The Federal Budget, and Deficit-Cutting

The debate over the federal budget and deficit: an overview

Partisan conflict over federal spending has intensified since President Obama’s inauguration. With the national debt climbing and deficits setting new records each year, Republicans say spending is out of control, while Democrats argue that long-term recovery from the financial crisis requires deficits in the short-term, and that cutting spending now will damage the economy and devastate the poorest members of our society. (For a basic explanation of the deficit and the national debt, see this News-Basics article.) The conflict escalated during the debate over taxes in December, 2010, and grew more heated after newly-elected conservatives joined the House of Representatives in January, 2011.

Updates

2/17/12: After yet another standoff between the president and House Republicans, Congress finally approved an extension of the payroll tax cut. As a result, workers will continue to have less of their pay withheld for social security. (The current rate is 4.2%, as compared to the 6.2% rate in effect before 2011.)

The deficit-cutting supercommittee

As part of the August, 2011 deal to raise the debt ceiling, a congressional “supercommittee” of six Democrats and six Republicans was assigned to propose a plan to cut the deficit by $1.2 trillion over the next decade. The committee announced on 11/21/11, two days before its deadline, that it had failed. Unless lawmakers change the rules (which they are likely to do), the spending cuts will be made automatically, trimming defense spending and domestic programs equally, starting in 2013.

The committee deadlocked because Republicans refused to raise taxes, while Democrats refused to accept a solution that would achieve the entire $1.2 trillion through spending cuts alone.

For more on the supercommittee’s failure, see the New York Times.

Opinion on the supercommittee

“Staring into the Budget’s Abyss,” New York Times editorial, 11/7/11: “The committee should be working overtime to avoid a sequester, which would cut virtually every discretionary program at the Pentagon and the Homeland Security Department by 10 percent in 2013… Medicare providers would be cut by 2 percent, and there would be major reductions in other domestic programs… But as bad as the sequester would be, it would spare most social-insurance programs, making it better than the proposals by supercommittee Republicans to cut more than $2 trillion without raising any revenues. Those would largely spare the Pentagon but make deep cuts in programs that benefit the needy.”

Ezra Klein, “How the supercommittee-ologists view the deficit-reduction panel,” Washington Post, 11/14/11: an analysis of the many reasons why the supercommittee is failing.

Raising the debt ceiling

The law sets a limit on the debt the federal government can accumulate. This debt ceiling, which has been raised 10 times since 2001, now stands at $14.294 trillion. We reached the limit on May 16, 2011, but maneuvering by the Treasury Department pushed the deadline off by two and half months. Treasury Secretary Timothy Geithner warned that, unless the ceiling was raised by August 2, the government wouldn’t be able to keep paying its bills, and wouldn’t be able to pay investors who wanted to cash in their bonds. Economists warned that defaulting on the debt would have a catastrophic effect, because bond-rating agencies would downgrade our credit rating, and we would have to pay higher interest rates in order to borrow money. Although Republicans agreed that this should not happen, Speaker of the House John Boehner said early on that his party wouldn’t agree to raise the debt ceiling “without something really, really big attached to it,” i.e., a commitment by Democrats to make drastic spending cuts.

The clash over the debt ceiling became a showdown between the president and conservative Republicans in the House of Representatives, who believe that the government is too big and spends too much. Between April and July, negotiations broke down repeatedly over ideological differences. Democrats insisted that a deal to cut the deficit by reducing spending must also include increasing revenue, either by closing tax loopholes or by raising taxes on the wealthiest Americans. President Obama offered big cuts in Medicare, Medicaid, and Social Security spending in exchange for these tax increases (thereby angering the liberal wing of his party); but conservatives refused to agree to any deal that included higher taxes.

On July 31, two days before the deadline, the president and congressional leaders reached an agreement; on August 1, the House of Representatives passed the agreement, 269-161, with both liberals and Tea Party conservatives voting against it. (Liberals objected to the massive cuts in domestic spending, and the lack of any new tax revenue from the wealthy. Conservatives disliked the cuts in defense spending.) The Senate approved the package on August 2, the deadline for raising the debt ceiling, by a vote of 74-26.

The deal will yield up to $2.4 trillion in savings over the next decade. It raises the debt ceiling through the end of 2012, and establishes a special congressional committee to devise long-term deficit-cutting plans.

For a more detailed, updated account of the battle over the debt ceiling, see the New York Times. For answers to basic questions about the debt ceiling, see this Q&A from the New York Times. For details on the deal approved by the Senate, see CNN.

Updates on the debt ceiling agreement

8/5/11: As a result of the long struggle over the debt ceiling, and based on the agreement that ended the stalemate, Standard & Poors has downgraded its rating of U.S. Treasury bonds, from AAA (its top grade) to AA+. For more, see the Wall Street Journal.

Opinions on the debt ceiling stalemate

David Frum, “Wake up GOP: Smashing system doesn’t fix it,” cnn.com, 8/1/11: a former assistant for President George W. Bush sees much to criticize in his party during the debt ceiling crisis. He writes that a minority of Republicans “have come to dominate my party. [They] forced a debt standoff that could have ended in default and a second Great Recession.” Frum goes on to outline his idea of a better direction for the party.

Paul Krugman, “The Centrist Cop-Out,” New York Times, 7/29/11: “Republicans have, in effect, taken America hostage, threatening to undermine the economy and disrupt the essential business of government unless they get policy concessions they would never have been able to enact through legislation… Yet many people in the news media apparently can’t bring themselves to acknowledge this simple reality. News reports portray the parties as equally intransigent… as if the problem was too much partisanship on both sides… Wisdom doesn’t necessarily reside in the middle of the road, and I want leaders who do the right thing, not the centrist thing.”

Grover Norquist, “Read My Lips: No New Taxes,” New York Times, 7/21/11: “fiscal conservatives must stick to their commitment to oppose tax increases and fight to reduce the size of the federal government… The problem to be solved is not the deficit; it is overspending.”

David Leonhardt, “Why Taxes Will Rise in the End,” New York Times, 7/12/11: “A refusal to raise taxes… cannot take us back to the good old days. It would instead lead to a very different American society. For taxes to remain where they are, Washington would need to end Medicare as we know it, end Social Security as we know it, severely shrink the military — or do some combination of the above.”

Ross Douthat, “The Method to Their Madness,” New York Times, 7/11/11: analyzes the reasons why Republicans are holding out against tax increases as time runs out to raise the debt ceiling.

William Gale, “Not Raising the Debt Ceiling would Worsen the Fiscal Situation,” U.S. News & World Report, 3/28/11: While we need to resolve bring spending and revenue into better balance, that’s a separate issue from raising the debt ceiling. “Not paying the bills we already owe… would actually make a solution more difficult by undercutting the government’s creditworthiness.”

Michael Needham, “We Can’t Be Serious About the Debt Ceiling Until We Fix Spending,” U.S. News & World Report, 3/28/11: “We must seize this opportunity… to reform entitlements, reduce discretionary spending, and correct a legislative process that leads to ever more government spending.”

The December, 2010 tax deal

Two sets of tax cuts during President George W. Bush’s first term were set to expire at the end of 2010. In order to reduce the deficit, President Obama wanted to let the tax cuts expire for Americans with income of $250,000 per year or more, while preserving the cuts for other Americans. House Republicans refused to agree unless tax cuts for the wealthy were included. In the end, the tax cuts were extended for everyone for two years, despite opposition by liberals. The deal also included a one-year, 2% reduction in payroll taxes (which fund Social Security and Medicare), a lower estate tax rate (meaning that heirs will pay lower taxes on inheritances), and a 13-month extension of benefits for the long-term unemployed. The agreement came at a total cost of $858 billion.

The projected deficit of $1.6 trillion for fiscal 2011 is the biggest since World War II, when measured as a percentage of Gross Domestic Product, but President Obama defended the deal, saying that “the single most important thing we can do for deficit reduction is to actually expand economic growth.” Because the tax cuts were only extended for two years, longer-term tax policy will be decided in 2012— during the next presidential election campaign. (For details on the tax deal, see Wikipedia or the Wall Street Journal.)

Narrowly averting a federal government shutdown, April, 2011

No budget for fiscal 2010 was ever adopted. Instead, Congress has passed a series of “continuing resolutions.” In order to fund federal operations from April through the end of September, 2011, Democrats and Republicans had to agree on a temporary budget resolution before the previous resolution expired on April 8th. Many Republicans had campaigned on a pledge to cut $100 billion from the current year’s budget, and they demanded substantial spending cuts. Democrats reached an agreement with Speaker of the House John Boehner that included $33 billion in spending cuts over the following six months—but conservatives in the House had promised voters more, and they passed a plan with $60 billion in cuts. The Republicans also included “policy riders” in their budget that blocked funding to carry out the health care reform bill of 2009 and that limited the powers of the Environmental Protection Agency.

Although the two sides came close to agreeing on the size of spending cuts, they resisted compromise on policy differences. News analysts discussed the impact of a possible federal government shutdown, which hadn’t happened since 1995, when President Clinton clashed with a Republican-controlled Congress.

The two sides reached an agreement with less than two hours remaining before the deadline. The final deal cut $38 billion from federal spending from April through September. It did not include changes to environmental regulations that Republicans had sought, or an end to funding for organizations that provide abortions, including Planned Parenthood, but it did restrict abortion financing in Washington, D.C. For details on the compromise, see the New York Times.

The 2012 budget

The 2012 fiscal year begins on October 1, 2011. The battle over shaping the budget—and over how to tackle the deficit—began in February, when President Obama proposed a budget. The proposal cut spending in order to reduce the deficit and to free up funds for education, infrastructure, clean energy, and technological innovation, which the president described as key investments in the future. The budget included $3.7 trillion in spending, with a projected deficit of $1.1 trillion.

In April, Representative Paul Ryan of Wisconsin (who chairs the House Budget Committee) delivered a long-term budget plan that represents the Republican Party’s vision for the future. The Ryan plan cuts spending more drastically than the president’s ($6.2 trillion over the next decade), balances the federal budget by 2015, transforms Medicare into a voucher system (giving seniors fixed amounts to help them buy private insurance), and cuts $4 trillion in taxes on corporations and individuals. It spares the defense budget from major cuts, while transforming Medicaid (the publicly-funded health insurance program for low-income Americans) into a limited grant to states, which would reduce costs but would also reduce medical benefits for the poor. Ryan presented his plan as a decisive first step toward ending budget deficits and helping America compete in the global economy.

President Obama responded to Ryan’s plan a week later by calling for bipartisan negotiations to shape a multi-year deficit-cutting program. In contrast with the Ryan plan, he proposed tax increases for the wealthiest Americans, cuts to the military budget, reduced spending on Medicare and Medicaid (while leaving the two programs intact), and unspecified cost-saving changes to Social Security.

These starkly contrasting visions of the best path forward will shape the presidential campaign of 2012. In the short term, since Republicans control the House and Democrats control the Senate, neither budget plan has a chance of being approved without major changes.

For details on what’s contained in each of the budget plans, see the New York Times.

Why all of this matters

Few subjects in the news make non-economists yawn more than debates over budgets. But few issues have a more direct impact on our lives. The decisions and compromises our leaders make this year and next will determine how much funding is available for services that Americans depend on, and will either help or hinder the country’s economic recovery. Democrats believe that we need to protect the most vulnerable members of society and invest in America’s economic future, and that these goals will require higher taxes. Republicans believe that we can no longer afford the social programs Democrats love, and that reducing taxes to stimulate the economy is absolutely necessary. Voters will have to decide which vision they agree with, and hope they’ve chosen wisely.

Trouble ahead: Medicare and Social Security

Many observers, including Federal Reserve Chairman Ben Bernanke, point out that spending on Medicare and Social Security is a more serious long-term problem than the spending that Congress has recently been cutting by the billions. The Baby Boomers (a population bulge born between 1945 and 1960) have now begun to retire, and the cost of these two programs for the elderly is projected to exceed the revenues allotted to pay for them. President Obama and Representative Paul Ryan have proposed dramatically different ways to deal with Medicare’s ballooning costs (see above). As for Social Security, Ryan has suggested gradually raising the retirement age, and reducing benefits to middle- and high-income retirees. He would also offer people under 55 the option of investing about a third of their Social Security payments in personal retirement accounts that would be guaranteed against loss. The president has not offered specific suggestions on Social Security, but he said that changes need to be made in order to rein in costs.

Grover Norquist and the No Tax Pledge

Since 1986, Grover Norquist—founder and president of Americans for Tax Reform—has sponsored the “Taxpayer Protection Pledge.” Norquist asks legislators and candidates to promise, in writing, that they will oppose all tax increases. Nearly every Republican in Congress has signed the pledge. According to Norquist, “The government’s power to control one’s life derives from its power to tax. We believe that power should be minimized.” He has also said, “Raising taxes is what politicians do when they don’t have the strength to actually govern.”

Democrats blame the pledge for the deadlock in the deficit-cutting supercommittee: all six Republicans on the committee have signed the pledge.

In early November, 2011, some House Republicans asked Norquist to take their names off the list of signers, saying the sheet of paper they signed years ago is no longer valid. So far, Norquist has refused.

Terms in the news

Budget deficit: The amount by which government spending exceeds income in a given year.

Vouchers: payments to citizens who want to opt out of programs funded by taxes (such as public schools), to help them pay for private services instead.

Entitlements: Government programs that guarantee payments to those who meet the qualifications. Examples include Medicare, Social Security, and food stamps.

Discretionary spending: When used in a discussion of federal budgets, this means government spending that is flexible in amount. Each year, Congress determines how much to spend on individual programs, and can spend less in order to trim deficits.

Opinions

Teresa Tritch, “How the Deficit Got This Big,” New York Times, 7/23/11: How did we go from budget surpluses in the 1990s to nine years of deficits?  “The answer is largely the Bush-era tax cuts, war spending in Iraq and Afghanistan, and recessions.”

“Budget Battles: Tax and Spending Myths and Realities,” a New York Times editorial, 4/12/11: “House Republicans… want to cut spending on government programs over the next decade by $4.3 trillion. And they want to cut tax revenues over the same period by $4.2 trillion… [S]lashing vital services just to pay for more tax cuts is bad public policy and bad economics.”

Representative Eric Cantor, “We must cut spending to grow jobs,” TheHill.com, 2/4/11: “[F]ar too many people remain out of work. That is why all of our efforts are centered around jobs – starting with cutting spending and federal regulations – to grow the economy so that people can get back to work.”

Sally Kohn, “The Federal Budget Crisis Hoax,” Fox News, 4/6/11: “The extent of the federal budget crisis as a whole is being wildly overblown to scare us toward drastic measures rather than rational solutions.”

Ross Douthat, “The Middle-Class Tax Trap,” New York Times, 4/17/11: Douthat believes that President Obama’s budget proposal would eventually result in the middle class paying much higher taxes in order to keep Medicare afloat.

Paul Krugman, “Who’s Serious Now?” New York Times, 4/14/11: “The only real things in [the Ryan proposal] were savage cuts in aid to the needy and the uninsured, huge tax cuts for corporations and the rich, and Medicare privatization… [In Obama’s plan] you had a reaffirmation of American compassion and community, coupled with fairly realistic numbers. Which would you choose?”

David Brooks, “Ultimate Spoiler Alert,” New York Times, 4/14/11: analyzes the differences in vision and ideology between Paul Ryan and Barack Obama, and finds points to agree with on both sides.

Jonathan Chait, “War on the Weak,” The Daily Beast, 4/10/11: Chait locates the source of Paul Ryan’s ideas in novelist-philosopher Ayn Rand’s books, which Ryan (along with many Tea Party supporters) admires. Rand believed that the proper purpose of life is the pursuit of one’s own self-interest, and that those at the top contribute the most to society, while the lower classes contribute little. According to Chait, Ryan’s Randian budget proposal aims to benefit the wealthy by cutting benefits to the poor and middle-class.

Rick Newman, “How Life Would Change Under the GOP Budget,” U.S. News and World Report, 4/5/11: Although the Ryan plan will never pass with Democrats in control of the Senate, some changes Ryan proposes are inevitable, according to Newman. For example, seniors will have to pay more for their healthcare, and eligibility for government assistance will be limited to the neediest Americans.

“One has to wonder why, after so many years of not raising taxes on the wealthy, we still face the high unemployment, huge deficit and grave fiscal worries that Republicans promise us will happen if the tax rates are raised.” — Doris Fenig, 
Floral Park, New York (from a letter to the New York Times)

For more information

On how the federal budget process works: see the Center on Budget and Policy Priorities.

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Last updated 3/5/12

You may also be interested in the following News-Basics overviews: The Deficit and the Debt; The Financial Crisis; The Tea Party.