War, Taxes, and Priorities

December 7, 2011 at 5:30 pm

The Senate will shortly consider the McConnell-Hatch balanced budget amendment, which prohibits any deficit in any year, prohibits tax increases, and caps total spending at implausibly low levels (about 16½ percent of gross domestic product) — requiring a two-thirds vote of the House and Senate to overturn these provisions.  It also requires a three-fifths vote of both houses to raise the debt limit.

We’ve written about the serious adverse economic effects of creating a constitutional requirement to balance the budget every year, regardless of the state of the economy, and about the massive cuts that the spending cap would produce in Social Security, Medicare, and all other programs.

But it’s worth noting — especially on the anniversary of the Pearl Harbor attack, which plunged this nation into its biggest and costliest war — that while the amendment would allow Congress to run deficits, exceed the spending cap, or raise the debt limit by a simple majority vote if the nation is officially at war, raising taxes would still require a two-thirds vote of both the House and Senate.

In other words, if the nation is at war, majority rule would determine how much we spend to prosecute that war, and majority rule would allow us to run the deficits and accumulate the debt to finance that spending.  But the nation could not cover any portion of the war’s costs by raising taxes unless it could muster a two-thirds vote in both houses.

The implication is that keeping taxes low represents a higher national priority than raising revenue to finance a war.

Even if there were no other reasons to oppose the amendment, this is reason enough.

Cutting Federal Pay and Workforce Poses Problems

December 7, 2011 at 2:02 pm

Senate Republicans propose to freeze federal employee pay through 2015 and shrink the federal workforce by 10 percent over the next ten years to help pay for extending the payroll tax cut — although the savings actually would come from further large cuts in discretionary programs, potentially hitting everything from veterans’ health care to border security to food safety.  News reports indicate that House Republicans plan to use a pay freeze and cuts in federal employee retirement benefits to offset their proposed extension of the payroll tax cut.

The House and Senate Republicans note that their workforce proposals were in the plan from fiscal commission co-chairs Erskine Bowles and Alan Simpson, ignoring the fact that Bowles and Simpson recommended them as part of a comprehensive deficit-reduction plan that called for more than $2 trillion in increased revenues.

Also, as we pointed out when Bowles and Simpson released their plan, freezing federal workers’ pay, cutting their retirement benefits, and reducing the federal workforce would likely make the workforce less productive, less efficient, and less competent.  It might also save less than anticipated as agencies rely more heavily on federal contractors, although the strict caps on overall discretionary funding that Congress has enacted make it unlikely that agencies could hire enough new contractors to offset even a significant part of the cut in federal employees.

These changes would make it harder for agencies to attract and keep qualified federal workers, and for the remaining workers to manage federal operations effectively.  It is difficult, for example, to justify cutting staffing at the Social Security Administration by 10 percent just as the baby boom generation retires in large numbers and the number of Social Security beneficiaries swells.

As long-time budget expert Stan Collender (now with Qorvis Communications) explained regarding the Bowles-Simpson proposals:

The plan calls for a substantial reduction in federal employees.  A reduction in employees generally results in the government relying on more outside consultants to get the work done but, in addition to the recommended reductions-in-force, Bowles-Simpson also calls for significant cuts in the use of contractors.

The combination of those two seems to indicate that the now smaller number of federal employees will have to do everything that was done before, that is, that they will have to be much more productive.  But Bowles-Simpson also calls for a three-year freeze on federal employee salaries, and that almost inevitably means an increasing number of federal workers will quit. That will reduce rather than increase productivity as new and less experienced workers replace the more senior folks who will have left for greener pastures.

In other words, Bowles-Simpson projects substantial savings based on the expectation that a less experienced and much smaller federal workforce will be more productive and just as effective as the more experienced and larger workforce it replaces. That makes absolutely no sense.

Senate Balanced Budget Amendment Goes Far Beyond European Budget Rules

December 6, 2011 at 4:37 pm

The Senate will vote this month on a constitutional balanced budget amendment that would require a balanced federal budget every year, regardless of the state of the economy, unless two-thirds of the House and Senate overrode that requirement.  While some proponents point to balanced budget requirements in some European countries as evidence that the United States should adopt one, too, no European country has adopted or is seriously considering anything like the proposal before the Senate, as we explain in a new report.

  • No European country requires a balanced budget in every single year.  For example, some countries allow the government to run deficits during recessions in order to dampen their impact.

    The highly regarded private forecasting firm Macroeconomic Advisers has warned that requiring a balanced budget every year would make recessions “deeper and longer.”  If a balanced budget amendment were in place during this recession, “the effect on the economy would be catastrophic,” the firm concluded.

  • Some countries require the operating budget to be balanced but allow borrowing for capital expenditures such as infrastructure improvements, which can boost long-term economic growth.
  • Some countries’ balanced budget requirements are set in statute, not in their constitution, or simply reflect a commitment by political parties.  Thus, lawmakers can override them by a simple majority vote if circumstances warrant.

In fact, an International Monetary Fund survey of 81 countries — including all member countries of the Organisation for Economic Co-operation and Development (OECD) — found that, in 2008, not one had a constitutional balanced budget requirement that would require balance of the entire budget in every year, with no adjustment for economic cycles or capital investment.

Large Majority of Housing Voucher Recipients Who Can Work, Do Work

December 6, 2011 at 4:00 pm

In hearings on the Section 8 Savings Act, which would make a number of changes to the Housing Choice Voucher program (see our testimony), some policymakers expressed interest in increasing self-sufficiency among recipients of housing assistance.

While that is a worthy goal, our detailed new report on the demographic characteristics and labor force attachment of voucher households found that the large majority of households that can reasonably be expected to work, do work.

Specifically, in 2010, 88 percent of all voucher households were:

  • elderly,
  • disabled,
  • working  (or had recently worked), or
  • receiving assistance through the Temporary Assistance for Needy Families (TANF) program and thus likely subject to work requirements (see first chart).

88 Percent of Voucher Households Were Elderly, Disabled, Attached to the Labor Force, or Received TANF in 2010

Concerns about work effort among recipients of housing assistance typically focus on families that are not elderly or disabled.  The second chart takes a closer look at these families, who make up slightly more than half of all voucher households.

About three-fourths of non-elderly, non-disabled voucher households are attached to the labor force — that is, they worked in 2010 or 2009 or likely were required to look for or prepare for work as part of their participation in TANF.  The typical income for a family that worked in 2010 was about $17,000 — not enough to enable a family to afford decent housing in most places.

Large Majority of Non-Elderly, Non-Disabled Households Worked or Were Subject to Work Requirements in 2010

Nearly half of the non-elderly, non-disabled households that weren’t attached to the labor force included a pre-school child or a person who has a disability (other than the head of the house or spouse).  Caring for these individuals may make it difficult or impossible for single heads of households to work without child care subsidies or other assistance.

That leaves about 129,000 voucher households that aren’t disabled or elderly, don’t work, aren’t subject to work requirements, and don’t include a young child or person with a disability.  These households tend to receive assistance for a shorter time than other voucher households, and they are spread out among several thousand local public housing agencies across the country — most of which don’t serve enough such households to justify the staff time required for a work-related intervention.

Policymakers should consider these facts when considering changes to the voucher program.

Senate Balanced Budget Amendment an Extreme Version of a Bad Idea

December 5, 2011 at 4:03 pm

Congress would have to cut all programs by an average of one-fourth by 2018 to meet the spending cap in the constitutional balanced budget amendment that the Senate is expected to consider this month, a new CBPP report explains.

Like any version of a balanced budget amendment, the Senate proposal — introduced by Minority Leader Mitch McConnell (R-KY) and Sen. Orrin Hatch (R-UT) — risks serious harm to the economy by requiring that the budget be balanced even during an economic downturn.  But this proposal would do far more damage because it also would prevent the federal government from meeting the nation’s basic needs even when the economy is healthy.

That’s because the amendment would enshrine a severe cap on total federal spending in the Constitution.  If Congress cut all programs by the same percentage to fit within the cap:

  • Social Security would be cut $266 billion in 2018 alone and almost $1.7 trillion through 2021.
  • Medicare would be cut $169 billion in 2018 and almost $1.1 trillion through 2021.
  • Medicaid and the Children’s Health Insurance Program would be cut $115 billion in 2018 and more than $700 billion through 2021.
  • Veterans’ disability payments, pensions, and other entitlement benefits would be cut $19 billion in 2018 and $123 billion through 2021.
  • Key safety-net programs — Supplemental Security Income (SSI) for the elderly and disabled poor, the Supplemental Nutrition Assistance Program (formerly food stamps), the school lunch and other child nutrition programs, and the refundable portions of the Child Tax Credit and the Earned Income Tax Credit — would be cut $59 billion in 2018 and almost $370 billion through 2021.
  • Defense would be cut more than $140 billion in 2018 and almost $900 billion through 2021. These cuts, combined with cuts already scheduled under current law, would shrink defense spending to 2.0 percent of GDP in 2018, a level not seen since before World War II.
  • Appropriations for non-defense discretionary programs — the part of the budget that includes education, housing, veterans’ medical care, transportation, law enforcement, biomedical and other scientific research, environmental protection, and others — would be cut more than $140 billion in 2018 and almost $900 billion through 2021.  These cuts, combined with cuts already scheduled under current law, would shrink this part of the budget to 2.0 percent of GDP, the smallest percentage since 1930.

If Congress opted for smaller cuts in some programs, it would have to cut other programs even more severely.  For instance, if it exempted Social Security, it would have to cut other programs by more than one-third on average.

Click here for the full report.