Brookings: Topics - Fiscal Policy

State Budget Transparency: A Look Behind the Numbers

Tracy Gordon — Tue, 18 Jun 2013 11:14:00 -0400

Most states are now wrapping up their 2013-2014 budget cycles and apparently in good shape too. Even California, that perpetual budget laggard, is expected to end next fiscal year with a modest surplus thanks to temporary tax increases and a gradually improving national economy.

Critics are quick to point out that California’s budget is not exactly balanced given a $4.5 billion annual payment the state’s Teachers' Retirement System says it needs to meet its obligations. Nor is California alone in overlooking these “hidden liabilities.” Taken together, state and local governments are estimated to owe up to $4 trillion more than they have set aside for pensions and retiree health care.

Many observers concerned about state and local government finances have urged greater budget transparency. For example, Representatives Nunes (R-CA), Ryan (R-WI), and Issa (R-CA) have proposed requiring stricter accounting standards for states and municipalities as a condition of these governments’ continuing to receive tax exempt borrowing authority.

I’d like to focus on a different kind of transparency here. Right now, there is plenty of information on state and local government revenues thanks to numerous think tanks and non-profits that track state and local taxes or revenue burdens by state. However, the spending side of the budget remains a bit of an enigma.

Clearly, New York differs from North Dakota in what it spends each year. It also differs in its demographics, service costs, and labor market conditions. A framework I’ve been developing with co-authors sheds light on these factors and how they drive spending outcomes.

Let’s look at an example from K-12 education, states’ single largest expenditure item (excluding federal funds) and the one most popular with voters. A recent Census Bureau report confirms wide disparities exist among the states: In 2011, New York spent about twice as much per capita on public schools as Idaho (about $2,750 versus $1,150).

(Importantly, the Census report includes only spending by charter schools run by government agencies like universities, cities, counties, or public school systems – it excludes the most common type of charter school run by a private nonprofit. This is an issue for states like Arizona with a big charter school presence.)

But spending per capita is only the tip of the iceberg. States also differ in their student populations. Some (such as Texas and California) are home to more kids, while others (Texas) also have more kids enrolled in public schools, whether because of stronger compulsory education laws or more families who elect to send their kids to public versus private schools.

Because of its larger student population, Texas – which ranks near the national average in K-12 education spending per capita ($1,637) – is near the bottom when it comes to spending per student ($8,740). It displays a tradeoff common in many states and across many budget categories: broader participation in public programs versus lower spending per beneficiary or recipient.

We can dig deeper by looking at where spending goes. K-12 education – like most areas of state and local government – is labor intensive, so most costs are borne in employee compensation or payroll. New York, which had few kids enrolled in public school in 2011, was able to pay among the highest K-12 education salaries and benefits ($90,000 per year) in the nation.

Salaries and benefits reflect many factors, including costs of living and amenities that differ from state to state. However, in past work I found that taking into account the premium that all employers in a state – public and private – must pay to attract employees of a given education and experience level reduces, but does not eliminate, differences in K-12 education salaries.

Higher compensation costs often translate into lower staffing ratios, or fewer full-time equivalent employees per student. For example, New Jersey, which was not far behind New York in average K-12 education salaries, had lower staffing ratios in 2011 because it also had more kids per capita than New York. California exhibited a similar tradeoff between high payroll costs and low staffing levels.

The approach used here could be extended to health care, transportation, public safety, or any area of state and local budgets. It could be augmented with performance measures, although links between spending and outcomes are not always clear. Still, this framework would be a vast improvement over current “e-budgeting” efforts, which usually amount to little more than a few charts online or documents available as pdfs.

State and local officials would do well to engage in a productive conversation about budget tradeoffs. Voters need to understand what spending arises from policy choices versus background conditions – or which levers of government can be pulled and which cannot.

Authors

Tracy Gordon

Publication: Real Clear Markets

Image Source: © Mario Anzuoni / Reuters

Hey, Where Did Our Economy-Threatening Fiscal Crisis Run Off To?

Bill Frenzel — Wed, 12 Jun 2013 15:18:00 -0400

Federal policy makers always seem to be looking for reasons to dodge the difficult choices necessary to avoid the fiscal crisis. This month, they got some new excuses.

First, in mid-May, CBO updated its fiscal outlook, predicting the Fiscal Year 2013 deficit would be $200 billion less than earlier forecast. That’s delightful, but the 10-year forecast remains substantially unchanged. It also remains dismal.

Later in May, the Trustees of Social Security and Medicare made their annual report. It again showed the Social Security Trust Fund going into the red in 2033, at which time, recipients, by law, will take a 23 percent cut in benefits. It also showed the Social Security Disability Trust fund going broke in 2016, with a similar benefit cut of 20 percent. But, Medicare looked a bit better. It does not tank until 2026, two years later than previously forecast. That small improvement was another excuse.

And when the debt ceiling extension ran out on May 19, nobody cared because the Treasury has a little wiggle room. The moment of default has been pushed back until after Labor Day – an eternity in Washington. The later default date was hailed as a positive sign of economic improvement.

Despite these tiny rays of sunshine, all the long-term forecasts remain dismal. The long-term deficit and debt problems have not changed. But, small reasons to refrain from hard choices are never wasted in Washington. Inaction marches on. Neither Congress, nor the President, is conducting any observable negotiations. Nobody wants to fix the debt.

Fiscal fatigue and political recalcitrance have smothered budget negotiations. Even tax reform, an essential element of a comprehensive budget solution, seems now to have been drained of its vitality. Hopes for a “grand bargain” in 2013 have faded. Now the best outcome is to successfully avoid the debt ceiling default.

Having side-stepped the long term problem, both branches and both parties are content to wait until the last moment before worrying about defaulting on the full faith and credit of the United States. For now, political practitioners are giving their attention to assessing their bargaining clout, and predicting election victories, rather than in solving either the long, or short-term fiscal crisis.

The three budgets (House, Senate and the president’s) are still dueling. There is no apparent negotiation for budget reconciliation in process. The Chairs of the House and Senate Budget Committees meet from time to time, but there is no formal conference committee, and the administration has not expressed concern.

In FY 2013, which closes at the end of September, there was no Congressional budget. Nor has there been one in 5 years. There will certainly be none again this year. Without a budget, the Appropriations Committees of the House and Senate, each following its own budget, will determine federal spending for FY 2014. That will be exciting because the Senate budget assumes away sequestration, while the House budget etches it in stone.

We are thus doomed again to another series of short-term Continuing Resolutions (CRs) to fund federal government operations in FY 2014. Long-term solutions are politically impossible. Our representatives have other priorities. In Washington, politics are more fun, and core constituencies more important, than solutions.

Another debt ceiling mini-crisis will probably be avoided in the fall, but long-term debt will continue to cloud our future. The easy stuff has been done. The sequester made some small progress in limiting discretionary expenses.

On the hard stuff, entitlements and taxes, we are no better off than we were five years ago. The size of the problem, and its dire consequences, have long been common knowledge. The most predictable crisis in history has, as yet, not even generated a good discussion.

Every minute of delay in doing the hard stuff will make its ultimate cost more painful, both for the taxpayers, and for the recipients of federal spending.

So the answer to the question of what ever happened to our fiscal crisis is: little or nothing. The threat has not subsided. It has merely been ignored. The economic albatross of deficit and debt continues to threaten our future.

Authors

Bill Frenzel

Publication: Forbes

Image Source: © Jim Young / Reuters

Are Public Pensions Keeping Up with the Times?

Richard W. Johnson, Matthew M. Chingos and Grover J. "Russ" Whitehurst — Wed, 12 Jun 2013 09:56:00 -0400

Retirement plans for public employees in the United States face serious challenges: By their own calculations, states and localities are $900 billion short of the funds they need to set aside to pay for benefits they have already promised their employees, write the Urban Institute’s Richard W. Johnson and the Brookings Institution’s Matthew M. Chingos and Grover J. Whitehurst. But the problem is far more serious than currently imagined. What states accountants won’t admit, Chingos, Whitehurst and Johnson argue, is that the funding problem is much worse than states’ calculations show.

The underfunding problem has two key components: First, by their own calculations, most states are not contributing enough to keep up with the pension promises they are making to their employees. Second, states’ calculations seriously understate the extent of the funding problem. Most states assume that they will earn an average rate of return of 8 percent a year on their pension funds, a highly unlikely outcome in the current economic environment. This unrealistic assumption still produces a staggering unfunded liability: $0.9 trillion in 2011. Using a more reasonable assumption of a 5 percent return increases the unfunded liability to $2.7 trillion, these scholars estimate, which implies that the average state has only funded half of its pension promises. A funding gap of $2.7 trillion is more than four times the $607 billion in general outstanding debt on states’ books in 2012, Chingos, Whitehurst and Johnson report.

And many public employee pension systems also have design features that, even if the pensions are properly funded, compromise state and local governments’ ability to attract and retain the best employees, these writers assert. Young workers have little incentive to join the state’s workforce unless they plan to remain on the payroll for at least 25 years. Those who leave their jobs earlier forgo a significant portion of the retirement benefits from their employer. This is because most pension systems provide very steep rewards late in employees’ careers, penalizing those who work for the state for “only” 10 or 20 years. But there is also a problem at the other end of the career ladder, with pension systems punishing employees for staying too long past normal retirement age. This design feature makes it difficult for the state to retain experienced older workers, many of whom have specialized skills and deep institutional knowledge that are difficult to replace.

As debate swirls around how to properly fund public employee benefits, this report assesses the real challenges facing state and local government retirement plans and details the problems facing public employee pension systems across the country. Chingos, Whitehurst and Johnson’s comprehensive examination of the existing research on this topic highlights the many problems facing these pension plans, including the underfunding that threatens states’ economic futures and outdated design features that cripple states’ ability to recruit and retain the best public servants.

In the video below, Chingos and Johnson discuss the issues raised in the paper:

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Are Public Pension Plans Keeping Up With the Times?

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Image Source: © Radovan Stoklasa / Reuters

Extending Lower Student-Loan Interest Rates Is Not the Answer

Robert Gordon — Tue, 11 Jun 2013 00:00:00 -0400

The debate over student loans is a test of whether progressives can distinguish what we want from what we can afford, given political reality. So far, congressional Democrats are failing that test.

At the end of this month, interest rates on subsidized Stafford student loans will rise from 3.4 percent to 6.8 percent. It would have happened last year, but, facing an election, the parties agreed to extend the lower rate for a year. That was paid for by a mixture of hikes in pension insurance premiums and cuts in student aid.

Senate Democrats just tried to run a similar play, with a two-year, $8 billion extension, paid for by eliminating objectionable tax breaks. As the night follows the day, not one Republican voted for it.

Republicans' proposal, which failed by a mirror-image vote, would link student interest rates to U.S. Treasury bill interest rates. This means that rates would stay low now, but rise again when interest rates increase. Republicans would dedicate the modest savings from using that approach to cutting the deficit. President Barack Obama’s proposal (on which I worked) also links to T-bills, but provides a better deal for lower-income borrowers and uses savings to fund investments.

The key question now is whether Democrats should continue to insist on extending the 3.4 percent rate, which as a practical matter will require offsetting spending cuts that Republicans can live with. Democrats seem inclined to go in this direction; party leaders are said to be looking at a one-year rather than a two-year fix.

That is the wrong answer. Extending the 3.4 percent rate is not a compelling policy goal, and Congress should preserve precious offsets for better purposes, beginning with Pell Grants.

In principle, there are two reasons to worry about the high interest rates on student loans. The first is that high rates might deter people from entering or finishing college. As others have argued, however, there isn’t much basis to believe this happens. When you apply to college, you don’t even know what kind of financial aid package you are going to get. You only learn later, after you complete your financial aid forms. Cost matters to the decision to attend or stay, but given everything we know from behavioral economics (and life) about human short-sightedness, what matters most is the total amount you need to pay while you’re in school, followed by the total amount you need to borrow.

Consistent with that view, research shows that increasing the amount of grant aid, and hence lowering the amount that needs to be spent or borrowed, really does affect college attendance. This is why the Pell Grant program is so important. But there is no evidence that students are basing college attendance and completion decisions on fine calculations about monthly payments when they graduate. And that is doubly true when the amount at stake is so modest: in the worst case, less than $40 per month.

The other reason to worry is that students already carry enormous debt burdens after they leave school, and high interest rates make those burdens worse. But here, the government is already providing a decent solution, allowing individuals to repay their loans as a fixed share of their income. For new borrowers, that share is capped at 10 percent of income above 150 percent of the poverty line, with repayment limited to 20 years. In some other countries, like Australia, this approach to loan repayment predominates, and it works. Here, students are defaulted into fixed-sum repayment plans, and few choose to switch.

One smart way to reduce loan burdens is to encourage the use of income-based repayment, perhaps by changing the default rule. And the truth is that the income-based repayment program itself should be reformed so that it no longer encourages graduate programs (especially law schools) to charge hefty fees and then leave taxpayers holding the bag. The 20-year repayment period also arguably provides more support than needed for high-income earners.

All of this said, the income-based program still targets struggling borrowers better than subsidized interest rates. By definition, income-based repayment benefits go to students based on their incomes after they graduate, when they actually need to repay their loans. By contrast, the interest subsidy now at issue is provided to students based on their family’s incomes before college. That isn’t when anybody actually repays their loans. A poor kid who becomes a hedge fund manager still gets the benefit, while a kid from a well-to-do family who chooses public service and hits hard times does not. That doesn’t make sense.

Even in the long-ago era of budget surpluses, the smart answer to rising student debt would never have been raising student subsidies. College costs have risen far faster than inflation, by some measures faster than health costs. Barely half of students finish their degrees within six years, and nearly one in five schools has a negative return. The key for higher education is to increase its productivity so that more students complete an education that costs less, is worth more, or both. That’s easier said than done, but pressure for better results is now coming from online providers. Obama also wants pressure to come from an aid allocation process that links schools’ aid to students’ outcomes. There are probably other good ideas to incentivize greater productivity. Unlike simply lifting student aid subsidies, these approaches can reduce debt burdens without raising taxpayer burdens.

Senator Elizabeth Warren, who is advocating cutting student interest rates even lower than the rest of the party based on a flawed analogy with loans to banks, says “the federal government is making a profit from our students.” But the federal government is not a profit-making business. The money the Treasury gets from students goes to pay its (our) bills. With interest rates tied to Treasury bills as in both Obama's and Republicans’ plans, students are still getting a good deal on federal student loans. They offer lower rates and better terms than most banks’ loans to students, who typically lack collateral or work history. Keeping interest rates lower than they need to be inevitably shortchanges other priorities.

Last year, Congress paid for the one-year interest rate extension in part by reducing the period for which a student is eligible for a subsidized loan, from six years to four years for bachelor’s degree candidates. That was a good idea, since cutting off the subsidy sooner could encourage students to finish school faster. But Obama originally proposed to use the $1.2 billion in savings to forestall coming cuts in Pell Grants due to funding shortfalls in that program, and Pell Grants do far more than interest subsidies to help students in need attend and finish college.

Obama’s budget this year has $18 billion in smart student-aid savings that would be dedicated to protecting Pell Grants. Unlike last year, those savings should go where they are supposed to go. (And unlike in the current Republican proposals, any savings from loan changes should go into Pell Grants or other priorities.) If Democrats continue running last year’s play, they will end up with last year’s outcome, siphoning off savings that should be used for more pressing needs.

This piece originally ran on the New Republic website »

Authors

Robert Gordon

Publication: New Republic

Don't Let Them Fool You, We Still Have Debt Problems

William G. Gale — Sat, 01 Jun 2013 00:00:00 -0400

Your uncle, Sam, has ignored his chronic health condition – let’s say he’s diabetic – for a long time. Then he suddenly has a heart attack, followed by a long, slow painful recovery. As he is recovering, he is feeling good about his health – after all, he got though a crisis. But he is not actually healthier than he was before. He’s still diabetic, and now he has to deal with the cautions of being a heart attack victim as well.

I think of a situation like that whenever I hear or read people saying that our debt problems are behind us. It’s true that there has been good news recently on a variety of fronts regarding the budget, but it is premature to say that we’ve solved the long-term fiscal imbalance.

Fiscal optimism stems from the Congressional Budget Office’s most recent estimates, which place the deficit at 4 percent of GDP this year, falling as low as 2 percent of GDP by 2015, before rising to about 3.5 percent of GDP by 2023. These figures are way down from the deficit of 10 percent of GDP that prevailed a few years ago. Some of this reduction is due to the slowly improving economy. The rest is due to policy changes, slower health care cost growth, and various technical factors.

But the fiscal problem isn’t gone. There are really two different deficits out there – the short-term and the long-term.

Short-term deficits are a useful tool in a weak economy with very low interest rates. They boost aggregate demand and help close the gap between actual and potential output. If anything, current deficits should be larger than they are, given the $800 billion gap between what we actually produce and what we could produce. The policies that have brought this year’s deficit down – including the sequester, the tax increases on high-income households, and the expiration of the payroll tax cut – are holding the recovery back and are solving the wrong deficit problem.

The long-term deficit is where the real concerns about fiscal sustainability lie. When an economy is running at full steam, increased deficits crowd out private investments, boost interest rates, and reduce future living standards. They mortgage our future. So, while the headlines and commentators trumpet the reduction in the current-year deficit, the real fiscal concern is how we are doing on the long-term front. We are slowly recovering from the heart attack, but not addressing the chronic conditions.

Here, it is instructive to compare the current long-term situation to that which existed before the Great Recession. Economists and political leaders were rightly concerned about the long-term fiscal situation at that time. In many ways, however, the fiscal outlook is worse now than it was then.

Most obviously, the debt/GDP ratio is now almost 75 percent, double the size it was pre-recession and the highest in U.S history except for 7 years around World War II. Carrying that extra load (much less paying it down) is the equivalent of Uncle Sam walking around with an extra 30 pounds on his waist. It will be a drag on economic activity and limit our policy mobility, or it will force painful changes.

In addition, the long-term economic growth rate is now projected to be lower than it was pre-recession. One of the documented effects of financially-induced recessions is not just that the subsequent recovery is slow but often that the underlying growth rate of the economy is reduced as well.

And of course these changes are playing out with the full retirement of the baby boom, which will reduce revenues and raise Social Security and Medicare expenditures, much closer than it was pre-recession, giving us less time to make policy adjustments.

On the positive side, there the recent slowdown in the growth rate of health care spending is potentially very good news for the long-term budget. But no one knows at this stage how much of the slowdown will prove to be permanent.

In any case, there are two appropriate reactions to the notion that the debt crisis has been resolved. First, there never was a crisis, in the sense of a potential massive withdrawal of capital from the U.S. or from federal debt instruments, as evidenced by the exceedingly low interest rate on federal obligations. Calling the fiscal imbalance a crisis is and always has been a “cry wolf” strategy designed to get policymakers’ attention. The only potential debt crisis we faced was the politically manufactured one that would have occurred had we not raised the debt ceiling.

Second, the long-term problems remain and in some ways are more serious than before. These concerns are inherently less dramatic than the events of the last few years, but that does not make them less important. Most economic models show that the long-term effects of debt buildup can be quite large, much larger than the impact of other policies, such as tax reform. But the effects are not sharp and spiked; they are gradual and persistent, without a particular drop-dead date. As a result, political leaders largely ignored the long-term problem before the recession and are now looking for a reason to ignore it again.

Policymakers need to be more active on both the short- and long-term fronts. Not only is the long-term imbalance not an excuse to avoid short-term actions, addressing short- and long-term problems at the same time would actually be more effective than addressing either problem in isolation. Carefully-crafted stimulus now would help the budget over time by boosting the economy. A long-term budget plan would increase the impact of a stimulus package by showing that the fiscal trajectory was under control What is remarkable is that policy makers’ response to both the heart attack the economy went through the last few years and the chronic conditions it faces is to do nothing on either front.

Authors

William G. Gale

Publication: Real Clear Markets

Image Source: © Kevin Lamarque / Reuters

You Get What You Pay For: Lessons From the IRS Scandal

Henry J. Aaron — Fri, 31 May 2013 00:00:00 -0400

Everyone is outraged by the IRS scandal—Republicans and Democrats, members of Congress and the president, alike. Outrage is a good clean emotion to have when one encounters outrageous behavior. But after a good fist-clenching growl, serious people need to decide what to do to prevent a repetition of such misbehavior.

Here are three suggestions. First, implement the specific reform suggestions put forward by the Inspector General whose report documents the misdeeds. Next, tighten the law under which organizations are granted tax exempt status. The third suggestion—and this may surprise you—raise the budget of the Internal Revenue Service—a lot!

Before explaining the suggestions, let’s start with the facts. As far as tax exemption is concerned, organizations claiming tax exempt status don’t have to apply to the IRS, but most do to avoid challenge later on. Tax exempt status under section 501(c)(4) of the Internal Revenue Code is supposed to be granted to an applicant only if it is a ‘social welfare’ organization. That means that no income of such organizations is taxable and that the names of contributors may be kept secret. Under current administrative interpretation such groups may spend up to half of their income directly on political campaigns and limited amounts on lobbying, but they may spend without limit on ‘general advocacy,’ provided that such spending is related to their ‘social welfare’ purpose. In 2012 some such organizations—conservative and progressive, alike—spent virtually all of their income on ads advancing the cause of one political candidate or another, presumably on the theory that a particular candidate’s victory will advance social welfare.

Spread too thin

Of course, the IRS spends most of its time on other matters. It collects taxes—well over $2 trillion. It must also provide a lot of data for the soon-to-be-implemented health reform law and impose penalties to enforce it. For these tasks, it is dreadfully underfunded. The IRS budget is virtually unchanged since 2008 as is its staffing levels, despite the increase in its responsibilities related to health reform.

The IRS lacks sufficient resources to do all of these jobs adequately. If you doubt me on this point, consider the following facts. The IRS audits only 1 percent of all returns. An estimated $450 billion that is legally due goes uncollected, in significant measure because so few individual returns are audited. If you cheat or make an innocent mistake, there is little chance that the over-worked and under-staffed IRS will find out. The Government Accountability Office estimates that each additional dollar spent on auditing would yield more than $8.

The toll from short-changing the IRS is not just lost revenue. When resources are so meager and the return to enforcement is so high, administrators are loath to divert budget and staff from chasing evaders to staff training and oversight. It would be absurd to say that the administrative abuses now so much in the news are caused by meager budgets—after all, real live people who should have known better did what was done and real live supervisors failed to stop them from doing it. But a major reason why training and oversight were missing is that short-sighted, penny-pinching members of Congress deprived the IRS of enough money and staff to do what Congress asked them to do. Members fearful that the IRS will run amok, should recognize that the way to avoid that risk is more supervision not less.

The law needs to be changed

Even with adequate staffing, however, the law governing tax exempt status for so-called ‘social welfare’ organizations is so vague that anything other than rubber stamping all applications would likely evoke complaints of politicization. What is a tax administrator to do when an organization says it is engaging in “social welfare” and then defines those activities as paying for TV ads and staff devoted entirely to explaining to voters why a particular candidate has taken the right or the wrong position on political issues or why a particular bill should be approved or rejected? What are voters to do when such organizations shield the names of donors who are financing the attack ads that pass as ‘public education’? The result of such a loosely drafted law is an avalanche of anonymous funding for political campaigns. The result is that members of Congress are driven to spend most of their time—and not just in election years—raising money from hard-headed pragmatists many of whom buy influence with their ‘donations.’

Only Congress can remedy this flawed law. It can do so by requiring that names of all donors to tax exempt organizations, not just those the IRS singles out for selective scrutiny, be divulged and by denying tax exempt status to any organization that engages in more than de minimis lobbying or campaign spending. The Supreme Court ruled that past limits on campaign spending were unconstitutional. It did not rule that organizations doing the spending should be exempt from taxes. Only Congress can assure that the Internal Revenue Service has sufficient resources to do the jobs they are charged with doing. But only the IRS management can implement the common-sense reforms that the Inspector General who documented these abuses prescribed to prevent them from recurring.

But for these reforms to occur, the American public must get beyond their well-justified anger with administrators who abused their authority and recognize why shoddy legislation and budgetary penny-pinching created an environment that fostered those abuses.

Authors

Henry J. Aaron

Publication: Yahoo! Finance

Image Source: © Jonathan Ernst / Reuters

Reviving U.S. Foreign Policy: The Case for Putting America’s House in Order

Thu, 30 May 2013 15:30:00 -0400

Event Information

May 30, 2013
3:30 PM - 5:00 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

A rising China, climate change, terrorism, Iran’s nuclear ambitions, a tumultuous Middle East, and a defiant North Korea all present serious challenges for U.S. foreign policy, but could internal factors actually pose the biggest threat to the United States, its security, and its position as a global leader? In his new book, Foreign Policy Begins at Home: The Case for Putting America's House in Order (Basic Books, 2013), Richard Haass argues that U.S. national security depends on the United States addressing significant internal issues: repairing its crumbling infrastructure, improving education, reforming its immigration policies and reducing its burgeoning debt. Haass, president of the Council on Foreign Relations, contends that these shortcomings directly threaten America's ability to project power and exert influence overseas; to compete in the global marketplace; to generate the resources needed to promote the full range of U.S. interests abroad; and to set a compelling example that can influence the thinking and behavior of other nations.

On May 30, Foreign Policy at Brookings hosted Haass for a discussion on the challenging issues facing the United States at home and their impact on the successful pursuit of U.S. foreign and security policies abroad. Brookings Senior Fellow Robert Kagan joined the discussion. Vice President Martin Indyk, director of Foreign Policy, provided introductory remarks and moderated the conversation.

Politics, Higher Education and Health Care in the Austerity Era

Wed, 22 May 2013 09:00:00 -0400

Event Information

May 22, 2013
9:00 AM - 12:00 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Register for the Event
The A. Alfred Taubman Forum on Public Policy

Since the onset of the Great Recession, public discussion has centered on whether spending or austerity is the best path to economic recovery. As evidenced by the sequestration, recurring debt ceiling fights and the ongoing euro crisis, clear policy prescriptions to kickstart anemic economies remain elusive. Often lost in the public discussion surrounding government budgets, though, is consideration of austerity’s implications for national politics and how policy is enacted and implemented. How has the debate surrounding spending versus budget-cutting shaped the political conversation in the United States? What has been austerity’s impact on the policymaking process?

On May 22, the Governance Studies program at Brookings will host a half-day forum centered on the changed political and policy conversations in the austerity age. The fourth annual A. Alfred Taubman Forum on Public Policy will convene leaders from academia, the media, government, and business to explore the far-reaching implications of austerity reform and philosophy on the American political landscape and today’s most pressing policy challenges, specifically in the areas of higher education and health care.

After each panel, participants will take audience questions.

Audio

Politics, Higher Education and Health Care in the Austerity Era

Supporting Broad-Based Economic Growth and Fiscal Responsibility through Tax Reform

Adam Looney — Wed, 22 May 2013 02:30:00 -0400

Chairman Murray, Ranking Member Sessions, and Members of the Committee: Thank you for inviting me to share my views on the role of tax reform in supporting broad-based economic growth and fiscal responsibility.

The United States faces a daunting outlook for budget deficits, an increasingly challenging global economy for many American workers and businesses, and rising income inequality.

Improvements in tax policy could help address these challenges by making our tax system more fiscally sustainable, more efficient, and more fair. Indeed, any tax reform will be evaluated based on how it affects each of those three criteria.

But improving on all three dimensions simultaneously is increasingly difficult because of tradeoffs between competing goals of efficiency, revenues, and equity.

Today’s long-term budget outlook means that we’re likely to need higher tax revenues in the future. And rising inequality means that changes in policy will be increasingly scrutinized for how they affect the progressivity of the tax schedule. But a tax reform that devotes revenues to deficit reduction and retains our progressive system would have much more difficulty achieving other goals—such as lowering tax rates.

In my testimony today, I want to describe some of these tradeoffs and some potential paths forward.

Tax Reform and the Budget

Much of the energy surrounding tax reform focuses on the model of the Tax Reform Act of 1986. In that reform, tax rates were lowered substantially and the lost revenue was restored by cutting tax breaks, deductions, exclusions, and other so-called tax expenditures. That reform enhanced economic efficiency without increasing the deficit. In the 27 years since then, however, the economic context has changed, making such a reform harder to achieve.¹

First, we face a dire long-run budget outlook; most believe that putting the budget on a sustainable path will require contributions from both spending cuts and revenue increases. Many hope that tax reform can help produce those revenues.

This makes tax reform more difficult because revenues allocated to deficit reduction are revenues that cannot be used to reduce rates, and vice versa.

Moreover, raising revenues and cutting rates at the same time is a tall order. At first glance, the list of tax expenditures is projected to add up to $1.4 trillion in 2015.² But that figure dramatically overstates the revenue gains that are available from cutting expenditures.

Some expenditures, including obscure items like imputed rent, would be difficult to eliminate for practical or administrative reasons; others, like credits and deductions for working families with children are integral to combating poverty and encouraging employment. These categories account for roughly one quarter of all tax expenditures.³ An additional one-third of the tax expenditures arise from the preferential treatment of savings and investment. And the largest non-savings-related expenditures include those for health insurance, mortgage interest, state and local taxes, and charitable contributions. These, and many others, tend to serve substantive goals, remain on the books because they were too difficult to eliminate in 1986, and, as you well know, are backed by popular constituencies.

In addition to political difficulties, there are basic practical issues to consider. Certain tax expenditures exist for the purposes of simplifying the tax system, to reduce record keeping, or to minimize the filing burden on taxpayers. Eliminating those provisions or scaling back others could make the system more complicated and onerous.

Because of such considerations, the Congressional Research Service warns that “it may prove difficult to gain more than $100 billion to $150 billion” each year from reducing tax expenditures.⁴ And those estimates are based on a 35 percent top rate; if marginal tax rates were reduced, eliminating a dollar’s worth of deductions would raise proportionately less revenue. In other words, if eliminating a dollar of mortgage interest today raised 39 cents, under a top rate of 25 percent, it would raise only 25 cents—37 percent less.

To put these numbers in perspective, in order to be revenue-neutral, the tax plan included in House Budget Committee Chairman Ryan’s budget would require eliminating roughly $450 billion worth of tax expenditures each year just to balance out the individual income tax rate cuts targeted in his plan.⁵ The plans initially developed by the Domenici–Rivlin Task Force and the Bowles–Simpson Commission, which reduce rates and contribute to deficit reduction, likely require reductions in tax expenditures of a similar or larger magnitude.

The gap between the reductions in tax expenditures required by such plans and those that could be agreed upon illustrates the challenge of formulating a plan that achieves both lower rates and higher revenues.

Tax Reform in a Progressive System

A second consideration is the issue of rising income inequality and its relationship to the tax code. Earnings have risen dramatically at the top—by more than 250 percent over the past 30 years for households in the top one percent of the income distribution. At the same time, many households at the middle and bottom have experienced stagnating or even declining earnings. Changes in the tax system over the past 30 years have exacerbated these problems; the very people who have received the biggest income gains in the past three decades have also seen the largest tax cuts. A progressive tax code is perhaps the most significant and powerful tool available to counteract income inequality. Indeed, there are increasing calls for policymakers to use the tax code for that purpose.

Such concerns were much less salient the last time we did tax reform. In 1986, the phenomenon of rising inequality had yet to be fully discovered or understood, and the technical expertise to measure how the tax system affected inequality had yet to be developed.

Today not only are concerns about the progressivity of the tax schedule heighted, but so is our ability to measure how tax changes affect different groups. That raises the level of scrutiny directed to reform and also reveals a substantive tradeoff: that any changes in rates and tax expenditures must balance out within income groups in order to retain a progressive tax structure.

In a series of papers, colleagues at the Tax Policy Center and I analyzed these tradeoffs by examining a hypothetical reform with the stated goals of maintaining tax revenues, lowering marginal tax rates, while at the same time ensuring a progressive tax system.⁶ We took as an example a plan that lowered the top rate from 35 to 28 percent and continued the low rates that apply to savings and investment. These rate reductions are roughly the same levels specified in earlier plans from Bowles–Simpson and Domenici–Rivlin, but are substantially smaller than those specified in Chairman Ryan’s plan. We asked what it would take to achieve other goals of revenue and progressivity.

In that analysis, we estimated the revenue losses due to lower rates, and then tried to pay for those revenue losses by eliminating tax expenditures. We assumed that certain tax expenditures were off the table because of the administrative difficulty of closing certain breaks; others were off the table because they provided preferential treatment for savings and investment.

Overall, the available tax breaks were enough to offset revenue losses from lower rates. But this resulting tax schedule, we found, was less progressive. Even when we implemented the most progressive way of reducing the remaining tax breaks, there was simply not enough revenue from these breaks in the top brackets to offset the revenue losses from lower marginal tax rates.

This result—that this sort of base-broadening reform led to a less progressive tax system—was true even when we incorporated revenue feedback, not just according to the standard dynamic effects used by Tax Policy Center, Treasury, and the Joint Committee on Taxation, but also additional feedback effects from optimistic estimates of potential economic growth, drawn from theoretical models.

The implication is that such a tax reform must give up on at least one of its stated goals: either higher-income taxpayers would receive a tax cut and middle- and lower-income taxpayers a tax increase; the deficit would go up; preferences for savings and investment would have to be reduced; or marginal tax rates would need to be higher.

Prospects for Reform

Of course, these considerations don’t rule out tax reform; indeed, many experts have put forward plans that provide more incremental reforms that simultaneously achieve efficiency gains, higher revenues, and a more progressive tax system. But such plans require substantial compromises.

For instance, certain plans proposed by the Domenici–Rivlin Task Force and the Bowles–Simpson Commission achieve their distributional goals by eliminating preferential rates for capital gains and dividends and curtailing other savings and investment-related tax breaks.

A host of other incremental reforms propose improving the efficiency of the tax system not by reducing rates but by reducing inefficient or wasteful tax expenditures. For example, deductions and exemptions—like for mortgage interest, that currently provide tax savings of up to 39.6 percent—could be replaced with flat credits of, say, 15 percent, providing continued support for homeowners but in a less-costly and more progressive way.⁷ An overall limit on the value of tax expenditures at 2 percent of income would provide an across-the-board reduction in costly tax expenditures.⁸ The President’s Budget includes a provision to limit the amount that certain tax deductions and preferences can reduce tax liability by to 28 percent. And at a meeting convened by the Hamilton Project last February, a bipartisan group of tax experts presented proposals to reduce benefits from the mortgage interest deduction, subsidies for fossil fuels, preferences for retirement savings, and the overall value of deductions.⁹ A common thread is that all of these proposals enhance economic efficiency, raise revenues, and increase progressivity.

Beyond economic appeal, proponents of this approach hope for political appeal. To paraphrase Harvard Professor Martin Feldstein: if Republicans want to reduce the deficit by cutting spending and Democrats want to increase revenues, by focusing on tax expenditures we should find a middle ground.¹⁰

1. For a further discussion see: Greenstone, Michael, Dmitri Koustas, Karen Li, Adam Looney, and Leslie B. Samuels. “A Dozen Economic Facts About Tax Reform,” The Hamilton Project (May 2012).

2 Marron, Donald B. “How Large are Tax Expenditures? A 2012 Update,” Tax Notes (April 9, 2012): 235.

3. For a description of these expenditures, see Nguyen, Hang, James Nunns, Eric Toder, and Roberton Williams. “How Hard Is It to Cut Tax Preferences to Pay for Lower Tax Rates?” Tax Policy Center (July 10, 2012): Table 1.

4. Gravelle, Jane G. and Thomas L. Hungerford. “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening,” Congressional Research Service (March 22, 2012): 3.

5. Tax Policy Center Table T13-0110

6. Brown, Samuel, William Gale, and Adam Looney. “On the Distributional Effects of Base-Broadening Income Tax Reform,” Tax Policy Center (August 1, 2012); Brown, Samuel, William Gale, and Adam Looney. “TPC’s Analysis of Governor Romney’s Tax Proposals: A Follow-Up Discussion,” Tax Policy Center (November 7, 2012); Marron, Donald. “Understanding TPC’s Analysis of Governor Romney’s Tax Plan,” Tax Vox (August 8, 2012); and Nguyen et al. (2012).

7. Batchelder, Lily L., Fred T. Goldberg, Jr., and Peter R. Orszag. “Reforming Tax Incentives into Uniform Refundable Tax Credits,” The Brookings Institution Policy Brief 156 (August 2006).

8. Feldstein, Martin, Daniel Feenberg, and Maya MacGuineas. “Capping Individual Tax Expenditure Benefits,” NBER Working Paper 16921 (April 2011)

9. See Alan Viard, “Replacing the Home Mortgage Interest Deduction,” Joseph E. Aldy, “Eliminating Fossil Fuel Subsidies,” Karen Dynan, “Better Ways to Promote Saving through the Tax System,” and Diane Lim “Limiting Individual Income Tax Expenditures” in 15 Ways to Rethink the Federal Budget, The Hamilton Project (February 2013).

10. Feldstein, Martin. “A Simple Route to Major Deficit Reduction,” The Wall Street Journal (February 20, 2013).

Authors

Adam Looney

Image Source: Chris Maddaloni

Federal Tax Reform? Don't Bet The Rent Money On It

Bill Frenzel — Tue, 14 May 2013 11:52:00 -0400

In some years there are no budgets. This year we have been presented with thre dueling budgets, one from each house and one from the president. Neither house has picked conferees, and neither has any current inclination to do so. Each prefers to glare at the other until the next election day.

The “Grand Bargain” on the Federal budget this year is still possible, but it seems less and less likely. The prospect is for another year of small deals, recurring crises, and several continuing resolutions.

As hopes for the big fiscal fix recede, tax reform moves to center stage. Ideally, tax reform ought to be a part of a larger budget agreement. But, with that agreement now slipping out of reach for 2013, tax reform seems to some observers to be a more promising suspect.

Tax reform appeals to both parties for different reasons. Democrats need it for new spending to stimulate growth. Republicans want to use it for lowering tax rates for the same reason. Those differences may be irreconcilable, but members of Congress seem to want to give tax reform a try.

Perhaps the best reason for tax reform optimism lies in the fact that the chairmen of both tax-writing committees really want to do it. Dave Camp, chair of the House Ways & Means Committee, is now serving his last term as chair under caucus rules. Max Baucus, Camp’s Senate Finance Committee counterpart, is in a similar position. He is retiring from Congress after this term.

Both of these leaders are strongly motivated to produce a tax bill before they slide into history. Both are able veterans who know the tax code. They meet regularly. Both have held hearings on tax reform, and have given it much study over the past two years. In addition, Camp has the blessing of the House Republican leadership including Speaker Boehner, who has saved the precious number, HR 1, for a tax reform bill.

Some business interests, led by the U.S. Chamber of Commerce, want to see reform of the tax code, too. Many of them see advantages in potentially lower rates, and in reform of U.S. taxation of their foreign income. American business is by no means unified on this subject, but there clearly is plenty of interest.

There is, however, another side to the tax reform story. Historically, it is a rare event. The last successful effort was in 1986. Before that one has to backtrack to 1958 to identify a major tax reform enactment. In the 1986 version, both Congressional parties, (with Democrats in the majority) and the President, Ronald Reagan, strongly supported it. Even so, the process took two years. Nobody believes that the 1986 political consensus can be duplicated today.

In 1986, the American people polled strongly in favor of tax reform. Nowadays, they are not so sure. They saw the 1986 act substantially altered by amendment in the years immediately thereafter. Today, the public is not sure that tax reform will help them. And, even if it does help, they are pretty sure it will soon be amended beyond recognition. Trust in the government has all but faded away in the last three decades.

In the end, the biggest hurdle for tax reform will be to overcome the opposition of interests who are unwilling to part with their tax preferences peaceably. Unsurprisingly, many individuals and corporations just love their tax preferences. Some of them would be worse off with a system that abolished those preferences even if their basic tax rates were lowered.

This group is sophisticated. It knows how to make strategic political contributions, and it knows how to lobby successfully. It also knows how to maneuver in the current political environment where polarization is the rule, and in which members of Congress do not often trust one another. For these interests, the conditions on the playing field are just about perfect for defending their preferences.

Just as the country needs a Grand Bargain, it also needs tax reform. It would be wonderful if tax reform could be achieved this year. The two chairmen and many members will give the good old college try. But, if a budget compromise is not possible, it also seems unlikely that a good tax reform bill can be enacted. Cheer for tax reform; pray for it; just don’t bet the rent money on it.

Authors

Bill Frenzel

Publication: Forbes

Image Source: © Kevin Lamarque / Reuters

Advancing Reform: Medicare Physicians Payments

Kavita Patel — Tue, 14 May 2013 10:00:00 -0400

Chairman Baucus, Ranking Member Hatch and members of the Committee, thank you for this opportunity to highlight ways to advance physician payment reforms in Medicare. The Medicare program retains a strong commitment to provide care to approximately 50 million beneficiaries across the country; a key partner in the provision of this care are the 900,000 healthcare providers who see beneficiaries in medical offices, hospitals, skilled nursing facilities and other settings.[1] Each day, providers work hard to deliver the best care for their patients yet our current payment system falls short time and time again, with financing mechanisms that perpetuate fragmented care and volume over coordination and value. Fortunately, there are better ways to pay physicians that can enable them to improve care, enhance the patient experience and potentially achieve greater savings for the Medicare system overall. I am honored to present some solutions from my work at the Engelberg Center for Health Care Reform at the Brookings Institution and our Merkin Initiative on Clinical Leadership, as a Commissioner on the National Commission on Physician Payment Reform and perhaps most importantly, as a practicing internal medicine physician.[2]

Current Payment Policies in Medicare

Currently, Medicare pays physicians primarily by a fee-for-service (FFS) schedule that is informed by relative value units (RVUs). Relative value units are determined from the Resource Based Relative Value Scale (RBRVS) which defines the value of a service through a calculation of physician work, practice expense and practice liability.[3] A relative value unit is assigned to every medical service that physicians carry out during a clinical visit. [4] The RVU is then adjusted by geographic region (so a procedure performed in Miami, Florida is worth more than a procedure performed in Salem, Oregon). This value is then multiplied by a fixed conversion factor, which changes annually, to determine the amount of payment to the physician. As the number of billable service codes have grown over time, an extensive regulatory process was enacted to develop RVU weights and update them year over year.

Over time, the RVU updating system has placed an increasing importance, evidenced by RVU weights, on procedures, scans, and other technical services that fix certain ailments or problems. Emphasis on technologies and interventions have resulted in a marked disparity between reimbursement for specialties which emphasize procedures such as cardiology and gastroenterology and those that do not such as primary care, endocrinology or infectious diseases, thus exacerbating shortages and the hierarchical culture within medicine.

The 1997 Balanced Budget Act exacerbated the problem with the introduction of the sustainable growth rate or SGR. The SGR was intended to keep the growth in Medicare physician-related spending per beneficiary in line with growth in the nation’s gross domestic product (GDP). In the early years of the SGR, this worked fine, as spending growth was lower than the calculated GDP target and payment rates for physician services increased. But starting with the recession in 2002, spending growth per beneficiary began to exceed GDP growth. In 2002, payment rates were reduced accordingly, by 4.8 percent.

Every year since then, the scheduled SGR payment rate reductions have not taken full effect. Instead, because of concerns about access to care and the sufficiency of payments, Congress has headed off the full payment reductions on a short-term basis. Typically, this has involved offsetting at least some of the budgetary costs with payment reductions affecting other Medicare providers. As Figure 1 illustrates, actual updates as well as the SGR formula update still grow at rates far below input costs (MEI) and payment rates for other providers, thus exacerbating systemic flaws. In short, our system is broken.

Payment Reforms in the Affordable Care Act

The Affordable Care Act included over 100 policy changes in Medicare provider payments, many of which are currently being phased into the current delivery system and affect physicians directly. [5] These reforms include Medicare Accountable Care Organizations (ACOs), Value-based payment modifiers, the Bundled Payments for Care Improvement initiative as well a number of broader efforts for statewide level innovation, multipayer efforts to promote primary care and alignment of payments for Medicare-Medicaid beneficiaries (dual eligibles). These reforms are incredibly effective at encouraging providers to delivery high-quality, coordinated care at a lower cost and enable Medicare to pay for value. As Jonathan Blum, Acting Deputy Administrator and Director of the Center for Medicare recently pointed out in his testimony before this committee, “the Medicare program has been transformed from a passive payer of services into an active purchaser of high-quality, affordable care.” [6] While these reforms will offer a great deal of insight into how we can improve Medicare physician payment through authorities granted in the Patient Protection and Affordable Care Act, they are still largely based on a fee-for-service payment system. We must acknowledge the limitations in implementing payment reforms in the face of a dominant fee-for-service system. One early large-scale Medicare pilot implemented in oncology in 2006 serves as a good example: in conjunction with reductions in Part B drug payments, oncologists received an additional payment to report on whether the chemotherapy care provided by them adhered to certain evidence-based guidelines. This promoted comparisons to the published guidelines and also supported the development of evidence on how widely published guidelines were being followed in practice. [7] However this pilot did not make any changes in the underlying structure of fee-for-service payments and did not explicitly tie payments to measured improvements in performance, resulting in limited feasibility and adoption. In order to move away from our current system and build on the promise of ongoing efforts we must remove the SGR as a constant impediment to true systemic change.

Recommendations of the National Commission on Physician Payment Reform

In an effort to explore new ways that to pay for care that can yield better results for both payers and patients, the Society of General Internal Medicine convened the National Commission on Physician Payment Reform in 2012. Our commission, composed of a broad range of leadership and expertise spanning the public and private sectors, adopted twelve specific recommendations for reforming physician payment:

The SGR adjustment should be eliminated
The transition to an approach based on quality and value should start with the testing of new models of care over a 5-year time period and incorporating them into increasing numbers of practices, with the goal of broad adoption by the end of the decade.
Cost-savings should come from within the Medicare program as a whole. Medicare should where possible, avoid cutting just physician payments to offset the cost of SGR repeal, but should also look for savings from reductions in inappropriate utilization of Medicare services.
The Relative Value Scale Update Committee (RUC) should continue to make changes to become more representative of the medical profession as a whole and to make its decision-making more transparent. CMS has a statutory responsibility to ensure that the relative values it adopts are accurate and appropriate, and therefore it should develop alternative open, evidence-based, and expert processes beyond the recommendations of the RUC to validate the data and methods it uses to establish and update relative values.
For both Medicare and private insurers, annual updates should be increased for evaluation and management codes, which are currently undervalued, and updates for procedural diagnosis codes, which are generally overvalued and thus create incentives for overuse, should be frozen for a period of three years. During this time period, efforts should continue to improve the accuracy of relative values, which may result in some increases as well as some decreases in payments for specific services.
Fee-for-service contracts should always include a component of quality or outcome-based performance reimbursement.
Higher payment for facility-based services that can be performed in a lower cost setting should be eliminated. Additionally, the payment mechanism for physicians should be transparent, and should reimburse physicians roughly equally for equivalent services.
In practices having fewer than five providers, changes in fee-for-service reimbursement should encourage methods for the practices to form virtual relationships and thereby share resources to achieve higher quality care.
Over time, payers should largely eliminate stand-alone fee-for-service payment to physicians because of its inherent inefficiencies and problematic financial incentives.

10. Because fee-for-service will remain an important mode of payment into the future even as the nation shifts to fixed-payment models, future models of physician payment should include appropriate elements of each. Thus, it will be necessary to continue recalibrating fee-for-service payments, even as the nation migrates away from that method of paying physicians.

11. As the nation moves from a fee-for-service system to one that pays physicians through fixed payments, initial payment reforms should focus on areas where significant potential exists for cost savings and higher quality.

12. Measures should be put into place to safeguard access to high quality care, assess the adequacy of risk-adjustment indicators, and promote strong physician commitment to patients.

Moving Beyond the SGR

Eliminating the SGR is a principal recommendation of many expert reports, including our Commission’s Report, MEDPAC, The Brookings Institution, Simpson-Bowles and the Bipartisan Policy Center, but the question remains, repeal and replace with what? [8][9]^,[10]As stated above we (and other clinical groups and societies) recommend a five year transition to newer models of payment which move away from FFS as the dominant payer. But the devil is in the details, and proposals to move towards new models over a period of time leaves policymakers and physicians wondering what their practices will look like next month, next year and beyond. In moving from principle to practice, it is also important to acknowledge that while there will be no one payment model that applies to all physicians, payment models must be relevant to primary care physicians and specialists alike. Additionally, given the growing complexity of caring for Medicare beneficiaries, payment models should encourage collaborations between specialists and primary care physicians rather than focus on a model that is suited for one clinical specialty alone.

Short-Term Steps in Advancing Payment Reforms

To facilitate providers’ transition to alternatives to fee-for-service payments, CMS should harmonize current payment adjustments and quality improvement initiatives and apply those funds towards a care coordination payment which could give physicians more support for broader long-term reform pathways. Medicare has implemented quality reporting systems and payment adjustments for physicians, hospitals, and other providers. But these payments are generally administered as either a flat percentage or adjuster to all FFS payments. In contrast, shifting some existing FFS payments into a care coordination payment would give providers more support in moving toward condition-based, episodic payments, or global payments that allow for management of a population of payments that would otherwise be impossible in the current payment setting.

Table One highlights current efforts within the Medicare to increase value in care; each initiative is important but in isolation results in marginal financial gains and at times and each of these initiatives is limited in scope. For example, quality measures for the Physician Quality Reporting System (PQRS) have flexible annual submission options, with qualification through registries, electronic health records etc. However, the program has suffered from criticism that measures are not as relevant to specialists. And at best, providers will gain approximately an average of $1059 for participation per year, which some might say is not worth the effort, even in a penalty phase of the program. With the passage of the American Taxpayer Relief Act of 2013, a mechanism will be in place by 2014 for specialty specific efforts to satisfy CMS’ reporting requirements for PQRS, which will encourage higher specialist participation in quality improvement efforts and help align clinician-developed quality measures with CMS’ mandate to examine quality of patient care. Applying these measures to help physicians understand how registries can not only benefit their patients but lead to better predictability in a changing payment landscape will facilitate entry into pathways of reform.

Meaningful use measures are also quite detailed with important process metrics but physicians will likely also “perform to the measure” and may have difficulty going beyond unless there are linkages to payment reform. This is reflective of the sentiment that many providers express that they are constantly being asked to measure and perform, all while trying to see just as many patients in a day of work with little to no reward for doing less or changing workflows in order to reduce inappropriate utilization of resources. For example, proposed Stage 2 meaningful use measures include 17 core measures and six additional menu objectives from which a physician would choose at least three. This adds up to a total of 20 distinct actions that often involve all office staff. Rather than adding to these measures, CMS should consider how existing measure components could be applied to a payment update overall or a care coordination payment for the care of a patient with a chronic disease.

In the case of a care coordination payment, providers who opt to enter into a care coordination pathway in the first year can receive a lump sum of payment. This payment would be roughly equivalent to the potential bonus payments for all programs in table one. In return they would have to demonstrate that they are improving clinical practice and implementing outcomes-based clinical measures which are germane to their practice. In this example, a cardiologist would receive a population level care coordination payment derived from bonus payments and some FFS payments who does the following:

Participates in a care coordination pathway for chronic cardiac disease (atrial fibrillation, congestive heart failure, etc)
Subscribes to a cardiac specific registry (thus meeting PQRS requirements)
Implements patient engagement tools for electronic care coordination, medication reminders, therapeutic lab monitoring for anticoagulation (meeting requirements for meaningful use, value-based modifier program, e-prescribing)
Implements a significant practice transformation (potentially a new component which allows for a physician in a small, medium or large practice to individualize their approach to innovation)

The cardiologist would satisfy program requirements and would receive the maximum bonus payments.

Implementing this kind of approach involves potentially supporting CMS and additional entities to provide data on performance measures and quality improvement at more regular intervals along with technical assistance to understand how to translate incoming data into practice transformation. This process can begin in the year following a SGR repeal and can be supported through the assistance of existing clinical societies and quality improvement organizations. In this manner, assumption of clinical and performance risk becomes more commonplace for physicians. Simply put, physicians understand that they need to be held accountable for payment in a standard fashion, but want to feel that they can bring some degree of personalization into their practice in order to meet the needs of their populations.

Finally, I encourage CMS to continue implementing important changes through the Physician Fee Schedule including recent changes for care coordination.[11] These changes are an important acknowledgment that while we migrate from a payment system dominated by fee-for-service, we need to also enhance the existing system to be aligned with the expected outcomes of policy changes. Recent calls for evaluating the distribution of evaluation and management codes and determining the accuracy and appropriate valuation are also an important step in the short term.

Movement from The Short Term to Longer Term Sustainable Payment Reforms

As clinicians of all specialty types realize that there is a viable pathway to care for patients and work across silos. The appetite for a more attractive option is evidenced by the overwhelming response to applications for the CMMI Challenge Grants, BPCI initiative, Medicare Shared Savings Program and other efforts. Clearly, physicians want an alternative.

Through my work at the Brookings Institution’s Engelberg Center for Health Care Reform and the Richard Merkin Initiative on Clinical Leadership, we have been meeting with physicians in primary care and specialties as well as other healthcare stakeholders. With iterative feedback from clinicians in practice, we have proposed a longer term payment model that takes into account the currently uncompensated critical elements of patient care, the need for more flexibility in the way physicians are able to use their time and treatment resources in the best interest of their patients’ individual circumstances, and the need to implement care reforms in a way that recognizes the intense and growing cost pressures in our health care system.

Our model, outlined in Figure 2, would build on the short term payment advances above with incorporation of a payment for care coordination that is derived from the programs in Table One and identify additional opportunities to improve care and lower costs that are not reimbursed well in traditional fee-for-service payment systems. For example, a common procedure in the outpatient cardiac practice is the echocardiogram (echo), or ultrasound of the heart. This procedure is sometimes performed in place of preventive counseling or watchful monitoring of a patient in coordination with a primary care physician, in large part because a hospital-based outpatient cardiology practice receives up to $450 for an echo compared to $53 for a visit without the procedure. Imagine paying both the cardiologist and primary care physician a fixed payment of $400 that allows for longer term communication and conservative monitoring in return for reporting on clinical outcomes at a population level. The clinicians are take the financial risk involved in the clinical care of their patient using the investments previously made by clinically driven pathways, registries and care coordination solutions.

Column A represents total spending on health care and reflects the current state of physician payment: exclusive reliance on the FFS model for physician payments, with waste and inefficiency in the form of redundant and unnecessary care, breakdowns in coordination, escalation of preventable complications etc. This leaves the total cost of physician care high.

Column B illustrates total spending in our alternative payment model. First, a set of services currently reimbursed for a particular episode of care or part of chronic care management are bundled together into a single payment to physicians as a case management payment. For example in clinical oncology a case management payment would include after hours phone care for breast cancer or a palliative care counselor for patients with lung cancer. This enables clinicians to focus less on volume and more on tighter coordination among providers and settings for patients. In addition, we continue the aforementioned care coordination payment paid to physicians, which is built on concepts such as PQRS/ MU and actually increases the current level of physician payment relative to the fee-for-service baseline in Column A. Care coordination payments allow flexibility for physicians to invest in clinical practices and infrastructure through practice transformations that maximizes their ability to treat patients in clinically appropriate ways while not reducing their income due to reductions in billable procedures that would otherwise occur. The investments in clinical practice can include infrastructure/HIT investments or in the case of a small practice, an investment in a shared clinical social worker with other small practices with similar patient populations.

Continuous quality improvement resulting from adherence to clinician-driven process and outcomes measures and the increased flexibility in income will push physicians to decrease and ultimately eliminate the waste and inefficiencies that plague the current system. Overall physician payments increases, offset by reductions in total Medicare spending and system wide savings. Care coordination payments that enhance total physician income tied to quality measures would encourage physicians to collaborate and focus on elements of patient care that reduce cost and inefficiencies across the spectrum. In oncology, for example, we do not specify which metrics should be used in which case but comment that target metrics would change over time and as efficiency is maximized in certain areas of care (i.e. ED visit rates) bonus payments would not cease because of lack of room for improvement. Measures would have to be selected with flexibility to accommodate various provider circumstances and changes in the long term improved performance in certain areas.

Physicians who enter into broader accountable care arrangements in which there is a shared savings component will likely find that this model could lead to an increased proportion of shared savings beyond the 2% threshold; therefore our described model would not be mutually exclusive to ACO arrangements, but could enhance them given the decreased reliance on fee-for-service reimbursement.

Tools that Enable Financial, Clinical and Performance Risk

As I have mentioned earlier, physicians will need tools to better understand risk- these are not lessons we had in medical school or in clinical training. Financial metrics (such as those available to ACOs), performance metrics in the form of actionable and regular data feeds as well as peer-led initiatives should be considered essential components of a payment reform package.

Conclusion

Our nation is in a sustained period of constrained finances and while the cost to repeal the SGR has been decreased to $138 billion, finding the offsets and mechanism to pay for such a solution will not be easy. But it is essential that this Committee seize the opportunity to finally dispel the notion that we allow for a system that rewards the balkanization of our patients through a payment mechanism which promotes volume over value. I commend Senators Baucus and Hatch in their recent call for proposals and specific suggestions from the clinical community and look forward to working with the Committee to identify a tangible path forward. Thank you for this opportunity and I look forward to your questions and comments.

[1] Report to the Congress: Medicare Payment Policy. Medicare Payment Advisory Commission. http://www.medpac.gov/documents/Mar12_EntireReport.pdf

[2] Frist W, Schroeder S, et al. Report of The National Commission on Physician Payment Reform. The National Commission on Physician Payment Reform. http://physicianpaymentcommission.org/wp-content/uploads/2013/03/physician_payment_report.pdf

[3] The RBRVS has three components. Physician work accounts for the time, skill, physical effort, mental judgment and stress involved in providing a service and is approximately 48 percent of the relative value unit. Practice expense refers to the direct costs incurred by the physician and includes the cost of maintaining an office, staff and supplies and accounts for 48 percent. Professional liability insurance takes into account the malpractice insurance essential for maintaining a practice and is 4 percent of the calculation. Overview of the RBRVS. American Medical Association. http://www.ama-assn.org/ama/pub/physician-resources/solutions-managing-your-practice/coding-billing-insurance/medicare/the-resource-based-relative-value-scale/overview-of-rbrvs.page

^{^[4]}The Centers for Medicare and Medicaid Services (CMS) uses Current Procedural Terminology (CPT) codes to determine services that it will reimburse for Medicare enrollees and each CPT code has an assigned relative value unit.

[5] Policy Options to Sustain Medicare for the Future. January 2013. Kaiser Family Foundation. http://kaiserfamilyfoundation.files.wordpress.com/2013/02/8402.pdf

[6] Statement of Jonathan Blum on Delivery System Reform: Progress Report from CMS Before the Senate Finance Committee. 28 February 2013. Full transcript available at: http://www.finance.senate.gov/imo/media/doc/CMS%20Delivery%20System%20Reform%20Testimony%202.28.13%20(J.%20Blum).pdf

[7] Doherty J, Tanamor M, Feigert J, et al: Oncologists’ Experience in Reporting Cancer Staging and Guideline Adherence: Lessons from the 2006 Medicare Oncology Demonstration. J Oncol Pract. 6(2): 56–59. 2010.

[8] Antos J, Baicker K, McClellan M, et al. Bending the Curve: Person-Centered Health Care Reform. April 2013. Full report here: http://www.brookings.edu/research/reports/2013/04/person-centered-health-care-reform

[9] Bowles E, Simpson A, et al. A Bipartisan Path Forward to Securing America’s Future. Moment of Truth Project. April 2013. Full report available here: http://www.momentoftruthproject.org/sites/default/files/Full%20Plan%20of%20Securing%20America's%20Future.pdf

[10] Daschle T, Domenici P, Frist W, Rivlin A, et al. A Bipartisan Rx for Patient-Centered Care and System-Wide Cost Containment. Bipartisan Policy Center. April 2013. Full report available here: http://bipartisanpolicy.org/sites/default/files/BPC%20Cost%20Containment%20Report.PDF

[11] Bindman A, Blum J, Kronick R. Medicare's Transitional Care Payment — A Step toward the Medical Home.N Engl J Med 2013; 368:692-694

Authors

Kavita Patel

Publication: U.S. Senate Committee on Finance

Sequestration and U.S. Defense Spending: Healing the Wounded Giant

Michael E. O'Hanlon — Mon, 13 May 2013 12:50:00 -0400

Sequestration cuts to the U.S. defense budget have started to affect military contracting and training. Such changes may be fine in the short term, but costly in ways beyond dollar figures in the long term. In his new book Healing the Wounded Giant, Senior Fellow Michael O’Hanlon focuses on the question of how much could be cut from the defense budget if done right. In this video Q&A, O'Hanlon provides examples of two areas where cuts can be made: ground forces and procurement of the F-35 combat jets. He also predicts what Secretary Hagel will propose for the defense budget and how it has the potential to help strike a fiscal deal.

Video

Sequestration and U.S. Defense Spending: Healing the Wounded Giant

Authors

Michael E. O'Hanlon

How to Cut the Pentagon Budget Better Than Sequestration Does

Michael E. O'Hanlon — Mon, 13 May 2013 15:16:00 -0400

A deeply flawed conventional wisdom is developing that despite warnings from former defense secretary Leon Panetta and others that the sky would fall if sequestration occurred, automatic spending cuts are not so bad after all. By this logic, not only should the cuts in defense as well as domestic “discretionary” accounts continue, but it would also be okay to implement automatic and across-the-board cuts in the next fiscal year, too, starting in October.

Yet the path we are on is far from acceptable.

While some of this year’s roughly $46 billion in defense cuts from sequestration reflect reasonable pruning, many of the reductions are not sustainable. Savings from policies such as dramatically reducing training for most military units this summer are not catastrophic if done once, but they cannot be continued without fundamentally jeopardizing military readiness.

Then there are savings that appear real but are not, such as deferred overhauls of major weaponry and deferred maintenance at bases. We can put off some repairs, but most will have to be done eventually — and may be more expensive if deferred. Then there are savings made on the backs of those with limited ability to make their voices heard: furloughs of civilian government employees top this list. In addition to being highly disruptive to government operations, these furloughs suggest that federal workers are second-class citizens (even as members of Congress can keep their entire paychecks for the year). Graduating students at public policy schools and other worthy individuals are being denied opportunities to work for the federal government due to hiring freezes.

Together, these temporary savings, faux savings and unfair savings represent at least half the $46 billion in cutbacks that the Defense Department is experiencing.

The military budget can be cut beyond the initial reductions from the 2011 Budget Control Act. But continued sequestration or reductions of comparable magnitude such as those resulting from the Simpson-Bowles proposals go too far. Such plans tend to make sweeping claims that, because defense spending remains reasonably high by historic and international standards, it can be cut much further. This reasoning is too vague for a world in which crises continue throughout the broader Middle East, U.S. forces remain engaged in Afghanistan, North Korea continues to nuclearize, and China continues its rise. It is time to get specific about further defense cuts.

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Authors

Michael E. O'Hanlon

Publication: The Washington Post

Bending the Cost Curve in Health Care the Right Way—Through Better, More Person-Centered Care

Mark B. McClellan — Thu, 09 May 2013 13:54:00 -0400

The United States spends about 17 percent of GDP annually on health care, a figure that is projected to grow substantially in the years ahead, despite the recent slowdown in health care spending growth. Rising costs mean insurance coverage keeps getting more difficult to afford. Those rising costs, plus the aging demographics of the nation, account for most of the spending side of our nation’s long-term fiscal challenges at both the federal and state level. They mean higher expenditures on Medicare and Medicaid, and the tax subsidies for employer-provided coverage and the new subsidies for private insurance in the individual marketplaces. At the same time, biomedical innovation using genomics, systems biology, information technology, and innovative and convenient ways to deliver care holds the potential for much more effective, personalized care – if we can afford to develop and use it. That’s not the case so far: patients often do not get treatments we know to be effective, innovative treatments and ways of delivering care are hindered by payments that are tied more to the site of services and what we’ve paid for in the past than the value of these treatments for particular patients, and we often pay more for complications than for the coordination of care and person-focused support that could help health care providers and patients get much better results for the money they spend. Something has to change, not just to make sure that healthcare costs can be contained, but also to make sure that the quality of health care gets better by providing better support for what patients need.

Our new report, “Person-Centered Health Care Reform: A Framework for Improving Care and Slowing Health Care Cost Growth” is a system-wide framework to address our cost problems by improving care – by leveraging the large and growing opportunities for more person-focused care. We have developed a set of proposals for saving $1 trillion over 20 years and improving care at the same time. Written in collaboration with leading experts from across the academic and political spectrum, our report proposes a framework for how to improve health care financing and regulation so that we can achieve better, higher-value care for each person. The report describes a specific series of steps to improvement the way care is delivered in each part of our health care system, including Medicare and Medicaid, the employer and individual insurance markets, antitrust enforcement and other regulatory reforms. Focusing on person-level quality of care as the fundamental strategy for addressing health care cost growth is in some ways new, but it builds on promising ideas and trends throughout our health care system. It is an idea whose time as come, and which we should start to adopt as our long-term approach to addressing the health care quality and cost problems now.

This report is the third in our “Bending the Curve” series. While building on the past reports, it also differs from our previous work in some very important ways. First, we have broadened our group of authors. Still with us is the core group of experts who participated in previous reports – people like Joe Antos from AEI, Mike Chernew and David Cutler from Harvard, Mark Pauly from University of Pennsylvania, Dana Goldman from USC, Steve Shortell from UC Berkeley, and others who have a tremendous amount of health policy expertise and experience. We’ve also benefitted from some new expert perspectives, including Kate Baicker from Harvard. And along with that expertise, our group now includes some other experts with extensive policy and political experience – including NGA director Dan Crippen, former Senate Majority Leader Tom Daschle, former CEA chair and Columbia dean Glenn Hubbard, former Utah Governor and former HHS Secretary Mike Leavitt, former HHS Secretary and University of Miami President Donna Shalala, and former budget directors Peter Orszag and Alice Rivlin. Together, this unique group sparked a new and welcome level of discussion about reform. In particular, as Mike Leavitt put it, if Republicans and Democrats were at the point where they had to reach an agreement on reforming care and addressing the challenge of rising costs, what would they agree on – and how could we make sure it would work?

As we worked to answer these very practical questions, we were forced to consider the full range of key technical and political issues involved in health reform. We reviewed the kinds of reforms that we have considered before to improve quality and lower costs, along with new evidence on how those reforms and others being implemented now are working (with different degrees of success) in the public and private sectors. We combined that with consideration of how best to move forward in a way that avoids the need for disruptive short-term payment cuts, provides the policy certainty needed to accelerate the trends toward the availability of much better, more personalized care, and addresses serious short-term weaknesses in in Medicare, including unstable physician payments and a lack of support for beneficiaries to save money when they get better care These considerations led to a plan that involves implementing reforms that are not disruptive in the short term while supporting better quality and coordination of care, leading to a large impact over time on supporting improvements in care that can sustain slower cost growth in the years ahead. Our conclusion is that enacting these health care reforms will not be easy, but we agree that this is the best path forward.

We do need to act now. If enacted, our framework is able to avoid the more aggressive steps that will almost certainly be needed in the years ahead to achieve more urgent reductions in federal spending, like cuts in payment rates as in sequestration, or restrictions in coverage for vulnerable populations and in access to new types of innovative care. And even more importantly, it will speed up the innovations in health care and biomedical technology that lead to better results and lower costs for patients. The bottom line is that the best way to control health care costs is to have health care policies now that do as much as possible to support better care for each patient.

We have a window of opportunity right now for implementing thoughtful health care financing and regulatory reforms that improve care today and promote much better, person-centered health care for the future. This is the best way for the country to achieve its overall deficit reduction targets. We should act now before the window closes, and we are left only with policy options that shift costs, reduce quality, and most importantly, diminish the ability of patients and health care providers to achieve better care and better health.

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Authors

Mark B. McClellan

A Bipartisan Case for Chained CPI

Martin Neil Baily and Glenn Hubbard — Thu, 09 May 2013 00:00:00 -0400

Over the last few days, politically driven critics have called on the president to abandon his support for changing the way the government indexes provisions in the budget to inflation by switching to “chained CPI.” Looking beyond politics, we’re here to say that these critics’ arguments are wrong on their merits.

As economists from opposite ends of the political spectrum, we would strongly urge the president and leaders in Congress to continue to support moving to chained CPI, which represents the most accurate available measure of inflation and cost-of-living increases. Switching to this more accurate measure of inflation represents the right technical, fiscal and retirement policy—and policymakers should not delay any further in making this improvement.

From a technical sense, the current CPI—or consumer price index—that is used to index many parts of the budget and tax code is widely understood to overstate inflation. This is because it fails to account for so-called “substitution bias,” in which consumers reallocate their purchases depending on the relative prices of similar goods. For example, if the price of apples goes up, consumers will buy more oranges. However, this behavior is not accounted for in standard CPI measurements.

The Bureau of Labor Statistics, which calculates the CPI, is very aware of this shortcoming, which is why it has developed and refined the chained CPI for more than a decade. The nonpartisan Congressional Budget Office states that the chained CPI “provides an unbiased estimate of changes in the cost of living from one month to the next.”

Some argue that using the chained CPI to index Social Security benefits is inappropriate because it does not reflect inflation for retirees, which critics suggest is higher than it is for working-age adults because of the elderly’s higher rate of spending on healthcare. However, the CBO has said that based on the available research, it is unclear whether the cost of living actually grows at a faster rate for the elderly than for younger people, and that the CPI-E —“E” for “experimental”—which was intended to provide a more accurate measure of inflation for seniors, has several methodological flaws that overstate inflation, including underestimating the rate of improvement in healthcare.

Beyond the technical case for the chained CPI, there is a strong fiscal case. Because current measures currently overstate inflation by about 0.25 percent per year, moving to a more accurate measure would result in real deficit reduction. Measuring inflation more accurately would generate savings from throughout government: about $390 billion in the first decade alone. Roughly one-third of those savings would come from slower growth in Social Security benefits, another third from revenue increases (as certain tax provisions such as the cutoff points of income tax brackets are indexed to inflation) and the remaining savings from a combination of other spending programs and lower interest payments on the debt. Given the very real need to begin to put our debt on a sustainable path, this would be a small but important contribution. The savings would be gradual, with only a small amount in the near term, thus protecting our fragile recovery from immediate austerity.

Finally, switching to chained CPI is the right retirement policy—or rather, a small piece of it. The Social Security program is on a path to exhaust its trust fund. Current projections indicate that this will occur in 2033, threatening cuts for all beneficiaries, including the very rich and the very poor, the very young and the very old, veterans, disabled workers and others. Improving the way we measure inflation won’t prevent the program’s looming insolvency, but it will eliminate a full fifth of the long-term funding gap.

To the extent that the overpayments under the current formula offset the shortcomings of our current retirement system for the lowest-income and most-elderly beneficiaries, a switch to chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations, rather than providing higher-than-justified inflation adjustments for all beneficiaries.

The federal government should not knowingly continue to measure inflation inaccurately, especially given the costs to the budget and to the Social Security program. Changes that cut Social Security benefits are a tough sell for Democrats, and changes that increase revenue are a tough sell for Republicans. But if they cannot even agree to a technical correction to those areas of the budget, how will they be able to make the hard choices to control our debt and reform our government over the long term?

Authors

Martin Neil Baily
Glenn Hubbard

Publication: The Hill

How to Avoid Another FAA Fiasco

Clifford Winston — Wed, 08 May 2013 00:00:00 -0400

In the aftermath of last month’s air traffic control fiasco, many people are probably wondering how there could be a budget pinch since travelers pay for air traffic control every time they buy an airline ticket. Current fees amount to a 7.5% ticket tax per flight and $3.90 per flight segment, which generates some $10 billion in annual revenues. Assuming that user fees fund the service, it made no sense that the sequester would affect air traffic control. But that assumption is wrong.

What Americans experienced in April was a classic example of how federal transportation deficits can reduce the nation’s productivity. Millions of man-hours were wasted on planes that were delayed, and hundreds of thousands of travelers postponed or canceled trips that generate work for people at their destinations. Unfortunately, the United States will experience more costly disruptions to its transportation system unless its deficits are curbed by efficient policy reforms or by privatization.

Travelers’ user fees do not bear a close relationship to an aircraft’s contribution to the cost of air traffic control. Why? Because there is no variation in price for airspace congestion that increases traffic control’s workload. The gap between passengers’ user fees and the cost of air traffic control is even greater for unscheduled general aviation (corporate jets and other private flights). General aviation causes unpredictable peaks in demand for airspace, and their preferred altitude approaches create additional complexity and cost for controllers. Overall, revenues from user fees do not cover costs, and the difference is covered by a subsidy from the general federal fund.

The Federal Aviation Administration has been unable to figure out the real costs of air traffic control services and thus has underpriced it since its founding in 1958 as the Federal Aviation Agency. The inadequacy of the ticket tax to cover costs over time has been compounded by the intensity of airline competition that has driven down real airline fares. The costs of air traffic control also have undoubtedly been inflated by the delays and cost overruns attributable to the FAA’s inability to adopt new technology to upgrade and modernize the system. The long-anticipated next generation satellite-based air traffic control system, known as NextGen, is billions over budget and years behind schedule. It may need to be renamed PastGen at the rate of its deployment.

FAA’s involvement with public airports is also characterized by pricing and cost inefficiencies. The charge that an aircraft pays public airports to land—they are not charged to take off—is based on weight and generally does not vary by time of day. But the time at which an airplane lands clearly affects airport congestion and an airport’s capacity to reduce delays. Building new runways has turned into multiyear projects with a price tag in the billions of dollars due to various regulations that can take decades to meet, especially Environmental Protection Agency environmental impact standards.

As part of a federal agency that depends on taxpayer funds to cover a deficit caused by its inefficiencies, air traffic control is at the mercy of Congress. So when the sequester hit, the FAA’s already troubled budget was cut—including funding for air traffic control.

To be sure, the 10% cut in air traffic control was politically efficient from the White House’s perspective, because it delayed more than one-third of all flights and drew the immediate attention of the public and Congress. But FAA’s pricing and operating inefficiencies led to the deficits that rendered air traffic control operations subject to manipulation.

Air traffic control is not an isolated case. Evidence in my forthcoming Journal of Economic Literature paper indicates that the nation’s highways, ports, urban bus and rail transit systems are also characterized by prices that are below costs and by inefficiencies that inflate operating costs, which have resulted in large and growing budget deficits that make those services vulnerable to politics. Cuts in their funding could adversely affect the nation’s productivity by, among other things, increasing commuting and shipping delays.

One way to insulate the nation’s transportation system from the threat of costly political shocks is to efficiently reform its pricing policies so services are financially supported by real, cost-based user charges. Alternatively, the U.S. could follow the lead of countries such as Canada, England, Australia and New Zealand and explore privatizing its transportation services.

All of America’s transportation modes and infrastructure services were initially developed and operated by the private sector. Over the past centuries, they were brought into the public sector by financial crises—some that the government arguably helped create by interfering in the market. Now that the government’s political crises are becoming ever more disruptive, it may be time to return the transportation system back to where it started.

Authors

Clifford Winston

Should the United States Have 2.2 Million More Jobs?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 03 May 2013 10:30:00 -0400

Employers added 165,000 jobs in April, according to the Bureau of Labor Statistics, following upwardly revised gains of 332,000 in February and 138,000 in March. The three-month average pace of job gains of 211,000 was slightly above the average pace of 173,000 jobs over the last twelve months. The unemployment rate edged down to 7.5 percent, and the fraction of the population reporting a job edged up. The unemployment rate has now declined 0.6 percentage point since last April, although much of this change can be attributed to declining rates of labor-market participation rather than increases in employment.

These numbers continue a pattern of steady growth in the labor market, but they also confirm that America’s recovery from the Great Recession is still very much a work in progress. The public sector, especially, has been a drag on the economy in recent months. While the private sector has added roughly 2.2 million jobs over the past year, employment in state, local, and federal governments has declined by 89,000, including significant losses to teachers and emergency responders. In this challenging economic climate, there is growing concern about how sequestration—the across-the-board budget cuts to discretionary spending that took effect on March 1—may negatively impact the recovery even more. Indeed, forecasters at the Congressional Budget Office project that the sequestration could reduce overall GDP growth in the United States by 0.6 percentage point and cost the economy 750,000 jobs by the end of 2013.

In this month’s employment analysis, The Hamilton Project examines the trajectory of public-sector employment since the onset of the Great Recession and contrasts this decline to periods of economic recovery after previous recessions. We find that the last several years’ policy choices are starkly different from those following previous recessions. Specifically, there are 2.2 million fewer jobs today, relative to what would have occurred with the policy response typical of the five preceding recessions. We also continue to explore the “jobs gap” and find that the country needs to add about 10.0 million jobs to return to pre-recession employment levels.

Government Employment Since the Recession

The downward trend in public-sector employment, described in a Hamilton Project report last summer, has continued into the opening months of 2013. While the private sector has added jobs to the economy in every month since March 2010, a total increase of approximately 6.8 million jobs, the public sector has contracted. To put this in perspective, federal, state, and local governments added jobs in only twelve of the thirty-eight months since March 2010 and have lost more than 625,000 jobs over this period.

The graph below shows the ratio of government employment to the civilian non-institutional population (every civilian in the United States sixteen and older who is not in prison or a live-in care facility) going back to 1980. For the twenty years prior to the Great Recession, this ratio stayed relatively constant, but since then it has dropped precipitously, except for the temporary uptick in 2010 when government employment rose to accommodate demand for U.S. Census workers.

This figure shows that the percentage of individuals working for federal, state, and local governments is at a decades-long low. In fact, the ratio of government employment to population has not been below 9 percent since the mid-1960s. The result, as detailed in last summer’s Hamilton Project report, is over 200,000 fewer teachers, 50,000 fewer policemen, and 6,000 fewer air-traffic controllers since 2009.

Government Policy: It's Different This Time

By cutting jobs during a period of already high unemployment, budget policies have contributed to the tepid pace of labor-market recovery and stand out as a departure from typical policy responses after recessions. The figure below shows the change in government employment forty-six months after every recession in the United States going back to 1970. (The double-dip recessions of 1980 and 1981, which ended in November 1982, are counted as a single event.) The bars are scaled by the population of the United States in June 2009 so that the magnitudes of employment changes are comparable.

The ongoing recovery, which began when the Great Recession ended in June 2009, dramatically deviates from the usual pattern. In the forty-six months following the end of the five other recent recessions, government employment increased by an average of 1.7 million. During the current recovery, however, government employment has decreased by more than 500,000. Put together, the policy differences have led to 2.2 million fewer jobs today. Such a large contraction of the public-sector during a recovery is unprecedented in recent American economic history.

The April Jobs Gap

As of April, our nation faces a jobs gap of 10.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Policymakers are currently faced with the unenviable task of simultaneously increasing employment and addressing America’s long-term budget deficits, but—at a time when the rate of government employment is at a historic low—sequestration threatens to further slow the growth of the public sector and lengthen the time it will take to close America’s jobs gap. Even when ignoring any indirect impacts, a typical policy response to the Great Recession would have led to a jobs gap that is 2.2 million jobs smaller than current gap of about 10.0 million and commensurately reduced the amount of time until the economy returns to full employment.

It is critical to achieve both employment gains and fiscal stability. The textbook approach is for government to continue to support the recovery and credibly enact deficit reduction that will not take hold until the employment crisis has been mitigated substantially. With respect to deficit reduction, The Hamilton Project recently released a collection of fifteen proposals that seek to reduce the deficit while improving efficiency and promoting broad-based economic growth. To see how these proposals could impact the long-term deficit, you can try our interactive budget calculator here. The Hamilton Project also continues to explore policies to boost employment, including a recent discussion paper on improving worker training programs.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Healing the Wounded Giant : Maintaining Military Preeminence while Cutting the Defense Budget

Michael E. O'Hanlon — Fri, 03 May 2013 00:00:00 -0400

Brookings Institution Press 2013 120pp.

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Sequestration and U.S. Defense Spending: Healing the Wounded Giant

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Sequestration and U.S. Defense Spending: Healing the Wounded Giant

Synopsis:

Barack Obama may have survived a tenuous economy and a bitter political campaign to secure another four-year term as president, but major partisan debate and division remain. As a Democratic White House and a (majority) Republican House of Representatives tangle perilously close to a “fiscal cliff,” vital priorities hang in the balance. In this, the newest entry in Brookings’ long line of defense budget analyses, Michael O’Hanlon considers the best balance between fiscal responsibility and national security in a period of continued economic stress.

O’Hanlon believes that savings in the range of what Obama proposed in 2012 are the right goal for defense cost reductions in the coming years. He explains why cuts of the magnitude required by sequestration, and those suggested by the Bowles-Simpson and the Rivlin-Domenici plans for greater fiscal health, are too deep on strategic grounds, particularly in light of America’s rebalancing toward Asia and ongoing turbulence in the Middle East.

Excerpt from the book:

"It is important not to latch onto some strategic fad to justify radical cuts in the U.S. Army or Marine Corps. For two decades, since Operation Desert Storm, some have favored “stand-off” warfare featuring long-range strikes from planes and ships as the American military’s main approach to future combat. But it is not possible to address many of the world’s key security challenges that way—including scenarios in places like Korea and South Asia, discussed further below, that could in fact imperil American security. In the 1990s, advocates of a so-called “military revolution” often argued for such an approach to war. But the subsequent decade proved that even with all the progress in sensors and munitions and other military capabilities, the United States still needed forces on the ground to deal with complex insurgencies and other threats."

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Read an op-ed on U.S. Defense Spending from Michael E. O'Hanlon, in The Washington Post »

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Michael E. O'Hanlon

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Fund - Don't Cut - U.S. Soft Power

Michael E. O'Hanlon and Gen. David Petraeus — Tue, 30 Apr 2013 00:00:00 -0400

The president’s budget proposal is now on the streets of Washington, D.C. Currently, it would protect funding for the State Department and the Agency for International Development and related activities from further cuts. The combined annual budget for development aid, security aid and diplomacy has averaged close to $60 billion over the past half decade. That is now slated to decline to about $50 billion, partly due to reduced war-related costs. But this amount could come under intense scrutiny. Moreover, if there is no grand bargain between the president and the Congress, sequestration could force reductions of a further 10 percent.

Such an outcome would be bad for our nation’s security. As each of us has testified on Capitol Hill in past years America’s ability to protect itself and advance its global interests often depends as much on its “softer” power as it does on our nation’s armed forces. For example, though Latin American countries were themselves primarily responsible for their progress, the headway many of them made in stabilizing their countries in recent years has been a big plus for American security, too — and American aid had a role in that progress. That is part of why we have supported a budget deal that would repeal sequestration and achieve most further deficit reduction through savings in entitlement spending with similar increases in revenue generation. Implicit in our approach was the thinking that lawmakers should avoid the temptation to gut foreign aid just because it generally lacks a strong constituency in the United States.

America’s spending on development and diplomacy and security aid — the so-called 150 account — has strengthened under Presidents George W. Bush and Barack Obama. That has been a positive and long overdue development. Funds for diplomacy and development were starved in much of the 1990s. Some of the reductions in that earlier period were warranted, admittedly, as aid then was not always as productive as it might have been.

Today, we are arguably doing a good deal better. Various forms of development assistance and aid have, in fact, produced impressive results on a host of fronts in recent years. The President’s Emergency Plan for AIDS Relief, a major initiative of Presidents Bush and Bill Clinton and now President Obama, has played a significant role in helping to turn the tide against the HIV/AIDS epidemic — even if more work remains to be done. Development assistance has also helped more than 600 million people move out of extreme poverty, achieving one of the United Nations Millennium Development Goals several years before the 2015 target date.

Moreover, as John Podesta has recently written, in this century alone, aid has helped reduce the global childhood mortality rate by one-third — impressive, even if only halfway toward the U.N. goal for 2015. The maternal mortality rate has been reduced by almost half, as well. And progress has been seen in other sectors — such as agriculture, energy and other realms, including many in the combat zones where each of us spent considerable time in the past decade.

America deserves considerable credit for much of this progress, as the U.S. is the world’s largest aid contributor, at roughly $30 billion in 2012. The United Kingdom, Germany, France and Japan round out the rest of the top five donors, each providing from $10 billion to $15 billion a year. But relative to our economy’s size, America does not do more than its fair share; it provides just 0.19 percent of gross domestic product in development aid, similar to Japan’s level but less than half that of the three big European donors listed above, and less than a third the U.N. goal of 0.7 percent of GDP. Private donations improve our net national position somewhat, but only to an extent. The State Department budget is still less than 5 percent of the military’s — and the number of Foreign Service officers worldwide is less than half the number of soldiers in a single Army division.

Given our military contributions to international stability and the global economic growth that results from that stability in various areas, American foreign aid doesn’t need to grow substantially. But it should not be cut further. Consider some of the ideas we might want to consider in the years ahead. These should not be unconditional offers of help but would require the right kind of cooperation from key nations abroad whose future stability is central to our own security:

A possible deal to help Egypt revive economic growth and service its debt after a two-year economic downturn following its Arab Spring; this would be contingent on President Mohamed Morsi respecting the Egyptian constitution and helping us with Middle East peace;

A possible proposal to help Pakistan reinvigorate its energy sector, which currently holds back the country’s growth and compromises its quality of life; this would be contingent on Pakistan contributing more to security in the region and to pursuing reforms that reduce disincentives for significant private initiatives in the energy arena;

A major push with other donors to help countries like the Democratic Republic of the Congo reform and strengthen their security forces;

Aid for transitional governments in Libya, Yemen and Mali, and perhaps someday Syria, to get on their feet so they can stabilize, develop security forces, police their own territories and prevent terrorists from establishing sanctuaries;

Ongoing help in future years for Afghanistan’s government provided that it takes steps toward better governance and a sound election in 2014.

This agenda need not break the bank; even taken together, development aid and assistance and these initiatives would not remotely add up to another Marshall Plan. But this discussion suggests that our security will be improved by sustaining foreign aid in the years ahead rather than by making further cuts.

Authors

Michael E. O'Hanlon
Gen. David Petraeus

Publication: POLITICO

Brookings: Topics - Fiscal Policy

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Michael E. O'Hanlon

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Fund - Don't Cut - U.S. Soft Power

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