Thursday, February 9, 2023

Analysis | Peter was already robbed. He can’t pay Paul.

Comment

“Obviously, no cuts to Medicare or Medicaid or Social Security. That’s a nonstarter for either side.”

Rep. Nancy Mace (R-S.C.), in remarks on NBC’s “Meet the Press,” Jan. 22

House Republicans are angling for a fight with the White House over raising the debt ceiling. The debt limit must be raised — no later than early June, according to the Treasury Department — or the federal government will no longer be able to pay its bills.

Republicans have signaled that they will consider raising the debt limit only if President Biden agrees to spending cuts. The White House says it will not negotiate conditions for boosting the debt ceiling.

Too often, politicians talk in broad strokes about the federal budget, with big numbers that make little sense to most people. Or they suggest that actual reductions in spending would be relatively easy to accomplish.

On the CBS program “Face the Nation,” for instance, Mace said: “I would lean on the agency heads. Whether it’s one penny or five pennies, the Penny Plan does it with five cents on the dollar in five years.”

Five cents on the dollar means a 5 percent reduction in spending every year — without accounting for inflation. That translates to steep reductions in spending. One penny — a 1 percent reduction — would not bring the budget into balance.

Other Republicans have floated a dollar-for-dollar exchange — a $1 increase in the debt ceiling in exchange for every dollar of spending cuts. That’s all but impossible. The debt ceiling needs to be raised to pay for things that have already been purchased, under laws passed by previous Congresses.

Here’s a guide to help understand the debate.

Not like the family budget

Politicians often invoke the image of a couple sitting around the kitchen table, figuring out the family budget and how to pay off credit cards. But the federal budget is not like a family budget at all. There is no law that requires the budget to be balanced — and in grave economic times, such as during the pandemic, it is appropriate for the government to go into debt to help stabilize the economy.

But policymakers should be prudent.

Issuing new debt is a choice with certain consequences. It is one thing to issue debt to build better schools, ensuring a well-educated workforce for the future; it is another thing to build up debt to finance the expenses of the elderly, such as through Social Security.

The state of the U.S. economy is also a factor. When the government issues new debt and the economy is near full employment, it crowds out capital formation and ultimately passes on a smaller economy to future generations. In an economy with high unemployment after a recession, many economists would say the impact of borrowing on capital formation is greatly reduced. Some economists also believe that future generations will be richer and more productive, and thus able to afford the bill left by the previous generation.

One way to measure whether debt is too high is to compare it with the size of the overall economy. In 2023, the national debt is about 96 percent of the gross domestic product, the broadest measure of the economy. That’s almost as big as it was during World War II — and the Congressional Budget Office (CBO) says the national debt is on track to exceed the World War II level by the end of the decade.

The federal budget as one dollar

Because Mace spoke of 5 cents on the dollar, let’s assume the entire federal budget is one dollar.

The problem is that current federal revenue is worth about 83 cents, meaning the federal government is spending 17 cents more a year than it earns. (We’re relying on the most recent CBO estimate for fiscal year 2023, but these numbers do not reflect additional 2023 spending that Congress authorized in December.)

About 62 cents is spent on “mandatory programs,” such as Social Security, the old-age retirement and disability system (22 cents); Medicare, the old-age health insurer (17 cents); and Medicaid, the health-care program for the poor (10 cents). These programs are frequently called entitlement programs because people receive payments or services if they are “entitled” to them under the law — and any reduction in spending requires a new law. Other mandatory programs include income security such as food stamps and unemployment compensation and federal retirement and veterans programs, among others. (Complicating matters, some programs such as Medicare have offsetting receipts, such as health-care premiums, but we will try to keep this simple.)

Almost 8 cents goes to spending on interest payments to holders of Treasury bonds — a number that will keep growing as more debt will be issued in the coming decade. Policymakers can’t shortchange bondholders without severe consequences, so that part of the budget will have to be left untouched.

That leaves about 30 cents that is spent on discretionary spending — annual appropriations made by Congress for things like the national defense, national parks, air traffic control and the like. When Mace refers to “agency heads” making cuts, she means discretionary spending.

But about half, almost 14 cents, is devoted to the national defense — which is also off-limits to many lawmakers.

Just over 16 cents go to the rest of the federal government — which means it is even less than the shortfall (17 cents) in federal revenue. All of it could be eliminated — even popular programs such as border protection, air traffic control and farm subsidies — and the government still would be in deficit.

In effect, Mace would put almost half the federal budget out of reach — Social Security, Medicare and interest on the debt — and have the rest of the budget bear the burden. That would mean a 31 percent cut elsewhere to reach balance. If national defense is also off the table, the rest of the budget would need to be reduced 40 percent. That’s far different from the 5 percent a year suggested by Mace.

Freezing spending isn’t easy either

Sometimes politicians suggest just a simple freeze in spending — the same dollar amount as the year before. But that is in effect a cut, meaning fewer resources for the government.

Inflation and population growth over time raises the cost of programs. So even a spending freeze means less year after year. If you earned the same salary year after year, eventually you would feel pinched as costs for groceries and housing rise.

Here’s our favorite example of this phenomenon: Defense spending technically remained constant from 1987 to 1994: $282 billion a year. But look what happened to the military during those seven years: The number of troops fell from 2.2 million to 1.6 million, the number of Army divisions was reduced from 28 to 20, Air Force fighter wings dropped from 36 to 22, and Navy fighting ships declined from 568 to 387. That’s because inflation over time ate away at the value of those dollars. By most measures, defense spending was trimmed in that period, although in theory, not a penny was cut.

Of course, one way to mitigate the deficit would be to boost revenue. But most Republicans have ruled out any tax increases. They also want to keep in place the 2017 tax cuts due to expire at the end of 2025 — even though, according to the Tax Policy Center, that would add more than $3 trillion to the federal debt over 10 years. In any case, as a percentage of the gross domestic product, tax revenue already is projected to be higher (18.3 percent) than the average over the past six decades, even if the tax cuts are extended, according to calculations by Brian Riedl of the Manhattan Institute.

Spending increased in ‘nonstarter’ programs

Riedl has studied what happened to the federal budget since 2000, when the government last ran a budget surplus. As a percent of GDP, overall spending has jumped 7.7 percent. But discretionary spending, even with the coronavirus pandemic, was not the key culprit. Instead, Social Security and other health entitlements accounted for 3.6 percent of GDP and other mandatory spending was 3.2 percent of GDP.

Until recently, the discretionary part of the budget pie has been shrinking. That’s in part because, since 1983, the six major deficit-reduction deals have mostly relied on savings in discretionary spending, according to Riedl’s calculations. There is increasingly little left to cut in that part of the budget.

Instead, it’s the part of the budget that Mace says is a “nonstarter” — Social Security and Medicare — that is responsible for the growing debt. The federal government keeps borrowing from general revenue to make payments to those programs. More than half of the projected $21 trillion deficit in the next decade will come from such transfers, Riedl estimates. In part, that’s because most people receive more in benefits than taxes they paid into the system, especially from Medicare, as people live longer and health costs have risen, according to estimates by the Urban Institute.

The nonpartisan Committee for a Responsible Federal Budget has produced a blueprint on how to achieve what sounds like a modest goal — keeping the debt steady at about 97 percent of GDP until 2032. Only one-quarter of the $6 trillion in savings would come from limits on discretionary spending. But contrary to Mace’s red line, the plan calls for lowering costs for Medicare and also increasing the retirement age for Social Security. It also calls for overhauling the payroll tax for Social Security to raise more revenue — and boost other taxes.

The Republican Study Committee, made up of conservative Republicans, last year revealed a budget plan that would gradually lift the Social Security retirement age to 70, from the current 67, and Medicare eligibility to 67, from the current 65, as a way of reducing spending. It proposes to trim almost $17 trillion in spending over 10 years, with the bulk of it in mandatory spending, especially Medicare and Medicaid. But it’s the type of plan issued by a minority party when it has no chance of passage. Although less than 20 percent of the cuts would come from the discretionary basket of the budget, many of the ideas are politically perilous.

As for the “Five Penny Plan,” that’s a proposal by Sen. Rand Paul (R-Ky.) that Mace introduced in the House in 2022. Given the recent increase in spending, Paul now calls it the Six Penny Plan — a 6 percent reduction every year — because otherwise he would not achieve balance in five years. This plan calls for steep cuts in government spending from current projections — $15.5 trillion over 10 years, according to a Paul aide — because it does not account for inflation and population growth at all. It just keeps cutting 6 percent off the previous year’s figure.

The plan does not specifically call for changes to Social Security and Medicare to achieve these savings, but instead leaves it up to Congress on how to meet these targets — a tall order indeed.

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