James Pethokoukis

Politics and policy from inside Washington

Obama debt panel shapes fiscal “battlespace”

Dec 2, 2010 21:20 UTC

It looks like the vote on the panel’s recommendations will be closer than I first thought. Here is my take from my Reuters Breakingviews columnette:

Wednesday’s final plan from President Barack Obama’s bipartisan budget commission might struggle to persuade a majority of the panel itself, never mind Congress. But despite the commission’s seeming toothlessness, the blueprint nonetheless sets the terms for what a budget deal might eventually look like.

Some in Washington have worried financial markets would blanch if the panel failed to reach a “grand compromise” to put Uncle Sam on a sustainable fiscal path. But no investor in U.S. assets should have ever defined success that way. After all, there’s no precedent for this sort of “blue-ribbon panel” achieving success on its own. Former Federal Reserve Chairman Alan Greenspan did head an outside group in the 1980s that added a few more years of solvency to Social Security. But that panel was on the verge of failure until the Reagan White House and congressional Democrats devised their own plan and handed it to Greenspan.

This time around, the politicians involved aren’t close to any agreement. The commission suggests, for instance, raising tax revenue from 2012-2020 by ending nearly $1 trillion in corporate and individual tax breaks. It also proposes reducing social insurance spending by nearly $600 billion over that period. Most of the congressional Republicans on the 18-strong panel won’t support any net tax increase, while most Democrats refuse to cut Social Security or Medicare benefits. These are battles that will be fought in the new Congress and in the 2012 presidential campaign.

So the commission won’t be making anything happen. But it has still drawn up the likely battle lines. And that effort shows scope for future compromise. Democrats and Republicans may disagree on what to do with the extra revenue gained by ending tax loopholes, but there seems to be broad agreement that such “tax expenditures” make poor policy. Republicans showed some willingness to cut defense spending, while Democrats conceded that high corporate tax rates can hurt competitiveness and growth. And a deep dive into the plan reveals the first steps — supported sotto voce even by some Democrats — towards dramatically reducing government involvement in the healthcare system.

None of that will change America’s debt-to-GDP ratio next year. But from the threads spun by Obama’s commission, a new fiscal tapestry will eventually be woven.

Now it’s Tom Coburn vs. Grover Norquist

Dec 2, 2010 20:06 UTC

It is getting interesting. On Twitter, Ryan Ellis (@taxplayer) of Grover Norquist’s Americans for Tax Reform had this to say about Judd Gregg, Tom Coburn and Mike Crapo supporting the Obama debt panel recommendations: “by agreeing to the simpson-bowles tax hikes, pledge breakers coburn, crapo, and gregg have admitted they lied about taxes to get elected.”

John Hart from Tom Coburn’s office emailed me this fiery response:

We don’t want to argue with someone calls himself a “taxplaya” but Ryan might want to cool it or tell his boss to come over and tell Dr. Coburn in person that he is a liar and tax-hiker.  Dr. Coburn was asked about the pledge this morning.  He said that if he was a pledge breaker then so was Reagan.   This plan actually brings tax rates to their lowest level since 1916.

Explaining Orszag’s maybe move to Wall Street

Dec 2, 2010 19:01 UTC

Former Obama budget chief Peter Orszag to Citi? Maybe. What, you thought the big banks hated Obama’s financial reform?Just listen to KC bank president Tom Hoenig in the NYTimes:

How is it possible that post-crisis legislation leaves large financial institutions still in control of our country’s economic destiny? One answer is that they have even greater political influence than they had before the crisis. During the past decade, the four largest financial firms spent tens of millions of dollars on lobbying. A member of Congress from the Midwest reluctantly confirmed for me that any candidate who runs for national office must go to New York City, home of the big banks, to raise money.

What can be done to remedy the situation? After the Great Depression and the passage of Glass-Steagall, the largest banks had to spin off certain risky activities, and this created smaller, safer banks. Taking similar actions today to reduce the scope and size of banks, combined with legislatively mandated debt-to-equity requirements, would restore the integrity of the financial system and enhance equity of access to credit for consumers and businesses. Studies show that most operational efficiencies are captured when financial firms are substantially smaller than the largest ones are today.

These firms reached their present size through the subsidies they received because they were too big to fail. Therefore, diminishing their size and scope, thereby reducing or removing this subsidy and the competitive advantage it provides, would restore competitive balance to our economic system.

To do this will require real political will. Those who control the largest banks will argue that such action would undermine financial firms’ ability to compete globally.

I am not persuaded by this argument. History suggests that financial strength follows economic strength. A competitive, accountable and successful domestic economic system, supported by many innovative financial firms, would restore the United States’ economic strength.

More financial firms — with none too big to fail — would mean less concentrated financial power, less concentrated risk and better access and service for American businesses and the public. Even if they were substantially smaller, the largest firms could continue to meet any global financial demand either directly or through syndication.


Yet more common sense – unexpected, in this instance – from Mr. Hoenig, the guy who always dissents from the otherwise-unanimous FOMC vote and really does talk sense. More please.

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Paul Ryan vs. Tom Coburn over Obama’s debt commission

Dec 2, 2010 18:47 UTC

Rep. Paul Ryan says he will vote “no” on the recommendations of the Obama debt commission: “Obviously, I’m not going to vote for it. … Not only didn’t it address the elephant in the room, healthcare, it made it fatter.”

But Sen. Tom Coburn, along with Sen. Mike Crapo, will vote “yes.” Coburn: “We are at a day of reckoning. This is a starting point, that’s all this is. You pass this package, then you do more.”

Here’s how I see it: Both men are genuinely frightened about America’s exploding debt problem. Of that I have no doubt. Both are also in favor of a dramatically smaller Federal government. But for Ryan, healthcare — maybe even more than the tax increases — is a poison pill. Coburn, I think, believes the panel’s report moves the ball forward overall and wants to keep the debate open. In response, my friends over at Americans for Tax Reform are already unloading on Coburn, Crapo and Judd Gregg since the plan does contain a net tax increase. On his Twitter account, ATR’s Ryan Ellis wrote: “by agreeing to the simpson-bowles tax hikes, pledge breakers coburn, crapo, and gregg have admitted they lied about taxes to get elected.”

But tax rates can be raised and lowered. Structural changes to entitlements and the tax system are longer lasting and are worth fighting for.  Now I don’t know whether Coburn and Crapo would actually vote in the Senate for the package as is. But if the Ryan-Rivlin plan were also part of the deal? That would be tempting, even with the tax increases. UPDATE: It seems Coburn would vote “as is” though he says he will work hard for changes.

Freeze the (pay)day!

Dec 1, 2010 19:40 UTC

Here is a bit from my Reuters Breakingviews column on the Obama federal pay freeze:

Americans are unlikely to accept austerity of any sort as long as they think Washington remains fat and happy. That’s why President Barack Obama needs to go beyond the token two-year government pay freeze he suggested this week. To get the rest of the country to committed belt-tightening more hacking and slashing is necessary.

On the face of it, U.S. federal workers seem insanely overpaid compared to their private sector counterparts. The typical federal employee in 2008 received total compensation of roughly $119,000, including $79,000 in salary. By contrast, the typical private sector worker was paid around $50,000 for total compensation of $60,000.

But those numbers are misleading since the government workforce is older and more educated. Once those differences are adjusted for, according to the American Enterprise Institute, annual compensation overpayment is more like $14,000 per worker, totaling a nearly $40 billion per year premium.

So there is room for deeper reductions than what Obama proposed, which would save $2 billion in the current 2011 fiscal year and $28 billion over five years. Just a five percent pay cut, if combined with a 10 percent reduction in the size of the federal workforce, would save some $25 billion a year.

Even that still wouldn’t make much of a dent in a budget deficit that could average a trillion bucks a year for the next ten. But it would show voters that Washington is willing to take the first hit – even if it enrages a powerful interest group in the process. It would also demonstrate a measure of governing competence to Americans before ambitious attempts are made to restructure the social insurance and tax systems.

Unfortunately, the timing of the president’s pay freeze announcement – two days before the final meeting of Obama’s debt commission – stokes speculation that panel may come up shorthanded. If that’s the case, the pay proposal, though welcome, will amount to a poor consolation prize.

The Obama debt commission also tackles this issue in its final report. It would freeze pay for three years and trim the workforce by 10 percent. How about a 10 and 10 plan, a ten percent pay cut and a ten percent workforce reduction. That could cut discretionary spending by $50 billion a year.

The Obama debt panel’s vision in one chart

Dec 1, 2010 18:59 UTC

As you can see from the chart below, this plan — if you exclude interest savings — actually depends quite a bit on revenue as opposed to spending cuts — 45 percent to 55 percent. The UK austerity plan is more like 3-to-1 spending over tax increases. Of course, when healthcare is basically off limits, it kind of limits your options:


Final report of Obama debt panel

Dec 1, 2010 14:38 UTC

The final report, which won’t get the 14 “yes” votes needed to nudge Congress to consider it, from the Obama debt panel is here. And here is  the chart which shows what it would do: