year, children’s spending did not keep pace with growth in the gross domestic product (GDP).

The children’s budget grew 1.6 percentage points slower than GDP between 2006 and 2007, inching up just 0.7 percent in real dollars. Spending on the big three entitlement programs -- non-child portions of Social Security, Medicare, and Medicaid -- rose 2.9 percentage points faster than GDP and 5.2 percent in real dollars.
Even while spending on children’s health programs grew 2.2 percentage points faster than GDP between 2006 and 2007, spending on education declined by 4.4 percentage points relative to growth in the economy.

The next Congress can affect future trends in children’s spending.

Six major programs are up for reauthorization or extension in the next Congress: State Children’s Health Insurance Program, No Child Left Behind, Child Care and Development Block Grant, Child Tax Credit, Child and Dependent Care Tax Credit, and the Earned Income Tax Credit.

Absent policy changes, children’s spending will continue to be squeezed in the next decade.

If current spending and revenue policies continue, children’s share of domestic federal spending will decline from 16.2 percent in 2007 to 13.8 percent by 2018.
As a slice of GDP, children’s spending will decline from 2.6 percent in 2007 to 2.2 percent in 2018, while Social Security, Medicare, and Medicaid will rise from 7.9 to 9.6 percent.
While domestic spending is projected to grow by $771 billion between now and 2018, the type of budget baseline used by the nation’s budget offices indicate that children will reap only 7.1 percent, or $55 billion, of this.

For the full text of the report and the PDF version of the fact sheet, please see the PDFs attached below.

Iraq War Spurs Growth in Vehicle Manufacturing and Fuel Supply Contracts

adminn — Thu, 05 Jun 2008 13:59:00 -0400

The ongoing wars in Iraq and Afghanistan have spurred strong growth in Pentagon prime contract awards to companies involved in armored vehicle production and fuel supply. In the mean time, major arms makers like Lockheed Martin and Northrop Grumman have experienced much more modest growth rates.

Armored Vehicle Makers Benefit Most

A New America Foundation analysis of the Department of Defense's top ten contractors for FY 2007 found that the greatest increase by far from the prior year was posted by BAE Systems, which purchased Armor Holdings Inc., producer of the Mine-Resistant Ambush Protected vehicle (MRAP), in July of 2007. BAE's Pentagon awards grew from $4.7 billion in FY 2006 to $9.8 billion in FY 2007, an
increase of over 87 percent. For General Dynamics, another top gainer, tracked combat vehicles like tanks accounted for more than half of the company's 39 percent increase ($4.1 billion).

By contrast, gains for the top three contractors were less dramatic. Lockheed Martin's Pentagon prime contracts increased by 4.5 percent, from $26.6 billion to $27.9 billion; Boeing's awards grew by 11.3 percent, from $20.3 billion to $22.5 billion; and Northrop Grumman's contracts increased by 4.2 percent, from $16.6 billion to $16.8 billion (see Table I).

Overall Pentagon awards grew by 4.3 percent from FY 2006 to FY 2007, from $298.5 billion to $312 billion. This was less than half the growth rate of 10.7 percent posted between FY 2005 and FY 2006— another sign that the Bush administration’s record post-World War II military buildup may be starting to wind down, despite the ongoing costs of Iraq and Afghanistan.

Iraq and Afghanistan Transform Contracting

Statistics from the Federal Procurement Data System provide a stark demonstration of the degree to which the Iraq and Afghan conflicts have transformed the Pentagon’s buying habits. A look at contract spending broken down by services shows that the Army has been the big winner, nearly doubling from FY 2003 to FY 2007, from $56.8 billion to $111.3 billion; the Navy was next in line, growing by 55.5 percent over the same time period, from $53.9 billion to $83.6 billion; while the Air Force was last with an increase of 30.8 percent from FY 2003 to FY 2007, from $51.5 billion to $68 billion.

A breakdown by products purchased is even more revealing, with contracts for “Liquid propellants and fuels, petroleum base” tripling between FY 2003 and FY 2007, from $3.7 billion to $11.1 billion. Major fuel contractors during FY 2007 included Royal Dutch Shell ($2.1 billion); Valero Energy Corporation, $1.0 billion; BP ($963.7 million); Exxon Mobil ($949.2 million); and Conoco Phillips ($267.2 million).

“Combat, Assault and Tactical Vehicles, Tracked” were among the top 5 products and services purchased by the Pentagon in FY 2007, at $8.9 billion, as were “Trucks and Tractors, Wheeled” at $8.1 billion. In addition to BAE Systems and General Dynamics, cited above, major vehicle producers receiving Pentagon prime contract awards during FY 2007 included McAndrews and Forbes Holdings (owner of AM General, the maker of the Humvee), $3.6 billion; and Oshkosh Truck Corporation, $2.3 billion.

A Threat to Big-Ticket Weapons Systems?

The “perfect storm” of rising fuel prices, an economic downturn, continuing needs for land equipment in Iraq, and growing calls for increasing the size of the Army and the Marines will place heavy budgetary pressure on expensive next generation items like the Lockheed Martin F-35 Joint Strike Fighter and the Army’s Future Combat System. Current combat needs and tightening budgets are likely to result in cutbacks or “stretch outs” of these kinds of projects.

Sources for this Report

USAspending.gov; U.S. Department of Defense Top 100 contractors series, FY 2006 edition; Tony Capaccio, “L-3 Rises, KBR Falls Among Top Defense Contractors,” Bloomberg.com, May 30, 2008; Business Wire, “BAE Systems Completes Acquisition of Armor Holdings Inc.,” July 31, 2007; Charlie Savage, “Senator Warns of a ‘Crisis’ In Pentagon Cost Overruns,” New York Times, June 4, 2008.

Contact

William Hartung, 212-431-5808, ext. 201, hartung@newamerica.net
Frida Berrigan, 212-431-5808, ext. 200, berrigan@newamerica.net

A PDF version of this report is available below for download.

Twelve Principles for Fiscal Responsibility

Fiscal Policy — Tue, 20 May 2008 10:45:00 -0400

The United States faces a number of serious fiscal challenges. Budget deficits are back, the economy has weakened, Social Security is unsound, growing health care spending is putting immense pressure on the budget, tax policy is at a major crossroads, and borrowing is projected to reach unsustainable levels. Politicians will have to take concrete steps to confront these challenges, and some level of sacrifice will be required. The sooner decisions are made, the better-both because it will give the public more time to adjust and because it will allow us to spread the sacrifices more broadly.

The presidential campaign can either be helpful in this process, by allowing politicians to develop a mandate for change, or damaging, if politicians merely use the election as an opportunity to promise new tax and spending initiatives that would make the situation worse instead of better. It is not surprising that politicians tend to prefer to propose costly new initiatives given that proposals to increase taxes or cut spending are rarely met with appreciation by voters and are almost always met with attacks from political opponents. But considering our current fiscal situation, it is critical that policymakers be willing to address the country's budgetary imbalances. It will require real leadership to do so.

To help move the political discussion forward, the Committee for a Responsible Federal Budget has put forth "Twelve Principles for Fiscal Responsibility." These principles will help voters ask the necessary questions and develop a better understanding of important fiscal issues, and they will help politicians speak directly to these looming problems in a manner that will prepare the country for the necessary changes ahead. Unless the next president and Congress take action to put our fiscal house in order, they will put the budget, the economy, and the well-being of future generations at risk.

The twelve principles are:

1. Admit That We Face Serious Fiscal Problems
2. Elevate the Issue of Fiscal Responsibility
3. Commit to Reducing the Deficit
4. Suggest Solutions to Fix Social Security
5. Suggest Ways to Address Rising Health Care Spending
6. Suggest Solutions to Outstanding Tax Issues
7. Plan to Reform the Budget Process
8. Use Honest Numbers
9. Offset the Cost of New Policies
10. Do Not Perpetuate Budget Myths
11. Do Not Attack Someone Else's Plan (Unless You Put Forward an Alternative)
12. The Media Should Do Their Job

See the below PDF to read the entire report.

How Much Does the Federal Government Spend To Promote Economic Mobility, And For Whom?

Fiscal Policy — Thu, 17 Apr 2008 09:30:00 -0400

In an economically mobile market economy, individuals and families are able to raise their private incomes, wealth, and ability (sometimes referred to as human capital) over time and across generations. In the United States, many associate economic mobility with the pursuit of the American Dream. Education, work experience, and saving enhance the opportunity for upward economic mobility. To this end, many federal spending and tax expenditure or tax subsidy programs aim to enhance economic mobility. But exactly how much does the federal government encourage economic mobility? What form does this encouragement take? And who benefits from these efforts?

To begin answering these questions, we trace federal expenditures and tax subsidies through an array of spending and tax programs that can be broadly classified as aimed at enhancing economic mobility. We show these expenditures in 1980, 2006, and projected to 2012 under the type of budget baseline developed by the Congressional Budget Office. Within the federal mobility budget, we classify several hundred programs into 10 broad budget categories:

Employer-related work subsidies (e.g., 401(k) plans and exclusion of employer contributions for medical insurance premiums and medical care);

Homeownership (e.g., capital gains exclusion on home sales and exclusion of net imputed rental income on owner-occupied homes);

Savings and investment incentives (e.g., dividend exclusion and expensing of certain small investments);

Education and training (e.g., Title I Education for the Disadvantaged, higher education, and Job Corps);

Child health and nutrition (e.g., Medicaid and child nutrition);

Work supports (e.g., earned income tax credit [EITC] and child care entitlement to states);

Other child well-being (e.g., foster care and children’s welfare services);

Business incentives and development (e.g., Economic Development administration and Small Business Administration);

Citizenship services (e.g., refugee and entrant assistance); and

Equal opportunity services (e.g., minority business development and equal Employment Opportunity Commission).

We separate expenditures and subsidies in the remainder of the budget into other assistance largely aimed at maintaining income and increasing consumption
(e.g., Social Security, Medicare, cash welfare, or SSI), or other spending largely for public goods (e.g., public infrastructure and research). The distinctions between mobility versus consumption and individual versus public goods are, like all budgetary classifications, somewhat blurred. For instance, programs that target a defined group, such as homeowners or renters, are usually counted in mobility or in consumption, respectively. Programs with geographic targets, such as the Appalachian region or areas affected by Hurricane Katrina, without identifying corporate or individual beneficiaries, are classified as public goods even though individuals or the firms that employ them are receiving the funds at some point. Thus, budget classifications are not meant to value alternative uses of public funds but to help sort out and account for the nation’s established priorities. Here we attempt to tease out through a budgetary exercise how much of the federal budget is directed toward improving individual economic mobility.

Our findings are as follows:

A considerable slice of federal funds has been aimed toward programs promoting mobility at some level. In 2006 alone, about $212 billion or 1.6 percent of gross domestic product (GDP) in direct spending and another $534 billion or 4.1 percent of GDP in tax subsidies went to programs aimed at promoting mobility, for a rough total of $746 billion. (The measure itself is rough because of the inevitable issues of categorization, and because one cannot strictly sum tax expenditures together.)

Roughly 72 percent of this $746 billion in mobility expenditures, or $540 billion, is delivered mainly through employer-provided work subsidies, aids in asset accumulation, and savings incentives. This spending flows mainly to middle- and higher-income households and often excludes lower-income households or provides them comparably little in benefits.

The remaining 28 percent, or $205 billion, of the mobility budget is channeled through programs that favor lower- to moderate-income individuals.

Even when the tax and spending incentives directed at middle-income households provide them with greater (relative) benefits than the rich receive, the effect may be to inflate key asset prices (e.g., higher prices for homes than would otherwise be the case). Such inflation places these assets further out of reach for the excluded poor and lower middle-income classes. Consequently, the absolute and relative mobility of lower-rung groups is undercut.

From 1980 to 2006, the mobility budget as measured here has risen from 5.2 to 5.7 percent of GDP. During this same period, income maintenance programs rose slightly less, from 9.3 to 9.9 percent (with non-child Social Security growing substantially while the rest of income maintenance fell).

Income maintenance programs tend to be moderately more directed toward those with lower incomes. At times, however, these programs may impede economic mobility by discouraging work and saving, especially for those with the fewest resources. (We do not assess whether these programs help in achieving greater equalization of consumption, which is a different objective than mobility, as measured by independent economic status.)

Finally, much of the spending that falls into our residual budget category includes public goods that may also promote absolute mobility for the population as a whole. We do not examine that possibility here. At the same time, most of these programs are not directed toward promoting relative mobility.

The net result is a budget of direct spending and tax subsidies that attempts to promote absolute economic mobility for some but, in many areas stymies relative and intergenerational mobility in the acquisition of private assets, income, education, and ability. Trend lines into the future show a likely deterioration, not improvement, in these conditions.

For the full text of the paper, please see the PDF attached below.

Fiscal Year 2009 Budget Resolutions

Fiscal Policy — Tue, 08 Apr 2008 06:06:00 -0400

This Budget Update looks at the budget resolutions passed by both the House (H. Con. Res. 312) and Senate (S. Con. Res. 70), compared to each other as well as to the CBO March baseline and the President’s budget as reestimated by CBO.

Major Points

The House-passed budget should be commended for complying with pay-as-you-go (PAYGO) rules without exception. The budget plan assumes that all changes to revenues and mandatory spending would be offset so that deficits would not be increased over the six- and eleven-year time periods.

Neither the House nor the Senate budget makes any attempt to control the unsustainable growth of mandatory spending programs. This is a disappointing shortcoming given the tremendous fiscal challenges the country faces. Both the President's budget and the alternative budget proposed by Congressman Paul Ryan (R-WI) included significant savings in the areas of entitlements. We would have liked to see these as the beginning of the discussion about how to slow the growth of the major entitlement programs.

As was the case with the President's budget, both budgets achieve balance by 2012, but would do so only by omitting likely costs from the budget. We therefore do not believe the small budget surpluses that are projected are realistic.

The major issues that will have to be worked out between the House’s and Senate’s budgets include: reconciliation, whether or not the resolution assumes the AMT patch is offset, the Baucus amendment in the Senate version that would reduce the budget surplus by extending specific tax cuts currently set to expire, the stimulus package, and discretionary spending.

For the full text of the budget update, please see the PDF attached below.

Taking Back Our Fiscal Future

Fiscal Policy — Fri, 04 Apr 2008 01:57:00 -0400

The authors of this paper are longtime federal budget and policy experts who have been drawn together by a deep concern about the nation’s long-term fiscal outlook. Our group covers the ideological spectrum. We are affiliated with a diverse set of organizations. We have been meeting informally for over a year, under the auspices of The Brookings Institution and The Heritage Foundation, to define the dimensions and consequences of the looming federal budget problem, examine alternative solutions, and reach agreement on what should be done. Despite our diverse philosophies and political leanings, we have found solid common ground. We agree that:

Unsustainable deficits in the federal budget threaten the health and vigor of the American economy.
The first step toward establishing budget responsibility is to reform the budget decision process so that the major drivers of escalating deficits -- Social Security, Medicare, and Medicaid -- are no longer on autopilot.

More specifically, we recommend that:

Congress and the president enact explicit long-term budgets for Medicare, Medicaid, and Social Security that are sustainable, set limits on automatic spending growth, and reduce the relatively favorable budgetary treatment of these programs compared with other types of expenditures.
The programs be reviewed on a regular schedule by the Social Security and Medicare Trustees or the Congressional Budget Office to determine whether they will remain within budgeted amounts.
Significant long-term deviations from budgeted amounts trigger automatic adjustments in benefits, premiums, provider payments, or other revenues. These adjustments could only be over-ridden by an explicit vote of Congress and acceptance by the president.

We provide examples of specific policies that might be adopted to bring the programs in line with their long-term budgets but believe that the first action needed to restore long-term fiscal balance is a change in the way budget decisions are made...

For the full text of the paper, please see the PDF attached below.

This Paper was Jointly Authored by the Following Individuals:

Joseph Antos
American Enterprise Institute
Robert Bixby
The Concord Coalition
Stuart Butler
The Heritage Foundation
Paul Cullinan
The Brookings Institution
Allison Fraser
The Heritage Foundation
William Galston
The Brookings Institution
Ron Haskins
The Brookings Institution
Julia Isaacs
The Brookings Institution

Maya MacGuineas
The New America Foundation
Will Marshall
The Progressive Policy Institute
Pietro Nivola
The Brookings Institution
Rudolph Penner
The Urban Institute
Robert Reischauer
The Urban Institute
Alice Rivlin
The Brookings Institution
Isabel Sawhill
The Brookings Institution
C. Eugene Steuerle
The Urban Institute

Letter On the Budget Resolution And Taxes

Fiscal Policy — Tue, 18 Mar 2008 06:59:00 -0400

Thank you for your inquiry concerning whether the budget plan reported by the House Budget Committee increases taxes. The budget resolution does not raise taxes. Both tax rates and tax revenues as a share of GDP will increase under the budget resolution because tax increases are part of current law, not because of policies introduced as part of the budget resolutions currently under consideration.

Barring changes, taxes will increase beginning in 2011 due to the way in which the original 2001 and 2003 tax cuts were passed. In order to decrease the number of votes necessary for passage and to help make the size of the tax cuts appear smaller, the reconciliation process was used. Reconciliation requires that the tax cuts expire at the end of the budget window. Accordingly, the assumed increase in taxes has been built into law for several years.

Under the budget proposed by the House Budget Committee, the budget would reach balance by 2012 in part due to the higher revenues resulting from the expiration of the tax cuts. At the same time, the budget expresses support for making at least some of the tax cuts permanent. Under pay-as-you-go rules, this would require offsetting the costs either through other tax increases or reductions in mandatory spending. We recognize the important work of Congressman Ryan in starting to address the issue of how to offset the revenue losses from reducing taxes, by offering an alternative budget proposal that would offset at least some of those costs, by slowing the growth of mandatory spending.

Rather than fighting over whether the House budget resolution raises taxes by failing to make the tax cuts of 2001 and 2003 permanent, (the answer is that it does not), we should be talking about the real types of trade-offs we face regarding the upcoming expiration of the 2001 and 2003 tax cuts. What would allowing the tax cuts to expire do to the economy? If we are going to make the tax cuts permanent, which ones? And if we are going to offset the costs -- as we should -- what other taxes will be increased or what spending decreased? If we are unwilling to offset the costs, how can we justify the greater debt that will result? These are the important questions that the President and Congress should be addressing.

For the original copy of the letter, please see the PDF attached below.

The Assets Report 2008

Asset Building — Wed, 12 Mar 2008 01:03:00 -0400

The purpose of this annual report is to summarize and take stock of the current state of federal policy through an asset-building lens, especially as it affects the asset base of families with lower incomes and fewer resources, which is the focus of our work. The report is divided into three sections. The first is a review of policy developments from the past year related to asset building, highlighting administration action and significant legislation, including assets-related bills introduced in the first year of the 110th Congress; the second is an examination of the President’s budget proposals for Fiscal Year 2009 from an assets perspective; and the third is a forecast of the assets policy issues that may be considered in Congress during the year or two ahead. A companion report, The 2008 Assets Agenda, to be released in April will offer a detailed description of a range of policy proposals to broaden savings and asset ownership.

Below are the highlights of the report:

2007 Review

The Administration responded to the housing crisis by creating the HOPE NOW alliance to conduct aggressive outreach to homeowners at risk of delinquency and foreclosure.
FHASecure was launched as a refinancing option for homeowners with non-FHA adjustable rate mortgages in response to the housing crisis.
The IRS began allowing taxpayers to directly deposit their tax refunds among a maximum three accounts, a change expected to facilitate savings by simplifying the process of making deposits.
The Senate introduced the New Saver’s Act, a set of 14 low-cost proposals to increase savings, especially by lower-income Americans.
The House of Representatives reintroduced the ASPIRE Act, to establish universal children’s savings accounts, opened automatically at birth.
The Freedom to Save Act, the first sweeping proposal to reform asset limits in major public assistance programs was introduced by Representative John Conyers (D-MI).
Proposals to reform the asset limit in the Food Stamp Program were included in both the House and Senate versions of the Farm Bill.
The College Cost Reduction and Access Act was passed, changing the way some Section 529 accounts are treated in financial aid calculations.
Presidential candidates in both parties highlighted savings policies as part of their economic policy platforms.

President’s Budget Proposals FY 2009

The budget includes over $407 billion in tax expenditures related to asset building, which will overwhelmingly accrue to middle- and upper-income households, according to the Joint Committee on Taxation.
Consolidation of tax-preferred savings accounts is proposed which would create a system of Retirement Savings Accounts, Lifetime Savings Accounts, and Employer Retirement Savings Accounts.
The President makes his second consecutive proposal to extend “Saver’s Credit” eligibility to deposits made in Section 529 College Savings Plans.
The Community Development Financial Institutions (CDFI) is again slated for a drastic funding reduction, including the outright elimination of funding for Native Initiatives.

2008 Preview: What’s on the Agenda in Congress This Year

The stimulus package, passed by Congress in January and signed into law by the President, will deliver $110 billion in tax rebates beginning in May.
The potential onset of a recession may trigger additional calls for a policy response, which could include a focus on savings incentives and financial education. Though passage of specific savings legislation is unlikely, savings proposals are expected to generate interest and attention.
Further examination of issues that created the housing crisis may lead to legislative and regulatory changes in the mortgage market and more broadly to the provision of financial services.
Deteriorating economic conditions may lead to a second stimulus bill, creating opportunities to consider additional policies designed to encourage savings and financial stability.

For the full text of the assets report, please see the PDF attached below.

A Primer on the Budget Resolution’s Impact on Education Funding

Education Policy — Tue, 11 Mar 2008 03:31:00 -0400

The budget resolution put forward by Congress each year -- which sets out the congressional budget plan for the next five years -- and the ensuing budget process itself are enormously significant for education funding. However, the arcane procedures under which Congress produces and acts upon the budget resolution are often confusing to the media and education advocates alike. This confusion is made worse by political rhetoric and partisan spin. This brief by the New America Foundation’s Federal Education Budget Project is meant to shed light on how the budget resolution affects education funding.

This primer clarifies certain aspects of the budget resolution and the budget process. They include:

Budget Functions and Committee Allocations;
How the Appropriations Committee Allocation Affects Education Funding;
Why the Appropriations Process Matters More than the Budget Resolution;
Mandatory Funding Allocation Matters for Education;
Reserve Funds and Discretionary Cap Adjustments;
Points of Order and Budget Enforcement;
Advance Appropriations for Education; and,
Budget Reconciliation.

For the full text of the FEBP's primer, please see the PDF attached below.

The President's Medicare Proposal

Fiscal Policy — Thu, 21 Feb 2008 00:00:00 -0500

Last week, the Bush administration released a proposal to

raise the Medicare premiums for wealthy Americans enrolled in the prescription drug program;
reform medical liability laws; and
introduce "value-based health care" measures to improve Medicare efficiency.

The proposal was issued in compliance with the "trigger" provision of the Medicare Modernization Act of 2003. This provision states that the President must present a plan when, for two consecutive years, the Medicare program's trustees estimate that funds taken from general revenues will exceed 45 percent of Medicare's total funding in any of the next seven years.

The Committee for a Responsible Federal Budget strongly urges Congress to use this as an opportunity to develop a plan to reduce Medicare's long-term shortfall...

For the full text of the CRFB's release, please see the PDF attached below.

More Details on the President's FY2009 Budget

Fiscal Policy — Thu, 21 Feb 2008 00:00:00 -0500

As the Committee pointed out in its earlier release (FY 2009 Budget), the President’s Budget reaches balance in 2012 only through a number of questionable assumptions regarding future fiscal policy. This update will extend that analysis by looking in more detail at the policy and baseline assumptions that underlie the Administration’s budget request.

This paper has pointed out places where the policy assumptions made by the Administration have made the 2012 deficit seem smaller than it likely will be. Acknowledging that costs for wars in Iraq and Afghanistan are likely to continue for several years, that discretionary appropriations likely will not be held to below-inflation growth, and that the AMT patch has become an annual ritual leads us to estimate a deficit of $223 billion in 2012 (see table below).

FY 2012 Deficit After Removing Certain Budget Assumptions
(in billions of dollars)

Projected Budget Surplus                48
  Additional War Costs                 -26
  Out-year Discretionary at GDP       -121
  Out-year AMT Patches                -103
  Additional Debt Service              -21
Possible Budget Deficit               -223 
CRFB Calculations based on CBO and OMB data.

Even this number may prove to be too small, however. Given the current weakness in the economy and the unlikelihood that Congress will act on the President’s recommendations for reducing Medicare spending, it is quite possible that the deficit in 2012 will be far larger than this figure...

For the full text of the CRFB's release, please see the PDF attached below.

Fiscal Policy: The Latest From New America

CRFB Projects a One Trillion Dollar Deficit

Fiscally Responsible Stimulus

Guide to Health Care Policy: The 2008 Presidential Election

Guide to Tax Policy: The 2008 Election

Guide to Social Security: The 2008 Presidential Election

Guide to Stimulus Proposals: The 2008 Presidential Election

Background

Campaign Proposals

Senator McCain

Senator Obama

The Energy Security for American Families Initiative

Financing the Productive Economy: The Heartland Development Bank

Infrastructure and Economic Opportunity

The Heartland Opportunity

Infrastructure Investment Key to the Heartland's Growth

The Heartland Development Bank

Public Private Investment in the Heartland Development Bank

Promises, Promises: A Fiscal Voter Guide to the 2008 Election

Kids' Share 2008

Kid's Share Fact Sheet: How Children Fare in the Federal Budget

Iraq War Spurs Growth in Vehicle Manufacturing and Fuel Supply Contracts

Armored Vehicle Makers Benefit Most

Iraq and Afghanistan Transform Contracting

A Threat to Big-Ticket Weapons Systems?

Sources for this Report

Contact

Twelve Principles for Fiscal Responsibility

How Much Does the Federal Government Spend To Promote Economic Mobility, And For Whom?

Fiscal Year 2009 Budget Resolutions

Taking Back Our Fiscal Future

This Paper was Jointly Authored by the Following Individuals:

Letter On the Budget Resolution And Taxes

The Assets Report 2008

2007 Review

President’s Budget Proposals FY 2009

2008 Preview: What’s on the Agenda in Congress This Year

A Primer on the Budget Resolution’s Impact on Education Funding

The President's Medicare Proposal

More Details on the President's FY2009 Budget

FY 2012 Deficit After Removing Certain Budget Assumptions(in billions of dollars)

FY 2012 Deficit After Removing Certain Budget Assumptions
(in billions of dollars)