The budget hasn’t been balanced since FY 2001, however, despite SAFE’s continuing advocacy of responsible fiscal policies. See, e.g., The “plan now, act later” idea is a nonstarter, 6/21/10; Don’t overthink the fiscal problem, it’s not that complicated, 5/18/18.
By the end of FY 2019 (9/30/19), gross federal debt stood at $22.7 trillion (107% of GDP) – a mere 12 percentage points below the historical peak (9/30/1946) - and based on current budget projections will rise far higher over the next 30 years.
With this situation in mind, SAFE member Jim Thomen and your faithful scribe recently requested a meeting with Senator Tom Carper. It took place on 10/4/19, building on two previous meetings (2016 & 2018). Herewith discussion highlights plus some further reflections on our part.
A. SAFE agenda – We used a handout to focus the discussion. For the underlying charts, see Legislative Contacts, 10/4/19.
CHART 1: basic information about SAFE and meeting agenda (“today we’d like to compare notes on an issue of common interest, the fiscal problem”).
B. Common ground - CHART 2: Congressional Budget Office chart showing public federal debt (excludes debt to trust funds) as a % of GDP from 1790 to 2050 (projected).
Sen. Carper agrees that the fiscal problem is serious and growing. See, for example, his explanation for voting against the Bipartisan Budget Act, which recently cleared the way for across-the-board increases in “discretionary” spending for FY 2020 & 2021. Carper statement on budget caps deal, 8/1/19.
. . . I remain very concerned about our country’s fiscal outlook. Unfortunately, there is a lack of the political courage needed, on both sides of the aisle, and certainly also in the White House, to put this country on a fiscally sustainable path. While I support many of the important spending priorities addressed in this deal and want to ensure that we avoid default, I cannot in good conscience keep voting again and again to add billions of dollars to our country’s skyrocketing deficit with no plan to tackle it. After all, it was Albert Einstein who said that the definition of insanity is doing the same thing over and over and expecting different results. Once and for all, our country needs a serious long-term plan – one that is thoughtful and balanced – that begins to rein in our massive federal deficit, raise revenues responsibly and avoid abandoning those who need our help the most.
C. Policy differences - CHART 3: Potential fixes: raise taxes, spending cuts, economic growth, deficit spending (including reasons to prefer spending cuts and economic growth vs. the other possibilities)
Despite agreeing with SAFE as to the gravity of the problem, Sen. Carper has a different view re the path forward. We favor spending cuts, which can be expected to boost economic growth. He would prefer a “balanced solution,” i.e., mix of spending cuts and tax increases, and believes deficit spending may be necessary to “prime the pump” if the economy is lagging.
Carper: Revenues as a percentage of GDP were relatively high during the second term of the Clinton administration – importantly due to tax increases in 1993. Yet US economic growth was robust during Clinton’s second term, and the budget was balanced for four straight years.
SAFE: OK, but many factors influence economic results including business sentiment. Maybe investors developed an optimistic view because they perceived that US political leaders had finally gotten serious about balancing the budget.
Subsequent checking shows that revenues as a % of GDP in FY 1998, 1999 and 2000 were not just relatively high, they exceeded the corresponding ratio in all prior years except 1944 (20.6%). What was going on?
No doubt the 1993 tax increases did contribute to the balanced budgets achieved in FY 1998 et seq. Looking back 20 years at the 1997 Balanced Budget Agreement, Joshua Gordon, concordcoalition.com, 8/8/17.
Legislation passed in 1993 by a Democratic majority in Congress and President Clinton increased tax rates on higher-income earners, lifted the wage cap for Medicare taxes and increased the gasoline tax. Without that history, the BBA might not have succeeded either as a negotiation or in achieving the ultimate policy outcome.
Note, however, that a capital gains rate cut in 1997 (from 28% to 20%) probably increased tax revenues by reducing the tax penalty for selling appreciated investments. The dangerous myth about the Bill Clinton tax increase, Charles Kadlec, forbes.com, 7/16/12.
Carper: Spending discipline (e.g., welfare reform) was also important in balancing the budget, and some Republican legislators – notably Rep. John Kasich (who then chaired the House Budget Committee) – made a major contribution.
SAFE (further analysis): Federal outlays as a % of GDP fell sharply during the years of budget balance, declining from 18.9% in FY 1997 to a post-1979 low of 17.7% in FY 2000-2001 (including historically low defense outlays). See this data recap at 10 year intervals for further historical perspective. Was spending really cut this sharply?
It has been suggested that the low outlays ratio resulted primarily from unexpectedly robust economic growth (during 1996-2000, annual GDP growth averaged 4.3%) rather than spending cuts. How to balance the budget – again, Michael Solon, Wall Street Journal, 8/4/19.
Real GDP growth was projected in 1995 to average 2.2% from 1996-2000. Instead it almost doubled, to 4.3%. That added $300 billion in revenue in fiscal 2000 alone—a single-year bonus of 3.1% of GDP, equivalent to $620 billion today.
Carper: Revenues as a % of GDP are now several percentage points lower than during the Clinton era, mainly due to a Republican tax cut in 2018 that no Democratic members of Congress voted for, yet the economic results have been merely so-so.
SAFE: Tax cuts promote economic growth by increasing the amount of funds available for business investment; tax increases have the opposite effect. It’s true that some companies have used part of their tax cut savings for stock buy-backs, but this simply provides investors with additional money that can be invested in other opportunities.
The Trump administration made a good start on boosting economic growth by cutting taxes and regulatory “red tape;” this effort was certainly worth a try. But the fiscal benefit was offset by allowing across-the-board spending increases, and business investment now seems to be cooling due to the “trade war” with China, etc.
Some observers say it’s time to admit defeat and boost taxes. When politicians advocate tax increases these days, however, they generally propose using the proceeds for new spending programs versus earmarking them for deficit reduction. See, e.g., our subsequent review of the 4th Democratic presidential candidates debate. Political theater may be entertaining, but it’s not very enlightening, 10/21/19.
Fiscal reality is only being factored into the equation to the extent of asking candidates (notably Elizabeth Warren) how they would pay for massive new spending commitments; no one is talking about eliminating the current trillion dollar deficits. Likewise, there was no discussion about eliminating wasteful spending, promoting economic growth by keeping taxes low, etc.
Further discussion established mutual agreement on a related point: the president’s swift rejection of the Trans-Pacific Partnership was an unforced error that weakened this country’s bargaining position in the trade showdown with China that is now playing out. Think twice about “America first” trade policies, 5/1/17.
Carper: Budget deficits may be needed during economic downturns to “prime the pump” and speed economic recovery. Then the government can run surpluses during economic booms to balance the budget over the cycle. In 2009, during the Great Recession, the Obama administration wisely proposed a major stimulus package even though massive deficits resulted.
SAFE: The trouble with Keynesian economics is that government leaders rarely seem to remember that part about running surpluses. We’d settle for habitually balancing the budget, which doesn’t require any judgment calls and avoids the danger of over-reacting to purported emergencies.
D. Budget process – CHART 4: Reviews by a Joint Select Committee (2018) and a subgroup of the Senate Budget Committee (2019) produced agreement that the budget process is “broken” but no consensus on how to fix it. Our impression (based on watching the videos of this action) is that the members of Congress need to shift their focus from treating symptoms, e.g., preventing government shutdowns, to curing the deficit disease.
It’s hard to imagine the 535 members of Congress making this shift without presidential leadership and public support Accordingly, why not recognize the fiscal problem – “not impeachment, not healthcare, not global warming” - as the top issue for the 2020 elections and challenge presidential candidates to offer plans for fixing it within five years?
We might have added (but didn’t think about it until later) that public interest in the fiscal problem (which led to the budget being balanced in President Clinton’s second term) was stoked by the third party presidential candidacy of Ross Perot in 1992. The sagacity of Ross Perot, Richard Berman, Washington Times, 3/27/17.
The last politician to really lay out our debt problem was Ross Perot. His 1991 charts simplified the then-$4 trillion debt problem and brought home the consequences of fewer retirement benefits, less security and increased taxes to the American public. (Voters rewarded his honesty with a surprising 19 percent of the presidential vote in a three-way race despite his less than charming personality.)
Sen. Carper seemed open to these ideas, including the 2020 election part. Also, it turned out that we share a high regard for Sen. Mike Enzi (R-WY), chair of the Senate Budget Committee, and Comptroller General Gene Dodaro (the government’s top auditor) who testified at one of the SBC sessions.
E. SAFE letters - CHART 5: Letter to the editor, 5/28/19; CHART 6: Letter to the president, 8/24/19; and CHART 7: Letter to congressional leaders (Pelosi, McCarthy, McConnell, Schumer), 8/24/19, all proposing fiscal problem as the top 2020 issue.
Relatively little time was spent discussing these letters. Sen. Carper did ask who wrote the letter to the editor, however, and yours truly acknowledged responsibility – albeit stressing my efforts to represent the predominant sentiment of the group.
Subsequent to the meeting, a response was received to the 8/24/19 letter to the president. Here it is for the record.
F. Budget balance blueprint – CHART 8: Budget balance blueprint: Recap of proposals [primarily spending cuts] that could eliminate current deficit of $1T in about 5 years.
Drawn from various sources without a review of the underlying data, our plan for cutting the deficit by $1 trillion per year was meant to be illustrative versus representing a definitive proposal. We explained the sources used (OMB, Heritage, Cato, etc.) and the logic of the various line items, e.g., (1) elimination of federal grants would be phased in over five years, and (2) there may well be waste in the current Defense budget but we would propose reallocation of any identified savings to other defense priorities on grounds that the current defense budget is at best adequate to support US commitments. For further discussion, see Politics aside, the budget could be balanced, 8/19/19.
Sen. Carper seemed receptive, and he correctly surmised that the $1 billion savings shown for Social Security was a placeholder for retirement benefits that are erroneously being paid to deceased persons.
In his committee assignments, Sen. Carper has found the reports of the Government Accountability Office very helpful. See, e.g., Substantial Efforts Needed to Achieve Greater Progress on High-Risk Areas, GAO, March 2019. Among other opportunities, this report (page 64) identifies (1) a “tax gap” of “hundreds of billions each year” that taxpayers are failing to pay, and (2) $151 billion in improper payments in FY 2018, notably erroneous or fraudulent Medicare, Medicaid, and Earned Income Tax Credit claims.
If all these holes could be plugged, which we suspect might be easier said than done, the resultant savings would provide a significant “down-payment” on the $1 trillion per year deficit reduction target.
G. Path forward – CHART NINE – Path forward: (a) SAFE perspective: we’ve done our best; our suggestions aren’t getting answered, let alone acted on; some members say US political leaders will never agree to real solutions; (b) our request for feedback.
Sen. Carper sees SAFE’s role as a constructive one and said we should keep it up as a reminder to DC that they need to do better. Reflecting on his own experience in government service, he underscored the importance of working with people who may have different views.
Elected treasurer of Delaware in 1976 at the age of 29, Carper quickly forged a productive relationship with the incoming governor, Republican Pete DuPont. Together they set out to restore the First State’s financial reputation (and bond rating) – with notable success. Among other things, the top income tax rate was slashed, more credible revenue estimates were established, spending controls were tightened, and they worked very hard to boost the state’s economy. The same strategies remain applicable today, both at the state and federal government levels.
After becoming a US senator in 2001, Carper picked up an invaluable tip from Sen. Mike Enzi. At the time, Enzi and Sen. Ted Kennedy were the ranking Republican and Democrat members on a Senate committee. How was it that a moderate Republican like Enzi and a liberal Democrat like Kennedy could get so much legislation accomplished? Simple, Enzi told Carper, the two senators agreed on 80% of the issues that came up, so they concentrated on those issues rather than fighting about the other issues.
Let’s suppose, said Carper, that we could have another Fiscal Commission like the Bowles-Simpson commission that nearly succeeded in brokering a “grand bargain” on fiscal issues in 2010, which would be ready to start work after the president was inaugurated in 2021. Wouldn’t that be a nice idea?
Either President Trump or a Democratic contender will be inaugurated in 2021, and we didn’t ask what outcome Senator Carper was envisioning. The idea of a fiscal commission has some appeal, however, and it will be interesting to see if anything comes of it.
We’re also hopeful that the president will offer some proposals for addressing the fiscal problem as the 2020 presidential race develops. And if the upshot is two competing plans, may the best plan win!
#Great work. You are my go to source for fiscal responsibility information. Carper is wise to hold court with you. – SAFE director
#I’ve never been high on Senator Carper. – Retired finance manager
#The liberals’ idea of a long-term fiscal plan is to raise revenues and spend more on social programs, as the EU does, which would cause the deficit to soar. I’m not convinced that Senator Carper can change their thinking. – SAFE director
#Please note: the erstwhile General Accounting Office was renamed the Government Accountability Office some years ago. – SAFE member (DE)
Thanks for pointing out this error, which has been duly corrected.