Committee for a Responsible Federal Budget Annual Conference

Fiscal Policy Experts Explore Policies, Politics Needed to Address Looming Crises

The Committee for a Responsible Federal Budget's 2007 board meeting, conference and dinner discussion were held March 13 at the Hyatt Regency on Capitol Hill. This event brought together many of the nation's foremost fiscal policy experts from both parties to discuss the budgetary challenges facing the nation, and the prospects for addressing them before they turn into full-blown crises.

A detailed recap of day's conversations -- including the afternoon round table, OMB Director Robert Portman's spech, and the subsequent dinner panel -- is provided below.

Budget Round Table

The meeting began with introductory remarks by President Maya MacGuineas, who briefly explained the mission of the Committee for a Responsible Federal Budget, and outlined three topics that she hoped the ensuing discussion would focus on: 1) Entitlement reform; 2) Potential areas of compromise on the budget, in particular those concerning Social Security and health care; and 3) Political strategies that can help "move the ball forward" towards greater fiscal responsibility in government.

Leon Panetta remarked that "we govern either by leadership or by crisis," a theme that he was to repeat throughout the board meeting. "At this point," he continued, "we know what the policy solutions on these issues need to be"; the real challenge is how to implement those solutions at a time of deep hostility and mistrust between the two political parties. In that respect, Maya's third question may be the most important of all.

Bill Frenzel introduced Congressman Frank Wolf (R-VA), who outlined for the Committee his SAFE legislation, co-sponsored with Senator Voinovich. Rep. Wolf's bill would create a bipartisan commission with 16 members, tasked with simplifying the budget process, boosting national savings, and solving the long-term entitlement shortfall. In his brief comments, Congressman Wolf emphasized that "everything would be on the table," including entitlements but also including defense spending. There would also be a series of public meetings held across the country in order to "educate the American people" about the looming fiscal crisis. Finally, he emphasized how important it is for the bill to accrue support from third-party groups like the CRFB, and asked influential figures in the budget world to write personal letters to Members of Congress urging the bill's adoption. And there is reason for optimism: "Sometimes in the House, the hardest issues can be the easiest ones to pass."
Congressman Wolf was followed by David Walker, Comptroller General of the GAO. Echoing Panetta, Walker stated that "the biggest deficit in America is the leadership deficit," and that the budget reform process has evolved to the point that the solutions are well-known, but the political will to implement them is lacking. As an example, he sketched out what he considered to be sensible, non-partisan solutions to the three major components of the budget deficit. Entitlements can be solved through discretionary spending caps, tax reform, base-broadening, and means-testing. The problems in Social Security can be remedied through supplemental accounts, the creation of a real, "untouchable" trust fund, and a higher retirement age. And health care can be solved through a guarantee of universal access, a federal health budget that would limit federal spending to some predetermined annual amount, a set of national practice guidelines that would standardize treatment and reduce the threat of litigation, and increased individual responsibility for health outcomes.
But whatever the reform, it will not pass unless it is bipartisan and broad-based. He agreed with Congressman Wolf and others that "a commission may be necessary" to pass these controversial measures without forcing Congress to pay a high political price. Following this discussion, he brought up three plans that in his opinion take steps in the right direction. The ultimate solution, he conjectured, may be a synthesis of all three: 1) The Wolf-Voinovich bill, which he praised for its willingness to put everything on the table; 2) the Conrad-Gregg bill, which requires a supermajority of legislators to vote for spending increases that aren't balanced by revenue increases; and 3) the Feinstein-Domenici plan, which would automatically force budget reconciliation, rather than keeping discretionary spending on "autopilot."
Following these two brief speeches, the floor was given to CBO director Peter Orszag, who made the following three points.
1) The long-term story here is not aging or entitlements, but health care costs that are spiraling out of control. "We do a disservice," he continued, "by uniting the health care issue with the aging issue," which represents a much less serious fiscal danger. Medicare, not Social Security, is what is driving up the costs of entitlements, and it is increasing so dramatically because of overall increases in the cost of health care, not because of our aging population.

2) Social Security is often spoken of as the easiest of the three major entitlement programs to fix, but this gets it backwards. When dealing with health care, there is an opportunity to eliminate waste and inefficiency without affecting health outcomes. On the other hand, Social Security is a cash-transfer program, so the only way to cut costs is to reduce benefits.

3) There is no crisis unique to Medicaid and Medicare. The problem is with systemic inefficiencies in the health care system, and so it follows that the solution is not to cut benefits, but to figure out a way to bring down costs.

Orszag had two suggestions as to how health care reform might be accomplished. First, the government should establish an entity that evaluates the effectiveness of new technologies and treatments, and uses that data to standardize treatment practices. Second, the increased use of information technology will reduce costly paperwork and will help doctors improve the quality of care through "rapid learning."
Jim Jones followed this discussion by introducing the topic of Wall Street and business buy-in for a program of fiscal responsibility: "how do you get the financial services industry to declare that we are in an economic crisis," in order to spur action from legislators? Bill Hoagland insisted that "there will come a time when Wall Street begins to focus on these issues," although it may be five years away. In response, Panetta asked whether the recent dip in the stock market contribute to a sense of urgency in the private sector to solve the budget deficit, to which Hoagland (who works in the private sector) answered that thusfar it has not. "Connecting the dots [from the stock market downturn] to the rest of the picture -- that's the step that hasn't been taken."
Stuart Butler, of the Heritage Foundation, hypothesized that "the politics of entitlement may be changing outside of Washington," citing as evidence his cross-country Fiscal Wake-Up Tour, where he met with a broad cross-section of Americans and talked to them about the coming entitlement crisis. He said that people respond with alarm when told of the large costs that will be borne by their grandchildren, and that many expressed a willingness to exchange a large but unsustainable benefits package for a less generous but more secure entitlement. "Maybe," he continued, "we should think of social insurance programs as actual insurance," meaning that programs like Social Security and Medicare should be shifted from universal entitlements to part of a comprehensive social safety net for the truly needy.
Eugene Steuerle was similarly engaged in the task of rethinking the very idea of long-term entitlements: "What is unique about the coming decades is that we have already committed these entitlement dollars" up front, tying our hands and reducing our flexibility to meet the fiscal challenges of the future. The solution should be a combination of triggers, automatic mechanisms, and limits on the growth of spending. And it will require a change in our mindset as well. Rather than making large budgetary commitments that extend decades into the future, we should determine the budget every two years, and carefully think about what programs to extend and what programs to eliminate with each new Congress. He also proposed two general principles that should govern all future decisions about the budget: 1) We should not have open-ended entitlement programs that grow faster than the economy; and 2) The full balance sheet for any new program should always be presented, so that the President is not able to manipulate the time frame to make a desired program appear cheaper than it will actually be.
Charlie Stenholm returned to Peter Orszag's idea of a best practices guideline for reducing waste in the health care industry, noting that it costs twice as much in Medicare dollars to treat a patient in Texas as it does to treat a patient in Iowa. He proposed a large-scale data mining project that would determine how much money is being wasted on frivolous or unnecessary procedures, in order to help states think about ways to contain growing health care costs. Orszag agreed wholeheartedly, stating that we "need more information than what the CMS [Centers for Medicaid and Medicare Services] can provide."

As Alice Rivlin pointed out, however, much of the relevant work has already been done by Dr. Jack Wennberg and his team at Dartmouth Medical School, who have published a series of studies on the variation in health care costs across the United States. Dr. Wennberg found that it costs 2.5 times as much to be treated in Miami as it does to be treated in Minneapolis, but that there is no appreciable difference in the quality of health outcomes between the two cities. The solution to rising health care costs, she stated, is a system that rewards doctors for following best practice guidelines and producing good outcomes. The current system incentivizes overtreatment by paying doctors more for every procedure they perform.

But Tim Penny evinced skepticism, contending that 1) even if it were possible to come to an agreement on best practices, getting buy-in from the medical community would be difficult; and 2) the states that spend more money on health care tend to be the largest states with the biggest Congressional delegations, presenting an intractable political problem to anyone who wants to scale back that funding.

Isabelle Sawhill returned to MacGuineas' original question (how can we move the ball forward politically?), stating that there were two effective strategies that would work well in tandem. First, budget wonks should take advantage of the short-term thinking that prevails in Congress. If the age of retirement is gradually raised, and phased in over a period of two decades, it will pass without controversy because sitting lawmakers won't have to pay a political price. Second, policy analysts should stop talking about the deficit in abstract terms ("the deficit this year is X trillion dollars"), and begin to talk about it as an obstacle to programs that people like. If people understand that the cost of a rising deficit is the diminution of their Social Security benefits, they will start to pressure Congress to rein in discretionary spending. Panetta agreed: "People will sign up for all kinds of reforms as long as it doesn't reduce their benefits."
MacGuineas weighed in with her own assessment of the politics of budget reform: "As much as I agree with the whole shared sacrifice, everything should be on the table approach, it won't compel the politicians to act." She wondered whether it would be possible to give Congress a sense of urgency without actually experiencing a financial crisis, suggesting the threat to sequester as a possibility, and asking what other rule changes might provide the kind of inexorable pressure that will be necessary to achieve concrete results.
For Stuart Butler, the answer is more education and a more transparent budget process. "Medicare Part D passed because most of the costs will be incurred outside of the standard ten-year timeframe." If the true costs of the program were emphasized to the public, it might not have passed with such popular support. Bob Bixby agreed: "if you raise the issue among key constituencies and in key locations," then you start to build pressure on Congress to take action.
Andrew Samwick, a professor at Dartmouth and a former economist on Bush's Council of Economic Advisers, shared some of his lessons from government service. First, a responsible fiscal policy will ensure either that the budget is balanced over the business cycle, or that it does not grow as a percentage of GDP. Until we can agree on that we won't make much progress. Entitlements, moreover, should be fully funded, and should never run a deficit. Second, "you can't pick and choose which fiscal dollars matter." The Bush administration, for instance, undermined its case for Social Security reform by signing off on the Medicare Part D entitlement. It is hard to warn about a coming entitlement crisis when you continue to pass new and expensive entitlements. Finally, "you can't be irresponsible with the general fund." If the administration cannot constrain discretionary spending, then it won't have the credibility it needs to cut down on entitlement spending.
William Niskanen, of the CATO Institute, shared four observations that ran the gamut of the issues under discussion. 1) Political solutions take time. It can be decades, sometimes the better part of a century, before a good idea is implemented. The important thing for policy experts is to develop the most convincing and cogent case possible, so that when the issue finally captures the popular imagination a solution is ready-to-hand. 2) If Congress wanted to address Social Security, as many in the room have already stated, the mechanics of a solution have already been worked out. 3) Health is certainly a big part of the coming entitlement crisis. The key is to focus on the supply side. This means taking on the AMA, state licensing boards, and other mechanisms that restrict the supply of medical services. If there were more doctors, and if doctors could travel freely from state to state, than the average cost of health care would be much lower. Consumers should also be allowed to purchase health care plans from out of state. 4) Niskanen reminded the group that a solution does not have to be everything they dream about. The perfect should not be the enemy of the good, and often piecemeal solutions will be all that is feasible.
But AARP Director David Certner insisted that the group return to Orszag's original insight. If what Orszag is saying is correct, then the real problem isn't with entitlements but with rising health care costs. As such, it is deceptive to lump Medicare and Medicaid (a serious problem) with Social Security (a minor problem) and then talk about a general "entitlement crisis" that is linked to changing demographics. In reality, the coming budget shortfalls have little to do with an aging population, and everything to do with health care costs that are growing without restraint. "Let's stop talking about the Social Security crisis and the entitlement crisis," he concluded, "and start talking about the economy as a whole." Douglas Holtz-Eakin also gave his support to this diagnosis.
Carol Cox Wait, former President of the CRFB, strongly disagreed. While agreeing that health care costs are growing at an unsustainable pace, she argued that entitlements also pose a serious danger to America's future, because these huge sums of already-committed dollars tie the hands of the next generation, and constrain its ability to adapt to new situations. For Cox Wait, some kind of means-testing for Social Security and Medicare will eventually be necessary.
Sue Tanaka also disputed the contention of Orszag and Certner. "I do think we have an entitlement problem," she stated. The budget is holistic, and even if some components of it are growing faster than others, it still makes sense to see where unnecessary spending can be cut out.
Chuck Blahous, who has served as a Social Security adviser to President Bush, added his own thoughts. "While the health care crisis may be larger," Social Security still presents a serious threat to the nation's fiscal solvency. As he pointed out, if we measure the Social Security shortfall using the same criteria the Greenspan Commission used in 1982, it is twice as big as it looks using the standard measurement. And the demographic facts speak for themselves: we will see a 24% increase in retirees in the coming decades, but only a 4% increase in workers.
For Stuart Butler, the attempt to separate health care costs from the more general entitlement crisis misunderstands the nature of the problem: "The cost of health care is whatever we are willing to spend on it, and if we refuse to set limits on federal health spending" then the system will have no incentive to lower costs. In other words, the key to reducing health care costs is to first reform Medicare and Medicaid, which are the biggest purchasers of health care services in the nation. "Medicare," he concluded, "is part of what drives up costs." Moreover, Butler detected a kind of infinitely regressive logic at work: "When you say you want to solve Social Security people say you have to solve entitlements as a whole; then when you want to solve entitlements as a whole, people say that you have to solve health care first. I fully expect that if we ever try to solve health care, people will tell us that we can't do that without first solving the problem of human evil."
Jumping on this insight, Niskanen proposed that all publicly-financed health care plans be changed from defined-benefit to defined-contribution. A premium subsidy could be offered to the indigent, calculated using a formula of income plus age.
Bill Hoagland agreed with David Walker's statement that "there is a crisis, and it is the crisis in health care," but took issue with his four suggested solutions. Universal access may be a noble goal, but it is certainly not a cost-saving measure; if anything, it is certain to raise costs substantially. Health Information Technology and electronic records that can be shared with other doctors is a great idea, but runs into serious and possibly insurmountable privacy concerns. Individual responsibility is too paternalistic -- "you can't legislate people's diets," and a federal budget for health care spending would just shift costs to the states and the private sector.
Jeffrey Liebman, a professor of public policy at the Kennedy School, doubted whether health care costs can be reduced as significantly as some (including Orszag) have suggested. "As we get richer, it's natural that we would spend a bigger fraction of our income on health care," especially since much of this spending is fueled by technological improvements and new medicines that simply cost more than the older ones. Liebman contended that spending as much as 25% of our GDP on health care may be optimal. "The problem is that this growth would enormously expand the size of government, so solving health care means solving taxes."
Richard Berner of Morgan Stanley stated that the business community is seriously exploring ways to constrain health care costs, and for the first time in several years may be "ready to get health care out of the workplace," even if it means higher taxes on corporate earnings or capital gains.
As MacGuineas pointed out, "the conversation seems to have become the Health Care Camp (address health care first) vs. the Budget Camp (address entitlements first). And I think that the budget is the more important of the two." She argued that: 1) regardless of what happens with health care, entitlements will consume an ever-growing share of the federal budget; and 2) most solutions to the health care problem would expand coverage, meaning that they would spend more money (at least in the short term) than they would save. That makes savings from Social Security all the more important.
Penny championed Paygo, arguing that it will be an effective tool for reining in Medicare spending. He also expressed support for the idea of a federal health care budget, stating that "there is a lot of money that can be saved in our health care system without scaling back coverage."
Sawhill sought to split the difference between the hawks urging restraint on health care costs, and those like Professor Liebman who argue that a wealthy society should spend an increasing percentage of its GDP on health care. Her proposal was to limit health care spending via a federal budget, and fund all health care spending through a dedicated tax such as a VAT. That way, if the public decides that it wants more federal dollars allocated it could lobby for higher taxes, making the cost of health care fully transparent. But Cox Waite was skeptical. Because health care entitlements are popular, she argued, the VAT would be voted higher and higher, but because taxes are unpopular, the higher VAT would be offset by other tax cuts, taking money away from general revenues. The result would be a budget that is more and more devoted to passing out entitlements, and less and less devoted to providing the kinds of services that most Americans need.
As the meeting drew to a close, both Panetta and Holtz-Eakin wondered how real budget reform could be accomplished: "Does the President go to Congress? Do you appoint a Commission?" Butler voiced his support for a Commission, but warned that it would have to go outside of Washington to build consensus. A plan that is developed behind closed doors will be a non-starter.
Penny offered three pragmatic suggestions: 1) Constant meetings with Presidential aspirants and their staffers, in order to make clear the importance of the budget as a national issue; 2) A scorecard for candidates, that would help the American public understand where each one stands on fiscal issues; and 3) A series of primary debates, sponsored by organizations like the CRFB, in order to get candidates committed to the idea of a responsible federal budget. To this list, Walker added that he has explored leveraging the internet to build awareness, and going to Wall Street to ask for the support of the financial services sector.
In closing, Niskanen urged the group to start talking about intergenerational programs like Medicare and Social Security as "inherently immoral," on the premise that they take money away from future generations to pay for privileges and benefits for the current generation. Samwick provided another perspective on this question, noting that these entitlements go disproportionately to the poor and vulnerable, while because of progressive taxation, those who pay for them are disproportionately well-off. "If we don't solve Social Security as an intergenerational issue," he warned, "it may return as a class issue."
Notes on the Speech of the Honorable Robert Portman, Director of the OMB