Mercatus Center Scholars on the 2012 Budget
February 11, 2011

Amid growing concerns over reaching the debt ceiling, all eyes are focused on the budget President Obama is expected to announce on February 14. Mercatus Center scholars consider what would make a fiscally responsible plan for the country.

Bruce Yandle:

“President Obama's 2012 budget proposal is a huge disappointment.  After having asked for and received well thought out recommendations from his deficit commission, Mr. Obama seemingly disregarded all of them.  While emphasizing that his budget would increase America's competitiveness, as if the country is in a race with the rest of the world for some unspecified prize, the budget Mr. Obama released burdens the nation with a $7.2 trillion increase in debt over 10-years.” 

“The budget does nothing to deal with the most serious sources of deficit--Medicare, Medicaid, and Social Security. If ours is to be a ‘race to the top,’ the nation will be running with a huge debt and interest cost burden.”

Antony Davies:

"The best thing the President can do for budget reform is to push Congress to replace the debt ceiling with a spending ceiling. The spending ceiling would equal 18% of the previous year’s GDP, would apply equally to all government spending with the exception of interest payments on the debt, and would be applied after Congress passes the budget. Historically, Federal tax revenues are 18% of GDP," said Davies.  "Setting spending to 19% of the previous year’s GDP immediately balances the budget. Making the cuts across the board and applying them after the budget has been passed gives Congressional leaders political cover as no one can be held responsible for any specific cut."

"A simple way to balance the budget is to take the 2003 Federal budget, increase it to account for inflation, and increase it again to account for population growth," Davies said. "The resulting total spending will approximately equal Federal tax revenues for 2011. Before people start howling about draconian cuts, think back to 2003 – schools operated, roads were maintained, the poor were not starving in the streets, and we were conducting two wars."

Veronique de Rugy:

"President Obama’s federal budget plan for 2012 includes a combination of spending cuts and tax increases, but the country did not get into this fiscal mess because of revenue shortfalls."

"Giving Washington yet more money will grant it more power over the economy, but it won’t guarantee a balance budget. Federal spending has little connection to revenue levels, and whether it is printing more money or taking on massive levels of deft, money can be acquired. The problem is with spending."

"Raising government taxes substantially is not only bad policy, it has proven difficult and ultimately unsustainable for any length of time in the past 60 years."

"Federal spending must be brought down to 19 percent of the economy or less—something that was accomplished with little trouble for the years 1997 through 2002, not to mention most of the period between 1950 and 1970."

David Primo:

“The most important thing President Obama could do for budget reform is propose binding, constitutionally-based budget rules that will force legislators to budget responsibly. Otherwise, any deals that get done this year will almost surely be undone in future years."

"The constitutional enforcement of rules is needed because legislators often have the incentive to do what is best in the near-term rather than the long-term, especially when difficult choices that may affect their bid for reelection are necessary . Binding budget rules would commit legislators to making those tough choices."

Jason Fichtner:

"President Obama is expected to release his Fiscal Year 2012 budget request to Congress on Valentine’s Day.While the President will portray his budget as a bouquet of roses, the truth is that the budget will be nothing but thorns in the side of the nation’s fiscal situation.  If recent history is any indication, expect another hit to the country’s addiction to growing federal spending and increases in the nation’s federal debt."

"The long-term budget problem cannot seriously be addressed without spending reductions. And raising taxes is not the solution. For one thing, any approach that involves tax increases alone would be prohibitively costly. The CBO estimates that tax rates would have to more than double to address the coming increase in spending. These high tax rates would paralyze the economy.  The problem is simply too much federal spending."

"Any serious budget plan should rein in the growth in entitlement spending and achieve a balanced budget within the next decade."

"The economy is slowly recovering from a severe recession and millions of American families have been forced to tighten their own budgets and get their fiscal house in order. Americans have found ways to do more with less, pay down debt and increase personal saving.  It’s now time that the US government get its fiscal house in order as well."

Matt Mitchell

Matthew Mitchell says that the budget needs to include cuts to spending, both current and future spending levels.

“Our current spending is problematic, but our future commitments to spend are impossible,” said Mitchell.  “Today, spending as a share of the economy is about 17 percent above the average share over the last 35 years. But in another 35 years, spending as a share of the economy will be twice its historical average. In my view, meaningful spending reform must start with the projected future growth in entitlement spending.” 

“Another aspect that would help when setting the budget is getting rid of the exceptions that everyone makes,” said Mitchell.  “Most politicians admit there’s a spending problem, but they want to make an exception for their favorite program.  And when you add up 535 exceptions, and no one wants to cut his or her particular project, then you have a spending problem.”

 

 

Mercatus Scholars on Chairman Ryan's Budget Plan

House Budget Committee Chairman Paul Ryan's 2012 budget is estimated to cost $6.2 trillion less over 10 years than President Obama's plan, and it appropriately targets both discretionary and non-discretionary spending. Mercatus Center scholars consider the commendable and improvable aspects of the plan.

Veronique de Rugy:

“While it’s a good start, there are three major problems with the plan,” said Veronique de Rugy. “First, it continues the Washington tradition of extending open-ended promises on Medicare, Medicaid, and Social Security to millions of people without paying for them. Second, Medicare will continue to provide health care support to everyone including the richest Americans. Third, the plan introduces some competition between providers but consumers may still be bound to a list of guaranteed coverage options chosen by the government.”

David Primo:

“This is one of the few plans in Washington right now that takes deficit and debt reduction seriously. The structural reforms that Ryan proposes to Medicare and other spending programs are exactly the kinds of changes needed in Washington if deficits and the debt are to be brought under control. Democrats and moderate Republicans who think this plan is too extreme need to spend some time with the numbers and commit to making the hard choices that will overall be better for our country.”

Antony Davies:

“The Republican’s proposal cuts $6.2 trillion from the President’s proposed budget over the next ten years. As government projections rarely hold beyond six months, let alone 10 years, cuts that span a 10-year period are largely symbolic. But, here even the symbolism is vitally important. The Republicans have started the right conversation – a conversation in which annual cuts are in the half-trillion dollar range.”

Bruce Yandle:

"The critical aspect of Ryan's proposal is not that it defines an ideal outcome, but that it opens the door for serious debate about entitlement spending. We as a nation cannot make meaningful progress in dealing with the deficit until we come to grips with and alter entitlement spending. Calling for changes in Social Security, Medicare, and Medicaid is serious but necessary business. Not dealing with the deficit should become the 'third rail' of American politics."

Matt Mitchell:

"It’s important not to be swayed by superlatives describing cuts as the largest ever. If the economy is always growing, then things like government revenue and government expenditures are also always growing. Thus, changes in revenue and changes in expenditure are always going to appear to be the largest ever.”

 

Balancing the budget with tax increases could do more harm than good
Veronique de Rugy

President Obama called for tax increases in his speech today, but economist Veronique de Rugy says that not only can the budget be balanced without raising taxes, but increased taxes would do more harm than good to the economy.

“It is worth looking to the work of former Obama CEA chairman Christina Romer and her husband, economist David Romer, which shows that increasing taxes by 1 percent of GDP for deficit-reduction purposes leads to a 3 percent reduction in GDP,” said de Rugy.

Cuts to spending are better than raising taxes says de Rugy, because of the negative effects increasing taxes has on economic growth, and the budget can be balanced without them.

“We can balance the budget over the next decade without raising taxes if we ratchet down spending from its current 25 percent of GDP to 19 percent of GDP - a figure that would still place it well above the 18.2 percent of GDP that Bill Clinton spent in his last year in office,” said de Rugy.

 

2012 Budget Needs to Focus on Spending Cuts
Veronique de Rugy and Jason J. Fichtner

The week will bring a serious discussion of the proposals for 2012 budget, and Jason Fichtner and Veronique de Rugy say that these proposals must include serious spending cuts to rein in the current deficit.  

Jason Fichtner suggests a 1 percent solution for tackling the budget, which calls for a reduction of federal spending by 1 percent per year, which would eliminate the deficit over a 10 year period.

“We need to act now, because the longer we wait, the more drastic these cuts will have to be in the future,” said Fichtner.  “If we put the entire budget on the table, we ought to be able to cut 1 cent for every dollar that we spend.”

Veronique de Rugy agrees that the focus needs to be on cutting spending, and says that keeping tax rates at their current level doesn’t harm our ability to close the budget deficit. 

De Rugy says that a balanced budget is possible in 2020 based on government revenues remaining at 19 percent of GDP.  It would mean $1.3 trillion in cuts over the next decade, or about $129 billion annually, out of ever-increasing budgets averaging around $4.1 trillion.  

“These are not even absolute cuts, but trims from expected increases in spending,” said de Rugy. “If these sorts of small, but systematic trims are impossible over the next decade, then really nothing is possible and debt, deficits, and despair are here to stay.”

 

What Does "Largest Ever" Really Mean?: How politicians use superlatives to sell their budget ideas
Matthew Mitchell

As Congress considers how to piece together a budget, some have characterized proposed cuts as the largest one-time reduction in spending in U.S. history. But economist Matt Mitchell says this is misleading, as spending and revenue are always getting larger, so the same percentage cut will always be the “largest ever”.

“In non-inflation-adjusted terms, the economy is almost always expanding,” said Mitchell.  “Inflation, population growth, and real economic growth all conspire to make this a fact of life. In the midst of the Great Recession, nominal GDP fell 2 percent in 2009 and that was the first time in 73 years that nominal GDP had ever fallen. By 2010, it was back up above pre-recession levels.”

“If the economy is always growing, then things like government revenue and government expenditures are also always growing,” said Mitchell.  “Thus, changes in revenue and changes in expenditure are always going to appear to be the largest ever.”

Mitchell explains that if enacted, $33 billion in cuts would be less than 1 percent of total spending.   “For perspective, in 1946, spending fell by over 40 percent,” said Mitchell.  “The next year, it was 38 percent. And then 14 percent. In the 50s, spending fell again by 7 percent and 4 percent.” 

“Politicians and pundits like to use superlatives (“largest”, “biggest”, “most drastic”), but the truth is that an ever-expanding GDP let’s them get away with exaggeration,” said Mitchell.

 

Beyond the Rhetoric: How to Analyze the Ryan Budget Plan
Veronique de Rugy and Jason J. Fichtner
April 5, 2011

Today, Budget Chairman Paul Ryan will release his plan to solve our budget problems, and it will surely receive a lot of praise and criticism from both sides of the aisle. But, to really analyze the effectiveness of the plan, one will need to look beyond the political rhetoric and dig into the details. So whether it involves Medicaid or Medicare or the size of spending cuts, here are some questions Mercatus scholars will be looking into. 

Does the plan address our debt problem, meaning does it address the explosion of Medicaid, Medicare, and Social Security?

“Ryan’s plan will transform Medicare for future retirees into a “premium-support” plan, which is similar to what was proposed as part of the bipartisan Domenici-Rivlin Debt Reduction Task Force,” said economist Veronique de Rugy. “It's a step in the right the direction acknowledging that we need to address these entitlement programs, but it doesn't get at the underlying issue of continuing the tradition of the government making open-ended promises without funding.”

“We need to reform Medicaid and Medicare programs to get back to the core mission or protecting the poor and the most vulnerable, not making a middle-class entitlement or an entitlement for wealthy people,” said economist Jason Fichtner. “We need to pull politics out of these programs, and we need to bring some consumer choice into health care reform, and actually protect those that need it most. And, we can do that by controlling costs with block-grants and premium-support.”

Other questions to look into:

"Does the plan put all spending on the table including defense spending?" asked Rugy. "Is the revenue side of the budget realistic?"

"Does it actually reduce spending (less spent nominally next year than this year)?" asked Fichtner. "If there is a reduction in spending, what will the rate of growth of government spending be?"

"If the plan doesn't balance the budget, does it balance the primary budget (not including interest)?" asked Fichtner.

 

Solving the U.S. Budget Crisis One Penny at a Time: How to balance the budget in just 10 years
Jason J. Fichtner
March 1, 2011

Today the GAO reported the U.S. could save tens of billions in savings and revenues  by cutting government waste and redundancy, and yet Congress is struggling to agree on a smaller figure to help avert a government shut-down. With the debt-ceiling debate sneaking up behind them, it’s time to start thinking long-term.

New research released by economist Jason Fichtner and the Mercatus Center at George Mason University  this week shows how the U.S. can balance the budget in just 10 years with less pain than people think. Fichtner proposes a "1 percent solution," calling to  reduce federal spending by 1 percent per year, which would eliminate the deficit over a 10 year period. This approach to deficit reduction is more political feasible and can be achieved without raising taxes. At the end of the day it requires a 1 percent cut from the bottom line. Fichtner says, if we put the entire budget on the table we ought to be able to cut 1 cent for every dollar that we spend.

Check out the 1 percent solution framework

 

Transcript from Live Q&A on Budget 2012
February 15, 2011

The following is a transcript of a live chat discussion between Mercatus scholars and members of the media regarding President Obama's budget proposal.

 

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