In his message last week, the President advanced what he believes is a “comprehensive, pro-growth economic strategy that invests in winning the future, lays the foundation for strong private-sector job growth and ensures that shared prosperity will keep the American dream alive for generations to come.” MFR’s own political commentator, Bill Leary, argues that with few specifics, this plan is more of a political position paper than a working document.  In this analysis, Bill comments on specific items highlighted in the Fact Sheet summary of the framework.  Bill can be reached via email or at 713.622.1120.

Part I:

Commentary on the Summary of the President's Framework
for Shared Prosperity and Shared Fiscal Responsibility

$4 Trillion in Deficit Reduction: The President is setting a goal of reducing our deficit by $4 trillion in 12 years or less.  The Administration projects that this framework will reduce deficits as a share of our economy to about 2.5% of GDP in 2015, and put deficits on a declining path toward close to 2.0% of GDP toward the end of the decade.

Comment: How realistic is the Administration’s objective given our debt to GDP percentages?  In Washington, long-term strategies are often ignored.  The President’s goal anticipates that it will be accepted, without change, by Congessional representatives and Presidents elected over the next 12 years.  Looking at the table below, the U.S. has a negative credit outlook, while other countries with not much less gross debt as a percentage of GDP are rated as stable.  This begs the question, what is a "good" percentage -- and what is the U.S. goal?

Debt on a Declining Path, Backed Up By an Across the Board “Debt Failsafe” Trigger: The President’s framework would require that, by the second half of the decade, our nation’s debt is on a declining path as a share of our economy. To enforce this requirement, the President is calling on Congress to enact a Debt Failsafe that will trigger across-the-board spending reductions (both in direct spending and spending through the tax code) if, by 2014, the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade. The trigger will not apply to Social Security, low-income programs, or Medicare benefits.

Comment: Again, the option is to adjust the debt-to-GDP ratio.  What we have seen since the GDP began to decline in the past few years is that  government spending was being used as a stimulant to accelerate ecomomic growith and fund global conflicts.  Are we willing to preclude targeted response to budgetary problems to rely on a formulary structure?

Since 9/11, budgetary expenditures and off budget military programs have exacerbated our need for debt.  Another factor to consider is the definition of “low-income programs” which are exempted from the “fail safe” reduction.  Debt financing may be required to meet this objective.  In the same vein, deficit financing may be required to meet short-term defense objectives. 

Comment:  Prior to 9/11, the ratio of debt to GDP was falling. Since the turn of 2001, it has been defense spending (on or off budget) that has exacerbated our situation. 

Balance Between Spending Cuts and Tax Reform: The President’s framework would seek a balanced approach to bringing down our deficit, with three dollars of spending cuts and interest savings for every one dollar from tax reform that contributes to deficit reduction.

Comment:  An issue that needs to be considered is the “multiplier effect” in a fragile economy. The multiplier effect is the incremental amount of spending that can increase consumption spending, increasing income further and hence further increasing consumption. In Presidential speak, increasing taxes means taxing the wealthy, or the 5-percent of taxpayers that pay a majority of federal income taxes. 

Shared Sacrifice from All, Including the Most Fortunate Americans: The President believes strongly that, as we make difficult choices to live within our means, we cannot afford to make our deficit problem worse by extending the Bush tax cuts for the wealthiest Americans.

Comment :  At the end of last year, the President accepted a compromise that, among other things, extended the Bush tax cuts.

Bipartisan, Bicameral Negotiations on a Legislative Framework: The President has asked Congressional leadership select represtatives to participate in bipartisan, bicameral negotiations led by the Vice President. The goal of these negotiations is to agree on a legislative framework for comprehensive deficit reduction.

Policy Highlights. The policy highlights in the President’s framework build on the down-payment included in his FY 2012 Budget. They include:

• Non-security discretionary spending:  This would entail cutting non-security discretionary spending to levels consistent with the Fiscal Commission, saving $770 billion by 2023.
• Security spending: It sets a goal of holding the growth in base security spending below inflation, while ensuring our capacity to meet our national security responsibilities, which would save $400 billion by 2023.

Comment:  The result is defense spending at the pre-9/11 levels.

Health care: The President opposes any plan that would simply shift costs to seniors and the vulnerable by undermining Medicare and Medicaid. Building on the foundation of the historic deficit reduction achieved through the Affordable Care Act, the framework would save an additional $340 billion by 2021, $480 billion by 2023, and at least an additional $1 trillion in the subsequent decade. These savings complement the new patient safety initiative that could lower Medicare costs by another $50 billion over the next decade by providing better care. The President’s framework includes initiatives that will:

• Bend the long-term cost curve by setting a more ambitious target of holding Medicare cost growth per beneficiary to GDP per capita plus 0.5 percent beginning in 2018, through strengthening the Independent Payment Advisory Board (IPAB).
• Make Medicaid more flexible, efficient and accountable without resorting to block granting the program, ending our partnership with States or reducing health care coverage for seniors in nursing homes, the most economically vulnerable and people with disabilities. Combined Medicaid savings of at least $100 billion over 10 years.
• Reduce Medicare’s excessive spending on prescription drugs and lower drug premiums for beneficiaries without shifting costs to seniors or privatizing Medicare. Combined Medicare savings of at least $200 billion over 10 years.

Other mandatory spending   Comprehensive deficit reduction must include savings in other mandatory programs, including agricultural subsidies, the federal pension insurance system, and anti-fraud measures, while protecting and strengthening programs that serve low-income families and other vulnerable Americans. The President’s framework includes a target of $360 billion in savings from other mandatory programs by 2023.

Comment:  Government spending has far out paced GDP.  As a result, federal debt has increased almost as dramatically.  (Debt has also been needed to cover off-budget defense spending.)

Tax reform: the President is calling for individual tax reform that closes loopholes and produces a system which is simpler, fairer and not rigged in favor of those who can afford lawyers and accountants to game it. The President supports the Fiscal Commission’s goal of reducing tax expenditures (e.g., mortgage interest deductions) enough to both lower rates and lower the deficit.

Social Security: The President does not believe that Social Security is in crisis nor is a driver of our near-term deficit problems. But, in the context of an aging population and a Social Security wage base that is declining as a share of overall earnings, Social Security faces long-term challenges that are better addressed sooner than later to ensure that the program remains for future generations the rock-solid benefit for older Americans that it has been for past generations. That is why the President supports bipartisan efforts to strengthen Social Security for the long haul. These efforts should be guided by several principles, including strengthening the program and not privatizing it, improving retirement security for the vulnerable while protecting people with disabilities and current beneficiaries, and not slashing benefits for future generations.

Next Up: Part II – Paul Ryan’s Alternative