CBO to Congress: Stop kicking the can!

kicking-the-can-down-the-road.jpgYesterday, the Congressional Budget Office released its 2014 Long-Term Budget Outlook, which outlines the consequences of continually kicking the can on fiscal policy reform. While CBO anticipates slowly decreasing deficits through 2018, CBO projects that, after 2018, increased spending on entitlements and higher interest rates on government debt will balloon the deficit to historically high levels. Deficits between 2015 and 2024 will thus total $7.6 trillion- a staggering total that will help boost the national debt to 78% of GDP by 2024. 

Extending its projections to 2039, CBO predicts that the nation’s fiscal position will severely deteriorate, but notes that the degree of deterioration depends on the projection used. To account for potentially different budgetary realities, CBO prepared two projections: one that is an extension of the current “baseline” projections, and another named the “Alternative Fiscal Scenario.”

What’s the difference between these two scenarios? The first is based on an extension of the agency’s projections for federal spending, debt, and deficits between 2014 and 2024, and assumes that current law will be followed. Following current law means that Congress would, for example, allow the projected 2015 spending cuts to occur; would let the yearly “doc fix” lapse, which would cut Medicare payments to doctors; and resist pressure to reauthorize “tax extenders”.. Under this scenario, CBO projects that the national debt will increase to 106% of GDP by 2039- a level not seen since 1946. 

However, this first scenario assumes that Congress will follow current law, rather than continue its status quo of last minute changes to fiscal policies. Given Congress’s frequent choice to avoid politically difficult subjects such as spending reductions, CBO considers it likely that Congress will change current law and thus continue to increase spending while decreasing revenues- hence the “alternative” scenario. Were this to happen, CBO predicts that the deficit would reach 183% of GDP by 2039- a level not seen in American history, and only matched internationally by troubled Greece and Japan.

In either event, current trends will continue to produce deficits and debt that will reach critically high levels in the next 25 years. CBO recommends policymakers pursue a mix of reforms to current federal spending as well as the tax code, improving the revenue stream while restraining spending growth. Critically, it urges Congress to implement these reforms sooner rather than later. If, for example, Congress wants to bring down the debt to 39% of GDP by 2039, it would need to increase revenues or reduce spending by 1.5% of GDP each year from 2015 on. However, if it does not take action until 2020, it will need to make adjustments to the tune of 3.2% per year, and, if it delays until 2025, by 4.3% per year. The message is clear: kicking the can won’t avoid the need for revenue increases, spending cuts, or a combination of the two. Kicking the can will simply increase the magnitude of reforms required in future years, placing a disproportionate burden on Millennials. 

CBO’s warnings reiterate our own. America is on an unsustainable fiscal path that will bring about a potential fiscal crisis and threaten our future economic growth and stability. Enacting reforms now will mean that the needed adjustments can be implemented gradually, thus lessening the impact on the larger economy and Americans’ pocketbooks. Delayed action, however, will place a sudden, sharp burden on Americans of all ages. 

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Long-term Debt and Economic Growth Don’t Mix

01032013_Debt_Ceiling_article.jpgWe’re glad to report that the U.S. budget deficit is at its smallest since 2008. Between last October and this June, the government ran up a deficit of $365.9 billion- a substantial reduction on the $509.8 billion figure reported for the same period in 2012-2013. For the year, the White House predicts that the total budget deficit will fall to $583 billion, which is also the smallest figure since the start of the 2008 recession.

However, we’re not out of the woods yet.                                                                                                                                                                                         The Congressional Budget Office cautions that smaller deficits this year do not translate into smaller deficits over the long term. The deficit as a percentage of GDP will decrease to 2.6% by 2015, but then increase again to 4.0% by 2024. The same can be said for the debt: it will decrease to 72.3% of GDP by 2017, but increase to 79.2% by 2024. While we have achieved much in the way of debt and deficit reduction, more must be done to chart a truly sustainable fiscal course that doesn’t place the burden of deficit reduction solely on discretionary spending. 

Despite these challenges, there are still defenders of the status quo who claim that concern about the deficit are misplaced, as Paul Krugman of the New York Times frequently does. Countries such as Japan, he claims, carry historically high debt levels and have solid levels of economic growth; why should we worry? This attitude has contributed to a general public denial of the long-term risks of high public and private debt. If we’re not seeing the problems today, do they really exist at all? And if the deficit is going down this year, why worry about next year?

In its annual report, the Bank of International Settlements (BIS) decried this head-in-the-sand mentality, and warned that many of the underlying causes of the Great Recession are present in the ongoing recovery. While noting that some limited economic growth has returned in most economies, the BIS warned that much of this growth is fuelled by both public and private debt, and therefore poses significant risks to overall economic health. High public debt, the report finds, may bring short term benefits in terms of stimulating sagging public demand and driving economic growth when the private sector cannot, but risks long term catastrophes. High public debt will inevitably mean that investors charge more to lend the government money. When that happens, taxpayers will foot the bill for higher interest rates in the form of more taxes and decreased government spending on other services. Increasing debt also means that governments are left with precious few options to deal with other financial crises that may arise: a recipe for a potential economic calamity.

The International Monetary Fund’s (IMF) own report echoes the BIS’s concerns. While recognizing that much has been done to lower the debt and deficit, the IMF argues that more must be done to correct the long-term trends of growing government debt. To meet future budget demands while balancing the budget, the Fund calls for a general accounts surplus of 1.25% of GDP by 2023, a far cry from the deficit projected by the CBO. Continuing on the current path will not produce the “sustainable longer-term path” needed to ensure future economic growth.

Given their dire predictions about the trajectory of current policies, you might think that these institutions are prophets of doom and gloom. Not so! Both the BIS and IMF argue that policymakers have a unique opportunity to enact desperately needed structural reforms to ensure economic sustainability in the long term. Chief among these is moving away from economic policies predicated on debt as a driver of growth. What might these reforms be? They might look a little something like what we’ve proposed in the past: simplification of the tax regime, needed structural reforms to entitlements, better mechanisms for infrastructure investment, and other structural reforms designed to promote a generationally balanced, sustainable fiscal policy. The IMF says that reforms, including two-year budgeting and sound bipartisan agreements on the debt ceiling, would have a “lasting effect” on fiscal stability. Such a policy recognizes that investment in public priorities is essential and that the government has a compelling interest in fostering growth, while respecting that long-term deficits are not an appropriate catalyst for sustainable economic activity.


Drawing by: Emily Flake/The Fiscal Times

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The Bumpy Road to Highway Investment

tacoma-narrows-bridge-401bb546f41f3309d4f99d07e6c8acba03e5fb4b-s6-c30.jpgIf you’re traveling anywhere in America this summer, chances are you’re probably going to make at least part of that trip on an interstate highway. It’s also likely that, in the course of that trip, you’ll groan and grit your teeth in anger at inevitable traffic delays due to road work and inescapable congestion. These annoyances are certainly inconvenient, but are also part of the American summer travel experience. After all, doesn’t everyone sit in gridlock on the way to the beach? 

Unfortunately, the news we’re sharing with you today won’t make you feel any better about your summer travel woes. The Highway Trust Fund, which provides roughly a quarter of all highway and transit funding, will be completely broke by the end of August. When that time comes, the flow of federal transportation dollars to state and local governments across the country will dwindle to a trickle; payments will only be made as new gas tax revenues come into the Trust Fund. Such a move will threaten hundreds of thousands of construction jobs, impose millions of dollars’ worth of costly delays to new road and transit projects, and halt necessary repairs. 

As you might expect, policymakers in Washington are quite divided about what can or should be done. Much of the controversy surrounds whether or not the gas tax, which is the primary source of revenue for the fund, should be increased. Last raised in 1993, the gas tax has contributed progressively less and less revenue due to inflation and, thanks to increasing fuel efficiency standards, less gasoline consumption. As any mention of potential tax increases in an election year places politicians in a political minefield, policymakers are examining several solutions that do not involve direct tax increases. 

President Obama has suggested that Congress should replenish the fund with revenues from closing corporate tax loopholes, a proposal that congressional Republicans have generally rejected. House Republicans have instead offered a proposal that would eliminate most Saturday mail delivery and transfer the savings to the fund. This move, however, would only produce about a year’s worth of revenue, and will force Congress to revisit the issue. Senate Democrats, meanwhile, are considering a repatriation holiday for offshore corporate profits, with the resulting revenues going to replenish the fund. However, no specific proposal has been introduced.

All three of these proposals contain the same weakness: none provide a long-term solution to the fund’s revenue problem, and instead continue to transfer money from the general fund (aka, the budget). Transfers from the general fund to the Highway Trust Fund have sustained the latter for the past six years to the tune of $41 billion. Continuing this pattern, which siphons money from other programs, would be yet another instance of unnecessarily kicking the can. 

There is, however, a bipartisan proposal that could address the structural deficit. Senators Bob Corker (R-TN) and Chris Murphy (D-CT) have offered a proposal that would raise the gas tax by 12 cents over the next two years, bringing it up to the level that it would’ve been had Congress indexed it to inflation in 1993. Their proposal would also index the tax to inflation using the Consumer Price Index, meaning that the rate would keep up with overall economic growth. But there’s a catch: the Corker-Murphy proposal would make permanent some $190 billion in various tax breaks, none of which are related to highway investment.

Given the disagreement about what a long-term solution should look like, it is likely that Congress will embrace a short-term fix. On Thursday, the House Ways and Means Committee approved a $10.5 billion package to meet all of the Trust Fund's obligations through May 2015. Like the other proposals we discussed, the Ways and Means Committee's proposal does not address the structural funding problems within the Trust Fund. Committee Chairman Dave Camp (R-MI) has indicated that he opposes any increase to the gas tax, casting doubt on the feasibility of any long-term revenue increases.

An obsolete, crumbling 20th century infrastructure- especially our highways- will not allow America’s 21st century economy to grow and prosper as it should. Policymakers should strive for a long-term, sustainable solution that replenishes the Highway Trust Fund and provides the resources needed to rebuild the nation’s existing roads and bridges, while also investing in new roads and transit projects. Politically, this is a tall order, but it is the only sensible solution. Otherwise, Congress will once again kick the can down the road and find it more riddled with potholes than ever before. 

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The $1.2 Trillion Gorilla: Student Debt Burden Threatens Financial Future of Millennials

student_loan_debt.pngBy Amy Morse and Elise Perkins

New data show that the record $1.2 trillion in student loan debt, which exceeds consumer credit card debt, is negatively impacting Millennials and the broader economy. Students graduating in 2014 are leaving school with an unprecedented average of $33,000 in debt. This debt overhang is impacting standards of living, delaying homeownership, marriage, car purchases, impacting credit scores, savings, and other consumer spending. We believe public policy change is necessary to help the Millennial generation, and future generations, ease the financial burden of college costs.  By focusing on the needs of the future workforce for sustained, long-term economic growth, we will provide greater opportunity for all American students.   

And as you consider reform – remember, we are not our parent’s generation. 

That’s not to say the Baby Boomers didn’t have their fair share of economic troubles. As two college graduates (and one with a graduate degree), we realize how fortunate we are to have the opportunities that higher-education affords; and understand that we agreed to pay back the loans given to us. However the cost of higher education has increased well over 500% since 1985 and the average debt burden has doubled over the past two decades. Boomers with a high school diploma have earned 77% of the income relative to a college graduate, but today that number has fallen to 62%. Millennials without a college degree are much more likely to be living in poverty (22%) compared to the Boomer generation (7%).  Access to a college degree is paramount in today’s economy. MIT’s David Autor’s recent report exposed the significance of the “falling bottom” in education inequality, revealing that the collective gains based on college education outnumbered the concentration of wealth of the 1%. We know this truth to be self-evident – as expensive as it is - a college degree is a necessary down payment for the American Dream. 

But high costs, fewer opportunities, and record debt are converging on Millennials and erupting in the perfect storm: the most-educated generation with declining mobility in the midst of a fragile recovery. In addition to the personal debt burden (disproportionately worse for the economically vulnerable), higher unemployment, stagnant wages, and postponing major investment choices, Millennials will also inherit the $17 trillion national debt burden that remains unresolved by a deadlocked Congress. 

Tackling student debt has dominated recent news with a new executive order from President Obama and a failed Senate proposal. President Obama’s executive order expands Pay-As-You-Earn options (capping monthly payments to 10% of income) to an additional five million borrowers. However, despite some bipartisan support, the Senate failed to overcome a filibuster to allow debate on Senator Elizabeth Warren’s (D-MA) Bank on Students Emergency Loan Refinancing Act, which would allow 25 million existing borrowers to refinance their loans to new, lower market rates. Congressional failure to pass meaningful reform for existing borrowers, particularly given historically low interest rates, is not acceptable for Millennials or for the broader economy. 

The Senate Budget Committee heard testimony in early June about the economic drag due to the ballooning student debt burden, which cited data from Treasury Secretary Jacob Lew, The Federal Reserve’s Federal Open Market Committee, The Financial Stability Oversight Council, and the automobile and financial services industries. Their collective diagnosis: high student loan obligations equal reduced consumer spending that will depress demand. 

The value of a college degree is significant to U.S. competitiveness as well as state economies. Contrary to what many believe, only half of first-time students graduate from college within six years. More focus needs to be paid to the relationship between cost and completion, especially given the economic burden on those who fail to receive a credential, but go into debt. The Committee for Economic Development’s (CED) recent call-to-action on postsecondary education reform cited an important study of broad-access institutions, which contribute the majority of the American workforce: “Increasing graduation rates at New York City’s six community colleges by just 10 percentage points for the class that entered in 2009 would, over a decade, be worth $689 million to the city and state in combined income, economic activity, and public investment value. Over two decades this amount would grow to $1.4 billion and over three decades to $2.1 billion.” 

Report after report confirms what American adults aged 18-34 already know: we do not have the same economic outlook as our parents did. For a generation that makes up a quarter of the U.S. population, and accounts for more than $1 trillion, in U.S. consumer spending, that’s a problem. 

In fact, a report from UBS calls Millennials “the most financially conservative generation to come around since the Great Depression.” 

Consider this:

Congress needs to pay more heed to our voices. The Millennial generation is more than the “selfie generation” – we are the most educated, racially tolerant generation in the history of this country. We are optimistic, entrepreneurial in spirit, digital-natives who will ultimately become the next generation of leaders—and sooner than we realize. 

In the next five years, Millennials will make up a third of the U.S. adult population.  Our inability to achieve the American Dream – because of the dual debt burdens - might lead to resentment instead of the optimism associated with American ingenuity. At the very least, it appears to be pulling Millennials away from traditional political party allegiance. 

Reform options deserve serious consideration from Congress. Reform proposals should also recognize the changing demographics of future students. The majority of public school students in seventeen states are low-income, more than previous generations. Apprenticeship programs, expanding and reforming Pell Grants, expanding the income-based repayment to all students, expanded refinancing options, expansion of alternative credentialing models, greater subsidies for broad-access institutions, innovative savings programs for low-income students, more focus on need-based aid among academic institutions, more transparency among academic institutions regarding completion and costs, among many more are all viable options. In addition, more research is needed on why students drop out before completing college, and how communities can promote greater opportunities to students to transition effectively into the workforce. 

Short-term decisions on Capitol Hill have only addressed components of this problem, stifled economic growth, and put our financial futures in jeopardy. We must consider the whole picture: the societal, economic, and cultural impacts that the combined individual and national debt will have on Millennials. 

Luckily, a number of Millennial-focused groups have emerged offering a national voice for this generation including: Generation Progress, Millennial Action Project, The Can Kicks Back, and Young Invincibles. The voice of these organizations must be seriously considered by lawmakers.

Higher education offers the promise of opportunity in America, where hard work and merit-based achievements lead to innovation and growth. Unfortunately, ballooning higher education costs will undermine access for future students and depress opportunity for others. Time is no longer on our side. Lawmakers should use the 2014 and 2016 election cycles to rebuild the trust of our generation by addressing the crushing debt burden and cost of postsecondary education.


Amy Morse is Associate Director of Programs, and Elise Perkins is Director of Marketing and Communications at the Committee for Economic Development. Both women are Millennials. 

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Washington has kicked the can down the road far enough on our growing national debt. Join the Millennial movement to reclaim our American Dream.