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Deficits and Disaster

Ron Haskins

The Brookings Institution

September 14, 2010

Thanks to Isabel Sawhill, Alex Gold, Daniel Moskowitz and Mary Baugh.

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Overview

• Big Picture• Polls/Public Dialogue• Why Deficits Matter• Taking Action

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The Big Picture I: Budget Projections

Sources: Actual is from Office of Management and Budget Historical Tables (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/hist01z1.xls); CBO Baseline is from “The Budget and Economic Outlook: An Update,” August 2010 (http://www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf); Adjusted Baseline is from Auerbach and Gale, “Déjà Vu All Over Again: On the Dismal Prospects for the Federal Budget,” 2010 (http://www.brookings.edu/~/media/Files/rc/papers/2010/0429_budget_outlook_gale/0429_budget_outlook_gale.pdf).

Actual CBO Baseline (August 2010) Adjusted Baseline

-1,600

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

200

400

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

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20

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09

20

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20

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20

20

Su

rplu

s/D

efi

cit

, $B

illio

ns

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The Big Picture II: Spending and Debt as Percent of GDP, 2010, 2020, 2050

Note: The Medicare category is net of Medicare premiums and payments.Source: Congressional Budget Office, Alternative Fiscal Scenario, The Long Term Budget Outlook, June 2010.

4.8 5.1

12.9

1.4

9.4

5.26.5

10.4

3.8

6.65.9

12.4

16.5

26.0

10.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Social Security Medicare,Medicaid, CHIP,and Exchange

Subsidies

All OtherNoninterest

Net Interest Deficit

Deb

t as P

erc

en

t o

f G

DP

2010 2020 2050

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The Big Picture III: Rising Debt/GDP Ratio

62

87

146

233

344

0

50

100

150

200

250

300

350

400

2010 2020 2030 2040 2050

Year

De

bt

as

Pe

rce

nt

of

GD

P

Source: Congressional Budget Office, Alternative Fiscal Scenario, The Long Term Budget Outlook, June 2010.

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The Big Picture IV: Unsustainable Spending

Sources: Congressional Budget Office, “Historical Budget Data” (http://www.cbo.gov/ftpdocs/108xx/doc10871/AppendixF.shtml) and Congressional Budget Office, Alternative Fiscal Scenario, The Long Term Budget Outlook, June 2010.

Social Security

Medicare, Medicaid, Exchange

Subsidies, and CHIP

Net Interest

Average Federal Revenue, 1970-

2009

0

10

20

30

40

50

60

70

2010 2020 2030 2040 2050 2060 2070 2080

Year

Per

cen

t o

f G

DP

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Polls: The Deficit Is Top Priority

605358

53

55

56

35

4051

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 2008 2009 2010

Year

Pe

rce

nt

Wh

o S

ay

De

fic

it Is

To

p P

rio

rity

Source: Pew Research Center for the People & the Press, various years.

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Polls: Public Worried About Deficits

14%

11% 11%

8%7%

6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Mo

st

Imp

ort

an

t P

rob

lem

25

Ye

ars

fr

om

No

w (

Pe

rce

nt)

Source: Gallup, March 4-7, 2010.

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Polls: Public Support for Sacrifice

18%

69%

13%

0%

10%

20%

30%

40%

50%

60%

70%

Yes No Not sure

Source: Rasmussen, April 27-28, 2010.

30%

62%

5%3%

0%

10%

20%

30%

40%

50%

60%

70%

Willing Not willing Some, butnot others

Unsure / Noanswer

Source: CBS News / New York Times Poll, February 2010.

45%

51%

2% 2%

0%

10%

20%

30%

40%

50%

60%

70%

Willing Not Willing Some, butnot others

Unsure / Noanswer

Source: CBS News / New York Times Poll, February 2010.

Willing to pay higher taxes

Willing to decrease spending on health care or education

Willing to decrease military spending

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Polls: Willingness to Cut Specific Programs

Source: The Economist / YouGov Poll, April 3-6, 2010.

6

7

7

11

12

12

12

13

17

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22

27

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71

0 10 20 30 40 50 60 70 80

Veterans' Benefits

Social Security

Medicare

Medicaid

None of the Above

Education

Highw ays

Health Research

Aid to the Poor

Unemployment Benefits

Science and Technology

National Defense

Mass Transit

Agriculture

Housing

The Environment

Foreign Aid

Percent Supporting Specific Cuts

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Polls: Support for Specific Solutions

Source: Bloomberg Poll, December 2009.

20

23

26

57

66

0 10 20 30 40 50 60 70

New federal consumption tax

Cut spending growth on entitlement programs

Raise taxes on the middle-class as well as the wealthy

Cut discretionary federal programs

Raise income taxes on wealthy (individuals making$500,000; households>$1 million)

Perecent Supporting Specific Solutions

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Good News: Attitudes Change in Response to Dialogue

• Dialogues with public on Social Security, Medicare, and taxes

• Conducted by Viewpoint Learning in collaboration with other organizations

• 12 day-long dialogues all over the country• Representative sample of 35-45 participants

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Dialogues with the Public: Medicare– 68% support gradually raising the age of

eligibility from 65 to 67 – 68% support progressive scaling of

premiums to income – 79% support raising taxes to maintain

benefit levels– 75% support a 2-3% national sales tax– 63% support raising the payroll tax rate

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Dialogues with the Public: Taxes

• Participants are willing to pay higher taxes if they are sure that their tax dollars are well spent for reducing deficit or for earmarked purposes they consider important.

• 57% support raising taxes to reduce the deficit• 67% support investment in education and

transportation even if taxes increase

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Why Deficits Matter

• Dependence on foreign lenders• Rapidly rising interest costs • Burden on future generations• Limited ability to invest in children• Limited ability to address emergencies

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Dependence on Foreigners

49%

30% 32%36%

41% 42% 41%

47%44%

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2009

Tri

llio

ns

of

Cu

rre

nt

Do

llars

Foreign Holdings of Treasury Securities Domestic Holdings of Treasury Securities

Source: U.S. Treasury Department and U.S. Bureau of Public Debt (though June 2009).

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Rapidly Rising Interest Costs

Source: Congressional Budget Office, “The Budget and Economic Outlook: An Update,” August 2010, Table 1-2, (http://www.cbo.gov/ftpdocs/117xx/doc11705/BudgetProjections.xls).

187 202225

259

326

410

492

564

623

676

726

778

0

100

200

300

400

500

600

700

800

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Bill

ion

s o

f Cu

rren

t Do

llars

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Burden on Future Generations

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Spending On Children and The Elderly

$8,942

$2,895

$21,904 $21,144

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Public Spending Federal Spending

Spending Per Child

Spending Per Person 65and Older

Source: Julia B. Isaacs, How Much Do We Spend on Children and the Elderly (Washington, D.C.: Brookings, 2009).

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Productive Investments in Children

• Preschool Education• Home Visiting• Teen Pregnancy Prevention• Career Academies• K-12 Education, Especially KIPP Schools• Second Chance Programs for Teens• Community and Family-based Programs for

Delinquents• Community College Interventions• Small Schools of Choice

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Limited Ability to Address Emergencies

• Wars and Terrorists Attacks

• Natural Disasters

• Recessions

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Taking Action: Preconditions

• Public recognition that deficits are a problem• Public willingness to pay new taxes and accept

spending cutbacks• Everything on the table• Bipartisanship• Presidential Leadership

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Taking Action: General Rules

• Recognition of short-term vs. long-term impacts• Combination of spending cuts and revenue

incentives• No implementation until economy is in recovery• Implement cuts gradually over a period of years• Savings must come from big three

entitlements: Medicare, Medicaid, and Social Security

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Average Number of Years Spent in Retirement: 1950 and 2006

Source: Isabel V. Sawhill, “Paying for Investments in Children,” in Big Ideas for Children: Investing in Our Nation’s Future, edited by First Focus (Washington, D.C.: First Focus, 2008).

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Selected Statistics for the Elderly and Non-Elderly

Source: Isabel V. Sawhill, “Paying for Investments in Children,” in Big Ideas for Children: Investing in Our Nation’s Future, edited by First Focus (Washington, D.C.: First Focus, 2008); updated with data for 2007 where available.

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Taking Action: Social Security Reforms

30

50

90

100

50

60

30

30

0 20 40 60 80 100 120

Increase the Payroll Tax Rate By 1 Percentage Point in 2012

Increase the Payroll Tax Rate by 3 Percentage Points Over 20Years

Tax Covered Earnings Above the Taxable Maximum; Do NotIncrease Benefits

Reduce PIA Factors to Index Initial Benefits to Prices RatherThan Earnings

Lower Initial Benefits to Top 70 percent of Earners

Index Earnings in the AIME and Bend Points in the PIAFormula to Prices

Raise the Full Retirement Age to 70

Reduce COLA by 0.5 percentage points

Percentage Impact on Actuarial Balance

Source: Congressional Budget Office, “Summary Figure 1,” in Social Security Policy Options, summary (2010).

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Taking Action: Health Care Reform

• Is Obama reform the solution or part of the problem?• New costs

– Guaranteed access to a basic package– Subsidies related to income; Medicaid expansion– The Class Act

• Offsets to costs– Taxation of high-end plans– Medicare cuts– Employer and individual fees for not participating– “Bending the curve” (e.g., IT, evidence-based medicine, more

coordination, Medicare Commission)• But very unlikely that we can restrain costs enough to prevent growth

of government or reduce current projected deficits• Two possible choices

– Caps on spending (implicit rationing)– A new source of revenue to cover cost; e.g., VAT

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Taking Action: Four Revenue Options

• Increase income tax rates• Broaden the income tax base (reduce tax

expenditures)• Increase energy taxes• Impose consumption taxes

Source: William Gale, Brookings Institution, 2010.

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Cost of Selected Tax Expenditures:Average Annual Cost (2009-2013)

Tax ExpenditureAverage Cost

(billions)

Deduction for mortgage interest $114.58

Exclusion of employer contributions for health care $113.64

Reduced rates of tax on dividends and long-term capital gains $83.76

Credit for children under age 17 $32.06

Exclusion of capital gains at death $31.88

Exclusion of investment income on life insurance and annuity contracts for insurance companies $31.78

Deduction for property taxes on real property $25.14

Exclusion of Medicare supplementary medical insurance (Part B) $23.94

Exclusion on capital gains on sales of principal residences $17.32

Credit for alcohol fuels $8.38

Exclusion of Medicare prescription drug insurance (Part D) $5.76

Exclusion of employer-paid transportation benefits $4.30

Source: Joint Committee on Taxation, “Table 1: Tax Expenditure Estimates By Budget Function, Fiscal Years 2009-2013,” in Estimates of Federal Tax Expenditures for Fiscal Years 2009-2013 (Washington, D.C.: Author, 2010).

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Class Act

• Long-term care insurance• Short-term savings (2010-2019): $57.8 billion• Long-term costs:

– Adverse selection– CBO: “The program would add to

future federal budget deficits in a large and growing fashion.”

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