America's Fiscal Constitution (59 page)

There were few options for finding additional revenues for Medicare. The president had repeatedly pledged not to raise taxes for households making less than $250,000, or roughly 97 percent of taxpayers. In 2010 taxpayers earning more than $250,000 already paid about 50 percent of all personal income taxes.
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Many Democrats in Congress were more interested in passing legislation to expand coverage than in closing the Medicare funding gap. On July 14, 2009, House leadership introduced a bill that expanded coverage by borrowing a trillion dollars over ten years, according to Congressional Budget Office estimates. Days later, after faulting the prior administration for “the enactment of two tax cuts, primarily for the wealthiest Americans, and a Medicare prescription program, none of which were paid for,” the president vowed that “health-insurance reform . . . will be paid for.”
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As long as the federal government was borrowing heavily to pay for
existing
medical services, it would inevitably have to borrow to pay for any additional services. All but a handful of Senate Republicans criticized the alternatives for increasing access to medical services, though they did not propose to end the debt-financing of Medicare.

The Affordable Care Act, enacted by a razor-thin vote in March 2010, expanded Medicaid, required many people to purchase health insurance, subsidized certain insurance premiums, and placed new caps on Medicare reimbursements. Somewhat less than half of the cost of the Affordable Care Act was paid for using revenues from new Medicare taxes on high incomes, taxes on insurance with high premiums, and civil penalties on workers without health insurance. The act limited the growth in Medicare’s reimbursable fees for services to about 2 percent a year, far less than the average historical growth rate and less than even the projected rise in costs borne by physicians.
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Congressional Republicans opposed the Affordable Care Act, but incorporated its projected reduction in Medicare reimbursements into their own budget plan. The absence of a tax-funded budget or a congressional vote on the amount of debt used to fund specific appropriations confused the issue of how much debt would actually be required to pay for Medicare, Medicaid, and the coverage under the Affordable Care Act.

Unlike the 2003 Medicare Prescription Drug Improvement and Modernization Act, the Affordable Care Act’s net cost was reduced by additional taxes and planned reductions in Medicare reimbursement rates. Yet, by making the expansion of medical insurance its signature domestic policy initiative, the Obama administration found it difficult to balance the total outlays and revenues available for medical services.

Unemployment had remained higher for a longer period than after other downturns since the Great Depression. On November 3, 2010, the Federal Reserve announced that it would expand credit by making “large scale asset repurchases,” initially $75 billion in Treasury debt for each of eight consecutive months.
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Bernanke referred to this monetization of debt as “credit easing,” though most observers called it “quantitative easing.”
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The expansion of the monetary base also lowered interest rates. Republican leaders who had once embraced budgets financed substantially by foreign central banks now objected to purchases of federal debt by the central bank of their own nation.

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A Republican landslide in 2010 returned control of the House of Representatives to the GOP. Afterwards, John Boehner—the Ohio congressman who would become the new Speaker—obtained the president’s agreement to extend tax cuts enacted by Congress in 2001 and 2003 that were set to expire at the end of 2010. Boehner, in return, acquiesced to the president’s proposal to extend unemployment benefits and temporarily reduce payroll taxes. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, passed in December, required additional debt of $900 billion over ten years, an amount greater than the controversial stimulus plan in 2009.
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The use of trust funds to support popular types of spending within revenues provided by dedicated taxes had been one of the pillars of the American Fiscal Tradition. The reduction in payroll taxes supporting the Social Security Old Age and Survivors Trust Fund was a novel departure from both traditional budget practices and long-standing Democratic policy. President Roosevelt had vowed to maintain tax rates at a level that preserved the program’s actuarial balance. The payroll taxes supporting pensions for older Americans were first collected in 1937, even though the
nation was still suffering from the Great Depression. Workers accepted that taxation and realized that the popular pension program was not “free.”

More recently, the Clinton administration had urged that the Social Security trust funds be removed from the federal budget and that federal debt be retired to preserve the capacity to meet future pension obligations. At the Obama administration’s initiative, however, for 2011 and 2012 Congress lowered employee payroll withholding by 30 percent and replaced that revenue with a debt-financed payment from the federal funds budget.

In a political atmosphere characterized by heightened concerns about soaring federal debt, in early 2011 administration officials and Republican congressional leaders began negotiating the terms on which Congress would raise the debt ceiling. Voting to approve trillions of dollars in additional debt posed a particular political challenge for those Republican House members who had been backed by Americans who attended Tea Party rallies. The House could, of course, restore “pay as you go” budget planning and vote to spend no more than the estimated amount of tax revenues. That would require large cuts in outlays for Medicare and defense and highlight the consequences of tax reductions favored by House Republicans. Instead of trying to quickly balance the budget, Speaker Boehner said he would back a higher debt ceiling as part of a plan to reduce the growth in spending projected over ten years. Vice President Joe Biden chaired a group of senior congressional leaders that worked to identify $2 trillion in spending cuts over a decade, an amount equal to the additional borrowing projected to occur through the 2012 election.
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On July 17, 2011, the president and Speaker tentatively agreed to lower projected Medicare and Medicaid spending by $450 million and other spending by even more, and to raise $800 billion in tax revenue compared to projections at existing tax rates.
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The $800 billion increase in tax revenues could have resulted from a partial expiration of those tax cuts set to lapse at the end of 2012. (The complete expiration of those tax cuts would generate $3.5 trillion in revenues over ten years.
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)

The numbers discussed by Obama and Boehner were soft. The president wanted to retain existing Medicare and Medicaid services while reducing the growth in spending for those services, a concept he called “bending the cost curve.” Yet, if the administration believed it could lower medical costs without affecting services, it had every reason to do so immediately, with or without any budget bargain.
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Boehner, for his part,
never specified how he intended to increase revenues without raising tax rates. Ultimately the White House and House leadership agreed to impose caps on the rise of spending for defense and various categories of domestic spending over ten years. That agreement resulted in the Budget Control Act of 2011, which also increased the debt ceiling by $2.1 trillion.
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For the next fiscal year, beginning on October 1, 2011, the Budget Control Act provided for a reduction in projected outlays of $25 billion, a sum sufficient to cover only a day of federal funds borrowing.
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Future savings would arise from a process that combined elements of the Budget Enforcement Act of 1990 and the Gramm-Rudman-Hollings Act of 1985: Congress required the executive branch to sequester, or refrain from spending, the full amount that Congress appropriated above two annual limits on spending—one for domestic spending and the other for defense spending apart from the direct costs of war.

There was no effort to define appropriate uses for the borrowed funds or develop a plan to balance the budget over the span of a decade.

Two votes on the House budget resolution in March 2012 dramatized the extent of the collapse of the American Fiscal Tradition. Democrat Jim Cooper of Tennessee and Republican Steven LaTourette of Ohio sought to amend that budget resolution to conform to what they called the “Simpson-Bowles” budget plan. That label referred to recommendations made by the majority of the fourteen-person Commission on Fiscal Responsibility, appointed by the president in April 2010. The amendment offered by Cooper and LaTourette proposed to lower the growth in Medicare spending, although—like the commission’s report—it was vague on how that would be accomplished. On March 28, 2012, the House defeated the amendment, 382 to 38. The following day the House’s Republican majority passed a budget resolution sponsored by House Budget Committee Chairman Paul Ryan of Wisconsin. The Congressional Budget Office calculated that Ryan’s plan would perpetuate routine federal borrowing until sometime after 2040.

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By mid-2012 national income and federal funds revenues had been restored to their peak before the downturn. Emergency outlays authorized by the American Recovery and Reinvestment Act of 2009 were winding down. Yet a large gap still remained between tax revenues and routine
federal spending, even after excluding the ongoing cost of the wars in Iraq and Afghanistan.

During the 2012 presidential campaign, President Obama and Republican nominee Mitt Romney presented plans to balance the budget in some distant year while borrowing aggressively during the next presidential term. In a major speech on the deficit during the 2011 debate over the budget ceiling, the president had clearly described the need to close the gap in Medicare funding for the Baby Boom generation. Neither candidate in 2012, however, proposed to end borrowing for Medicare. In fact, Romney sought to repeal existing ceilings on Medicare reimbursement.

Budget agreements in 2010 and 2011 had postponed tax increases and extended some emergency spending until January 1, 2013, a date commentators characterized as the “fiscal cliff.”
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After Obama’s reelection, the White House and Republican congressional leaders extended the Bush-era tax cuts for over 99 percent of taxpayers.
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They agreed on a plan that increased income tax rates for individuals with incomes above $400,000 and couples with incomes above $450,000, ended the debt-financed reduction in payroll taxes, and postponed the spending sequestration mandated by the Budget Control Act of 2011 for three months. Compared to existing law, that compromise was estimated to add debt of $3.9 billion within ten years.
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Congress adopted the American Taxpayer Relief Act on January 1, 2013, by a lopsided margin. Despite dire predictions about the impact of higher taxes and scheduled sequestrations, there was no discernible change in the path of economic growth.

By 2013 the four pillars of the Tradition—clear accounting, “pay as you go” budget planning, self-funded independent trust funds, and borrowing for a specific purpose defined by Congress—had fallen into disrepair.

Incumbent leaders in each major political party acknowledged the virtue of balancing the budget in the distant future, but denied they had the ability to do so any time soon without impairing economic growth. Many Democrats maligned efforts to bring levels of spending in line with revenues as a form of “austerity.” Republican leaders disparaged efforts to substitute tax revenue for debt as a “job killer.”

As explained in more detail in
Chapter 22
, American economic history does not support the idea that a strong economy depends on chronic federal borrowing. Employment was slow to recover after the Great Recession of 2009. From December 2007 through April 2013 the employment of
college graduates increased by 9 percent, while employment of workers with only high school diplomas fell by 9 percent. Individuals without a high school degree fared even worse; their employment decreased by 14 percent.
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Not all college graduates found jobs for which they had been educated, but workers with more education generally fared much better than other citizens.

Many Americans expect federal leaders to seek greater opportunities for those left behind in the changing global economy. Candidates reinforce that expectation by asserting that they will “create jobs” if elected. The desire to improve American competitiveness is a tenuous rationale for using debt instead of tax revenue to pay for routine defense, medical, and other kinds of federal spending.

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IXTH AND
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URRENT
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RISIS

By 2014 virtually all mainstream federal elected officials agreed that excessive federal debt posed a real risk. Several features of this sixth national debt crisis highlight the unusual nature of those risks.

First, the amount of federal debt soared to record levels in relation to the size of annual income realistically available for taxation. Total unmonetized federal debt in 2014 roughly equals annual national income, so annual interest on the debt may absorb much of the nation’s economic growth. That puts the nation in a situation similar to that of an employee who receives annual pay raises but cannot improve his or her standard of living because of the need to pay rising debt service to creditors.