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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
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
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
19
22
22
27
27
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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