Brookings: Projects - Budgeting for National Priorities

Should Everyone Go To College?

Stephanie Owen and Isabel V. Sawhill — Wed, 08 May 2013 09:00:00 -0400

Summary

For the past few decades, it has been widely argued that a college degree is a prerequisite to entering the middle class in the United States. Study after study reminds us that higher education is one of the best investments we can make, and President Obama has called it “an economic imperative.” We all know that, on average, college graduates make significantly more money over their lifetimes than those with only a high school education. What gets less attention is the fact that not all college degrees or college graduates are equal. There is enormous variation in the so-called return to education depending on factors such as institution attended, field of study, whether a student graduates, and post-graduation occupation. While the average return to obtaining a college degree is clearly positive, we emphasize that it is not universally so. For certain schools, majors, occupations, and individuals, college may not be a smart investment. By telling all young people that they should go to college no matter what, we are actually doing some of them a disservice.

The Rate of Return on Education

One way to estimate the value of education is to look at the increase in earnings associated with an additional year of schooling. However, correlation is not causation, and getting at the true causal effect of education on earnings is not so easy. The main problem is one of selection: if the smartest, most motivated people are both more likely to go to college and more likely to be financially successful, then the observed difference in earnings by years of education doesn’t measure the true effect of college.

Researchers have attempted to get around this problem of causality by employing a number of clever techniques, including, for example, comparing identical twins with different levels of education. The best studies suggest that the return to an additional year of school is around 10 percent. If we apply this 10 percent rate to the median earnings of about $30,000 for a 25- to 34-year-old high school graduate working full time in 2010, this implies that a year of college increases earnings by $3,000, and four years increases them by $12,000. Notice that this amount is less than the raw differences in earnings between high school graduates and bachelor’s degree holders of $15,000, but it is in the same ballpark. Similarly, the raw difference between high school graduates and associate’s degree holders is about $7,000, but a return of 10% would predict the causal effect of those additional two years to be $6,000.

There are other factors to consider. The cost of college matters as well: the more someone has to pay to attend, the lower the net benefit of attending. Furthermore, we have to factor in the opportunity cost of college, measured as the foregone earnings a student gives up when he or she leaves or delays entering the workforce in order to attend school. Using average earnings for 18- and 19-year-olds and 20- and 21-year-olds with high school degrees (including those working part-time or not at all), Michael Greenstone and Adam Looney of Brookings’ Hamilton Project calculate an opportunity cost of $54,000 for a four-year degree. In this brief, we take a rather narrow view of the value of a college degree, focusing on the earnings premium. However, there are many non-monetary benefits of schooling which are harder to measure but no less important. Research suggests that additional education improves overall wellbeing by affecting things like job satisfaction, health, marriage, parenting, trust, and social interaction. Additionally, there are social benefits to education, such as reduced crime rates and higher political participation. We also do not want to dismiss personal preferences, and we acknowledge that many people derive value from their careers in ways that have nothing to do with money. While beyond the scope of this piece, we do want to point out that these noneconomic factors can change the cost-benefit calculus.

As noted above, the gap in annual earnings between young high school graduates and bachelor’s degree holders working full time is $15,000. What’s more, the earnings premium associated with a college degree grows over a lifetime. Hamilton Project research shows that 23- to 25-year-olds with bachelor’s degrees make $12,000 more than high school graduates but by age 50, the gap has grown to $46,500 (Figure 1). When we look at lifetime earnings—the sum of earnings over a career—the total premium is $570,000 for a bachelor’s degree and $170,000 for an associate’s degree. Compared to the average up-front cost of four years of college (tuition plus opportunity cost) of $102,000, the Hamilton Project is not alone in arguing that investing in college provides “a tremendous return.”

It is always possible to quibble over specific calculations, but it is hard to deny that, on average, the benefits of a college degree far outweigh the costs. The key phrase here is “on average.” The purpose of this brief is to highlight the reasons why, for a given individual, the benefits may not outweigh the costs. We emphasize that a 17- or 18-year-old deciding whether and where to go to college should carefully consider his or her own likely path of education and career before committing a considerable amount of time and money to that degree. With tuitions rising faster than family incomes, the typical college student is now more dependent than in the past on loans, creating serious risks for the individual student and perhaps for the system as a whole, should widespread defaults occur in the future. Federal student loans now total close to $1 trillion, larger than credit card debt or auto loans and second only to mortgage debt on household balance sheets.

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Should Everyone Go To College?

Authors

Stephanie Owen
Isabel V. Sawhill

Image Source: © Brian Snyder / Reuters

Discussing the Global Investment in American Jobs Act of 2013

Martin Neil Baily — Thu, 18 Apr 2013 09:30:00 -0400

Introduction

I would like to thank Chairman Terry, Ranking Member Schakowsky and the members of the Committee for the opportunity to present my testimony today on the Global Investment in American Jobs Act. I have had the opportunity over the past twenty years or more to do research on issues of productivity, competitiveness and the impact of foreign investment, looking not only at the United States but also at Europe, Japan, Korea and many emerging markets.

The American economy today is improving but fragile. Real GDP growth is expected to be around 3 percent in the first quarter of this year but only about 1 percent in the second quarter and be well below 3 percent for the second half of the year because of the impact of payroll tax increases and the sequester. The number of jobs is increasing but too slowly. After flat-lining in the middle quarters of 2012, business investment picked up in the fourth quarter, but we need a lot more investment in order to create the jobs needed to raise living standards.

To a great extent, the performance of our economy over the next 10 years or so depends on the contributions here at home of U.S. workers and companies. The competitive position of this country in the global economy will play a vital role and I applaud the House for proposing a comprehensive review of how to make the U.S. economy a more attractive place to invest for foreign companies. In the years after World War II, it was American companies that went overseas, bringing with them technology and business expertise as well as capital. These companies helped spread prosperity to the rest of the world, a process that is still happening. But today successful, productive companies from around the world are investing in America, bringing jobs, capital and, in some cases, new technologies and business efficiencies. The auto company that exports the most outside North America is BMW. Toyota makes the bestselling cars in America in its factories here; and Siemens is helping fix the electric power grid.

The inflow of foreign direct investment slowed as a result of the Great Recession, not surprisingly, but there is tremendous potential to increase that flow now and in the future, bringing additional jobs and boosting the economic recovery. Making America a location that attracts good foreign companies is very important and, by the way, those same factors will also make it more attractive for U.S. multinational companies to locate more of their investment here at home.

The Pattern of Foreign Direct Investment

Figure 1 below shows the inflow of foreign direct investment to the United States and the outflow of direct investment by U.S. companies overseas. The figure shows that the magnitudes of the inflow and outflows are comparable, although the outflow has been larger than the inflow for all but one year since around 2001. There was a surge of foreign investment into the U.S. market at the time of the technology boom in the 1990s, which dropped sharply when that boom subsided. The level of foreign inflows has not reached its 2000 peak since then. Is it a problem that the outflows exceed the inflows? The U.S. economy attracts huge amounts of capital from around the world every year. The McKinsey Global Institute estimated that between 2000 and 2007, 85 percent of the international capital available in the world (in the form of total current account surpluses) came to the United States, largely in the form of purchases of financial assets. Almost certainly, the U.S. economy became too reliant on foreign capital at that time. The capital inflows were the counterpart to the large current account and trade deficits and the easy access to funds contributed to the housing boom and subsequent bust. Direct foreign investment inflows are different, however, in that they are stable and brings jobs and production. Bringing in more foreign direct investment, even while we rely less on foreign purchases of U.S. financial assets, would be a plus for the economy.

Figure 1: Foreign Direct Investment in the United States and U.S. Direst Investment Abroad, Annual Flows, 1990-2011 (in billions of dollars)

Source: U.S. Department of Commerce

Figure 2 below looks at direct investment inflows to China compared to the United States. Over the entire period from 1995 to the present, direct investment in the United States was far greater than the flow into China. Of course, China traditionally put up barriers to foreign investment and even today many companies report that it is hard place in which to invest and do business. In 2012, however, based on the first three quarters of data, direct foreign investment into China exceeded the flow into the United States. Is this a matter of concern? Yes and no. China’s economy is growing rapidly and will likely become larger than the U.S. economy in the future. It is not surprising that multinational companies want to access China’s labor pool and its market. It is also notable that the direct investment flowing into China is not coming primarily from U.S. multinationals. Some American companies, like GM or Ford, have set up business in China, but most of the investment in China is from Taiwan, Korea and elsewhere, not from the U.S. On the other hand, the recent weakness in investment inflows in the past few years, visible in Figures 1 and 2, may be indicative of the lack of relative attractiveness of the United States to foreign investors.

Figure 2: Foreign Direct Investment into China and the United States

Source: World Bank, OECD. * Figures for 2012 obtained by annualizing the first three quarters.

Figures 3 below shows information about the stock of foreign direct investment located in the United States by industry and, below that, by country. Two points are notable. First, a disproportionate fraction of foreign investment coming to the United States is in the manufacturing sector. This important sector makes up less than 10 percent of the economy today but a much larger share of foreign investment stock. Over the past twenty years or more there has been concern that the U.S. economy is not devoting enough of its investment to manufacturing, having an adverse impact on competitiveness and contributing to the large chronic trade deficit. It is notable that foreign-based multinationals have shown greater willingness to invest in manufacturing operations and are adding to competitiveness. Second, by far the largest proportion of the foreign investment (71 percent) comes from European countries, with the next largest coming from Asia, notably Japan, but also Korea. The UK, Netherlands, Switzerland, Germany and France are the largest investors from Europe. This pattern of investment coming from Europe and Asia is not perhaps surprising since these economies are among the most developed with global leading companies, strong technologies and efficient business practices. These countries are also strong allies of the United States. The economic problems in Europe and Japan help explain the decline in the inflow of investment. When foreign companies are stressed at home they are less willing to invest here.

Figures 3: The Cumulative Stock of Foreign Investment in the United States by Industry and by Geography.

The Pros of Foreign Investment in the United States

1. Foreign companies can bring new technologies and efficient operations. Overall, the U.S. economy remains the global leader in both productivity and technology, but there are large variations by firm and by industry. We cannot expect to be the country that is the source of every innovation or every good business idea, and we are not. Research that compares productivity across countries has found that the biggest benefits of innovation come from its dissemination through the economy. American innovations in computers and semiconductors now contribute to economic growth around the world. German innovations in auto parts are used by the American auto industry. Foreign direct investment is crucial to distributing innovations and allows the U.S. economy to benefit from the global pool of new ideas.

2. Foreign direct investment provides capital for jobs in America. American corporations are on average very profitable, partly because they are well-run compared to companies world-wide, but also because they set high target rates of return before they are willing to invest. U.S. corporate strategy has emphasized being lean in the use of capital and avoiding making large, risky investments unless the expected returns are high. Without making any judgment on this practice, it means that there are opportunities in America for investment and job creation where projected returns are pretty good but where U.S.-based companies are reluctant to commit the necessary capital. Foreign companies based in Asia now own and operate much of the steel capacity based in the United States. As I will discuss shortly, the energy boom is attracting many foreign companies to build highly capital intensive new plants making petrochemicals in America. Infrastructure is an area where foreign investment could make a contribution to U.S. economic performance.

3. Foreign direct investment increases the competitive intensity of the U.S. economy. A basic tenet of economics since Adam Smith has been that competition benefits consumers. Markets with a dominant single producer or with an oligopoly of companies that reach tacit agreements to limit price competition will result in prices that are too high. More recently, economic research has stressed the dynamic benefits of competition in putting pressure on all market participants to cut costs and develop new and innovative products. Global companies that have established their positions in their own domestic markets can provide important competitive pressure to American industries where the domestic companies have become complacent.

The Cons of Foreign Direct Investment in the United States

1. Foreign investment can displace jobs and production in domestic companies. There is little question that the arrival of Asian and European auto companies producing in North America has resulted in a decrease in the number of jobs in the traditional American companies in the industry. Many of those jobs were unionized. Many Americans look back to a time in history when domestic companies dominated the economy and foreign competition was minor. Much of the apprehension is about imports and the trade deficit, but the changing identity of companies producing in the U.S. market is also a concern.

2. Foreign takeovers of American companies can be motivated by a desire to capture American technology. The fight among countries and companies to take advantage of technology is older than the industrial revolution. Alexander Hamilton orchestrated an effort to bring European technology to post-revolutionary America, while today China is doing its utmost to push its economy into the twenty-first century by grabbing as much technology from around the world as it can. One reason that American companies have been reluctant to invest more in China is because of concerns about violations of property rights. The U.S. government, of course, already has in place safeguards to prevent the capture of vital technologies by foreign entities and all foreign takeovers have to be vetted. The hard question is whether or not this process is striking the correct balance between protecting vital American interests and excluding foreign investors who could contribute positively to our economy.

3. In the event of an economic downturn, foreign-owned companies may protect home country workers and operations at the expense of their U.S. operations. Some multinational companies produce the same, or very similar, products in different locations around the world. These companies have a choice about how to allocate production in situations where they have overcapacity. If workers in their home country have reached agreements to protect their own jobs, the company may decide to keep full employment at home and cut production elsewhere. This concern is a legitimate one, but should not be overstated. Shifting production is costly and most foreign-owned companies with significant operations in the United States are concerned about the long term sustainability of their U.S. operations.

Balancing the Arguments

Although there are real concerns about foreign direct investment, the benefits greatly outweigh the costs. On balance, international trade is beneficial to Americans but the case for expanding trade is a hard one to make to skeptical voters. By contrast, the case for encouraging foreign investment is much easier to make. New green field investments clearly create jobs and benefit local communities. Takeovers of domestic companies by foreign companies are also generally beneficial, providing an infusion of capital and new management that can prevent established companies from failing and allow them to make investments.

How to Make the United States More Competitive

1. Get the macroeconomics right. Chronic U.S. trade deficits since the early 1980s have been sustained by an equal shortfall of domestic saving over investment. The best policies in the world will not restore American competitiveness in the long run as long as there is gap between national saving and investment. Reducing investment is not the right approach. Alternatively, national saving will need to increase once the recovery has taken a firmer hold. There are few if any tools by which government can influence private saving; thus, the increment to national saving will be achieved most effectively by reducing or eliminating the federal budget deficit over the next ten years. It is clear from the past that insufficient levels of national saving drove up the exchange rate, priced U.S. exports out of foreign markets and swelled the volume of imports.

2. Work for trade agreements. Balance in international trade needs to be a more focused objective of U.S. foreign policy. In past negotiations, the United States traded access to U.S. markets for foreign political support or access of U.S. financial firms to foreign markets, to the detriment of admittance for U.S. exports. A major German auto company is siting an assembly plant in Mexico because that country’s free trade agreements will allow it to use the plant as an export platform to Latin America and elsewhere. In addition to obtaining more trade agreements, there is also a need to develop greater international consensus on appropriate guidance for exchange rates.[1]

3. Improve the Corporate Income Tax. The mobility of capital, technology, and production facilities makes the national taxation of production as opposed to consumption increasing impractical. The marginal rate of corporate taxation in the United States is too high, particularly in relationship to the tax rates of other countries, inducing firms to locate overseas. The United States needs to follow the lead of other countries in shifting toward greater reliance on consumption-based taxation.[2]

4. Improve skills. Both American companies and foreign companies investing in the United States say that the skills of the U.S. workforce are comparatively weak. It lags behind many other countries in developing effective vocational education and job training programs, and the educational attainment of young workers is falling behind that of countries like Canada, Japan and Korea. Furthermore, U.S. 15-year-olds rank 25th in math and 17th in science in PISA scores among OECD nations. Germany is an example of a country that has used a high-quality vocational education system to improve the skills of its workforce. While there is no space here to elaborate on what changes should be made, greater attention needs to be paid to reversing the deterioration in workforce skills.

5. Repair and improve infrastructure. Similarly, the country suffers from a deteriorating physical infrastructure that raises the costs of production. The extraordinarily low level of current interest rates suggests that now is a good time to borrow funds to finance the repair and modernization of those systems. The adoption of such a program is constrained by a concern that it is simply an excuse for added deficit spending. That issue can be addressed within a capital budget framework in which each investment is financed with amortized debt for which a portion comes due in each year and is repaid with an explicit tax or dedicated revenue source over the duration of the bond issue. Such financing, if matched by a credible dedicated revenue source, would not add to concerns about an unmanageable level of general fund debt.

6.Take advantage of the energy boom. U.S. natural gas resources have nearly doubled since 2003, driven by the development of shale deposits nationwide. The United States has the second largest recoverable shale gas reserves in the world at 24 tcm (trillion cubic meters), after China’s reserves of 36 tcm. However, the United States is substantially ahead of the rest of the world in having started to tap these reserves at increasing scale. By 2020, shale gas is expected to add 10-15 billion cubic feet per day over current levels and grow to over 25 percent of total gas production. Along with shale gas, light tight oil (LTO) production has also developed rapidly. Current LTO production estimates for 2020 are between 5 and 10 million incremental barrels per day, although even higher numbers are possible. There are environmental dangers involved in this new wave of energy production but with the right regulation it should be possible to develop the oil and gas fields responsibly. It is expected that natural gas will be priced in the United States at $4-6 per million BTUs, well below the $12 price range in Europe and $16 in Asia. Oil prices are set globally, but it is likely that U.S. domestic prices will carry a differential below imported oil and the greater security of domestic supply will be an attraction for users. Cheap natural gas will also keep electricity prices down.

The energy revolution is already making America more competitive. Global companies are investing in new plants here to take advantage of the low price of energy and natural gas as a feedstock. For example, in 2012, Shintech Louisiana LLC, a Japanese company, invested an additional $1.3 billion in a PVC plant in Louisiana.[3] Methanex Corp. (Canada) invested $550 million in the United States in summer 2012 to construct a methanol production facility in Louisiana. This was the corporation’s first U.S.-based facility in over a decade.[4] Sasol Ltd. (South Africa) agreed in December 2012 to build an “integrated gas-to-liquids (GTL) and ethane cracker complex” in Louisiana. This project alone is estimated to create 1,253 jobs directly, “with salaries averaging nearly $88,000, plus benefits,” and thousands of additional indirect job gains. Total investment is estimated to be between $16 billion and $21 billion, with ultimate value approximated at $46 billion by a Louisiana economic impact study.[5] Foreign direct investment is thus making an important contribution towards exploiting new energy sources for the benefit of the economy.[6]

Conclusion

The Obama Administration has been working to make it easier for foreign companies to build new plants and create jobs here. An interagency effort is underway to create one-stop-shopping for companies and I applaud the effort by this subcommittee to seek out ways to make America a more attractive location for foreign companies to invest. More needs to be done to coordinate federal agencies and states and localities in terms of permitting and meeting environmental requirements. Companies also report that the process of obtaining permits is much too slow and too complex.

On balance, foreign direct investment coming to the U.S. economy has been beneficial, generating jobs, making-capital intensive investments and diffusing technology developed in other countries to our economy. There are legitimate concerns about protecting our technology and workers, but these challenges can be met. America is already an attractive place for foreign companies to invest and policymakers should make sure our competitiveness is sustained and enhanced.

[1] A greater reliance on market-determined exchange rates would be preferable in most cases, but countries differ widely in their stages of development and ability to rely on such mechanisms.

[2] The United States also attempts to tax the foreign income of U.S. companies, albeit with a deferral. Most other countries use a territorial-based system in which income is taxed only in the country in which it is earned.

[3] Mark Crawford, “Hot United States FDI Sectors: Advanced Manufacturing,” Area Development Online, http://www.areadevelopment.com/LocationU.S.A/LocationU.S.A2012/U.S.-FDI-sectors-advanced-manufacturing-262000987.shtml.

[4] “At the Epicenter of the U.S. Industrial Rebirth,” Louisiana Economic Development,” http://www.louisianaeconomicdevelopment.com/led-news/articles/at-the-epicenter-of-the-us-industrial-rebirth.aspx.

[5] “Sasol Announces Largest Manufacturing Investment In Louisiana History, Creating More Than 7,000 Direct And Indirect Jobs,” Louisiana Economic Development, December 3, 2012, http://www.louisianaeconomicdevelopment.com/led-news/news-releases/sasol-announces-largest-manufacturing-investment-in-louisiana-history,-creating-more-than-7,000-direct-and-indirect-jobs.aspx?c=News%20Releases&id=39.

[6] There are exaggerated claims being made about the extent to which the energy boom will improve U.S. competitiveness and create manufacturing jobs. The discovery of new ways to extract natural gas and oil may make the U.S. self-sufficient in energy and reduce the trade deficit, but it will also increase the value of the U.S. dollar, partially or fully offsetting the cost advantage of cheap energy. This is an example of the “Dutch Disease” that afflicted Dutch manufacturing some years ago when large gas reserves were discovered.

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Testimony Prepared for the Hearing: Discussion of the Global Investment in American Jobs Act, 2013

Authors

Martin Neil Baily

Publication: United States House of Representatives, Subcommittee on Commerce, Manufacturing, and Trade, Committee on Energy and Commerce

Image Source: © Paul Vernon / Reuters

On the Budget, Obama's Opening Bid Was Reasonable

Ron Haskins — Tue, 16 Apr 2013 15:26:00 -0400

It would be difficult to imagine an uglier process of enacting legislation on important issues than the last two years of attempts by federal policymakers to reduce the size of the nation's deficit. Although no single explanation would suffice to account for the difficulty of making bipartisan progress, a major philosophical difference between the political parties stands out as the major culprit.

Broadly speaking, Republicans want smaller government and lower taxes; Democrats want more government and higher taxes. Since enactment of the Social Security Act in 1935, the story of the federal government has been one of expanding programs, increasing federal spending, and increasing taxes. Republican denials notwithstanding, Republicans have often supported the thousands of laws that expanded government relentlessly over the years and even in raising taxes to support the programs, although they have often kept in check the higher levels of spending proposed by Democrats. Even so, for the last several years Republicans have talked more vigorously about the philosophy of small government and low taxes. Necessity met opportunity when the nation entered a slow-burning deficit mess, aggravated by a severe recession that soon convinced almost everyone that the federal government had to balance its books by cutting spending, raising taxes, or both. Roughly speaking, the need to reduce the deficit, combined with the fact that cutting spending would move the nation toward the Republican goal of smaller government, has given Republicans an opportunity to cut spending to an extent that would have otherwise been impossible.

By contrast, the deficit puts Democrats in a defensive posture because, as President Obama's budgets show, they typically propose increased government spending. Ironically, Democrats also have been able to seize on an external force to support their cause. That force was the Great Recession that began in December 2007 with effects, especially high unemployment, that continues today. In 2009, Democrats were able to pass an $800 billion plus stimulus bill to fight the recession and that bill expanded a host of programs for the poor and unemployed. Some of those changes have been made permanent, which has had the effect of permanently boosting government spending.

The recession and the stimulus have allowed Democrats to advance their agenda; the deficit and the compromise legislation Congress has passed to reduce it over the past two years have allowed Republicans to advance their agenda, although the fiscal cliff agreement in January did contain a $600 billion tax hike on the rich.

Now comes President Obama with his budget proposal for 2014. He proposes to increase taxes by imposing a minimum tax rate of 30 percent on earnings over $1 million, limiting itemized deductions for those in the top tax brackets, and increasing the federal tax on cigarettes to pay for expanded spending on preschool. Republican leaders have been scathing in their rejection of the tax increases. But the president also proposes changes in health care, primarily Medicare, by encouraging more Medicare recipients to use generic drugs and by making elderly couples with incomes over $170,000 pay for more of their care. And most importantly, Obama proposes to change the inflation adjustment in Social Security benefits in a way that would reduce spending by about $130 billion over the next decade and even more after that.

Although Republican leaders have been hostile to many features of the Obama budget, the Medicare and Social Security proposals are important and would both cut spending. It is even possible to see the inflation adjustment proposal as a breakthrough because a Democratic president has, at the cost of infuriating his political base, proposed to reduce spending on the program that is the greatest policy achievement of the Democratic Party. In the past, Republican leaders have urged the president to make the specific inflation adjustment proposal he now offers in his budget. Republicans should take it.

The President makes a number of new spending proposals in his 2014 budget, notably on infrastructure, preschool expansion, support for manufacturing, and making permanent several existing tax credits that help low-income families. But the Office of Management and Budget estimates that as a percentage of GDP, the nation's debt would decline from 76.6 percent in 2013 to 73 percent in 2023. Many analysts and politicians think the debt should be reduced more, but this reduction, if the OMB estimates are correct, would represent continued progress on the deficit and a major breakthrough on Social Security.

The opening question for serious negotiations about the 2014 budget and deficit reduction is whether both sides have shown enough give to justify serious bargaining. Whatever else it might do, the Obama budget proposal, by offering an important reduction in Social Security spending and a cut in Medicare spending that could be expanded in the future, shows considerable give on the president's side. So far the response from most Republicans has been dismissive. Maybe Republican leaders should take a second look and make a counterproposal that falls between the Ryan budget and the president's budget while retaining the Social Security and Medicare savings. If they have to offer something in taxes, which they will to get a deal, remind Democrats that the Social Security inflation adjustment would also increase income taxes by around $100 billion over ten years and accept the president's cigarette tax proposal. Something along these lines would allow both Democrats and Republicans to achieve part of their traditional agenda.

Authors

Ron Haskins

Publication: Real Clear Markets

Image Source: © Jason Reed / Reuters

Brookings Expert Roundtable on President Obama’s Federal Budget Proposal for FY 2014

Ron Haskins, Isabel V. Sawhill and Bill Frenzel — Thu, 11 Apr 2013 16:00:00 -0400

President Obama’s FY 2014 budget proposal offers a blueprint that will cut the deficit by $1.8 trillion dollars over the next decade, invest more in infrastructure and early childhood education and is intended to improve the nation’s failing fiscal health. But can it really do that? And more? We examine the budget proposal and its impact in this discussion.

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Around the Halls: The Obama Administration's Budget Release

Alice M. Rivlin, Isabel V. Sawhill and Bill Frenzel — Wed, 10 Apr 2013 12:00:00 -0400

With the release of the Obama administration's FY 2014 budget, Brookings experts weigh in on the president's proposals:

Alice Rivlin, Senior Fellow, member of the President’s Debt Commission:

The President’s budget offers specific proposals for creating jobs and investing in productivity while simultaneously reining in the rising debt. It creates the opportunity to jumpstart serious bipartisan negotiation on how to accelerate the recovery in the context of balanced comprehensive tax and entitlement reform that will put the budget on a sustainable path for the long-run future.

Isabel Sawhill, Senior Fellow and Co-Director of the Brookings Budgeting for National Priorities Project:

This budget begins the difficult process of reallocating funds from more affluent seniors to lower-income families and their children. Much more needs to happen on this front over the coming decade but the President's proposals to limit spending on Medicare and tax-favored forms of retirement saving for the most affluent, slow the growth of social security benefits for non-vulnerable seniors and invest in Pre-K programs are all steps in the right direction.

Read Sawhill’s related blog post: The President’s Budget: A Good Strategy for Difficult Times

William Frenzel, former House Budget Committee Ranking Member and Brookings Guest Scholar:

It does not pass muster as a Budget because it does not get us where we want to be in ten years. But, as an invitation to Republicans to re-engage in ‘grand bargain’ discussions, it demonstrates real leadership by the President.

Authors

Image Source: © Gary Cameron / Reuters

The President’s Budget: A Good Strategy for Difficult Times

Isabel V. Sawhill — Mon, 08 Apr 2013 15:08:00 -0400

The President’s budget will be released on Wednesday and its outlines have already been revealed to the media. According to most accounts, he will offer to slow the growth of entitlements, make some new productivity-enhancing investments in infrastructure and early childhood education, and insist on raising some new revenues by curbing deductions for the wealthy.

The big question is what will this accomplish in our current deeply polarized environment?

He has clearly chosen a more centrist approach than the two parties in Congress. His plan is more liberal than the House Republicans’ but more conservative than the Senate Democrats’. Democrats will be especially upset that he is proposing to change the inflation adjustment used for Social Security benefits and Republicans will continue to insist that new revenues are unacceptable. Finding a compromise in this environment will be almost impossible, especially if Republicans remain wedded to their mantra of no (more) new taxes.

At the same time, he may have moved far enough away from the usual Democratic position to interest some Republican senators in a deal. His plan to meet with members of the Senate right after the budget is released suggests that he plans to continue his so-called “charm offensive” and that he wants to find a way to make this budget work politically. If he is successful, and can get a plan agreed to in the Senate, he and his allies will be able to present such a plan to the House, putting them in the difficult position of either agreeing with most of the plan or looking even more recalcitrant than usual.

The House Republican budget plan involves abolishing the Affordable Care Act, making draconian cuts to Medicaid and other programs for the poor, shifting Medicare to a premium support plan a decade from now, and not only retaining, but adding to, the deep cuts to domestic discretionary spending included in the sequester. It says more about Republican ideology than it does about what the public supports. The voters favor a more balanced plan and one that protects the poor and avoids terminating many parts of the health care reform bill.

If I’m right that the President’s plan is much better aligned with public preferences than anything the House is contemplating, then even if he loses the political battle, he can win the public opinion war. Some Democrats argue that it is a mistake for him to compromise so soon in the process, but that argument ignores the impact his positions can have on how the voters judge his performance. There will be more battles to come with the expiration of the debt ceiling in May and the need to fund the government in 2014, not to mention the mid-term elections in the fall of that year.

With the public at his back, the President may ultimately prevail, as he did post-re-election with his plan to raise taxes on the wealthy. Whether he does or not, he has no other choice than to try to find a reasonable compromise. His willingness to talk about entitlements and to make specific proposals to reduce their growth needs to be part of the strategy. He can do this without giving up on the equally-important need to reform the tax system in a way that produces some new revenues.

Authors

Isabel V. Sawhill

Image Source: © Jason Reed / Reuters

A Balanced Budget Should Take a Backseat to Real Reforms

Isabel V. Sawhill — Thu, 14 Mar 2013 14:28:00 -0400

Both houses of Congress have now submitted their budget plans. The House plan is the handiwork of Republican Rep. Paul Ryan and balances the budget within 10 years by cutting spending. The Senate plan, offered by Democratic Sen. Patty Murray, puts the debt on a downward trajectory relative to the economy but is far less draconian. It includes a balanced mix of spending cuts and revenue increases but does not aim to balance the budget.

No one who has looked at the numbers thinks it's realistic to balance the budget within 10 years while simultaneously increasing defense spending and reducing the top tax rates (personal and corporate) to 25 percent. The only way Ryan is able to achieve this feat is by eliminating Obamacare and slashing funding for Medicaid and other domestic programs, including those targeted on low-income families.

That said, getting our fiscal house in order should be a high priority. The issue is not only how to do this—but also how quickly. Too much fiscal austerity in the near term could tank the economy. The spending cuts enacted in 2011 after the debt ceiling crisis and the tax increases agreed to in early 2013 will, in combination, halve the growth rate of the economy in 2013, according to the Congressional Budget Office. The Democrat's budget includes $100 billion of short-run spending on infrastructure, education and technology to help the economy recover more rapidly. Whatever one thinks of such stimulus measures, the fact remains that without stronger growth, businesses and households will not thrive, revenues will not recover and debt will continue to grow even if spending is reduced.

In my view, we should enact reforms to both taxes and entitlements now but phase them in gradually so as not to undermine the recovery. Whether we balance the budget at the end of 10 years is less important than whether Democrats and Republicans can set aside their starkly different priorities and enact these painful but much needed reforms. The big challenge is not balancing the budget; it's restoring confidence that our government can work.

Authors

Isabel V. Sawhill

Publication: US News and World Report

Image Source: © Jason Reed / Reuters

Payments to Elders Are Harming Our Future

Harry J. Holzer and Isabel V. Sawhill — Fri, 08 Mar 2013 00:00:00 -0500

Foolish, indiscriminate and badly timed cuts in the federal budget have begun. The primary reason is that Republicans have refused to budge any further on taxes. Still, Democrats must share some of the blame. By failing to propose more specific cuts to entitlement spending, they have forfeited the high ground and allowed a small but critical set of programs to absorb all of the pain.

The “sequester” is just the latest chapter in the muddled thinking that has characterized the story of the federal budget for the past several years. Alarmists who call for immediate spending cuts and immediate reductions in our debt-to-GDP ratio (now at 73 percent) overstate the dangers of current levels of spending and debt, and they understate the damage to employment and economic growth that results from recently enacted belt-tightening. That tightening, including the effects of provisions enacted in both 2011 and 2013, is expected to halve the growth rate in the gross domestic product this year, according to the Congressional Budget Office.

This self-inflicted wound to the economy and to jobs makes no sense. If anything, we should be using this period, when workers are underemployed and firms’ physical plant and financial resources are underutilized, to improve productivity by investing more in infrastructure and job training.

At the same time, those who argue that we can put off any serious discussion of debt reduction for a number of years — because of the temporarily stable debt-to-GDP ratio projected for 2015 to 2022 — understate the dangers that loom just beyond this period. The aging population and the growth of health-care costs make enacting reforms to entitlements imperative. Enacting them now would help the economy by reducing uncertainty. This would also instill more confidence in government, give people time to adjust and release the pressure on the small portion of the budget that so far has absorbed virtually all of the cuts.

The reluctance of our fellow progressives to consider sensible reforms to entitlement programs is puzzling. None of us wants to impose new burdens on vulnerable seniors or those who are about to retire. But any new provisions can be phased in gradually and structured in a way that protects the oldest and most fragile members of the population in addition to those with limited incomes.

With these caveats, progressives must begin to acknowledge a hard fact: Our very expensive retirement programs already crowd out public spending on virtually all other priorities — including programs for the poor and those that strengthen the nation’s future — and will do so at even higher rates in the next decade and beyond unless we reform these large programs.

Social Security and Medicare alone cost the federal government about $1.3 trillion last year, accounting for more than 37 percent of federal spending; they are slated, along with interest on the debt, to absorb virtually all currently projected federal revenue within the next several decades. In contrast, all nondefense discretionary spending — which includes outlays on education, job training, transportation, public safety, research and many other growth-enhancing programs — amounted to only 17 percent of the budget, and they will continue shrinking each year.

Given that Americans have always resisted paying high taxes — and we see little sign of that viewpoint changing — what will happen to other priorities as our spending on retirement programs soars? Even if revenue rises, how can we possibly begin to fund the investments — in early-childhood health and education programs, K-12 reforms, effective workforce policies, improvements to crumbling infrastructure and the advancement of science — that are so badly needed to generate broadly shared economic growth? For how long will we continue to sacrifice investments in our nation’s children and youth, as well as its future productivity, to spend more and more on the aged?

Our preference is to restructure the delivery of health care so that it delivers the same benefits in less costly ways. Growth in health-care costs has slowed over the past few years, and the Affordable Care Act may bring further progress. But such changes are likely to be insufficient, requiring some restrictions on eligibility or expenditures. Asking affluent seniors to pay more for their benefits would be a good place to start.

If the issues are fairness and growth, not the size of government per se, then the right thing to do is to ask the affluent to pay more. Cutting programs aimed at providing a way up the ladder for the young and the poor, and doing so at a time when the economy is weak, is just plain dumb.

Authors

Harry J. Holzer
Isabel V. Sawhill

Publication: The Washington Post

Image Source: © Lucy Nicholson / Reuters

Let's Have More Immigrants, Not More Babies

Isabel V. Sawhill — Wed, 20 Feb 2013 12:04:00 -0500

Fertility has fallen in all advanced countries and will almost surely continue to fall in the future. In the United States, the fertility rate is now 1.93 children per women, a little below the replacement level of 2.1. It waxes and wanes with the state of the economy and other factors, but the long-term trend is pretty clear: women have fewer children as their own opportunities, along with their ability to control their reproductive destinies, expand.

Bear in mind that right now roughly a quarter of all childbearing in the U.S. is unintended. As women's employment opportunities continue to grow, as marriage rates continue to decline, and as the promise of newer and more effective long-acting contraceptives is realized, women will almost surely have even fewer children than they do today with some ,opting out of childbearing altogether. As one indicator of where we may be headed consider the data on the number of women who have remained childless by the age of 40-44. It was 18 percent in 2008, up from 10 percent in 1976, an increase of 80 percent.

Should this be a concern?

Most definitely, says Jonathan Last, in his new book, What to Expect When No One's Expecting. In his words, we can "forget the debt ceiling. Forget the fiscal cliff, the sequestration cliff and the entitlement cliff. Those are all just symptoms. What America really faces is a demographic cliff: The root cause of most of our problems is our declining fertility rate." These problems, according to Last, include not just an aging population but less innovation, lower productivity, slower growth, and less ability to project our military power around the world. Just look at Japan, he says, where consumers bought more adult diapers than baby diapers last year!

But is Last right? It's certainly true that the aging of the population is a big fiscal problem in Japan, and to a lesser extent, in the U.S. Spending on pensions and health care are rising sharply as the number of working age adults per elderly person shrinks. But the solution does not need to be more babies. We can solve the problem by allowing more immigrants to enter the country -- legally. What we need is a new immigration system that not only creates a path to citizenship for the 11 million who are here illegally now, but creates a reformed system that increases the numbers allowed to come into the country in the future in a way that is better aligned with our economic interests.

The fact is that immigration, done the right way, is good economic policy. It may also be good social policy as well.

The key point from an economic perspective is that the 7 billion people in the world are a potential pool of talent that any advanced country should want to attract. Ignoring that pool is the equivalent of General Motors recruiting all of its workers from Michigan while ignoring the other 49 states.

Fears that immigrants replace or undermine the wages of American workers are, for the most part, unfounded. They may have hurt the job prospects of some of our least skilled workers, such as high school dropouts, but they have become the backbone of many sectors of the economy from construction to agriculture, thereby producing jobs for Americans in businesses that would otherwise be unable to flourish.

If we move to a more employment-based immigration system in which the needs of the economy are given much greater weight and family reunification a smaller role, immigration can become a dynamic force for growth and a partial solution to our fiscal problems. Countries, such as Canada and Australia, in which skills-based immigration is the norm, have benefitted from such a system.

Immigration is often feared because immigrants are "different," because they place a burden on local social services, and fail to assimilate by learning English and the other hallmarks of our culture. Yet, we have been a nation of immigrants from the beginning with each new wave raising such fears and later becoming almost fully accepted into society.

With a more rational and controlled immigration system, one based more on employer needs, any short-run problems of adjustment would be far easier to deal with and the resulting longer term diversity would be a potential source of strength for the nation as a whole. In the meantime, if fertility does decline, and there are fewer American children to support, whatever resources parents and governments have to invest in the education and health care of the next generation will go much further.

Expecting women to rededicate themselves to producing children is not in the cards, even with the kind of family-friendly policies that Last and some others support. One only has to look at what is going on in Europe where such policies have been tried at great expense to see that they are not likely to be very effective. At 1.6 children per woman, the fertility rate in these countries is well below U.S. levels.

So no, Mr. Last, we don't need more babies; we just need more immigrants.

Authors

Isabel V. Sawhill

Publication: Real Clear Markets

Image Source: © Marvin Gentry / Reuters

Establishing a Task Force for Expanding Preschool Programs

Ron Haskins — Wed, 13 Feb 2013 17:39:00 -0500

In a single paragraph, President Obama’s State of the Union address opened the door to implementing important changes in the nation’s multitude of preschool programs and to increasing the number of children participating in quality programs.

Of all the opportunities to promote the development of poor children and to increase opportunity in America, none is as promising as high-quality preschool programs. Although there are still disagreements about the strength of evidence on these programs, the literature on preschool’s impacts on a host of short-term and long-term child outcomes is strong, and there are several excellent benefit-cost studies as well.

Research leads to the conclusion that if poor children attended high-quality preschool, they would be better prepared to achieve and behave well in public schools. There could also be longer-term outcomes including higher graduation rates, less delinquency, less teen pregnancy, and higher rates of employment and income. But these benefits and their corresponding budget savings will not be achieved unless the preschool education is high-quality, provided by highly effective teachers. Today, most preschool facilities do not meet that standard.

As would be expected in a State of the Union address, the president gave only a hint of what he had in mind for preschool. His goal was to “make high-quality preschool available to every child in America.” If the Obama administration is serious about expanding early childhood programs, here is one way to proceed.

The first order of business should be to figure out how to get the most out of the programs we now have and the money we now spend. The president should appoint a small group within the administration that includes one senior official from the Departments of Education, Health and Human Services, and Labor, as well as the White House and Office of Management and Budget, and charge them with presenting a bold plan for coordinating these programs. The president’s task force should consult widely, especially with the states, for how these programs can be better coordinated at the state and local level.

Second, the president should abandon his idea of providing high-quality preschool for “every child in America.” Rather, his task force should assume that only children from poor and near-poor families would be eligible for federal subsidies. Especially in this time of budget crisis, it is likely to be decades before the combined financing of the federal and state governments can afford the additional billions of dollars that would be required to provide free, universal preschool programs.

Third, the task force plan should include strategies for providing the poorest children and families, as well as those at risk of abuse and neglect, with home visiting and other support services. For this relatively small group, the services should begin in the prenatal period and extend throughout the preschool years.

Fourth, we will eventually need additional dollars to make sure every poor and near-poor child can receive services. Thus, the group should make an estimate of the costs of their system and propose several alternatives for sharing the burden between the states and the federal government.

The nation should stop setting preschool policy by merely creating more programs and adding money to existing ones in accord with political feasibility. Instead, we need a vision of the comprehensive system we should build and estimates of the long-term costs of the system. As President Obama said several times during his State of the Union address, “we can do this.”

Authors

Ron Haskins

Publication: Spotlight on Poverty

What Will Rubio Say in Response to the SOTU?

Isabel V. Sawhill — Fri, 08 Feb 2013 00:00:00 -0500

I have no idea what Senator Marco Rubio (R-FL) will say on Tuesday. But here’s a good guess: opportunity matters. We need to build a strong middle class. People should be given every chance to climb the ladder of opportunity. They don’t need handouts but they do need a helping hand. And we can’t forget about the immigrants who have made this country great.

Here’s what he probably won’t say: it costs money to provide opportunity. If we want more early education programs, more health care and nutrition, better teachers in the classroom, and more Pell grants so low-income and immigrant kids can go to college, taxpayers will have to pony up. Instead, he’ll claim that his vision is consistent with a more limited and less costly government.

The fact is these two goals – providing opportunity and limiting costs – need not be incompatible. We can invest more in less advantaged kids and keep the cost down if we just face up to the need to reallocate resources from the affluent elderly to struggling younger families and their children. And yes, that means curbing the growth of Medicare and Social Security.

It wouldn’t surprise me if Rubio softened the Republican message while evading the hard policy questions. But getting the message right isn’t a bad start.

Authors

Isabel V. Sawhill

A State of the Union Wish List

Ron Haskins — Fri, 08 Feb 2013 09:00:00 -0500

Here are three things I wish Obama would say, but probably won’t, in next Tuesday’s State of the Union address. The first is to start delivering on his first-term promise to change the tone of debate in the nation’s capital. In his January 14 press conference, the president said that House Republicans have suspicions about government’s role “to make sure that seniors have decent health care as they get older” and to “make sure that kids in poverty are getting enough to eat.” Issuing blanket statements like this about your political opponents is neither the way to change the tone of debate in Washington nor the way to publicly characterize people you’re about to negotiate with over issues – such as deficit reduction, immigration, and gun control – that are vital to the nation’s future. Obama would be well advised not only to avoid negative and mostly unjustified accusations of this type, but even to try to say something nice about Republicans.

Second, the president should say something as specific as possible about his ideas on further deficit reduction. Between the 2011 Budget Control Act and the 2012 American Taxpayers Relief Act, Congress and President Obama have reduced the deficit over the next ten years by $2.4 trillion (including interest savings). If the $1.2 trillion (again including interest) from the sequester is actually implemented, the total deficit reduction so far will be $3.6 trillion over ten years. Not bad for a dysfunctional government. But at least another $1 or $2 trillion is needed even to maintain a steady debt/GDP ratio over the next decade. Worse, there has been virtually nothing saved from entitlement programs, and no agreement so far that would put Medicare and other health programs on a more sustainable growth path. It would be a breakthrough if the president highlighted and expanded his offer of changes in entitlement programs like he did in his recent press conference. He should also say that he is ready to talk about savings in Medicare – while perhaps adding that he would be especially interested in discussions about savings that could be achieved by having the higher income elderly pay a higher fraction of their health care costs.

Third, President Obama and his wife and children have set a wonderful standard for marriage and American family life. It would be difficult to exaggerate the damage that is being done to American children and the nation’s GDP by the tsunami of nonmarital births and the relentlessly rising share of American children being reared by single parents. For starters, kids in female-headed families are four times as likely to be poor as kids living with their married parents. Black children bear the heaviest burden in this regard because well over 70 percent of them are born into single parent families. Similarly, over 50 percent of Hispanic children are born outside marriage, imposing a heavy burden on them as well. Economic opportunity is a theme President Obama has strongly emphasized, but the astounding level of nonmarital births is like a little motor pushing up poverty rates and reducing opportunity for millions of American children – and disproportionately so for black and Hispanic children.

The president has a better chance than anyone in the nation to have an impact on this problem. He should include at least two paragraphs about marriage in his State of the Union address. In the first paragraph, he should describe the advantages of marriage to adults, children, and society, which can be done without mentioning the negative effects of single-parent families. In the second paragraph, he should announce that once a month for the next year, he plans to attend a predominantly black, Hispanic, white, or integrated church – as often as possible accompanied by his wife – to sing the praises of marriage and the great contribution his marriage and family have made to his personal life and to lives of his wife and children.

President Obama has a chance to hit a policy trifecta – encouraging civility in the nation’s capital, reducing the deficit while at last addressing entitlement and especially Medicare spending, and speaking out for marriage as a way to reduce poverty and increase opportunity in America.

Authors

Ron Haskins

Do Republicans Stand a Chance on Immigration Reform?

Ron Haskins — Thu, 07 Feb 2013 00:00:00 -0500

After its failure to defeat a vulnerable President Obama and to retake the Senate in the 2012 elections, leading Republicans and conservative thinkers have conducted a searching critique of their Party. National Review, Commentary, and the Weekly Standard, three of the most important voices of conservative thinking, devoted nearly entire issues to dozens of penetrating and often scathing critiques of the Party by major right-leaning thinkers.

Although it would be a stretch to say that a consensus developed about any single factor accounting for the Party’s poor electoral performance, a prominent culprit was what might be called right-wing absolutism. In Rule and Ruin, Geoffrey Kabaservice gives an insider’s view of the cleansing of moderates from the Republican Party since the Goldwater/Johnson presidential election of 1964. The cleansing of moderates has in turn resulted in Republicans who win House and Senate seats being, on average, well to the right of the American public. On issue after issue, including taxing the rich, budget compromises that include spending cuts and tax increases, the Dream Act and general immigration reform, and increasing the debt ceiling, polls show that Republicans have been out of step with the public. Indeed, the intransigence and rhetoric of some Republicans on these issues have contributed greatly to public polls showing that a majority of the public blames Republicans for the gridlock in Washington. In a New York Times/CBS poll, for example, 60 percent of those surveyed say the president is attempting to negotiate with Republicans to work things out while only 27 percent said Republicans are making the same effort.

Perhaps chastened by defeat and their standing in the polls, Republicans so far in the 113th Congress appear to be presenting a more reasonable public persona. Speeches on poverty and opportunity by Rep. Paul Ryan and Sen. Marco Rubio were thoughtful and well received. The decision to avoid a showdown and instead to compromise on the debt ceiling is another sign of new Republican thinking. But the biggest opportunity of all is presented by immigration reform.

A Bipartisan Issue

It would be difficult to overstate the advantages to our economy of immigration reform. A key part of reform should be adjusting the basis for admitting immigrants from the current overemphasis on family relationships to immigrants already in the country, to a greater emphasis on the education, skills, and experience of those we admit. Other nations are attracting well-educated immigrants by giving them preferences for admission and a clear path to citizenship. We’re losing out. We should make it especially easy for students to enter and stay in the U.S. According to a recent Brookings study, immigrants are 30 percent more likely to found a business than native Americans. A study by the Kauffman Foundation reported that immigrants were involved in the founding of a quarter of engineering and technology companies created between 2006 and 2012. There is also evidence that immigrants who work in science and technology substantially increase employment among native-born Americans.

Another reason so many conservative thinkers are recommending that Republicans support immigration reform is that Hispanics are an increasing portion of the American population and are a critical part of the electorate in many states. One number shows the Republican problem: Romney received 27 percent of the Hispanic vote. With nearly a quarter of all children (and rising) now being Hispanic, the Hispanic share of voters is sure to increase in the future. Immigration reform gives Republicans a chance to overcome the perception that they are anti-immigrant and anti-Hispanic.

What About Illegal Immigration?

Thus, Republicans have every reason to support immigration reform. But there are two problems. The first is that our borders are not secure. While it is true that the number of undocumented immigrants in the U.S. has declined in recent years, the reason is that our economy has lost some of its sheen. But when the economy starts humming again, illegal immigration is certain to rise. Violating the nation’s laws is not a good way to begin a path to becoming an American citizen. So tightening border security is a real issue.

But the barn door has been open for many years and we have around 11 million undocumented immigrants already in the country. What should happen to them? Again, Republicans are justifiably concerned that creating a path to citizenship for those who violated our laws to get in is tricky business. The common Republican argument that if we once again allow illegal entrants to become citizens, as we did in the immigration reform legislation of 1986, why would any future illegal entrants not think they can violate U.S. laws and still eventually become citizens?

It's Time for Compromise

A reasonable Republican response to the twin issues of containing illegal immigration and dealing with undocumented immigrants already in the U.S. begins with the realization that Republicans are the minority party and must compromise to get a deal. Further, Republicans should enter the debate understanding that there will not be a bill unless the issue of undocumented immigrants is addressed. So Republicans must find political tradeoffs between increasing border security, especially by strengthening measures to prevent undocumented entrants from getting jobs, and creating a path to citizenship for those already here. In a perfect world, adults who enter the U.S. illegally should not be able to stay and become citizens. But we don’t live in a perfect world and both humanitarian and political considerations overmatch the reasonable desire to keep illegal entrants from becoming citizens. Achieving a compromise on immigration will be the most important test of whether Republicans are now willing to get things done by compromising with Democrats and the president.

Authors

Ron Haskins

Publication: Yahoo! Finance

Going Big On Deficit Reduction Is Dead. Now What?

Ron Haskins — Mon, 14 Jan 2013 21:40:00 -0500

Nearly everyone understands that the nation’s deficit will eventually bankrupt the federal government and have a catastrophic effect on the American economy. But, hey, interest rates are low and investors are still willing to purchase the federal debt despite receiving almost no return. There seems to be no immediate threat. So those who don’t want to fix Medicare, the heart of the nation’s deficit problem, have a continuing excuse – don’t take anything away from the elderly, continue borrowing a trillion or so a year, and above all don’t do anything to harm the limping economy.

We’ve seen this routine before. It’s now time for deficit hawks to face facts. Democrats aren’t willing to cut spending, least of all in Medicare where cuts are most needed, and Republicans are not willing to raise taxes. Both sides have been forced by factors they could not control to violate their most fundamental values a little, and as a result future deficits have been reduced by a little over $2 trillion as compared with a baseline that assumed the continuation of the Bush tax cuts. If we could be confident that the 2011 deficit commission deal, last year’s debt ceiling deal, and the recent fiscal cliff agreement were initial steps along a path leading to an end of deficit spending and a stable federal debt, the achievements of the last two years would look almost reasonable.

But the problem is that all the factors that made deficit hawks hopeful of a grand bargain are now dead. The president’s offers on entitlement reform, modest in the first place, are now shown to be Lucy’s football; the odds of getting another tax increase through the House are minuscule; and the Democrats’ fervent protection of entitlements seems stronger than ever. And the biggest factor of all is that the American public does not want entitlement cuts or tax increases unless they are confined to the rich. Once again, the baby boom generation shows itself to be perfectly willing to send the bill for their benefits to their children and grandchildren.

So forget going big or even medium on deficit reduction. Now we need to go tiny. And what is tiny? Following William Galston of Brookings, I define tiny as holding the line on the accumulated debt of the federal government as a percent of GDP over the next ten years. The debt-to-GDP ratio is now 73 percent. If our goal is to treat this 73 percent as our deficit line in the sand, how much will we need to slow spending growth or increase revenue to arrive at New Year’s Eve in 2023 with a federal debt at or below 73 percent of GDP? A more accurate estimate will be possible when the Congressional Budget Office (CBO) publishes its new baseline that includes the $600 plus billion tax increase from the fiscal cliff agreement, but the figure looks like it will be somewhere between $1.0 and $1.5 trillion. Can the federal budget be reformed to achieve even this pitifully tiny goal?

Fortunately, we have three pending deadlines – the debt ceiling and the re-emergence of the spending sequester that will occur at the end of February and the end of the continuing resolution that is keeping the government open on March 27 – that will in all likelihood lead to messy, last-minute compromises. So there’s not much time for deficit hawks in both parties to come up with a plan. Even assuming that Medicare cuts and further tax increases are off the table, there are still substantively and politically reasonable ways to come up with something close to $1 trillion in saving over the next decade:

Mike O’Hanlon of Brookings has suggested several ways to achieve between $150 billion and $200 billion in defense without making any of the more than $500 billion in defense cuts in the sequester
Changing the cost-of-living adjustment in Social Security and the tax code to yield a more accurate increase in benefits each year could save around $150 billion to $200 billion
Lowering the rate at which Medicaid expenditures are reimbursed for states with high per-capita income could save as much as $180 billion
The federal government spends about $630 billion on entitlement programs other than the Big Three of Social Security, Medicare, and Medicaid; the COLA change, reforms in agriculture programs, and reforms of the SNAP, Supplemental Security Income, Unemployment Compensation, and Earned Income and Child Tax Credit Programs could yield another $200 billion to $300 billion

These reforms, combined with the savings in interest payments of about $120 billion they would produce, will yield a little less than $1 trillion in total savings over the next decade.

There is no obvious way in the near future to reduce the nation’s debt to some safer level of, say, the 60 percent of GDP recommended by the National Research Council and the National Academy of Public Administration. But in the meantime, we should apply the Socratic Oath to deficit reduction – first, do no harm; don’t let the deficit grow. Greater deficit action than this will probably have to await a fiscal crisis. Meanwhile, the nation continues to be in grave fiscal jeopardy.

Authors

Ron Haskins

Publication: Real Clear Markets

Restoring Marriage Will Be Difficult

Isabel V. Sawhill — Thu, 20 Dec 2012 00:00:00 -0500

Editor's Note: The below is a reaction to “The President’s Marriage Agenda for the Forgotten Sixty Percent,” a report featured in this year’s issue of State of Our Unions, an annual journal published by the National Marriage Project at the University of Virginia and the Center for Marriage and Families at the Institute for American Values.

This report sounds an alarm about marriage trends in middle class America. It is full of important facts and citations to the literature. Indeed, I know of no better source for such information than the Institute for American Values and the National Marriage Project. As the authors note, marriage is alive and well among the best educated but rapidly disappearing among those with less than a college degree. What we are seeing is alternative living arrangements that have spread from the poor, and especially poor blacks, to the rest of society. The consequences for children and for society have been far from benign.

Against this backdrop, the authors argue for a more muscular response including: ending marriage penalties in tax and benefit programs, providing help to less skilled men so that they can become better marriage partners, more investment in marriage and relationship education, and a more robust effort by civil society to restore a marriage culture.

While I am deeply sympathetic to most of this report’s conclusions and to the wake-up call it embodies, I have three reactions that I believe need to be part of this discussion.

First, I am conflicted. My right brain says that marriage is a good thing for all the reasons enumerated in the report. My left brain says that we can’t put the genie back in the bottle. It may be possible to slow the decline in marriage but I am increasingly doubtful that it can be resurrected in its 20th century form. The interesting question is what form will the much greater diversity of living arrangements take in the future. I suspect marriage as we have known it is not coming back. A combination of greater affluence, more gender equality, and changes in attitudes are conspiring against a restoration.

Second, I am somewhat less optimistic than the authors about the ability of their policy agenda to make much of a difference. In part, this reflects my belief that the trends we are witnessing are deep seated and that the authors’ preferred policies, while perfectly sensible and probably helpful on the margins, are swimming against a tide that is too strong to be reversed. Moreover, the research on what such policies have accomplished to date is not very reassuring.

Third, like the authors, I am concerned about the consequences. However, I put greater faith in policies and messaging that encourage young adults to defer childbearing until they are ready to be parents — or to not become parents at all. If childless adults do not marry, whatever the consequences for them, it does not significantly harm others. The problem for single parents is not that they are single; it is that they are parents as well. Parenting is hard enough for married parents; it is even more difficult for those who must do it alone. I say this realizing that many single parents did not choose this role. But then I am reminded of the fact that 70 percent of pregnancies to single women under 30 are unintended. Something is wrong in an era when many effective forms of contraception are available and often subsidized, yet the vast majority of young adults are still not taking responsibility for the consequences of their sexual encounters. In addition, while the policy hurdles to successfully providing young adults with the motivation and the means to prevent unwanted pregnancies and births are high, the task seems to me to be less daunting than an effort to bring back marriage.

In sum, by all means let’s work to restore marriage as the best environment in which to raise children but at the same time let’s stop the epidemic of unplanned childbearing that creates unwed (or temporarily cohabiting) mothers in the first place.

Authors

Isabel V. Sawhill

Publication: Family Scholars

A Bipartisan Proposal: Go Medium to Avoid Fiscal Cliff

Ron Haskins and Michael E. O'Hanlon — Wed, 05 Dec 2012 17:37:00 -0500

After a year of drama and high expectations, it appears increasingly likely that the current session of Congress will not solve the nation’s fiscal woes. Perhaps it was always too much to expect a lame duck to ride to the rescue. Especially after a close election and with a still-divided government, there is no clear consensus on who won a mandate to do what.

But we should be able to agree that the American people did vote for something to be done about the nation’s crippling deficit, without impeding economic recovery in the process. They also surely expressed a collective view that a balanced approach is essential. This assessment should lead President Obama and members of Congress to one central conclusion: if it proves impossible to “go big” and truly solve the nation’s long-term fiscal dilemma in the short time remaining before the New Year, they could go medium for now.

Our proposal would ask Republicans to accept slightly higher taxes than they prefer, but through reductions in deductions and exemptions as they advocate, rather than a raising of rates. It would ask Democrats to accept significant cuts to entitlements – but cuts that nonetheless phase in gradually and protect the basic integrity of all existing programs. It would also generally protect discretionary accounts including defense and domestic investments, which have already been hit by last year's deficit reduction legislation.

Some of the problems with the existing positions of key leaders are becoming apparent. President Obama wants to restore tax rates of the Clinton years on the rich and fully half of his deficit reduction dollars come from new revenues (it is not persuasive to count as savings costs from future military expenses that were never going to happen anyway). The Republicans consider this a non-starter. Republican congressional leaders talk of raising revenues through closing of tax loopholes, but to date they are unwilling to be specific. No one puts social security on the table except through bromides such as an expressed desire to “strengthen it” for the long term. And the much-heralded Simpson-Bowles plan, while a brilliant piece of work in many ways, makes too many cuts in areas like national defense.

Perhaps we can still hope for a Christmas-season miracle, but failing that, it is time to start readying a backup plan to avert the huge disruption to our economy that would result from a plunge off the fiscal cliff. Further deficit reduction of some $2 trillion to $2.5 trillion would result from the following ten-year deficit reduction plan, to complement the $1.2 trillion in savings (mostly in defense as well as domestic discretionary accounts) already achieved under the first tranche of the 2011 Budget Control Act:

Seek roughly $1 trillion in revenue increases, less than President Obama’s preferred $1.6 trillion but still a substantial amount. This is measured against a baseline that assumes continuation of the Bush tax cuts. To ensure maximum support from Republicans, these additional revenues should be achieved Simpson-Bowles style by capping deductions and exemptions rather than raising rates.
Put social security on the table but in a careful and gradual way. In principle, Social Security is not the main cause of our deficit woes. But that is only because social security taxes are, relatively speaking, so high. The hefty taxes used to support social security in effect deprive the rest of the government of funds for other purposes. Therefore, changes to the system that make it less expensive to the Treasury are warranted. At a minimum, changes like adjusting the formula for cost-of-living increases in social security payments by roughly 0.5 percent a year can save more than $50 billion annually by 2020 without affecting anyone precipitously or dramatically. Most experts agreed that the current COLA overstates inflation.
Avoid further substantial net cuts in domestic discretionary accounts for now. While reallocation is appropriate, these crucial parts of the budget fund our investments in infrastructure, science and education while also providing safety in our airports, our food supply, and our borders among other things. Under existing stipulations of the Budget Control Act – that is, the cuts made last summer – their cost is already headed towards a smaller share of GDP than at anytime under Ronald Reagan or Bill Clinton. A modest $150 billion in additional ten-year savings is ample.
Limit further defense cuts to $150 billion over ten years as well. Given last year’s budget agreement, this is ambitious enough. Today, U.S. troops remain in Afghanistan; Iran continues moving towards nuclear bomb capability; other parts of the Middle East remain in turmoil, and North Korea prepares missile launches while China squares off with other Asian powers over disputed islands and waterways. This is no time to cut the military deeply again based on hand-sweeping arguments about how the Department of Defense’s real budget is still bigger than during the Cold War. While that may be true, it is also true that as a fraction of GDP, it is headed towards 3 percent, historically a modest figure.Z
Medicare reforms should be adopted that would produce $300 billion in savings over ten years. Three possible reforms, to be suggested in any deal but left to Congressional committees to detail in 2013, would be to gradually raise Medicare eligibility to age 67, to increase co-payments for high income recipients, and to reduce payment rates in areas of the nation that have high Medicare costs. For the long-term, congress should provide funds to the Centers on Medicare and Medicaid Services to conduct demonstrations on premium support in up to five states. The version of premium support envisioned by the Ryan-Wyden and Domenici-Rivlin proposals hold great promise for using market forces to control the growth of health care costs, but we won’t know if premium support will actually work unless we try it.
Entitlement programs other than Medicare, Social Security, and Medicaid will cost $630 billion this year. We think it reasonable to achieve $300 billion in savings over ten years in these programs by adopting different COLA adjustments in civilian and military retirement programs, among other reforms.

This modest approach may not turn the Fiscal Grinch into a completely nice guy, but it will at least stop him from throwing the economy off the edge of Mount Krumpet this holiday season. And that may be good enough for now.

Authors

Publication: CNN

Taxing the Wealthiest Could Go a Long Way

William G. Gale — Wed, 05 Dec 2012 13:26:00 -0500

Middle-class households will eventually have to see their taxes rise and some of their benefits fall as part of a long-term fiscal solution. The projected budget shortfalls in coming decades are too substantial for any large group to escape unscathed.

But increased tax revenue from high-income households alone could go a long way toward stabilizing the medium-term debt relative to the economy – a policy that could be achieved with about $2 trillion in deficit reduction over the next decade.

The administration has already proposed $1.6 trillion in tax increases on high-income households. The top two rates would return to Clinton-era levels, 36 and 39.6 percent. Tax benefits would be capped at 28 percent per dollar of itemized deductions, health insurance premiums, retirement contributions and tax exempt interest. These changes would have no effect on anyone currently in the 28 percent bracket or below, about 98 percent of households.

A plan that is not yet on the table would be to reform the alternative minimum tax. The A.M.T, originally intended to assure that the richest Americans pay taxes, applies to a broader income base than the regular tax. But it has an almost flat rate structure of 26 and 28 percent.

Two changes would be helpful. First, raise the top A.M.T. rate to 35 percent or the top rate in the personal income tax. (This would allow repeal of the phase-out of personal exemptions in the A.M.T.) Second, raise the tax rate on capital gains and dividends in the A.M.T. to 28 percent or to the rate that applies to regular income in the A.M.T. These changes would raise substantial revenue from high-income households and would turn the A.M.T. back into the shelter-reducing levy it was meant to be.

Authors

William G. Gale

Publication: The New York Times

Forget the Fiscal Cliff; Focus on the Debt Ceiling

Isabel V. Sawhill — Tue, 04 Dec 2012 00:00:00 -0500

For all the talk about the fiscal cliff, it is not the most worrisome economic issue facing the country. The real cliff is the debt ceiling and if we go off that cliff, it will be catastrophic. Most people remember the debt crisis of August 2011 as hair-raising. This horror movie is about to be released again with even scarier features. Unless the debt ceiling is increased during the lame duck session of Congress, get ready for a terrifying show.

According to the Bipartisan Policy Center, the Treasury will meet the statutory limit on the debt in the last week of December. To prevent default, the Treasury can then employ certain “extraordinary measures” to free up cash to pay everything from interest on the debt to Social Security checks. Those measures are likely to be exhausted by February 2013, according to the Center. At that point, the government can no longer pay its bills. The costs of a temporary delay are estimated at about $20 billion over the next decade – a price tag similar to what it would cost to keep Medicare physician payments at current levels (the so-called “doc fix”). Taxpayers should be irate about having to fund these special measures just because Congress can’t do its job.

The debt ceiling crisis puts the fiscal cliff in a new perspective. Imagine that current negotiations are successfully concluded with a compromise that involves some spending cuts and some tax increases. As if that kind of compromise weren’t difficult enough, without an agreement to raise the debt ceiling such a compromise would be almost useless. Both sides would be back at the negotiating table in a matter of weeks over a much bigger threat to the economy – the inability of the federal government to pay its bills. The consequences would be a probable downgrading of our debt, a plunge in the stock market, higher interest rates, and a new and probably unprecedented financial crisis.

This scenario makes it essential to raise the debt ceiling now as part of any compromise on taxes and spending and to take it off the table for the future as a way for one party to hold the other hostage to its views.

The President has suggested borrowing from an idea initially proposed by Senate Majority Leader, Mitch McConnell. It would permit the President to propose an increase in the ceiling which would then go into effect unless Congress not only disapproved the proposal, but was also able to overturn a Presidential veto of their action to disapprove. Since overturning the President’s veto would take a two thirds majority, his proposal would almost always become law. Convoluted? Yes, but designed to protect members of Congress from having to be on record as having supported an increase in the debt and far better than the status quo.

Market participants should stay focused on this aspect of the negotiations. Whatever happens to taxes and spending, it pales in comparison to whether the two parties can agree to not use the full faith and credit of the federal government as a tool to extract concessions from one another. The U.S. has never defaulted on its debt (although it came close during the War of 1812 when only a private syndicate was able to raise the necessary cash to pay for mounting expenses).

Those who believe that a refusal to raise the debt ceiling will somehow put limits on spending and shrink the size of government are confusing the need to pay obligations already incurred by Congress with the need to rein in future expenses. Spending restraint is needed and along with new revenues is the right way to fix rising levels of debt. The debt ceiling itself is an anachronism. As Alan Greenspan once put it, we don’t need both suspenders and belts.

Authors

Isabel V. Sawhill

Publication: Real Clear Markets