Red Ink Page 11
IT’S THE DEFICIT, STUPID
If there’s a chart or PowerPoint slide that shows a volcano-like explosion of spending or deficits in the future, chances are it was made by, paid for, or inspired by Pete Peterson, age eighty-six, the modern incarnation of an Old Testament prophet roaming the country and the airwaves to lament the profligacy of his times. “My daughter jokes that when I do pass on, it will be at my desk with my head huddled over a speech explaining why the Social Security trust fund is an insolvent oxymoron,” he wrote in his memoir. “I hope she’s right and that it has lots of PowerPoint charts.”
His mission: to generate enough alarm about deficits so politicians cut spending and raise taxes—and soon. Peterson is “the godfather of this whole effort of trying to bring sanity to our nation’s finances,” said Erskine Bowles, who chaired a deficit-reduction commission that Obama appointed.
Pete Peterson is the son of a Greek immigrant who ran a café in Kearney, Nebraska, that was, Peterson allows, known less for its food than for being open 24/7 for twenty-five uninterrupted years. He hopscotched through corporate America, getting rich along the way. Between stints as chief executive of Bell & Howell and of Lehman Brothers, he served as Nixon’s secretary of commerce. In 1985, Peterson cofounded Blackstone Group, a private equity firm, a venture that made him and his partner, Steve Schwarzman, really rich.
As Peterson tells it from his office on the forty-eighth floor of a Manhattan office tower with a spectacular view of the New York skyline, his intense focus on the dangers of deficits dates to the early 1980s. He and his wife, his third, were trying to buy a house in East Hampton on Long Island from a friend who was playing hard to get. To win her favor, Peterson agreed to speak at the inaugural forum of a group she was forming, the Women’s Economic Round Table. She accepted on the condition that he talk about Ronald Reagan’s budget. Peterson had voted for Reagan, assuming him to be both a social and a fiscal conservative, but the homework he did for the speech convinced him otherwise. In March 1981, just two months after Reagan took office, Peterson stunned the White House and Reagan’s many fans on Wall Street by condemning his tax cuts as “too much of an all-or-nothing gamble, too much of a high-wire act.” The problem, he told the women’s roundtable in 1981, was “a growing systemic inability to control mandated [benefit] spending programs.” He has been making the same point in speeches, magazine essays, and books for the past thirty years. (And he got the house.)
When Blackstone sold shares to the public in 2007, Peterson cashed out to the tune of $1.85 billion. “I did not want to finish life as the retired CEO playing golf five times a week,” he said. He had financed antideficit campaigns before. In 2008, he went big time, creating the Peter G. Peterson Foundation to “engage the American people and our leaders in confronting what I consider to be the greatest challenge before us as a nation: our unsustainable long-term national debt” and endowing it with $1 billion.
Peterson’s foundation has bankrolled what might be called the deficit-industrial complex, a set of overlapping organizations with a shared goal of rallying the public—and especially the business and political elite—to reduce the deficit before financial Armageddon arrives. In 2011, the foundation gave $3.1 million to an outfit formed by a passionate deficit warrior, David Walker, a former head of the Government Accountability Office and also an ex–chief executive of the Peterson Foundation; $1.5 million to the Concord Coalition, a group Peterson helped form in the 1990s that, among other things, runs a roving “fiscal wake‑up tour” to get the public alarmed; more than $500,000 to the Committee for a Responsible Federal Budget, a nonpartisan Washington group that presses the case for deficit reduction; and $200,000 each to six think tanks of differing political persuasions to craft deficit-reduction plans of their own. The foundation has financed an eighty-five-minute documentary on the dangers of debt, called I.O.U.S.A. It has run a national advertising campaign around a fictional presidential candidate named “Hugh Jidette.” (Say it quickly three times.) Because Pete Peterson likes them, the foundation also produces a steady stream of scary and colorful charts.
The message is simple and consistent: the United States must slay the deficit dragon before it kills the United States. The actual belt-tightening should be delayed until the economy has recovered, but it must be done if the nation is to make the investments needed to restore the American dream of rising living standards.
“On our current course, we are headed toward an unthinkable situation in which the federal government spends more than four times as much on interest as it spends on education, R&D, and infrastructure, combined,” Pete Peterson has said. “This effectively would mean spending much more on our past than we do on our future … robbing future generations of the opportunities we have enjoyed.” And in contrast to Paul Ryan—and current Republican orthodoxy—Peterson has long argued that tax increases are essential, inevitable, and wise. “Unlike some of my Wall Street colleagues,” Peterson wrote in the Atlantic back in October 1993 and has repeated frequently ever since, “I see absolutely nothing wrong with imposing higher tax burdens on the wealthiest in our society.”
A TWO-FISTED FISCAL POLICY
Inside the White House, the banner for doing more, much more, to help the economy than Obama and Congress did was carried by Christina Romer, the Berkeley economist and chair of the Council of Economic Advisers. The CEA is an unusual cog in the economic-policy-making apparatus. Created by Congress in 1946, the three-member council of economists, usually drawn from academia, controls nothing. Its sole task is to give the president “objective economic advice and analysis.” Its influence varies from administration to administration, and its fiscal advice over the years is a history of the evolution of economists’ thinking about budgets.
Romer is a numbers-crunching bleeding heart. “The first recession I really remember was that in 1981–82,” she once said. “That recession was personal.” In 1983, her father lost his engineering job at a chemical company. “I vividly remember the phone call where he told me that he had ‘been sacked.’ He was careful to say that I shouldn’t worry about my wedding, which was scheduled for that summer. There was money put aside for that.” Her father later found a lower-paying, though stable, job overseeing subway car rehabilitation in Philadelphia.
Romer drew unwelcome notoriety early in the administration when she and a colleague predicted in January 2009 that, without any stimulus, the unemployment rate would reach 9 percent but an $800 billion dose of fiscal adrenaline would keep it from rising above 8 percent. As later revisions to government data revealed, the economy was in much worse shape at that moment than the Obama team realized. Still, unemployment peaked at 10 percent in October 2009, and Republicans have never let her forget the flawed prediction.
Romer shared Krugman’s frustration that the government wasn’t doing more to bring down unemployment—and still does. “The evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs and that reducing the budget deficit lowers growth, at least in the near term,” she said after leaving the White House. In the early days of the Obama administration, she saw a case for a much bigger fiscal stimulus (as much as $1.8 trillion) than the new president eventually proposed. She believes the economy would be better today if Obama had secured another big dose of stimulus in late 2009.
But she doesn’t share Krugman’s conviction that the deficit can be safely ignored for now, especially in the wake of the tumult in Europe over governments that can’t pay their debts. In fact, the only way, in her view, to get more stimulus now is to package it with a credible set of deficit-reducing measures that would take effect later when the economy was stronger. “We don’t have to reduce the deficit immediately. In fact, we can increase it temporarily, as we need to, to help create jobs,” she has said. “But to reassure financial markets (and ourselves) that we will be solvent over the long haul, we need to pass a plan as soon as possible for reducing the deficit gradually over ti
me.”
Although less emphatic in public, Fed chairman Bernanke takes a similar view. He is wary about prescribing fiscal policy to members of Congress, who like to remind him that decisions on taxes and spending are their turf, not his. But when pressed at a February 2012 hearing in the House, he endorsed what he called “a two-handed plan”—one that coupled increased spending on infrastructure or education or tax cuts while simultaneously addressing “the long-term necessity of making fiscal policy sustainable.… You need to think about those two things together.”
Alas, thinking about “two things together” is not Congress’s strength. In their rhetoric for much of the past couple of years, both Congress and the president have rushed to one side (extend the Bush income tax cuts, continue payroll tax holidays, cut corporate tax rates) and then to the other (raise taxes on the rich, close tax loopholes, cap annually appropriated spending, slow the growth in Medicare spending). Obama’s latest budget has elements of both: a proposal, for instance, for a new tax break to encourage employers to hire (would increase the deficit by $14 billion in the first year) and a proposal to limit the tax deductions for upper-income taxpayers (would reduce the deficit by $27 billion in the first year). Republicans promptly chastised him for seeking to raise taxes and cut spending on Medicare, and then complained he wasn’t doing anything about the deficit.
THE TRUTH TELLER
Romer and Ryan, Krugman and Peterson are full-throated advocates with clear and loudly stated views on what the government should and shouldn’t do differently. In contrast, Doug Elmendorf, director of the CBO, is more of a national truth teller, trying to make the public and the politicians understand choices they cannot evade while at the same time not hurting his—and the CBO’s—credibility by taking sides. The Washington Examiner once dubbed him “a geek with guts.” At a time when almost every fact about the federal budget is the subject of fierce debate, Elmendorf’s measured voice can be hard to hear, but some people do listen. When he called a press briefing on the agency’s annual economic and budget outlook in January 2012, he drew ten television cameras to record his carefully calibrated words.
Slim and bespectacled, Elmendorf could play a college professor on TV. “A quiet man who thinks carefully about everything,” the New York Times once said of him. Indeed, he deliberately chose a baseball game for one of his first dates with his future wife. “You want to be sure there’s something going on to fill the lull in the conversation but not like a movie where you can’t talk,” he explained.
Elmendorf’s academic pedigree is impeccable: Princeton, 1983; Harvard Ph.D., 1989. The advisers for his dissertation—“Fiscal Policy and Financial Markets”—were Martin Feldstein and Greg Mankiw, top economic advisers, respectively, to Reagan and George W. Bush, and Larry Summers, top economic adviser to Clinton and Obama. After five years helping to teach the big introductory economics course at Harvard, Elmendorf came to Washington in the mid-1990s to work at the CBO. “Starting about then,” he said, “I thought being CBO director would be a very good job.” But first he went to work on the staff of the Federal Reserve Board, with a couple of breaks to work on the staffs of the White House Council of Economic Advisers and the Clinton Treasury. Elmendorf left government in 2007 for the Brookings Institution think tank but came back in 2009 when the congressional leadership—then all Democrats—picked him to run the CBO, succeeding Peter Orszag, who went to the White House to be Obama’s budget director.
At congressional hearings, Elmendorf is like the referee in a food fight. With calm dispassionate words and charts, he tries to give his bosses in Congress a reality check. Members of Congress cross-examine Elmendorf as if he were an expert witness in a murder trial, laboring to get him to support the questioner’s point of view. (Senator Kent Conrad, a Democrat from North Dakota, at a February 2012 hearing: “Why wouldn’t one conclude from what you’ve said here that the best policy in the short term would be to extend tax cuts, at least some significant part of the tax cuts, and defer some of the spending cuts … several years, but right now agree to a plan that will raise revenue and cut spending so that at the end of the 10 years we’ve dramatically reduced deficits and reduced the growth of debt?”)
Elmendorf tries just as hard to be sure Congress understands the daunting dimensions of the deficit and the alternative ways to reduce it while avoiding taking sides in the partisan debate, particularly over taxes. (“I don’t want to speak to a specific combination of policies that the Congress might choose to extend or let expire,” he told Conrad. “But on your general point, I think agreement about how the country’s budget will be put on a sustainable path would be a good thing for the economy in the short run because it would give people some confidence that they knew where policies were headed, which is very hard to have in the current environment.”)
Elmendorf, in short, is a good guide to the fiscal landscape. His tour begins with a couple of observations.
One is a demographic fact. “We cannot go back to the tax and spending policies of the past because the number of people sixty-five or older will increase by one-third between 2012 and 2022,” Elmendorf says. As more baby boomers cross the threshold for collecting Social Security or being covered by Medicare, spending on those programs will rise. And even hard-core spending cutters willing to talk about paring Social Security or Medicare or raising the eligibility age propose exempting those who have already turned fifty-five.
The other is a political fact that sums up the entire budget dilemma in a single sentence. “The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services,” he has said.
The CBO’s traditional role is to take budget plans that the president and members of Congress devise and put numbers on them: what would the course of spending and taxes and deficits be if they were enacted. To that end, it also produces a Chinese menu of deficit-reducing options from which Congress can choose.
But none of that seemed to be penetrating the political debate. So Elmendorf tried a different tack. He started by projecting today’s tax and spending policies ten years out, the baseline referred to earlier. That would put the budget deficit in 2022 above $1 trillion and rising. By then, the U.S. government would be borrowing so much that the national debt, as a percentage of the GDP, would be dangerously high (over 90 percent) and still rising.
Then he asked: What would have to happen to avoid that outcome, to bring the spending and revenue lines close enough together so that the national debt would at least stop climbing, as a percentage of GDP? His answer: spending cuts or tax increases or a combination of the two that add up to $750 billion a year by 2022. Even in Washington that’s a big number.
What would it take to get to that goal? Remember, the starting point for the exercise is that Congress sticks to the caps it has set on annually appropriated defense and domestic spending. “The country,” Elmendorf pointed out, “is [already] on track to substantially reduce the role of most federal activities, relative to the size of the economy.” Perhaps Congress will squeeze more out of defense between now and 2022, depending on the state of the world. But it’s a good bet that what it saves in defense, it’ll end up spending on domestic programs—highways or job training or disaster relief or something.
So say Congress decided to get really serious about the deficit by looking at spending on the big benefit programs that today account for 40 percent of all federal outlays: Social Security and the growing Medicare and Medicaid budgets. Say it raised the age at which the elderly become eligible for Medicare to sixty-seven (from sixty-five) and the age at which they’re eligible for full Social Security benefits to seventy (from sixty-seven). Say it shifted to a less generous formula for setting Social Security benefits and adjusting them for inflation. Say it boosted the premiums that the elderly on Medicare pay for their coverage and made them pay m
ore of their health care bills out of pocket. And say it limited increases in federal spending for Medicaid, the joint state-federal health insurance program for the poor, so the tab rose no faster than the pace at which private sector wages rise.
Any one of those would be a very big deal. But if Congress did all that, it would be saving about $250 billion annually by 2022. That’s a big number to be sure, but here’s the rub: all those measures combined would save only a third of what’s needed to reach Elmendorf’s budget nirvana goal. If all the weight is put on the big entitlement programs—Social Security, Medicare, and Medicaid—they would need to be cut by 25 percent to put the budget on a sustainable course by 2022.
Which is why the conversation inevitably turns to raising taxes alongside cutting spending.
Elmendorf’s starting point for the exercise is that all the tax cuts that Bush instigated and Obama continued are extended at the end of the year. Say Congress took Obama’s advice and let income tax rates on the over-$250,000-a-year crowd rise to pre-Bush levels. That would bring in between $100 billion and $150 billion in 2020. Say it also eliminated the federal income tax deductions for mortgage interest and state and local taxes, changes that would raise taxes on many more people. That would yield another $180 billion. Both would be huge changes, and they, too, would get Congress only about one-third of the way toward the goal. If Social Security, Medicare, and Medicaid were shielded altogether, then taxes would have to be raised by about one-sixth. That’s a big tax increase.
Put all the spending cuts and the tax increases on this shopping list into the deficit-reduction basket, and there still would not be enough money to bring the deficit to sustainable levels by 2022. Elmendorf’s list of options is hardly exhaustive: if Congress let all the Bush tax cuts expire, raising the taxes of almost everyone who pays income taxes, it would, by CBO estimates, come close to hitting the target. But the point is clear: small changes will not suffice.