“Laying Out The Best Options”: The Progressive Case For The Chained Consumer Price Index
Liberals are going to have to decide if they’ll stick with the president if the plan he floated this week to cut Social Security benefits by switching to the so-called chained CPI becomes a reality, and it’s not an easy choice. Progressive pressure groups and lawmakers are furious with Obama for proposing the cuts, as I noted yesterday, but House Democratic Leader Nancy Pelosi said she’s confident that her caucus would ultimately support the plan if the president asks them too.
The case against moving to the chained CPI is easy to make: It represents a real cut to seniors’ Social Security benefits, which has so far been a non-starter. Even advocates of the switch acknowledge this. But since we may have to swallow it, it’s worth laying out the best progressive argument possible in favor of the chained CPI. We’re not saying it’s right, but it’s a case that should be made.
And the argument does exist. The Center for Budget and Policy Priorities, one of the most well-respected liberal think tanks on policy analysis, has endorsed the change. As has the Center for American Progress, Washington’s most powerful liberal think tank, which recommended the chained CPI in its comprehensive Social Security reform plan.
The key question is this: Do you believe Obama can get a deal without cutting anything from social safety entitlement programs, or is he going to have to do something? If you fall in the former camp, then the chained CPI is dead on arrival. But, if you think we’re going to have to cut entitlements at some point, then the chained CPI is probably the least bad option of a menu of bad possibilities, including raising the Medicare retirement age, which is the most likely alternative and would be far more harmful.
On its own, the chained CPI is unquestionably bad, but as part of a deal to raise taxes, extend unemployment benefits and do the other good things Obama wants to do, and if it includes major mitigating tweaks, it can be made almost palatable.
First of all, it’s important to note that the CPI formula doesn’t affect just Social Security. Rather, it appears in hundreds of different places on both the revenue and spending side of government. Almost every government retirement, disability and income-support program pays annual cost of living adjustments that are linked to the CPI. On the tax side, dozens of elements, from the standard deduction to limits on contributions to 401K plans to the earned income and child tax credits, are adjusted every year based on the CPI.
The whole point of the CPI is make sure benefits keep pace with inflation on the one hand, and to ensure that people are paying enough taxes as inflation changes on the other hand. So while the chained CPI cuts benefits, it also raises revenues in a way that’s palatable to Republicans. The change is estimated to save about $220 billion over 10 years, $72 billion of which would come from increased tax revenue.
Moreover, both CBPP and CAP, along with many independent economists, believe the chained CPI is a more accurate measure of inflation than the current index, called the CPI-W. The CPI is calculated by measuring price changes in a basket of 250 common consumer goods, but only the chained CPI takes into account that people shift their buying habits in response to price changes. Adjusting for that, the chained CPI grows about .3 percent slower than the current rate.
Liberals rightly note that this substitution effect isn’t really true for the very poor and very old, who spend a disproportionate amount of their income on non-substitutable goods like healthcare and housing. That’s why the only acceptable way to shift to the chained CPI is to include exemptions for some of the most vulnerable groups.
There are two major changes necessary. First, add a bump in benefits to the very old, who are more likely to have high healthcare bills and to have exhausted their savings that supplemented their Social Security income. Second, exempt Supplemental Security Income, which serves the poorest, disabled and blind but still often leaves people below the poverty line. SSI benefits should actually be increased, but that would require a different effort, so it should at the minimum be exempted from the CPI change.
Obama has indicated that he will demand these changes. The Simpson-Bowles and Rivlin-Domenici deficit reduction plans, which both included a move to the chained CPI, also included similar caveats. Nancy Pelosi said the changes would be included in a final deal: “The details of this are not all ironed out, but they all mitigate for helping the poorest and neediest in our society, whether they’re Supplemental Security Income recipients, whether they’re 80 and older or whether they’re truly needy in-between.”
With the changes, CBPP says, “we believe that the chained CPI is a reasonable component of a comprehensive package to put the budget on a sustainable course.”
But wait, aren’t there more progressive ways to change Social Security? Yes, but.
Dylan Matthews yesterday laid out three alternative ways to cut the plan that is far progressive in the economic sense and appealing to progressives in the political sense. Two of the plans are different ways to reduce benefits for the wealthy, while the third option would be to raise or eliminate the tax cap, which prevents any income over about $110,000 from being taxed. These plans would all save far more money than the chained CPI, and do it all by hurting only the rich, unlike the CPI change. Great, right?
There are two major political problems with either approach. The first is in the short term: Republicans will never support raising or eliminating the tax cap as it would be a huge tax increase. Even Democrats would have trouble embracing it, since it would mean raising taxes on people who make under $250,000 a year, whose taxes they’ve promised not to hike.
The second problem is in the long term. Social Security was designed to be not a welfare program but a social insurance program. You get out what you paid into it over many years of working, with only marginal changes to redistribute income downward. Making it a welfare program would undermine the programs long-term political strength.
This was a cornerstone of FDR’s vision for the plan. He had to defend the plan from attacks from the populist left, which called for more aggressive redistribution from general taxation. Some means testing may be possible without transforming the perception of the program into a welfare plan, but it’s a potentially dangerous precedent.
Perhaps the best argument against the chained CPI is that even if it is a more accurate measure of inflation, Congress should not cut benefits because it would be almost impossible to restore or raise them (which is probably what actually needs to happen) through a change in the benefit structure. This would require an enormous congressional fight and Republicans would almost surely kill it, so the current CPI should be preserved, the thinking goes. This is convincing. The only plausible response is a good government argument that the CPI should be used to calculate inflation, not monkey with benefits in a backdoor way.
To Paul Krugman, the plan put forward by Obama is barely acceptable, and anything more would be unacceptable, but he’s not convinced the chained CPI is an outright deal killer.
Since the chained CPI may become a reality, liberals should at least begin thinking critically about it, even if just to decide once again that it is unacceptable.
By: Alex Seitz-Wald, Salon, December 19, 2012
“That Terrible Trillion Deficit”: Another Disingenuous Attempt To Scare And Bully The Body Politic Into Abandoning Social Programs
As you might imagine, I find myself in a lot of discussions about U.S. fiscal policy, and the budget deficit in particular. And there’s one thing I can count on in these discussions: At some point someone will announce, in dire tones, that we have a ONE TRILLION DOLLAR deficit.
No, I don’t think the people making this pronouncement realize that they sound just like Dr. Evil in the Austin Powers movies.
Anyway, we do indeed have a ONE TRILLION DOLLAR deficit, or at least we did; in fiscal 2012, which ended in September, the deficit was actually $1.089 trillion. (It will be lower this year.) The question is what lesson we should take from that figure.
What the Dr. Evil types think, and want you to think, is that the big current deficit is a sign that our fiscal position is completely unsustainable. Sometimes they argue that it means that a debt crisis is just around the corner, although they’ve been predicting that for years and it keeps not happening. (U.S. borrowing costs are near historic lows.) But more often they use the deficit to argue that we can’t afford to maintain programs like Social Security, Medicare and Medicaid. So it’s important to understand that this is completely wrong.
Now, America does have a long-run budget problem, thanks to our aging population and the rising cost of health care. However, the current deficit has nothing to do with that problem, and says nothing at all about the sustainability of our social insurance programs. Instead, it mainly reflects the depressed state of the economy — a depression that would be made even worse by attempts to shrink the deficit rapidly.
So, let’s talk about the numbers.
The first thing we need to ask is what a sustainable budget would look like. The answer is that in a growing economy, budgets don’t have to be balanced to be sustainable. Federal debt was higher at the end of the Clinton years than at the beginning — that is, the deficits of the Clinton administration’s early years outweighed the surpluses at the end. Yet because gross domestic product rose over those eight years, the best measure of our debt position, the ratio of debt to G.D.P., fell dramatically, from 49 to 33 percent.
Right now, given reasonable estimates of likely future growth and inflation, we would have a stable or declining ratio of debt to G.D.P. even if we had a $400 billion deficit. You can argue that we should do better; but if the question is whether current deficits are sustainable, you should take $400 billion off the table right away.
That still leaves $600 billion or so. What’s that about? It’s the depressed economy — full stop.
First of all, the weakness of the economy has led directly to lower revenues; when G.D.P. falls, the federal tax take falls too, and in fact always falls substantially more in percentage terms. On top of that, revenue is temporarily depressed by tax breaks, notably the payroll tax cut, that have been put in place to support the economy but will be withdrawn as soon as the economy is stronger (or, unfortunately, even before then). If you do the math, it seems likely that full economic recovery would raise revenue by at least $450 billion.
Meanwhile, the depressed economy has also temporarily raised spending, because more people qualify for unemployment insurance and means-tested programs like food stamps and Medicaid. A reasonable estimate is that economic recovery would reduce federal spending on such programs by at least $150 billion.
Putting all this together, it turns out that the trillion-dollar deficit isn’t a sign of unsustainable finances at all. Some of the deficit is in fact sustainable; just about all of the rest would go away if we had an economic recovery.
And the prospects for economic recovery are looking pretty good right now — or would be looking good if it weren’t for the political risks posed by Republican hostage-taking. Housing is reviving, consumer debt is down, employment has improved steadily among prime-age workers. Unfortunately, this recovery may well be derailed by the fiscal cliff and/or a confrontation over the debt ceiling; but this has nothing to do with the alleged unsustainability of the deficit.
Which brings us back to ONE TRILLION DOLLARS.
We do indeed have a big budget deficit, and other things equal it would be better if the deficit were a lot smaller. But other things aren’t equal; the deficit is a side-effect of an economic depression, and the first order of business should be to end that depression — which means, among other things, leaving the deficit alone for now.
And you should recognize all the hyped-up talk about the deficit for what it is: yet another disingenuous attempt to scare and bully the body politic into abandoning programs that shield both poor and middle-class Americans from harm.
By: Paul Krugman, Op-Ed Columnist, The New York Times, December 16, 2012
“Willy Nilly Nonsense”: Mitch McConnell Doesn’t Understand What The Debt Ceiling Is
Now that Republicans have pretty much resigned themselves to the idea that there is going to be some kind of tax increase for the wealthy, they’re comforting themselves with the idea that come early next year, they’ll still be able to re-enact the lovely conflict we had over the debt ceiling in 2011 and hold the American economy hostage to their demands. President Obama has quite sensibly said that we ought to just get rid of the debt ceiling itself, since it serves no purpose and allows a party to engage in just this kind of economic blackmail if it’s desperate and cynical enough. So Republicans are pushing back, none more so than Senate Minority Leader Mitch McConnell. But in the process, McConnell has revealed that he has no idea how the debt ceiling actually works.
What McConnell has been saying is that if we eliminate the debt ceiling, it will give the president all kinds of new powers, to spend money willy-nilly however he wants to, run up the debt, and generally become a kind of fiscal dictator. Yesterday he said about the prospect of eliminating the debt ceiling, “I don’t think that there’s any sentiment whatsoever for giving the President perpetual authority without congressional involvement.” And last week in a speech on the Senate floor, he said this:
By demanding the power to raise the debt limit whenever he wants by as much as he wants, he showed what he’s really after is assuming unprecedented power to spend taxpayer dollars without any limit. This isn’t about getting a handle on deficits or debt for him. It’s about spending even more than he already is. Why else would he demand the power to raise the debt limit on his own? And by the way, why on earth would we even consider giving a President who’s brought us four years of trillion dollar deficits unchecked authority to borrow – he’s the last person who should have limitless borrowing power.
Wow, that really would be terrible, if the president had “unprecedented power to spend taxpayer dollars without any limit,” with “unchecked authority to borrow.” The only trouble is that eliminating the debt ceiling does nothing of the sort. In case you’ve forgotten your fourth-grade civics, Congress sets the budget, not the president. The president can’t spend a dollar that Congress doesn’t appropriate. He can’t borrow a dollar that Congress hasn’t said he should borrow. When we reach the debt limit and then go past it, it isn’t because of anything the president has done, it’s because of the budget Congress has written. The reason we take on debt is because federal spending, set by Congress, exceeds federal tax revenues, also set by Congress. The only thing the debt ceiling does is require Congress to have what is in effect an additional vote on their own budget. Eliminating the debt ceiling doesn’t give the president one iota more authority or power. What it does, however, is take away the power the Republicans now have to use blackmail to achieve their policy goals.
OK, so I was kidding when I said Mitch McConnell doesn’t know how the debt ceiling works. He knows exactly how it works. But he also knows that most Americans know next to nothing about it, and he knows that reporters will dutifully pass on whatever he says about it, without adding the appropriate disclaimer that would make their reporting about this topic accurate.
By: Paul Waldman, Contributing Editor, The American Prospect, December 12, 2012
“A Solid Template”: President Obama’s Opening Bid To Avert The Fiscal Cliff Is Familiar And Sound
President Obama’s opening bid for negotiations resolving the “fiscal cliff” has surfaced, and the contours are both familiar and sound. The Washington Postand an unofficial outline drafted by Republican aides both suggest that the administration has essentially proposed its budget request for fiscal 2013. And the president’s latest budget offers a solid framework for navigating the fiscal obstacle course, as it would substantially moderate the pace of deficit reduction while making a responsible down payment on longer-term deficit reduction. Relative to current policy, the contours are shaping up roughly as follows:
- Allow the upper-income Bush tax cuts to expire (+$850 billion)
- Restore the estate and gift taxes to 2009 parameters (+$120 billion)
- Curb tax expenditures (+600 billion)
- Stimulus spending (-$50 billion)
- Extend emergency unemployment benefits (-$30 billion)
- Extend or replace the payroll tax cut (-$110 billion)
- Continue AMT patch, “doc fix,” and tax extenders (-$240 billion)
- Defer sequestration (?)
Most critically, the Obama framework includes a variation of his American Jobs Act, proposing increased near-term government spending on infrastructure and state fiscal relief while maintaining the ad hoc stimulus set to expire at year’s end—the emergency unemployment compensation (EUC) program, the payroll tax cut, and recent expansion of refundable tax credits—which is the single largest economic headwind threatening recovery among the major components of the scheduled fiscal restraint. (See our à la carte deconstruction of these major components’ budgetary versus economic impacts) The Republican aides’ draft suggests the administration would dedicate $50 billion for infrastructure and stimulus spending, $30 billion for EUC, and $110 billion for an extension of the payroll tax cut or a targeted tax credit, all relative to current policy. And if the administration is looking for a replacement for the payroll tax cut, they could adopt our proposed targeted refundable tax rebate, which would provide a bigger and better economic boost.
Beyond these job creation measures, the president’s proposal for dealing with the economic challenge at hand of overly rapid deficit reduction would largely adhere to current policy—the alternative minimum tax would be indexed for inflation, scheduled Medicare physician reimbursement cuts would be prevented (i.e., the “doc fix” would be continued), expiring business tax provisions would be continued, the sequester would not be implemented in 2013, and the Bush-era tax cuts would be extended for all but upper-income households (those earning more than $250,000 a year). Again, this is all consistent with the president’s budget, with the exception that the budget repealed the sequester instead of deferring it to an unspecified date.
Overall, this proposal would substantially moderate the pace of deficit reduction relative to the current policy, which is critical because this baseline includes sizable fiscal contraction (the payroll tax cut and emergency unemployment benefits are assumed to expire and discretionary spending caps ratchet down). Indeed, the entire challenge posed by the fiscal obstacle course is that budget deficits closing too quickly will push the economy into an austerity-induced recession, and the president’s opening bid actually addresses this very real economic challenge, prioritizing job creation and economic recovery over the (not imminent) problem of longer-term deficit reduction.
But the proposal would make substantial long-run deficit reduction as well. It would allow the upper-income Bush tax cuts to expire, raise roughly another $600 billion from upper-income households and business (presumably by capping the value of tax expenditures), return the estate and gift tax to 2009 parameters, reduce Medicare and Medicaid spending by nearly $400 billion (largely without cost-shifting to states or households, with most savings from providers and pharmaceutical companies). Again, these are all proposals from the president’s budget request. As I calculated a few months back, the president’s budget—as scored by the Congressional Budget Office and adjusted for subsequent baseline revisions—would reduce public debt by $3.0 trillion relative to current policy, lowering the debt-to-GDP ratio to a sustainable 73.4 percent. (Add in the nearly $1 trillion from ending the war in Afghanistan, already built into current policy, and you hit the $4 trillion mark that has become the arbitrary but symbolic threshold for fiscal seriousness.)
A back of the envelope calculation suggests that the combination of continuing EUC, continuing the payroll tax cut, increased infrastructure spending, and expiration of the upper-income tax cuts would boost real GDP growth by 1.5 percentage points and increase nonfarm payroll employment by 1.8 million jobs by the end of 2013, relative to current policy. Details on timing of other deficit reduction are lacking, and would likely somewhat reduce the net economic boost, but the proposal nevertheless offers substantial net fiscal support for our depressed economy. My colleague Josh Bivens and I estimated in another recent paper that the president’s 2013 budget would boost employment by about 1.1 million jobs in 2013, largely because of AJA spending and targeted tax cuts (which we delayed one year from the now-ended 2012 fiscal year to allow for feasible implementation).
This framework also closely resembles the proposals in our recent EPI and Century Foundation report Navigating the fiscal obstacle course: Supporting job creation with savings from ending the upper-income Bush-era tax cuts. We proposed diverting half of the savings from ending the upper-income Bush tax cuts and recent estate tax cuts—roughly $600 billion—to job creation measures heavily weighted toward the next three years, which would boost real GDP growth by 1.7 percentage points and increase employment by 2.0 million jobs in 2013. The upper-income Bush tax cuts are the least economically supportive component of the fiscal obstacle course and have a huge opportunity cost; as far as down payments on deficit reduction go, this is the most sound starting point—as the president has proposed in all four budget requests.
The one major departure from the president’s budget is the new and excellent proposal to eliminate the statutory debt ceiling. The statutory debt ceiling has proved an unacceptable economic liability, particularly since Speaker of the House John Boehner (R-Ohio) irresponsibly pledged in May that he would again hijack the nation’s debt ceiling to be used as a bargaining chip. This duplicative, ill-conceived law should be repealed, or at the very least ruled inoperative.
The president’s budget offered a sound template for moderating the pace of deficit reduction, coupled with a down payment on longer-term deficit reduction that would impose little near-term economic drag—substantially less than the economic boost from the AJA. By adding repeal of the debt ceiling to this balanced package, the president’s opening bid makes for an even more responsible economic and budgetary policy.
By: Andrew Fieldhouse, Economic Policy Institute, November 30, 2012
“What Do Republicans Want?”: President Obama Couldn’t Have Been Any Clearer, And He Won
As we head into negotiations on the Austerity Trap (better known by the inaccurate moniker “fiscal cliff,” which I refuse to use), there’s a clear narrative emerging. This narrative has it that Democrats want to see taxes increase on rich people, which Republicans aren’t happy about, while Republicans want to see entitlement “reform,” which Democrats aren’t happy about. So once everybody gives a little, and Republicans accept some tax increases for the rich while Democrats accept some “reform” of Social Security and Medicare, then we can have a happy ending.
The problem with this is that while the Democrats’ position is quite clear—the Bush tax cuts should expire for income over $250,000—the Republicans’ position is extremely vague, on both the tax side and the entitlement side. Let’s take taxes first. A bunch of Republicans are being praised for their willingness to violate Grover Norquist’s pledge to Never Raise Taxes In Any Way Ever Never Ever. Yet they’re remaining steadfast that tax rates must stay the same, while allowing that maybe we can trim some deductions for the wealthy. As Steve Benen points out, some are acting like these Republicans are being generous for essentially taking the position that they support Mitt Romney’s tax plan. Perhaps they’re assuming that the wealthy will be able to cleverly evade any limitation on deductions, so it won’t make a difference to their primary constituency. But in any case, we haven’t heard them take a specific position. Are they proposing a hard cap on all deductions? Eliminating certain deductions while keeping others? We don’t yet know.
Then we get to the price Republicans are going to want to exact for any agreement to stop the Austerity Trap, and this is where they’re vague. They want “reform” of entitlements. What is “reform,” you ask? Well, nobody ever says. The reason is that Republicans know perfectly well that the things they would like to do to Social Security and Medicare are unpopular. We can dispense with Social Security quickly: The program is basically fine, and you could eliminate future shortfalls in benefits with some minor tweaking of the financing, like raising the income cut-off for Social Security taxes, which is currently at $110,100. But the real budgetary challenge is Medicare.
You may remember that when Paul Ryan joined the Republican ticket, a lot of attention was paid to his Medicare plan, which would essentially turn Medicare from an insurance program into a voucher program, in which seniors would try to find affordable insurance coverage from private insurance companies. You may also remember that he and Romney quickly stopped talking about it and turned to accusing Barack Obama of cutting Medicare by $716 billion, heartless enemy of the welfare state that he is. This should remind us of two things: First, the “reform” that Republicans want in Medicare is to privatize it and end its guarantee of health coverage; and second, that only one party has reformed Medicare. That reform, also known as Obamacare, not only found hundreds of billions of dollars in savings but also moved toward changing the payment structure (away from fee-for-service and toward rewarding providers for making and keeping patients healthy) and included a lot of pilot programs that could reduce costs in the future.
This debate is just getting started, so perhaps it’s not so terrible that Republicans have been so unclear about what specifically they want. But they shouldn’t be allowed to get away with it for long. Let’s also not forget that we had something of a referendum on all these questions earlier this month. Barack Obama couldn’t have been clearer that he wanted to raise taxes on the wealthy and didn’t want to voucherize Medicare. And he won.
By: Paul Waldman, Contributing Editor, The American Prospect, November 25, 2012
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