Quick Hits: Debt Crisis Conference Follow-Up

Image credit: Salvatore Vuono

On Tuesday, the Committee for a Responsible Federal Budget convened a major conference to discuss the nation’s long-term fiscal crisis. Key players like Ben Bernanke, Gene Sperling, Alan Simpson, and Paul Ryan were in attendance. You can read my recap of the event here; below is some follow-up on a few things I wrote about earlier.

(1) Most of the coverage of the conference has focused on Fed Chair Ben Bernanke’s warning to politicians not to mess around with the debt ceiling or treat it as a political game. As I pointed out, many others at the conference, including Gene Sperling and Neel Kashkari, gave the same warning. Hopefully it will be heard.

(2) Two additional perspectives on what level of economic growth the U.S. can realistically achieve in the coming years: Stanford economist and Hoover Institution Fellow John B. Taylor says we can reach 5% with the right policies in place. Donald Marron of the Urban/Brookings Tax Policy Center argues that reaching that level of growth and sustaining it over several years is highly unlikely.

(3) I posted earlier today about Larry Lindsey’s discussion of three ways we are underestimating the size of the coming debt crisis. One of his assertions was that we are underestimating the costs of the Affordable Care Act, a claim he based on a recent study from McKinsey. I pointed out that he was citing the McKinsey report incorrectly and that the study’s findings aren’t in line with previous estimates. I looked into it further today and found that a lot of people have been questioning the validity of this research.

Depite the weaknesses of the latest study, I think what I wrote in my earlier post is still valid – that we are likely misestimating (it could be under- or over-estimating) the costs of healthcare reform because there are so many unknowns about the impact it will have.

Three Ways We Underestimate The Size Of The Debt Crisis

At yesterday’s CRFB debt crisis conference, Larry Lindsey, a top economic advisor to President Bush, outlined three ways we are underestimating the size of our future debt. You might remember Lindsey as the NEC Director who was ousted for claiming the Iraq War would cost $100 to $200 billion, which other Bush administration officials claimed was far too high (we now know that the true cost is in the trillions).

Yesterday, Lindsey argued that the Obama Administration, the Bowles-Simpson Commission, and the House Republicans led by Paul Ryan are all making the following mistakes:

1. Underestimating interest rates

The Error: The current rate the government is borrowing at, 2.5%, represents a historic low. The average normalized rate over the past 20 years has been 5.7%.

The Cost: If rates normalize in 2013, we’ll owe an extra $5.4 trillion over 10 years in added interest costs. Lindsey suggested we won’t actually face these costs because the Fed won’t let interest rates normalize. But this will not please the markets.

2. Overestimating economic growth

The Error: The President’s budget estimates 4 to 4.5% annual growth over the next three years. But Lindsey and several others at today’s conference argued that the true rate is likely to stay around 2 to 3% for a while.

The Cost: The administration has calculated a cost of $755 billion over ten years for every 1 percentage point by which the actual growth rate fails to meet its projections. If we grow at 2.5% over the next three years instead of the 4 to 4.5% estimated by the administration, it will add $2 trillion to the deficit in the next ten years.

3. Misestimating the impact of healthcare reform

The Error: The CBO estimates that when the Affordable Care Act goes into effect in 2014, 9 to 10 million people (7% of employees) will lose their employer-sponsored health insurance and end up in the government-subsidized markets. The cost to the government for these people will outweigh the penalties paid by employers for not offering coverage. A recent study from McKinsey finds that 30% of employers say they will stop offering insurance after 2014, suggesting a higher number of people will be dropped onto the subsidized markets than previously thought.

The Cost: Lindsey seems to have misread the McKinsey study, because he stated that 30% of employees would be dropped and based his calculations on that incorrect assumption. Also, the authors of the McKinsey report admit that the 30% finding is higher than previous studies and their survey methodology may have something to do with this difference.

While Lindsey got the numbers wrong on the McKinsey report, I think he does raise an important issue: noone really knows what the short- or long-term impacts of healthcare reform will be on the government deficit, national healthcare costs, or the economy as a whole. How employers, individuals, insurance companies and other actors will respond to the reforms is still being hotly debated and, as the McKinsey report outlines, the predictions are likely to change as more people become aware of the reform provisions and their options under the new system.

The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here?
Committee for a Responsible Federal Budget // Roundtable // June 14, 2011
(Lindsey’s remarks start at the 38:35 mark)

How US health care reform will affect employee benefits
McKinsey Quarterly // Shubham Singhal, Jeris Stueland, & Drew Ungerman // June 2011

Quick Hits: Tuesday, June 14th

The NY Times has a Room for Debate discussion on an issue I blogged about on Sunday: older Americans are staying in the workforce while young workers can’t make their way in.

The New America Foundation has a new podcast up about combining local, state, federal, and private funding streams to improve early childhood education.

The Washington Post’s Fact Checker evaluates Obama’s recent claims about the success of the government bailout of the auto industry.

The Heritage Foundation’s blog The Foundry asks, when talking about the national debt, how do you help people understand how big a trillion is?

Expert Panel On Fixing Our Long-Term Fiscal Crisis

Today, the Committee for a Responsible Federal Budget held its annual roundtable conference focused on our country’s long-term fiscal health. It featured an all-star line-up of participants from politics, business, and media, including Federal Reserve Chairman Ben Bernanke and National Economic Council Director Gene Sperling. I watched the whole thing online and found it to be a balanced, reasonable, non-dogmatic discussion. I hope this level-headedness and spirit of bipartisan compromise can make its way into the broader public discourse on these issues.

Several key themes emerged which many or most people at the table agreed upon:

(1)  We have to address our long-term structural budget crisis.

  • Unlike global warming, there don’t seem to be any “budget denialists” trying to argue this problem doesn’t exist. We’ve seen it coming for years – as Bernanke pointed out our aging population and booming healthcare costs didn’t appear out of nowhere.
  • The question is how will we fix it? We can deal with it now, in a gradual, deliberate way, or we can let it progress further into a crisis and then deal with it in a panicked, painful way. But there’s no escaping it.

(2)  Politicians shouldn’t use the debt ceiling limit as a political leverage point.

  • Bernanke, Sperling, Neil Kashkari, and many others spoke out strongly against a political game of chicken around the debt ceiling increase. A default or even a short-term crisis of confidence in US credit could have disastrous long-term effects.
  • Some disagreed and felt the debt ceiling could be useful to force political action. As Ruth Marcus said, “Washington only works by crisis.”
  • Rep. Paul Ryan claimed House Republicans don’t want to use the debt ceiling as a threat but see it as their only option since the Democratically-controlled Senate hasn’t produced a budget (see 0:26:28).

(3)  Economic growth alone will not get us out of the budget crisis.

  • Bernanke, Bob Reischauer, Alan Simpson, and others argued that this is a structural problem we cannot possibly grow our way out of (see 2:11:00).
  • Reischauer, Diane Swonk, and Larry Lindsey predicted that the economy will continue to grow between 2% and 3% annually in the near future, not the 4% projected by the Obama administration or the 5% promised by Republican presidential candidate Tim Pawlenty.

(4)  A long-term budget deal needs to address both spending and revenues.

  • Politicians from both sides of the aisle emphasized the need for everything to be on the table, including both revenues and spending. The process will fail if politicians continue to draw hard lines and refuse to even consider entitlement cuts (as some Democrats have) or tax increases (as some Republicans have).
  • One popular proposal is the 3 to 1 ratio: $3 in spending cuts for every $1 in tax increases, which was the proportion settled on by the National Commission on Fiscal Responsibility and Reform and which moderator Steve Liesman was pushing hard today.

(5)  The public doesn’t understand what’s at stake and that everyone will have to make sacrifices.

  • David Brooks and Ruth Marcus suggested that the American people either don’t care about or don’t understand the significance of the long-term budget crisis. People think there is a simple fix that can somehow avoid new taxes or reduced benefits.
  • Both Gene Sperling (at 2:42:15) and Gene Steurle (at 2:16:30) made great points about how to frame the issue and the importance of a sense of shared sacrifice.

(6)  President Obama has failed to lead on this issue.

  • Many at the roundtable stressed the need for strong leadership and asserted that President Obama has failed to explain this issue to the public and sell them on the idea that everyone is going to have to make some kind of sacrifice.

As some panelists pointed out, at this point the budget crisis isn’t an economic issue but a political one (though I’d argue that important economic projections, like the growth rate, are still being debated). The questions that remain: Will a comprehensive deal be struck before the Aug. 2nd debt ceiling deadline? Before the 2012 election? What will the balance of spending cuts and tax increases ultimately be? Will a deal really make substantive changes or will we keep pushing the hard stuff off until later?

The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here?
Committee for a Responsible Federal Budget // Roundtable // June 14, 2011

Quick Hits: Monday June 13th

The Urban Institute’s Margery Turner on how the field of “urban policy” has changed as cities have gentrified, suburbs have expanded, and the relationship between the two has changed.

Paul Krugman of the NY Times explains that Medicare is cheaper than private insurance and cutting or privatizing Medicare coverage will actually cost more than it will save.

The Center for American Progress posted a short video (3 min.) summarizing what we know about discrimination LGBT people face in the workplace.

Jamelle Bouie at The American Prospect argues that the cuts to employers’ payroll taxes being considered by the Obama administration aren’t the best way to address the ongoing economic slump.

Republicans’ Dangerous Debt Ceiling Demands

The debt ceiling debate has been pushed back to August and, while almost everyone expects the ceiling will be raised, it won’t be without a political price and the Republicans are starting to name theirs. The Republican Study Committee (RSC), a group of conservative House Republicans, drafted a letter outlining three conditions for raising the debt limit:

  • Cut – Spending cuts that would reduce the deficit by half next year
  • Cap – A permanent limit on federal spending set at 18% of GDP
  • Balance – A Balanced Budget Amendment sent to the states for ratification, with protections against tax and spending increases

103 House Republicans have signed on to the “Cut, Cap, and Balance” plan, along with conservative advocacy groups like Heritage Action for America, the American Conservative Union, the Club for Growth, the Family Research Council, and Americans for Tax Reform.

The RSC offers no concrete plan on how their demands are to be achieved or what areas of spending should be slashed, but the level of proposed cuts is almost unfathomable even in a good economy. The RSC claims that cutting the deficit by half in 2012 would require spending cuts of $380 billion. The Urban/Brookings Tax Policy Center and the Economic Policy Institute both estimate the magic number is closer to $550 billion.

Even if the spending reduction needed to halve the deficit is $380 billion as the RSC claims, it would represent a decrease of 10% from the 2011 federal budget. In comparison, the 2012 budget proposed by House Republicans under Paul Ryan’s leadership would cut spending by 3%. Economists fear that such drastic spending cuts would cripple the still troubled economy and could push us back into a recession.

As Howard Gleckman of the Tax Policy Center points out, there are only two times in modern history when the US cut federal spending by more than 10% in a single year – at the end of World Wars I and II. Only when our military machine was quickly decommissioned and the economy was experiencing a post-war buzz were we able to achieve spending drops like those proposed by the RSC.

The RSC proposal seems to be part of an ongoing power struggle between moderate and Tea Party Republicans for control of their party. It could also be an attempt to create a political straw man so that more modest, but still drastic, spending cuts (like the 3% in the House Republicans’ proposed 2012 budget) seem palatable.

(Disclosure: I used to work for the Urban Institute.)

Teachers Unions: Friend Or Foe?

“Union power… imposes ineffective organization on the schools through collective bargaining, organizations that nobody would design if they had a free hand and really cared about kids, and… [it] blocks real reform.” – Terry Moe

AEI held an event last week with Terry Moe, Stanford professor and Hoover Institution fellow, to discuss his new book about the impact of teachers unions on education.

The crux of Moe’s argument is that teachers unions are, by their very definition, advocates for the job interests of teachers. While individual teachers and union leaders may care passionately about providing students with an excellent education, when acting as union members, this concern is secondary to their primary goal of improving teachers’ work conditions.

Thus teachers unions, one of the most powerful forces shaping our education system, do not always take positions that lead to the best educational outcomes for students. Tenure and seniority-based preferences, for example, reduce the ability of principals to hold teachers responsible for poor performance and to maintain the best possible workforce.

Why do the unions have so much power? As Moe explains, collective bargaining in the public sector is very different than in the private sector. The representatives of management sitting across the table are elected, and teachers unions hold enormous sway over these elections. As Manhattan Institute Fellow Marcus A. Winters writes in a review of the book, the unions are essentially electing their negotiating partners”.

Moe outlines some important structural issues that shape union influence on education policy, but I think he goes too far in concluding that organized teacher involvement in the process is inherently negative. Heather Harding of Teacher for America was on the panel (her talk starts around the 49 minute mark) and she gives teachers much more credit as a potential force for reform, given the right channels.

Harding insightfully articulates the dilemma facing teachers: their dual concerns as workers looking out for their own interests and as professionals seeking to provide the best education possible. In framing the problem around, “the conflicted nature of teacher voice and teacher advocacy,” Harding suggests we need more avenues for teachers to exert their collective influence as professional educators, rather than just as workers.

This idea has been around for at least a decade, since the “new unionism” concept was promoted by the president of the NEA, one of the largest teachers unions in the country. But I think it bears much more exploration before we give up on encouraging teacher involvement in education policy, even when it takes the form of unions.

“Special Interest? Teachers Unions and American Education” (video)
AEI // Panel // June 8, 2011

Special Interest: Teachers Unions and America’s Public Schools (book)
Terry Moe // Brookings Institution Press // 2011

You can find another review of the event by Frederick M. Hess, the moderator, here.

(Image Credit: Flickr user bonnie-brown under a Creative Commons license)

Young Adults Hit By Unemployment As Older Workers Avoid Retirement

“For every member of the millennial generation frustrated that she can’t start a career, there may be a baby boomer frustrated that he can’t end one.”

Writing in the National Journal, Ronald Brownstein explores an interesting dynamic of the recession: young adults are facing devastating unemployment rates while older worker have barely been affected.

The employment rate among older Americans (55+) is almost exactly what it was before the recession (see the graph below). The main cause: many older workers saw their retirement savings evaporate during the crisis and aren’t ready to leave the work force yet. Meanwhile, the recession hit young adults harder than any other age group, in part because of the decrease in job openings made available by older people leaving the work force.

Graph by The Brookings Institution

Some unemployed young adults are using this down time to increase their education and skills base. But Brownstein says we’ve also seen a concerning increase in “idleness” – young people who are neither working nor in school. Workers of all ages, if they want to receive Social Security checks and other benefits in the future, have an interest in ensuring young adults get off into working life on the right foot.

“Upside Down: Why millennials can’t start their careers and baby boomers can’t end theirs.”
National Journal // Ronald Brownstein // June 9, 2011

Pay for Play: Are Think Tanks Pandering To Donor Interests?

Image Credit: Salvatore Vuono

The Center for American Progress reports on how Big Oil donations are influencing the conversation on a proposal to increase the number of vehicles fueled by natural gas instead of oil. Oilman T. Boone Pickens spearheaded the natural gas cause with his “Pickens Plan” and a bipartisan coalition in Congress proposed the NAT GAS Act which would provide tax incentives to spur development of the industry. Most oil interests are opposed to the plan, for obvious reasons.

Some major conservative think tanks – the Heritage Foundation, Americans for Prosperity, the Competitive Enterprise Institute – have come out against subsidies for natural gas vehicles. And in doing so they neglect to mention the large donations their organizations have received from oil interests like Exxon Mobil and the Koch Brothers. The CAP report has a chart that helpfully outlines these conflicts of interest.

Look, all think tanks have to get their funding somewhere and all funders have some kind of viewpoint and agenda, though at least in the case of NGOs and government the drive isn’t personal profit. What troubles me is that these think tanks are not following the basic journalistic/academic rule of disclosing conflicts of interest.

In my experience, few think tanks from any side of the political spectrum consistently disclose these types of conflicts of interest. On CAP’s own website and in their annual report, I couldn’t find a list of their major donors. I think all policy research organizations should clearly outline, in a dedicated page on their websites, not just who their top funders are but what interests these funders represent.

Conservatives Power Big Oil, Stall Cleaner Natural Gas Vehicles
Center for American Progress // Daniel J. Weiss, Stewart Boss // June 6, 2011

Opinions on Abortion Depend On How You Ask The Question

A new survey of public opinion on abortion was released today, with a focus on the attitudes of the Millennial generation (age 18 to 29). Much of the coverage has been on the finding that, while acceptance of same sex marriage is steadily increasing among younger generations, young adults are no more likely than their parents to say abortion should be legal.

The other important story in the data: Many Americans have complex, conflicted views on abortion and how they articulate these views often depends on how the question is asked.

As has been the case for most of the last decade, the majority (56%) of Americans say that abortion should be legal in all or most cases. But the “most cases” part? It includes a lot fewer cases than you might think.

Graph by the Public Religion Research Institute

“Most cases” that end in abortion are more like the last three columns in this graph than the first four, but support for allowing abortion in these cases is 10 to 15 percentage points less than 56%. I’m sure support would be even lower for cases where the woman is financially comfortable (31% of abortions), already has children (60%), or is married (15%) (stats from the Guttmacher Institute).

Almost 30% of people have very mixed views on when abortion should be permitted and are in favor of allowing it in some circumstances but against allowing it in others. But this group classifies themselves inconsistently when asked to summarize their views: about half say abortion should be legal in all or most cases and half say it should be illegal in all or most cases, even though all of them have solidly mixed views when asked about specific circumstances.

Labels are another source of confusion: 37% of those surveyed either identify themselves with both the labels “pro-choice” and “pro-life” or reject both labels.

Speaking of labels, it seems people have succeeded in making the “Millennials” thing happen. I’m still not sold on it as a name for my generation (at 29, I’m on the very front end), but it’s definitely better than “Gen Y”.

Committed to Availability, Conflicted About Morality: What the Millenial Generation Tells Us about the Future of the Abortion Debate and the Culture Wars
Public Religion Research Institute // Robert P. Jones, Daniel Cox, Rachel Laser // June 9, 2011