Defense Secretary Robert Gates is set today to lay out to Congress his plans for cuts to Pentagon spending. (The Washington Examiner argues that defense spending must be “on the table” for budget cuts.)

CNBC says the U.S. could lose its top credit rating if lawmakers don’t make good on their promise to cut the budget deficit. On that note…

Are they or aren’t they? Yesterday morning it looked as if House Republicans were walking back on their pledge to cut $100 billion in spending this year. By the afternoon, House Majority Leader Eric Cantor told The National Journal that the party wasn’t retreating. (Still, the magazine says it will be tough to make the $100 billion goal.) According to The Washington Post, House Budget Chairman Paul Ryan (R-WI) says the GOP will cut something like $60 billion this year. Bloomberg and The Associated Press have more.

Yesterday the House voted for a rule (“Cutgo”) that would require increases in mandatory spending be offset by spending cuts only. This rule will replace the former House “Paygo” rule, in which either spending cuts – or tax increases – could be used to offset new mandatory spending.

The Wall Street Journal says momentum is building for an overhaul to corporate taxes this year.

According to Politico, President Obama will name his new National Economic Council chair on Friday. The frontrunner appears to be the Treasury Department’s Gene Sperling.

Some ideas for reducing spending from the op-eds pages: Diana Furchgott-Roth looks at the Highway Trust Fund, Veronique de Rugy looks at Medicare and Medicaid, and Daniel Henninger looks at the President’s power to cut spending. The Wall Street Journal’s David Wessel also weighs in.

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Emergency Spending

This designation was intended to provide Congress a vehicle with which to quickly fund actual emergencies (think unforeseeable occurrences, such as an extraordinary natural disaster, or the start or unanticipated ramping-up of a war.) But it increasingly has been exploited as an enormous loophole through which Congress can claim nearly anything an “emergency” and bypass budget limits and PAYGO restrictions.

NOT-SO-FUN FACTS: Congress’ exploitation of the “emergency” spending designation has exploded in recent years. In 1988, Congress passed $1.3 billion in “emergency” spending; by 2007, Congress’ “emergency” spending had grown nearly one hundred-fold, to $120 billion. The wars in Iraq and Afghanistan, for instance, have been largely funded under this designation.

Spending Cliffs

Used to mask the true cost of new spending with absurd assumptions, this scam typically involves dramatically spiking a program’s spending levels for several years, then pretending a future Congress will suddenly decide to slash the program’s funding back to pre-spike levels (yeah sure…that’s likely). This often is used to make 5- and 10-year spending and deficit levels look better, and to get around PAYGO requirements.

NOT-SO-FUN FACTS: Congress recently employed this gimmick to downplay by tens of billions (over just ten years) the true costs of their entitlement program expansion du jour (in this case, SCHIP) and to side-step their own PAYGO rules.

PAYGO

The pay-as-you-go mechanism has been weakened, scammed, used to chase higher spending with higher taxes, and simply waived so often its reality bears no semblance to its common-sense sounding name.

NOT SO FUN FACTS: PAYGO often comes with the feel-good slogan “No more deficit spending!” But since its most recent implementation in 2007, the deficit has exploded – from $160 billion in 2007, to $1.29 trillion in 2010.

Bump and Freeze

Washington loves to claim it will “freeze” spending, but this façade of fiscal austerity tends to quickly crumble when you consider what will be excluded (all of mandatory spending and a good chunk of discretionary spending is often exempted), or at what level a politician would hold spending (see the “bump and freeze” example, below).

NOT-SO-FUN FACTS: The “bump and freeze” version of this gimmick involves hiking spending by huge levels one year, then claiming austerity the next year by “freezing” spending at the inflated levels. Here’s an analogy: add a huge amount to your regular budget one year – a down-payment on a house, for example – then simply spend the same amount (including whatever you spent on the down payment) the next year, and pretend you’re being frugal because you “froze” your spending at last year’s level.

Baseline Boondoggle

This time-honored scam often involves artificially lowering spending projections relative to what Congress will actually do. In fact, Congress often holds press conferences to assure constituents the apparent cuts aren’t real…they’re just for, you know, “accounting
purposes.” See “doc-fix” example below for a bi-partisan favorite use of this gimmick.

NOT-SO-FUN FACTS: Oh, the bipartisan classic Medicare “savings” assumption no one even bothers to pretend is real: the “doc fix.” In short, because of errors in a Medicare physician payment formula, there are cuts assumed in the spending projections every year (cuts that everyone knows will never happen) to doctors who take Medicare patients. Rather fix the formula to reflect reality, both sides have long chosen to do an annual payment “fix” so that “they” will only be charged for that year. This sleight of hand allows Congress to mask hundreds of billions in future Medicare costs.BA

CARTOON: Government Money Tree

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The Onion’s American Voices: Senate Approves Jobless Benefits Extension

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CARTOON: PAYGO Leaky Cap

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The Onion: Budget Cuts Force British Government To Shut Down Mysterious Seaside Village

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“According to a study by the Brookings institution, Washington D.C. has the highest concentration of smart people in the United States. Lets see; we have a mess in the Gulf, we have a dysfunctional Homeland Security, and we are $13 trillion in debt. Imagine how bad it would be if these people weren’t geniuses.” — Jay Leno

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Key points on the “budget” plan, according to today’s The Hill:

Democrats have expressed concern about voting for a document showing lots of red ink in an election year.

House Democrats are readying an alternative budget measure that would set next year’s spending levels without requiring a vote on deficits.

House Budget Committee Chairman John Spratt (D-S.C.) said the alternative would be the “functional equivalent” of a full-fledged budget. But because it won’t be a traditional budget resolution, it will be silent on future deficits, which are expected to average nearly $1 trillion for the next decade.

In addition to setting spending levels for 2011, the alternative budget may have other provisions, such as squaring the pay-as-you-go law signed by President Barack Obama with the similar pay-as-you-go House rule, Spratt said. Both PAYGO measures require new tax cuts or entitlement programs be paid for with tax increases or spending cuts, but the House PAYGO rule, in place since before the law was enacted, can be more easily bypassed than the PAYGO law.

Clearly, no honest family or business would consider a document that ignores both the current and future consequences of its debt a serious fiscal plan.  It’s just as unlikely they’ll buy this “budget” charade from Congress.

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Too often does Washington only talk-the-talk when it comes to fiscal responsibility, rarely does it actually walk-the-walk.  The most recent and egregious example is pay-as-you-go, or PAYGO.  PAYGO rules are regularly avoided by identifying new expenditures as “emergency” spending.  “Emergency” spending, not being subject to PAYGO rules, simply adds to our already ballooning budget deficit.

We applaud the administration for recognizing this serious problem and hope they take substantive steps to reduce wasteful spending.   With a projected $1.6 trillion dollar deficit for 2010, it is past time to get serious about fiscal responsibility.

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The Senate will take up H.R. 4213, the tax extenders bill today. The cost of the bill has seesawed as lawmakers feel pressure from increasing deficits. However, that may not be enough – Politico reports this morning that lawmakers are looking to restore spending, including $24 billion in Medicaid funding, cut from the bill by the House.

Before the House acted, the Congressional Budget Office (CBO) estimated this piece of legislation will increase budget deficits by about $84 billion for fiscal years 2010 and 2011. Between 2010 and 2020, the bill increases federal spending by $102 billion. Some of this spending is offset with tax increases,

As the CBO points out, a good portion of this bill would be designated “emergency” spending and so would not be subject to pay-go rules. We’ve written about this issue in the past. The emergency designation applies to three provisions in the bill, including the extension of unemployment benefits and COBRA (health care benefits for Americans who’ve lost their jobs). For lawmakers who claim we’re in a recovery, this seems like a questionable use of the emergency designation considering that all of these programs had already been financed (and declared “emergencies”) under previous legislation.

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Earlier this week, the Wall Street Journal reported that in the last three years, PAYGO has been violated by $1 trillion.

The Hill, a newspaper that covers Capitol Hill, reported Tuesday that Democrats plan to add $50 billion in domestic spending to an appropriations bill meant to fund the wars in Iraq and Afghanistan. Included in that $50 billion is $5.7 billion for Pell Grants to college students and $9 billion in loans for renewable energy projects. According to an editorial this week in USA Today, much of this spending would be exempt from the PAYGO rules because it would fall into the “emergency” category. As the article helpfully reminds us, “the dictionary defines emergency as ‘a sudden, generally unexpected occurrence.’”

It’d be hard to argue that anything in this bill can be categorized as a “generally unexpected occurrence.” After all, the President submitted his budget request just three months ago and none of this funding was included.

Though we disagree with USA Today’s approval of tax increases to pay for this new spending (those could kill any recovery that may be underway), if really an “emergency,” the package should be paid for through cuts to other non-essential programs.

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We think it’s worth asking: if Congress is going to create an entity focusing on identifying systemic risks to our economy, shouldn’t that body begin with examining Congress’s spending habits?  Certainly, Washington’s reckless overspending and the exploding national debt threatens to undermine our global competitiveness and potential to grow.

Ironically, in the process of creating this very legislation, Congress is demonstrating that it shouldn’t be giving financial planning advice to anyone.  This legislation is estimated to cost $17 billion, and should be subjected to PAYGO rules, but bill sponsors are looking for ways to avoid making changes to comply with PAYGO.

It was just two months ago that Congress passed PAYGO — legislation that requires that that Congress offset new spending by reducing other outlays or raising revenue.  It was heralded as evidence that Washington is fully committed to fiscal responsibility. As the President put it:  “It’s pretty simple. It [PAYGO] says to Congress … You can’t spend a dollar unless you cut a dollar elsewhere. This is how a responsible family or business manages a budget. And this is how a responsible government manages a budget, as well.”

Yet since that time, Congress has regularly blown off PAYGO, and the same politicians that championed PAYGO have demonized those who have tried to enforce it.

Today, many warn that the U.S. is on the road to economic disaster as our debt explodes to unprecedented levels. What’s happening in Greece could happen here. If Congress is really worried about “systemic threats” to our economic system, it should reduce spending to levels that facilitate growth.

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Congress is set to discuss extending unemployment benefits again this week when the Senate returns from its recess. Media coverage has centered on Republican efforts to require the Senate to follow PAYGO rules so the cost of extending benefits is offset by cuts to other spending.  Senator Bunning made a similar stand last month, and now it’s Senator Tom Coburn who is pushing for PAYGO.

We’ve written before that if PAYGO is worth its name, it should be followed in instances like this. This unemployment extension clearly isn’t an “emergency” in the traditional sense:  Congress has been considering another extension for more than a month.

With more than 5 million Americans who’ve been out of work for 6 months or more, unemployment insurance Is now paying benefits much longer than it has in the past.  Congress has enacted multiple extensions so that payments can be received for as long as 99 weeks in some states.

The availability of nearly two years of unemployment benefits may have unintended consequences that contribute to our high unemployment rate.  The extended benefits may discourage active job searches, the acceptance of lower-paying jobs, or the decision to retrain and pursue a new line of work.  Larry Summers, the President’s top economic advisor, has written about how unemployment benefits can contribute to higher unemployment in the past:

The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

The Congressional Budget Office, while supporting extended unemployment benefits as part of an economic stimulus, acknowledged that such programs “dampen people’s efforts to look for work”. The CBO notes that this potential effect is “ less of a factor when employment opportunities are expected to be limited for some time,” as is the case in the current economic climate.

We all want to help the unemployed during this protracted downturn.  But policymakers need to consider if they should continue to embrace costly policies (the 30-day extension would add another $9 billion to our debt) that could make our unemployment problem worse.

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This bill will increase the deficit, as it was able to get around PAYGO rules using legislative trickery that only offsets $2 billion of its $17.6 billion cost.

The bill’s centerpiece is a year-long $1,000 tax credit for any qualifying employee that remains employed for an entire year.  The hope is that lowering the cost of hiring a worker will encourage employers to hire more.

Yet these tax credits are too temporary and too limited to stimulate employment and economic activity. The Brookings/Urban Institute Tax Policy Center explains:

The problem with subsidies such as this is that they are exceedingly sloppy.  A lot of money goes to those firms that would have hired anyway.  This, in fact, was the experience with the homebuyers’ credit.  It set off a flurry of new home sales last fall as buyers rushed to beat the deadline for getting the subsidy.  Once the tax-generated boomlet ended, the market fell off the table in December.

The best long-term jobs policy is to create an economic environment conducive to sustainable growth.  Certainly that should include lowering the costs employers face by lowering business taxes to levels that are internationally competitive – not for some business owners and temporarily but for all and permanently.

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