The Deal for All resolution, H.Res 733, which additional Members will cosponsor through the end of the year, advocates four key policies that have built the middle class, expanded the nation’s economy and must play a significant role in any future budget negotiation:
“Congress is gearing up for high-stakes tax and budget negotiations, and we’re standing with working families to make sure we build a stronger and fairer economy,” Progressive Caucus Co-Chairs Rep. Ellison and Rep. Grijalva said. “While both parties will need to make sacrifices, we cannot do so at the expense of economic growth or the middle class. A balanced approach like the Deal for All would end tax breaks for the richest 2 percent, close tax loopholes for the wealthy and special interests, and ensure Americans don’t lose the benefits they’ve paid into for decades such as Social Security and Medicare.
“Republicans have relied on excessive tax breaks for the wealthy and corporations and cut the very programs that helped create a thriving middle class. At the same time, just this week, the Republican House majority is opposing common-sense budget cuts to protect a bloated defense budget and maintain a Cold War approach. This discredited approach of trickle-down economics, combined with the GOP’s refusal to govern during this session of Congress, has created the impending year-end fiscal cliff. We will not allow the GOP to push the middle class over that cliff.
“By pursuing a fair tax policy, effective job creation strategies, and sensible defense spending based on twenty-first threats, we will be able to steer the American people to a bright and prosperous future.”
Lawrence J. Korb, who served as Assistant Secretary of Defense under President Reagan, notes the defense budget can be reduced without jeopardizing national security. “For FY 2013, defense spending will consume about 20 percent of the total federal budget and more than half of the discretionary budget,” Korb noted. “In addition, the defense budget will be larger than major mandatory spending programs like Medicare and Medicaid.”
Maya Rockeymoore, chair of the National Committee to Preserve Social Security and Medicare, said that decisions to change Medicare, Medicaid and Social Security “must be based on what is best for their beneficiaries, and not what is expedient for reducing America’s debt. Social Security, Medicare and Medicaid are vital to the economic and health security of millions of senior Americans.”
“Arguments that we need large cuts in spending to reduce the deficit are based on a false view of what is driving deficits, in particular the myth that government spending is exploding,” Chad Stone, Chief Economist of the Center for Budget and Policy Priorities said. “Trying to balance the budget through spending cuts alone, or worse, trying to balance the budget through spending cuts after cutting taxes even more than they would be by simply extending the Bush tax cuts is a recipe for draconian spending cuts that will hit low- and middle-income households very hard and threaten the core functions of government.”
“I think all of us here agree that the most important job for Congress right now is to help the economy to create jobs,” Steve Wamhoff of Citizens for Tax Justice added. “Tax cuts are one of the least effective tools to accomplish this goal.”
Testimonies from Progressive Caucus Hearing on Deal for All:
Lawrence J. Korb, Former Reagan Administration Official:
Defense spending cuts can and should be part of this nation’s plan to bring its spending under control. Why should defense be part of any deficit reduction agreement? The most basic reason is that it is one of the largest components of the federal budget and our GDP. In FY 2013, the Obama administration requested $712 billion for defense. As indicated in Table 1, this includes not just the Pentagon’s base budget, but also war funding, defense-related spending by other agencies, nuclear programs, and payments to the military retirement fund. It does not include the $138 billion spent on veterans’ pensions and health care.
Defense related activities in other agencies
Payments to military retirement trust fund
For FY 2013, defense spending will consume about 20 percent of the total federal budget and more than half of the discretionary budget. In addition, the defense budget will be larger than major mandatory spending programs like Medicare and Medicaid.
More importantly, however, the defense budget can be reduced without jeopardizing national security. Here are four reasons why.
First, the United States has just gone through an enormous defense buildup. The base defense budget – which does not include war funding - increased, in real terms, for thirteen straight years between FY 1998 and FY 2012. This was unprecedented in our history; for example, in the Reagan administration, defense spending grew in real terms for only four years before dropping back to more sustainable levels. After this era of nonstop growth, we can afford to make some defense cuts.Second, the defense cuts being discussed are smaller than they seem. Already slated to happen are $487 billion in cuts, which are mandated by the Budget Control Act. But these are not cuts from the current spending levels – they are reductions from projected growth in defense spending over the next ten years. In fact, the cuts barely reduce the DoD base budget from its 2012 levels at all – they bring us back to what we spent, in real terms, in 2010. And even if the larger cuts of sequestration kick in, defense spending would still be fairly high in historical terms. The DoD budget would only be brought back to its FY 2006 level, and, perhaps surprisingly, it would still be higher than what was spent on average in the 1980s under Ronald Reagan and George H. W. Bush.
Third, ending the indiscriminate growth of defense spending will force the Pentagon’s leaders to manage their funds more carefully, make hard choices, and end the shortsighted decisions that have characterized the last decade. Over the past decade, the Pentagon squandered $50 billion on weapons it later cancelled and allowed half of its procurement programs to operate well beyond their original budgets. For example, the F-35 Joint Strike Fighter now exceeds the estimates made in 2001 by 75 percent, a development Senator John McCain called a scandal and a tragedy. Moreover, during this period, the Pentagon irresponsibly funded items like missile defense, F-22s, and routine personnel costs from the war supplemental budget.
And, finally, the United States can afford to cut defense spending because we face a world with relatively few major threats and military commitments. We have withdrawn our forces from Iraq, and we are in the midst of a drawdown from Afghanistan that will be largely finished by 2014. We have the most powerful military in the world by far, and even sequestration-sized cuts would not seriously diminish our lead – we would still account for more than 40% of the world’s defense spending and our allies would account for about half of the rest. And we don’t face any existential threats: the Cold War is long over, we have seriously degraded the capabilities of terrorist networks after ten years of war, and our closest military competitor, China, spends hundreds of billions of dollars less than we do each year on defense.
To be clear - sequestration, with its sudden, indiscriminate cuts, is not the best way to reduce the defense budget. But similarly sized cuts, made carefully and strategically and phased in over time, could help us reduce our deficit without harming national security.
For example, shrinking the size of our nuclear arsenal to 311 weapons—a number the Air War College and School for Advance Air and Space Studies have endorsed as sufficient for nuclear deterrence—would save $11 billion per year.
Cutting the Navy (CV) and Marine Corps (STOVL) variants of the over-budget F-35 program—in favor of the cheaper yet still effective F/A-18 E/F—while reducing the procurement of the Air Force variant by half would save $4.28 billion in FY 2013 and $28.67 billion through FY 2017. And terminating the V-22 helicopter, which has long been hampered by cost overruns and technical problems, would save $2 billion in FY 2013 and at least $10-12 billion in the next decade.
Finally, the United States currently fields 11 aircraft carriers when no other country has even one of comparable size and power. Given this tremendous imbalance, the Pentagon could hold off building additional carriers, which cost $15 billion each, and consider retiring two of our existing carrier battle groups.
Maya Rockeymoore, Chair of the National Committee for the Preservation of Social Security and Medicare:
I want to thank Co-Chairs Raúl M. Grijalva and Keith Ellison and all the Congressional Progressive Caucus members on behalf of the millions of members and supporters of the National Committee to Preserve Social Security and Medicare, which I Chair, for your invitation to testify before you today.
The National Committee shares your serious concerns that a so-called “Grand Bargain” budget deal during the Lame Duck session or during the 113th Congress could rely on significant benefit cuts to Social Security, Medicare and Medicaid, which would hurt millions of middle and working class Americans. Unfortunately, too many lawmakers are embracing the Simpson-Bowles proposal as a template for the Grand Bargain. What some of your colleagues don’t know – or have chosen to ignore – is that Simpson-Bowles would disproportionately cut the social insurance safety net in exchange for vague promises of tax reform.
Here are a few of the arguments they use to justify a bargain that is not so grand for the American people.
Those pushing the Simpson-Bowles framework say that there must be “shared sacrifice” in addressing our nations debt. Yet, they forget that middle and working class Americans have already sacrificed much in the form of foreclosed homes, evaporated home values, drastically reduced 401k balances, increased poverty rates, and high unemployment rates. Middle and working class Americans have sacrificed even as wealthy corporations and individuals were given a pass with taxpayer-funded bailouts and the continuance of Bush-era tax breaks heavily skewed to benefit their bottom line.
Those pushing the Simpson-Bowles framework say that they are doing it for our children. Our children--who will be inheriting the cost of poor policy and fiscal decisions from the past 14 years. Our children who are the products of a recession generation of parents who have lost homes to foreclosure and vital financial security due to unemployment. Our children for whom the cost of education is getting steeper--even as their prospects for landing well-paying jobs after graduation diminishes. Our children, who by the year 2019, will be majority black and brown, and who hail from households that have the highest poverty rates and posses the least amount of wealth in this nation.
These are the children who have not benefitted from the decisions that caused the deficit and debt crisis and they are not well positioned to shoulder their costs in the future.
Yet Simpson-Bowles supporters seek to make our children subsidize our nation’s wealthiest corporations and individuals, in part by seeking to decrease the value of vital social insurance and safety net programs just as these children reach maturity.
Instead of embracing a plan that undermines the health and economic security of middle and working class families, The National Committee supports H. Res. 733, the “Deal for All” resolution that was introduced by Chairman Ellison. The “Deal for All” resolution contains our shared principle that any deal to replace the Budget Control Act of 2011 should not cut Medicare, Medicaid or Social Security benefits. For that reason, the National Committee sent a letter yesterday to all 435 House Members urging them to cosponsor the “Deal for All” resolution.
We continue to point out that without Social Security over half of older Americans would fall into poverty. While essential to so many, Social Security benefits are modest. The average monthly benefit is only $1,229. Beneficiaries cannot afford cuts, especially to preserve tax breaks for the wealthy.
But what is more, cuts to earned benefits would disproportionately hurt women and communities of color. Women -- who have endured a lifetime of income inequality would be harmed by proposals that seek to cut the Cost of Living Adjustment. And -- communities of color -- that have the highest poverty rates and possess the least amount of wealth would also see their income and health security eroded. African Americans, who have shorter life expectancies than other groups, would be especially harmed by the Simpson Bowles proposal to cut benefits by increasing the Social Security and Medicare retirement ages.
The National Committee believes Social Security’s finances should be strengthened by ensuring that the wealthiest among us, those who have benefited so much from this nation, pay their fair share.
In fact, if payroll taxes were applied more fairly to all workers—specifically by lifting the Social Security cap on earnings above $110,100 and making other minor adjustments—solvency could be assured. What is more, we could pay for needed improvements that would help Social Security meet the needs of all Americans --- including women and communities of color.
At the same time, we urge you to reject the myth that the test for a rational proposal to address Social Security solvency is to cut benefits and inflict pain on beneficiaries. That’s why we urge you to oppose:
- Ending the program’s social insurance promise by privatizing it for the benefit of Wall Street.
- Increasing the retirement age to 68, 69 or even higher.
- Reducing COLAs through adoption of the “chained” C-P-I, and
- Cutting benefits by altering the benefit formula.
Forty-seven years ago, President Johnson built on F-D-R’s legacy by providing health security to older Americans through the creation of Medicare and Medicaid.
Before Medicare, only 50 percent of seniors had health insurance and 35 percent lived in poverty. Insurance companies and hospitals regularly discriminated against seniors based on ability to pay, health status, and even race and ethnicity.
The passage of Medicare in 1965 represented a watershed moment. Our nation’s leaders decided our nation’s seniors deserved better and in 1965, they created Medicare--a near universal healthcare system to provide essential coverage for older adults. Many people do not realize that the Medicare law also required hospitals to desegregate their care in order to be eligible for federal dollars.
Today, Medicare continues to be essential for middle income seniors. Over half of Medicare beneficiaries have annual incomes of less than $22,500 and savings of less than $53,000.
Having guaranteed access to health insurance coverage is particularly beneficial for communities of color. Two-thirds of African Americans and Hispanics have incomes below $22,500, and they make up a large share of those who have incomes below the poverty level. In addition, people from communities of color are at greater risk for certain chronic conditions, such as diabetes. As a result, communities of color have a disproportionate stake in Medicare’s future.
Congress should support improving and strengthening Medicare by building on provisions in the Affordable Care Act that have already resulted in:
- Extending the solvency of Medicare Part A by an estimated eight years,
- Lowering Part B out-of-pocket costs for beneficiaries,
- Offering preventive services without out-of-pocket costs, and
- Reducing prescription drug costs.
Unfortunately, the House-passed GOP/Ryan Budget would take Medicare in the wrong direction by:
- Ending traditional Medicare,
- Privatizing it for the benefit of insurance companies,
- Making it harder for seniors to choose their own doctors,
- Cutting prescription coverage, free preventive services, nursing home benefits and
- Increasing the Medicare eligibility age to 67.
- We reject all of these proposals.
Likewise, reductions to Medicaid funding would negatively impact middle- and low-income seniors, many of whom have spent their life savings to pay for long-term care. Older adults and people with disabilities account for two-thirds of all Medicaid spending, and Medicaid pays for about 62 percent of all long-term services and supports. Cutting the federal contribution to Medicaid would jeopardize the availability and quality of long-term care both in nursing homes and in the community.
Medicaid remains a vital safety net and is especially important to communities of color. About 50 percent of all Medicaid beneficiaries are members of ethnic or racial minorities. Medicaid covers the cost of premiums, co-pays, and other essential services for dually-eligible seniors.
Sadly, millions of existing Medicaid beneficiaries likely would forgo needed medical assistance and become sicker if a proposal in the Ryan budget to block grant Medicaid became law. Establishing a federal "blended rate" would also reduce Medicaid payments to states.
Instead, what’s needed is the Medicaid expansion enacted in the Affordable Care Act. But to make this work – all states – red and blue – must cover vulnerable seniors, people with disabilities and children.
Social Security, Medicare and Medicaid are vital to the economic and health security of millions of senior Americans. Any changes in these programs should be made based on what is best for their beneficiaries, and not what is expedient for reducing America’s debt. And, Congress can cut the deficit without cuts to these cherished and successful programs if it focuses on improving the economy and asking those who have done extremely well in the last decade to finally pay their fair share.
Thank you for your leadership on efforts to protect Social Security, Medicare and Medicaid recipients from reductions in the benefits they rely on for a secure retirement. We look forward to working with you to secure support of the “Deal for All” resolution. Indeed, millions of Americans are counting on us to protect our essential social insurance safe net programs during the Lame Duck session and during the 113th Congress.
Thank you for the opportunity to testify.
Chad Stone, Chief Economist, Center on Budget and Policy Priorities:
Co-chairs Grijalva and Ellison and other members of the Progressive Caucus, thank you for inviting me to participate in this discussion of budget negotiations to address year-end fiscal issues. I hope in my testimony to provide an economic and budget framework for thinking about the choices that lie ahead and I offer the following three observations about how to approach those negotiations.
First, don't fear the fiscal cliff. Policymakers should not be panicked into accepting a bad budget deal by misguided fears that there will be an immediate economic calamity if we haven't worked out a budget deal by the end of the year. As I will explain, "fiscal slope" is a better term for the likely economic impact of the year-end reduction in the deficit that would take place under current law.
Second, reject the myth of "expansionary austerity" – the idea that trying to balance the budget in the midst of an economic slump by pursuing large cuts in government spending will promote job creation and a strong recovery. Europe's trying it; it doesn't work; traditional stimulus is what works to create jobs in a weak economy with high unemployment.
Third, pursue a balanced plan for addressing long-term deficits – one that includes a significant revenue contribution to deficit reduction. Only by including revenues in the plan can we avoid severe budget cuts that would hit low-and middle-income Americans hard – in areas from Medicare, Medicaid, and possibly Social Security to basic assistance for the poor – and that would weaken core government functions like education, scientific research, job training, and infrastructure investment.
Protection of low-income households and the need for a balanced plan that includes revenues are key features of Bowles-Simpson and other recent budget commission proposals as well as of past successful deficit-reduction efforts, including the 1990 budget agreement that helped pave the way to achieving budget surpluses later in the decade while at the same time reducing poverty and inequality.
An economic and budget framework
In the wake of the financial crisis and Great Recession, the US economy remains in an economic slump, operating well below its full productive capacity. We have substantial excess unemployment and underutilized machines, factories, and stores. That means we are not producing the full quantity of goods and services that we could be producing. We are not earning all the wages and income that we could be earning. And we are not collecting all the tax revenue we could be collecting if we were operating closer to full employment and full productive capacity. In terms of the chart below, our actual GDP is falling well short of our potential GDP and we are still a long way from closing the gap.
The key task in the short run is to put people back to work and close the output gap. In addition, our long-term budget situation is unsustainable under current policies and puts our long-term growth at risk. And of course we have the three-decade long problem of rising inequality. Our challenge is to find the right set of policies to achieve our short-term goal of getting back to full employment as well as our longer term goal of promoting sustainable growth with shared prosperity. That involves enacting a budget plan that temporarily accepts larger budget deficits until the economy is stronger, but ultimately makes sure that we have the revenues we need to pay for the government we want.
As Congressional Budget Office Director Douglas Elmendorf told the fiscal commission at the beginning of its deliberations:
There is no inherent contradiction between using fiscal policy to support the economy today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.
Federal Reserve Chairman Ben Bernanke does not disagree, in principle at least. He has said:
Fortunately, the two goals – achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery – are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.
Too much restraint too soon is bad for the economy and for shared prosperity in the short-term; failure to address our coming fiscal challenges is bad for the economy and shared prosperity in the long-term. But with the right mix of policies we can get the economy back on its feet, put people back to work, and promote strong future growth with shared prosperity.
Don't Fear the "Fiscal Cliff"
The so-called fiscal cliff is the collection of tax and spending changes due to occur in January under current law that will lower the budget deficit substantially but act as a drag on the recovery. I don't disagree with CBO's assessment that if all these changes go into effect and are allowed to remain in effect, such a sharp fiscal contraction would hurt the economic recovery and probably cause a recession. But that doesn't mean that policymakers should let misguided fears that the economy will immediately fall off a cliff panic them into making unsound budget decisions.
As our recent paper explains, rather than immediately falling off a cliff if the scheduled tax and spending changes take effect, the economy will start down a slope that would likely be relatively modest at first (and then much steeper if 2013 unfolds without a fiscal resolution). This means that if there is no agreement by January 1, policymakers will still have a limited amount of time to work out a responsible long-term budget agreement before the economy incurs any significant harm. Mark Zandi, chief economist of Moody's Analytics similarly notes that if the current tax rates expire on schedule on January 1, "The economy would steadily weaken as tax withholding schedules were changed and payroll tax rates increased, but the adjustment would be gradual. [emphasis added] . . ."
The sooner policymakers enact a balanced long-term deficit deal, the better. But the current political environment may prove too toxic. Our paper argues that policymakers would likely react quickly Zandi observed that:
Ideally, policymakers would navigate around the fiscal cliff in a way that does not undermine the recovery, while at the same time, making policy changes that lead to long-term fiscal sustainability. . . . [Such f]iscal nirvana is not politically achievable before the election, nor during Congress' lame?duck session afterward, but it will be early next year. The coming tax increases and government spending cuts [scheduled for January 1] probably have to bite a bit to generate the necessary consensus between the two political parties.
A recent Carlyle Group report makes much the same point: "The best outcome . . . might be the expiration of current fiscal policies to create real pressure for both parties to work together and quickly reach a ‘Grand Bargain.' "
Reject the Myth of Expansionary Austerity
I share the concerns of CBO Director Elmendorf and Fed Chairman Bernanke, that cutting the budget too much too fast will slow the economic recovery. That view is based on the mainstream economic proposition that in a weak economy, increases in government spending on goods and services and putting money in the hands of people who will spend it will increase demand for goods and services and increase output and employment. Cutting spending will have the opposite effect, slowing growth and job creation.
As we at CBPP have documented in our online chart book, the legacy of the Great Recession has been a stubbornly slow recovery. It is unfortunate that policymakers did not enact a well-thought-out second round of stimulus at the beginning of 2010, and the last minute tax cut/unemployment-insurance compromise they worked out at the end of the year was far from ideal. But contrast the U.S. experience with what has happened in the United Kingdom and the Eurozone, where policymakers bought into the misguided notion (which many Republicans here share) that the path to prosperity begins with fiscal austerity.
Austerity hasn't been working out well. For example, deficits have been smaller and fallen faster in the United Kingdom than the United States since 2009, but the U.S. economy has grown more, while the U.K. economy has faltered. The problems of the Eurozone continue to cast a pall over the U.S. economic recovery.
The ideal policy for addressing the fiscal cliff – Zandi's "fiscal nirvana" or Carlyle's "Grand Bargain" – would combine short-term fiscal stimulus with longer-term deficit reduction. As discussed in the next section, achieving such a grand bargain would involve scrapping sequestration and the focus on achieving deficit reduction through spending cuts alone. Well-conceived increases in discretionary spending in 2013-2014 could help support the economic recovery. A more balanced approach to deficit reduction that included revenue measures would prevent deep and harmful cuts across a broad swath of popular and worthwhile government programs.
For the health of the economy in 2013-14, the important issue with respect to the tax cuts is to ensure that tax cuts for low- and moderate-income households do not expire; the fate of the Bush tax cuts for the top 2 to 3 percent of taxpayers should be of little economic consequence in 2013 and 2014. Moreover, if only the tax cuts for lower- and middle-income households are extended, high-income taxpayers will still benefit from the reduced tax rates on the full portion of their income that falls in the lower tax brackets. CBO's analysis of the fiscal cliff indicates that a cost-effective way to continue using the tax cuts to shore up the weak economy would be to extend the middle-class tax cuts for a year or two, allow the upper-income tax cuts to expire, and extend the tax-credit expansions targeted on low- and moderate-income households. Such an approach would provide the most "bang-for-the-buck" in terms of supporting the economic recovery in 2013-14 without seriously compromising long-term fiscal sustainability.
Pursue a Balanced Plan for Addressing Long-Term Deficits
Arguments that we need large spending cuts to reduce the deficit are based on a false view of what is driving deficits, in particular the myth that government spending is exploding. They are also based on a false view of the tax burden most Americans face. Trying to balance the budget through spending cuts alone, or worse, trying to balance the budget through spending cuts after cutting taxes even more than they would be by simply extending the Bush tax cuts is a recipe for draconian spending cuts that will hit low- and middle-income households very hard and threaten the core functions of government.
I will leave the discussion of Medicare and Social Security to others and focus in my testimony on nondefense discretionary (NDD) spending, i.e., domestic spending subject to appropriations, and entitlement programs and discretionary spending affecting low-income households. As illustrated in the chart below:
• Virtually all deficit reduction since 2010 has come from discretionary programs; most of it from NDD. By 2022, NDD funding will be cut by upwards of $1 trillion, relative to 2010 levels.
• Under the Budget Control Act (BCA) caps, NDD funding will reach its lowest level as a percent of GDP since at least the Eisenhower administration. The House Republican budget would cut NDD far deeper – three times as deep each year as the cuts that would occur under sequestration.
• NDD does not contribute to growing deficits. The American Recovery and Reinvestment Act increased NDD in 2009, but only temporarily. Even before Congress began to cut NDD, CBO projected NDD spending to decline.
Steve Wamhoff, Citizens for Tax Justice
Thank you for the opportunity to speak with you today. My organization, Citizens for Tax Justice, is a non-profit organization that does research and advocacy and has worked for 30 years to promote tax policies that are fair for ordinary Americans.
I want to speak today about the vital need for the federal government to collect significantly more revenue than it does currently.
Tax Cuts Are a Poor Tool to Accomplish Goal #1: Create Jobs
I think all of us here agree that the most important job for Congress right now is to help the economy to create jobs. Tax cuts are one of the least effective tools to accomplish this goal.
The economist Mark Zandi, who is also a former adviser to John McCain, has concluded that for every dollar of revenue the federal government would lose from making permanent the Bush income tax cuts, U.S. economic output would increase by only 35 cents in the following year.
On the other hand, he finds that for every dollar the federal government spends on increased food stamps, work share programs, or unemployment benefits, U.S. economic output would increase by $1.71, $1.64, and $1.55 respectively.
Tax Cuts Make It Impossible to Achieve Goal #2: Reduce the Deficit.
After the jobs situation improves, Congress can focus on reducing the budget deficit, and clearly tax cuts do not make that any easier.
You have already seen this graph from the CBO illustrating how the budget deficit would be vastly smaller in future years if Congress simply does not pass any more legislation extending tax cuts.