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Diplomacy in Action

The Ongoing Budget Debate

Tim Fernholtz, economics correspondent, National Journall
Washington, DC
May 6, 2011

Date: 05/06/2011 Description: Tim Fernholtz, economics correspondent, National Journal, holds a roundtable discussion on the ongoing budget debate. - State Dept Image


2:00 P.M., EDT

MODERATOR: Good afternoon. Welcome to the Foreign Press Center. Today, we have with us Tim Fernholtz who is an economics correspondent with the National Journal, and he’s going to talk about the ongoing budget debate.


MR. FERNHOLTZ: Hey, everybody. It’s great to be here. I have been covering the (inaudible) budget debate at National Journal since January which has been fun because we’ve had, in the past six months, maybe the most sort of consequential and interesting and sort of no-holds-barred debate over the budget in the United States since we’ve had – maybe since the mid ‘90s.

Where we’re at right now, I guess is the United States – I guess just to step back, the U.S. budget is a very huge thing to cover because it touches on everything. I mean, anyone who’s covered politics knows really money is where the power is, and so there’s a lot of time and effort put into fighting over what we spend money on and what we don’t and also how we collect revenue. It’s also been in the last six months a really ideological battle. It hasn’t been as sort of interest-group-based as people might have expected. It’s been a lot about sort of fundamental principles for both the two major parties in the United States.

And so let me know, by the way – interrupt me at all if you have any questions.

So where we are now, the U.S. spends $3.7 trillion a year. We have a deficit this year of about $1.6 trillion that we’re borrowing to finance everything we couldn’t collect through taxes. Right now, we have a very large debt load in the United States. Relative historically, and just relative to anybody else, we have a debt to GDP ratio of 62 percent that’s projected to keep going up at the end of the decade, and a sort of conservation estimate it will be 76 percent of GDP, which is worrisome to the United States creditors and also it’s worrisome for a bunch of other reasons domestically, not the least of which is the idea that once you hit 90 percent debt-to-GDP ratio, you’re in sort of a disastrous insolvency area. So you can look ahead and see as that cost grows, that’s the sort of time period the United States has to sort of make some decisions about what to do about it. And that’s sort of where we’re at.

And the other side effect to all of this debt growth and the projected deficits going forward is that, one, there’s the idea that all of this debt growth is going to make it harder for private companies to borrow money, to invest, to expand, so it’s going to start crimping U.S. economic growth. And there’s also the idea that so much of the growth in our deficits is coming from some specific areas – health care, always. Everything is about health care in the budget world right now. That spending on those things, and particularly entitlement programs is going to crowd out spending on everything else from like discretionary programs, food stamps, whatever you can think of the government does, even the national security budget which has been sacrosanct forever. But if the pressure keeps coming from the mandatory side of the budget, it’s going to have to be cut.

So we’re at a point right now in the United States where policymakers see very serious consequences down the road and feel like they have to do something about it, but what should be done is sort of very hard for them to agree about.

And I thought I’d start in December of last year, December of 2010, with the Bowles-Simpson Fiscal Commission. I don’t know if you guys are familiar with. You might have heard it called the President’s Fiscal Commission. But at the beginning of 2010, when he released his budget for 2011, President Obama sort of punted a lot of sort of deficit reduction.

Oh, let me just take a step back to the other big factor driving – perhaps the biggest factor driving the budget problem right now, which is the recession of 2007 to 2009. Not only did the recession and the drop in economic growth hurt revenue collection, this year we have the lowest revenue as a percentage of GDP in the United States since 1952, since the Eisenhower years. So that sort of brought that side of the budget deficit down, but also spending increased not just the nearly $1 trillion fiscal stimulus of 2009; that was President Obama’s sort of first economic response to the recession, but also just the social safety net. More and more people, because of unemployment, were eligible for Medicaid, for food stamps, housing subsidies, and that impacted the deficits at the national level and at the state level severely.

So suddenly, you saw a ton more spending in response to the recession, a lot less revenue, and that’s why we’ve had trillion dollar deficits the last three years. That, sort of combined with the revenue losses from the Bush Administration’s tax cuts at the beginning of the 2000s and spending on the war, which was all borrowed, is sort of what got us to today from the early – yeah, from basically 2000 when we had budget surpluses being forecast forward for years after the Clinton Administration.

Now, those forecasts were a little rosy. The tech bubble that burst in the early 2000s sort of put the lie* to those policies, and it was sort of realized that those economic numbers were not credible, but at least at the time, there was some sense of balance budget. But in the last 10 years, you’ve seen big policy changes, and suddenly we have huge deficits and debt going forward.

And so that was a big issue for the political parties last year, the beginning of the year. Republicans traditionally, fiscal conservatives, deficit hawks really going after President Obama. President Obama more interested in his health care plan, which at the time was sort of on the rocks; financial reform; and a couple of other sort of big ticket policy proposals on his agenda, comes up with this Bowles-Simpson Fiscal Commission whose job is going to be to get outside of the system, outside of Congress and outside of the Executive Branch to come up with a bipartisan way to reduce the deficit. In some ways it was a punt. The President didn’t want to deal with fiscal policy that year, neither did Congress really. They didn’t pass a budget. This was a convenient way for everybody to sort of say the Bowles-Simpson Commission will do something good a year later.

And it’s also the recognition that there is a huge gulf between the parties that Congress has a lot of sort of political bickering and it’s nice to get people into a closed room and have them sort of talk over what actually could become a consensus before you sort of put it before the public and put it under the light of us and everyone who will criticize it.

And so the Bowles-Simpson Commission was made up of members of Congress from both parties, business leaders, labor leaders. It was chaired by a former Bill Clinton chief of staff, Erskine Bowles, and a former Republic senator from Wyoming, Alan Simpson. It sort of came together and came up with what is now the standard bipartisan plan. And if you ask any sort of moderate and even most experts of any stripe, you will hear the following thing about deficits and debt – there needs to be a grand bargain with everything on the table, revenues go up, spending goes down, there are reforms to entitlement programs, but everything is on the table.

And so that’s what the Bowles-Simpson Commission did. They came up with a plan that had caps on discretionary spending, they came up with federal pension reform, they endorsed a lot of the cost-saving reforms in the President’s budget but urged them to much further. They did a comprehensive tax reform, which I’ll sort of get to in a minute, that helped raised revenue to reduce the deficit. And they also proposed sort of an enforcement mechanism that if Congress didn’t meet those targets increasingly stringent cuts would be applied.

One of the reasons that comprehensive tax reform was in this bipartisan Bowles-Simpson plan is because, while there’s an agreement that you need to raise revenue among sort of experts that you can’t do balancing the budget on spending or taxes alone, one party in the United States – the Republicans – is almost universally and adamantly opposed to anything that raises revenue, and particularly raises tax rates. There’s an organization called Americans for Tax Reform, headed by a man named Grover Norquist. It’s been around since the late ‘80s. What it does is it enforces this sort of discipline on Republicans. It has a very tax pledge where candidates who say and they will not only not raise taxes, but they won’t close tax loopholes unless the rates are lowered across the board in response to that.

And so that sort of fiscal idea has a lot of adherence in the Republican Party. Once it was more based on the idea of sort of supply side economies, where cutting taxes would increase economic activities so much that you would see great increases in revenue. That idea sort of has not been born out, but now it’s more based on that idea that one, that there are economic incentives for economic activity, and keeping taxes low will help increase investment, entrepreneurship, things like that. And the other is the idea that the tax code is really insufficient right now. There’s a lot of loopholes. There’s $1 trillion every year go through tax loopholes that would have been collected as revenue, which is more money in a year than we spend on entitlement programs like Social Security and Medicare – is actually the largest sort of thing.

So back to the Bowles-Simpson Commission, what they realize is if Republicans don’t want to raise taxes you have to find a way around that, and so it’s the idea of comprehensive tax reform where you broaden the tax base by closing loopholes and bringing more people under the income tax rubric and then lower rates. So right now, the top rate is 35 – well, the top rate is 35 percent for the wealthiest people in the United States. Under sort of a couple different ideas where you would close these loopholes and lower rates, that could get down to 25 or 26 percent. But those people wouldn’t necessarily being paying fewer taxes, they would just be not losing so much revenue through a loophole.

So you would look at the home mortgage interest deduction right now. Anybody who gets a home loan in the United States can deduct the cost of paying interest on that. That’s one of the reasons people say that we had sort of the big housing bubbles – you have this incentive to get a house and lower your taxes that way. This would restrict it. You would restrict loopholes like that, so the overall rate would be lower. You’d be gaining more revenue, but it would also be more efficient. Your decision making wouldn’t be about whether or not you get a loophole; it would be about what you want to do that’s economically best for you, and then the taxes come in.

But the overriding point of that is that Republicans can go back to their constituents and say we lowered rates, but revenue stays the same or even increases under that rubric in the Bowles. The Simpson plan sort of split it half and half. They lowered rates, but they also took some of the money from the base broadening and put that into deficit reduction. That plan is sort of the standard baseline talking point plan in Washington right now, over how you sort of reduce the deficit. And there are a couple other plans that came out at the same time – we’ll set them aside so I’ll stop talking and we can get at the questions sooner.

Come January, though, you have a whole different scene in Washington. You have Republicans now control the House. You have more Republicans in the Senate. The President is widely regarded as being on his back foot because of the results of the November election. The sort of fiscal agenda at this point is three-fold.

The first thing that people on the budget side have to do is figure out spending for fiscal year 2011, which goes until September 30th of this year. This is the continuing resolution (inaudible), with the government shutdowns and all that. Because Congress couldn’t pass a budget last year, they also couldn’t pass appropriation bills.

Do you guys know sort of how the budget process works close enough? You get a budget every year that sort of authorizes how much you have to spend. Then the different appropriations committees, which have jurisdiction over different executive agencies, choose how much basically they get to spend specifically and actually allocate the money that they can spend. Normally, you do this in a series of 13 appropriation bills, but it’s hard to do that because Congress is lazy and slow and these things are difficult fights and it’s a huge hassle. Oftentimes, they do a big omnibus continuing resolution where they say we’ll just keep all the spending from last time and maybe tweak it a little bit.

They managed to agree on one in December of 2010 that went through – geez, I forget the first date, I guess probably March 14th. And so we spent this whole spring basically with the Democrats, Republicans in Congress, and the White House trying to figure out how much money to spend through this September. Talking only about the discretionary budget, it’s only 12 percent of the money the government spends in a year, largely driven by Republican campaign promises that they would cut -- $100 billion in spending the first year in office and reduced discretionary spending to 2008 levels. After all the deals were done, they were not able to do that. They cut spending about $350 million this year, 20 to 25 billion over the next 10 years. They advertise this as a $38.5 billion cut, but when you look at the numbers, that’s not actually true. The Congressional Budget Office has analyzed it and basically says a lot of what you cut wouldn’t have spent anyway because a lot of what you cut were rescissions – sort of saying money that was unspent, we’re taking it back to the Treasury and the remainder is just sort of spread over years.

So that has largely been accomplished. But some of the things that came out of that sort of debate is this idea that, one, discretionary spending isn’t enough. If you want to make a dent in the deficit problem, you need to go after the wider spectrum of the budget. And the other one is this sort of question about these 87 freshmen in the House of Representatives, these Republican freshmen, many of them are more conservative or conservative a different way than we’ve seen in recent years – Tea Party conservatives. They have bucked the House Leadership Speaker John Boehner and Majority Leader Eric Cantor on a few of these votes on fiscal stuff. They’re very adamant about cutting spending, adamant about not raising taxes. And most Republicans are, but they are more so and they’re much less inclined to sort of compromise or make a deal. They sort of see it as Washington as usual. They want to avoid it.

And there’s a sense that they feel unsatisfied with the CR debate’s resolution, that they didn’t cut enough, they didn’t make a real change. And so they’re expecting to get more and to fight harder on the next two, sort of, issues on the agenda.

The next one is the two budgets. The President released his budget in February after the State of the Union. It was pretty much a placeholder. The President was disinclined to sort of get out front with a lot of big policy ideas before the Republicans did, and so he got smacked around a lot for basically punting. His Social Security plan was just sort of a set of principles. In a lot of ways, it was identical to the previous budget with a debt-free – or sorry, with a spending freeze in discretionary spending where they would cut certain things to fund investments elsewhere, a tax reform plan. They decided not really to go after comprehensive, but to focus on corporate tax reform and basically just said it’s a good idea, but didn’t release any details, and just sort of doubled down on their healthcare plan. It was not a document that had a lot of change. It was not a document that had a lot of change. It was not a document that offered a lot to Republicans. People said he punted. He just sort of said we were going to be very fiscally sound.

Then the House Republicans released their budget. This was offered by Paul Ryan*, who I’m sure you’ve heard of. He’s the chairman of the House Budget Committee. He is the spokesperson of Republicans on fiscal issues. He has been doing this for years. He released plans in 2008 and 2010 called The Roadmap to Prosperity. These were very conservative plans that had sort of very radical ideas in sort of the American vein about what to do about entitlements, of privatizing Medicare, block-granting Medicaid, tax cuts sort of across the board and these older plans – dramatic spending cuts, but also cuts in defense budgets, things that conservatives are generally not known for doing. And he gained a lot of credibility in the policy community in Washington, one, for having sort of the guts to say, “I want to privatize and Medicare and make it defined benefit plan instead of a contribution plan – sorry, the other way around – defined contribution plan instead of a defined benefit plan,” which is a politically dangerous position as we’ve seen in the past few weeks, but also to spell out in a lot of detail about what he was going to do.

And so when the House Republicans released their budget a few months ago, it was primarily based on this. Ryan* authored it. It was very detailed by the nature of budget resolutions, it was very specific, and it passed the House with all but five Republicans voting for it. A few days before it passed the House on April 13th, President Obama came out and gave a big speech at George Washington University on fiscal issues, and this speech was notable this year for a lot of reasons. One, it showed how far Ryan* was able to push the debate that the President felt like he had to come out and sort of give a second take on this, and you could see him move his goals. Where his original budget had like a trillion dollars in deficit reduction, or so he said, over ten years, this sort of one he offered in the speech, this framework cuts the deficit four trillion over 12 years which is fudging, and of course the Republicans have complained about that, too. And so that’s sort of where we stand on the budget debate right now.

It doesn’t look like we’re going to get an actual congressional budget resolution agreed to by both houses this year, mainly because the deadline for that was April 15th and because the Senate has yet to produce any kind of budget resolution. Kent Conrad*, who is the chairman of the Budget Committee there says he will in the next week. He sort of revealed one to the Democrats on Tuesday, but it’s not public knowledge yet. But all of that is lining up for the big one which is the debt limit. It’s the third item on the fiscal agenda this year, and it’s what’s driving the discussion right now. The United States has this sort of arbitrary cap on how much the federal government is statutorily allowed to borrow. It’s a weird thing because it has to be raised periodically. But whether or not you raise or lower it has no effect on how much the government tries to spend.

So what’s happening right now is we’re having an argument over – the debt limit right now is (inaudible) at about I think 14 trillion, maybe. And they want to bump it up to keep borrowing. Treasury estimates we’re going to meet the debt limit in, I think, eleven days – May 16th I think is the day. And then after that they have about two months of wiggle room into early August whereby sort of juggling the U.S. accounts and sort of bringing money out of the sock drawer, we won’t default on our debt. But if the Congress does not eventually raise the debt limit, we will probably default. There are people who think we won’t. I’ll get into that in a second. But basically, mainstream economists, chairman of the federal reserve, business leaders are all of this position that if we default on our debt or even make it appear that we’re going to default on the United States’s debt, it would have tremendously bad consequences for the financial markets at home and abroad, interest rates would rise, borrowing would become very difficult, they would get sort of 2008-era scary.

And so we’re trying to get Congress to – the Administration is trying to get Congress to raise the debt limit. Everyone in Congress, at least in the leadership, says that they want to. Speaker John Boehner says he wants to, Senate majority leader says he wants to. The problem is that the Republicans – or not the problem – the wrinkle is the Republicans are saying they want to do this with a combination of spending cuts and budget enforcement mechanisms to go forward in order to get them to vote for this and basically in order to get the House to vote to pass it and the Senate not to filibuster it. So you have another standoff over spending. And this one is a lot harder to deal with than the government shutdown one because the consequences are more severe. But also, if you want to do a spending cut right now, no one in Congress really wants to reopen the 2011 appropriations bill that they just finished after a huge fight settling to cut money this year. But neither – at the same token, none of them are ready to start talking about cutting money for 2012 because the appropriators, the people in Congress who set those budgets are not even prepared to lay those bills out.

So it’s hard to cut discretionary spending. It’s hard to do any kind of like reform of entitlements programs in the next three to four weeks, and Congress is facing a situation where they have set up this standoff, but it’s going to be very hard for them to come up with anything that gives them an excuse to vote yes on the debt limit, particularly the Republicans. So now we have the first meeting yesterday of this commission led Vice President Joe Biden. It’s four Republicans – sorry, four Democrats, two Republicans from Congress, and Joe Biden, and the President’s sort of senior economic staff hashing out what they’re going to do about the debt limit. What’s interesting is that this week – in the last two days, actually, we’ve seen what looks like a move towards compromise.

On Tuesday – or no, yesterday morning – late last night, The Washington Post reported that Eric Cantor, the majority leader of the House of Representatives, who particularly unique in being the guy in Republican leadership who is supposed to represent movement conservatives. John Boehner is the establishment guy, moderate face for Republicans sort of. Eric Cantor has been rhetorically and positioned himself this way to be the hardcore conservative in the Republican leadership, told Loy Montgomery*, reporter for The Post that they don’t think their Medicare plan, which is the center of the Ryan budget and what has been so politically divisive these past few weeks is going to pass Congress, which anyone could have told you months and months ago because the President opposed it and the Senate opposes it. But by sort of admitting that, they opened up an opportunity for the conversation to move to areas where they could make a deal.

And so now the conversation is sort of dominated by two things – where can you get cuts or revenue that’s not tax increases – and this is like the near-term conversation. People are talking about agricultural subsidies, especially with food prices so high; sort of seems like no-brainer to cut those. People are talking about spectrum sales, selling portions of the wireless spectrum to private companies to develop technology around and maybe some sense that there will be reforms around the edges of Medicaid, which is the healthcare program for the poor and children.

And so that’s sort of the near-term agenda, but in the long-term, you still have Republicans who are very set on moving the entitlements programs to a system where the government’s contribution is limited to a certain amount as a way to control spending and keeping revenue at historically low levels. And the Democrats really want to (a) preserve the entitlements programs as they are, and to do that, they want to find all of these cost-saving reforms, which will not be easy to do, and it’s not even clear that it’s possible. I think experts think it is, but it will be a hard slog, and Democrats want to find a way to raise taxes, certainly on the wealthy, and I think if you talk to them privately, much more broadly.

Interestingly, both parties – there’s consensus that comprehensive tax reform needs to happen and that a grand budget deal needs to happen. But there’s also sort of a consensus that it won’t happen until 2013. And so the 2012 presidential election is really going to be the battleground where you see people going after each other and both parties trying to establish themselves on these fiscal issues just because this year is going to be so focused on the debt limit through August and just getting – once that’s over, you’ll have to do appropriations for the next fiscal year for 2012, which I’m telling you, set your government shutdown clocks again for September 30th because we’ll go through another set of government shutdowns and quick continuing resolutions and things like that. And then by 2012, the presidential race is going to dominate the narrative so much that you’ll see all of these fiscal issues sort of put on the back burner until the new President or reelected Barack Obama sort of takes it up.

QUESTION: What will dominate in 2012? I’m sorry –

MR. FERNHOLTZ: Fiscal issues – well, the presidential elections.

QUESTION: Okay. No, no, but what is going to – in terms of fiscal issues, what is going to be the main topics that –

MR. FERNHOLTZ: Well, you hear most of the Republican presidential candidates right now, the ones that have announced and the ones that haven’t have basically said that Paul Ryan’s* budget is sort of the GOP platform, like these are the ideas that they’re going to embrace about cutting the deficits, about the danger of the debt, about the need to really radically change the entitlement scheme from what it has been since the ‘60s to a much more limited system. And from the Democrats, really if you haven’t, go read the speech that Obama gave on April 13th because it really encapsulates, I think, what’s going to be his campaign rhetoric, which is that the vision that Republicans are laying out of the country’s entitlement programs is too austere, it’s not part of the American identity, and we can’t let children, seniors go without medical care. While at the same time, trying to position himself as the reasonable reformer who is going to find the savings in these programs in order to finance them and make them viable going forward.

And the interesting thing is from Paul Ryan* and Republicans, too, they really make this debate about like what the United States will be as a society and as a country. They say that without encouraging more entrepreneurial, more individualized sort of approach to life by getting rid of the sort of overbearing welfare state, we’re not going to be able to have any economic growth going forward. And that they say that there are reforms to Medicare and Medicare are necessary, because if you do nothing, or if you follow the President’s prescription, they’ll just be gone.

In the next 10 to 15 years, if nothing is done, we just won’t be able to afford those programs. You’ll either see radical cuts in benefits or whatever vision the two parties can come up with in the meantime.

QUESTION: And you think that debate is going to (inaudible)?

MR. FERNHOLTZ: No. That’s sort of the end of it. We can just sort of talking right now. It sort of brings us up to the day.

QUESTION: You think that this debate is going to last until 2013? Is that what you said?

MR. FERNHOLTZ: Oh, yeah. I do think so.

QUESTION: The entitlement reform thing?

MR. FERNHOLTZ: Basically the numbers – so here’s a few sort of things that could happen. But basically, where the political process is sort of intersecting with economic reality, there’s a sort of a consensus that something needs to be done to get at least the debt on a sustainable level in the next five to 10 years, and 10 years may be a long outset because if economic growth is not very good, if there’s another recession, oil prices keep going up, any number of sort of economic shocks could make those forecasts (inaudible). And of course, we could also just have a year of awesome growth all of a sudden. Someone invents the power widget and suddenly we have the most productive economy again and we take off and it’s not an issue anymore. But the likelihood is that decisions need to be made about the debt in the next five to 10 years or things are going to get really problematic.

But right now, we have a situation of divided government, where both the Democrats and the Republicans have power but very different ideas about what to do to solve this problem. In lieu of just buckling down and finding a consensus, it seems like they’re going to say, look, in 2012, we’re going to battle this out and whoever wins gets to put their policies in place essentially.

You saw the same thing in the ‘90s. In 1994, the Republicans took over the House of Representatives and the Senate when President Clinton was in his first term, and the first two years were mainly the same sort of government shutdown bickering. Although, I think it – I think it was actually less. I think actually it’s been managed much better this time. We haven’t really had sort of the crisis moment. We didn’t actually have a government shutdown except for maybe 45 minutes ambiguously.

And then 1996, you saw a presidential election that returned basically to a divided government office, and the lesson that a lot of these folks took from that is that, all right, it’s a divided government and we’re going to have to deal with this. And so you saw welfare reform in the ’97 budget deal that lead to sort of the surpluses of the late ‘90s and early 2000s. And so people are sort of seeing – and basically I’m talking to a lot of veterans of these Clinton debates right now who are now sort of lobbyists or senior advisors – to whoever – and that’s sort of the dynamic that they are seeing.

And so in 2012, there are a couple plausible scenarios. You could have a Republican sweep, and then the Republicans will set to work sort of implementing the Ryan care plan or whatever they want and they’ll have a good mandate for that. You could see Obama win. And I think even if Obama wins, you’ll see a divided Congress still. But I think then you would say Obama would have a mandate for his policies, the Republicans would say we got reelected there, and they would sort of have to do something about it. That’s conventional wisdom, and it obviously could be wrong in many ways and it’s really way early to sort of prophesize that.

But I would say it’s highly unlikely in my view that you’ll see a really comprehensive budget deal this year. I think we’re just running out of time. There’s too much else going on. And during the year of a presidential election, I think it’s hard to imagine that that would happen.

What they do want to accomplish this year is – the big news a few weeks ago was that Standard & Poor’s, the bond rating agency, said our long-range assessment of U.S. debt is downgraded. We don’t think it’s so great. And what’s interesting is they didn’t say it’s because of like the economic fundamentals of the United States. They said it’s because the political process is so broken that you can’t seem to solve these problems.

So the goal right now, and I think what you saw yesterday coming out of this meeting that Biden led and the comments that leaders on both parties have been making is put in place some kind of credible framework where we put a little down payment of deficit reduction now, you put in some kind of mechanism – whether it’s spending caps or like a debt fail-safe trigger is what the President wants, so if in 2014 the debt is still rising, you get automatics cuts, automatic tax increases. Republicans in the Senate want a balanced budget amendment that would constitutionally make it so you could only have a balanced budget, put in place some kind of mechanism that would convince everybody that yes, we’re serious about reducing our deficit and we will start doing it now, and we’ll actually do it once we sort of resolve this political clash we’re having.

So yeah, if anybody has other questions go for it.

MODERATOR: Any questions?

QUESTION: I have a question. So do you think the – you said you thought the Republicans would continue to advocate for less entitlement – or to kind of roll back Medicare and Medicaid, entitlement reform for 2012. But then recently what you said about Eric Cantor, how -- kind of indicated that there might be a compromise, they might not do the – for the Biden taskforce. And there’s some speculation that that was because during the two week Easter break they had met a lot of backlash from their constituents over reforming Medicare and Medicaid. So do you think that the Republicans will still continue to advocate for that, given the backlash? Or what do you think is going to --

MR. FERNHOLTZ: So, yeah, that’s basically – you did a good job summing up where we are, and it’s sort of hard to say at this point. From the rhetoric that I’m hearing right now, they’re not backing off the plan in principle. The way they’re framing is that President Obama has rejected our plan and he needs to bring his plan to the table; President Obama won’t accept our good ideas and it’s his fault. Now, President Obama retorts that well, I did a whole healthcare overhaul last year that did a lot with Medicare and now I’m going to do even more.

But I think Republicans realized two things. One is that – in the House at least – they all voted for it, they all voted yes, so it’s hard to get away from that. And two, I think they realize that regardless of what they do, the Democrats are going to come after them for it. The Democratic campaign committees have been already running ads. If you look, there’s a special election in upstate New York right now in the 26th district, where a Republican incumbent – where – sorry – I forget exactly the nature of it, but the Democratic challenger has been rising in the polls based on relentlessly going after this Medicare thing.

So I think the Democrats think they’re going to make the conversation about it, and I think the Republicans in general still think it’s the right policy choice and are just going to go for it. I don't think we’ve seen them sort of accept that it is like a – it’s too dangerous for them to touch yet. But it’s, as you say, very fluid. It just sort of came out yesterday that they sort of conceded the political realities that it’s not going to pass this year, and if in the next two weeks, months, you see people sort of backing off it even more, than maybe it won’t be about Medicare per say, it won’t be about that kind of reforms. It may be it will be about something else.

But I think right now it’s going to dominate the conversation. And you already have sort of, with the exception of Mitt Romney’s been sort of very quite on it, but the most plausible sort of Republican presidential candidate is like Tim Pawlenty of Minnesota, the governor there, Indiana Governor Mitch Daniels have sort of come out and said I think it’s good idea, too. So it’s going to be hard for them to walk away from that, and the Democrats aren’t going to let them because they feel like it’s very fertile ground for them. So that’s my take, but it’s real early for that sort of prognostication.

QUESTION: Yeah. I have a follow-up to that. Do you think that this – the Cantor backup on Medicare has anything to do with the town hall reaction for the last few weeks, or --

MR. FERNHOLTZ: I think it’s definitely part of it. It’s really hard to tell how that works, because everybody’s always returning to August of 2010, when you had sort of the Democrats going back to their districts during the healthcare debate and just keep your government hands off my Medicare crazy, crazy fights. It turned out to actually not have that much affect. The law actually passed, eventually.

And you didn’t even see, I think, that level of sort of craziness in the last two weeks, but I think you did see it. There were definitely town hall meetings that went nuts. People heard from their constituents, and you see like really conservative representatives like Michele Bachmann, who’s like the queen of Tea Party Republicans, coming out and saying look, I voted for it, but I’m putting an asterisk on it, I’m not sure, I’m worried about it. And if Michele Bachmann is sort of worried about it that’s a sign that I think conservative Republicans are feeling that pressure.

And you have to remember that in 2010, when the Republicans gained the majority in the House of Representatives, their campaign platform was repealing ObamaCare because it cut your Medicare. And they got a huge turnout among senior citizens, older white voters came out in droves and voted them into office. And now they’re saying we want to cut your Medicare. So it’s sort of a big reversal. And I mean the most interesting thing is that the Ryan budget actually keeps all of the Medicare cuts that Obama proposed, and all of the Republicans voted to keep those cuts that they ran against in 2010. They just repealed all of the coverage expansion, so you keep the Medicare cuts but get rid of the universal healthcare.

And so it’s an interesting debate, and the way Republicans are finessing it is they’re saying our Medicare reforms won’t affect people who are 55 and older. So they’re basically saying everybody who’s old and voting for us, great; everybody who’s younger, you’re going to get a new system. And I should do a little more justice to the Republican plan, because their Medicare plan basically says look, if we inject a lot more consumer choice and competition into the Medicare market by running it through these private companies that we subsidize, you’re going to see people making decisions on their own that lower costs and force insurers and physicians to compete.

There is a lot of research that suggests that healthcare does not work like that as a market, because people don’t often have a choice about what kind of healthcare, they don’t have a lot of information. I don't know what kind of surgery* I need, my doctor does. And there’s also the sense that most of the Medicare expense is in – I think 50 percent of Medicare’s expense is in 5 percent of the population that is just incredibly ill and requires a lot more care than anybody else. And so even if the 95 percent are making a lot of choices that lower their costs, that’s really sort of marginal compared to these people who are taking up a lot of it. And so there’s also there’s also the fact that – and this is what the Democrats are really focusing on – is that they have set the vouchers that seniors would receive to pay for their healthcare, they grow each year based on the growth of inflation, but medical cost growth is growing at much faster rates than inflation. So you would end up basically getting a reduced amount of government support as the years went on.

Now, the Republicans see that as sort of a cost-limiting factor, people are going to have to make better decisions, you’re just going to pump less money into the system, and they’re going to be forced to lower their prices. But a lot of people basically say look, you’re going to see seniors not having enough money, these are people on fixed incomes, they’re not in the working population, they can’t earn more money, they’re going to be relying more on their families, this is going to be an economic burden, they might fall through onto Medicaid, which is a much worse healthcare program that doesn’t do as good of a job, or you’re going to see a lot of senior poverty. Before Medicare existed, there was 35 percent senior poverty rate in the United States.

And that’s sort of what liberals are pointing to and saying, do you want to see – the Democratic Campaign Committee ran an ad a few weeks ago that was sort of tongue-in-cheek, and it had like seniors delivering newspapers and one like senior showing up as like a stripper as a party, like how are your parents going to earn their money to pay for their – rest of their healthcare. And while that was sort of a joke, I mean, the question is out there, and Republicans haven’t really sort of answered it yet.

And on the converse side, the Democrats plan, they’re Affordable Care Act – basically, it actually relies on sort of some similar market-based mechanisms, the exchanges they set up for working-age people are sort of similar to the Ryan plan’s Medicare exchanges, but those are people who are earning an income and they’re younger and healthier, so it’s sort of different and the subsidies are higher. But they’re really counting on this independent aim* and advisory board, independent of Congress, to sort of look at what medicine works and how much it costs and best practices from around the country and try and mandate on the broadest possible national market lower costs on different things in order to drive down the price of healthcare. It’s never been tried on that scale. There’s a lot of skepticism, certainly among conservatives, that it will work. A lot of healthcare economists basically say it’s our sort of only Medicare hope. The CBO does not really think it’s going to save that much money, they are skeptical of it.

But that’s sort of where a lot of sort of the liberal healthcare experts are looking as this board of experts that’s going to help – liberals looking to a board of experts (inaudible) – that are going to help cut down on the costs of healthcare across the country and try and move it from this fee-for-service model, where physicians get paid based on what kind of procedures and tests that they do to sort of a fee-for-results model, and the idea being to give physicians less incentive to sort of order tests or do whatever and more incentive to just solve the problem at a lower cost.

But this is not a debate that’s going away. Even the people who support ObamaCare and think it’s amazing think it needs to go much further to solve the problem, so it’s definitely going to be going back and forth for the next couple of years on it.

QUESTION: Question to corporate tax reform. Then considering that there is bipartisan agreement that we should* lower the corporate tax rate, how early do you see there actually being like a number proposed? Do you see that being maybe included in the President’s 2012 budget. Because Secretary Geithner was on like Meet the Press --

MR. FERNHOLTZ: It’s not in the 2012 budget, which made a lot of people unhappy. So Geithner has said, and there’s been a lot of reports, that there’s a plan in the works for corporate tax reform. It may be revealed in May or June. The assessment that I’m hearing from sort of K Street lobbyists is that it will only be revealed if the President feels like he is under political pressure to produce some kind of policy document in that area.

While there is a consensus that corporate tax reform needs to happen, there’s a consensus there for a lot of different reasons. So it’s still not clear how quickly it would move. It’s being driven by a lot of large multinational corporations who operate globally who see the United States’ corporate tax regime – I think we certainly statutorily the highest corporate tax rates in the G-8, and we’re the only G-8 country that has a global tax system. So if a major American company has subsidiaries abroad and they want to bring those profits back to the United States, we tax them, I think, at the difference between the U.S. level and the level of the country those operations were in.

Basically, it’s created this incentive where a lot of American companies funnel their profits, either keep them in the countries where their subsidiaries are or funnel them through very low tax countries like Ireland, for instance. So there’s hundreds of billions of dollars in corporate profit sort of sitting abroad, and so these multinational corporations are saying we’d really like you to get rid of this global tax regime so we can bring our money back tax-free, and it will be great for the U.S. economy to have that sort of investment and money come back. It probably would be great for the U.S. economy to have that happen.

The last time we sort of tried an experiment in that vein was the tax repatriation holiday in 2004. It did not have a huge economic benefit to the United States. They brought back money, but it mainly went to shareholders, dividend buyouts – I’m sorry – share buybacks and dividends to shareholders, so it wasn’t like a huge economic impact. But there are pretty credible arguments that it’s making it harder for U.S. companies to sort of make investment decisions based on business fundamentals rather than tax law. And there’s also the issue that the corporate tax has not been getting a lot of revenue in the past 10, 15 years, it’s been gathering less and less, it’s not very efficient because there’s a ton of loopholes in it but also because a lot more corporations are filing basically under the individual tax code as partnerships or S corporations. So like Facebook, which is a big – everybody knows what Facebook is – it’s not like a corporation. It’s actually an S corp. It’s filed as a partnership and they pay only capital gains taxes on their profits.

And so there’s a lot of different interests at stake here. Different sectors of the American economy are taxed differently. I know the corporate tax code and your energy tax credit is my like wasteful loophole. And there’s a lot of regional interests at play here, and there’s also companies that are just based in the United States and are domestic don’t see why these foreign – these big multinationals should have some kind of preference in the tax code. So there’s that in the mix, and there’s also the fact that people are concerned that the U.S. tax code really incentivizes debt financing, so you get more benefits for borrowing money than actually selling parts of your company, and they want to try and reverse that too.

And everybody agrees the way to do it is same* sort of base broadening, close the loopholes, lower the rates strategy. But the territorial versus global issue complicates that a lot. The fact that so many businesses are taxed from the individual tax code makes it difficult to do. And people in Congress basically say we want to do a comprehensive 1986 style tax reform, where everything’s on the table. The Administration is weary of going into that, because I think they’re worried that it’s going to become a tax cut fiesta, and you’re just going to see revenue drop even further.

And so the big question right now that’s sort of outstanding is will a lot of the major trade organizations and corporate groups who are driving this discussion sort of agree that it needs to be revenue neutral or revenue enhancing, and that’s, I think, what will make the Administration first step into play there. So that’s where it is. But again, I think that’s a 2013 project. But if you look at the 1986 example, the first tax bill that was introduced – that was the framework for what happened in ’86 came out in ’84, I think, so it takes time. That’s what people say.

MODERATOR: Any questions from New York?

MR. FERNHOLTZ: Anything else?

MODERATOR: All right. Thank you very much.

MR. FERNHOLTZ: Yeah, my pleasure, guys. I hope it’s –

MODERATOR: Oh, sorry.

MR. FERNHOLTZ: Oh, yeah. (Laughter.)

QUESTION: So how the current budget negotiation will affect 2012 budget – (inaudible) budget negotiation. According to recent U.S. medias, both party will reach agreement (inaudible) so like spending cap, like that, and set aside difficult issues, Medicare like that, until 2012 president election. So the – if reach some agreement current budget negotiation, the 2012 budget negotiation will be cooled down or the – some political game will going on?

MR. FERNHOLTZ: Well, here’s the thing. I mean, I think you’re – I think what you’re hearing is right, that right now they’re basically talking about sort of some kind of framework for agreement, how much money they want to take out of the deficit, but not necessarily how they want to do it, because that’s where the point of disagreement is. Their goal right now, I think, is really just to figure out how to get the debt limit raised, and I think there’s a sense that they don’t – it’s not yet clear I think to me or I think to the folks in the room whether that’s going to impact the 2012 spending discussion. It could be, it could be a part of that, or it could be an entirely separate agreement. It sort of depends on their timeline, so they have until early August to get this debt limit raised, and then they have until September 30th to get the spending levels set for 2012. It’s not clear yet, I think, how much the debt limit talks are going to affect the budget. You can see them coming out of that and saying look, we agreed on all the spending levels for 2012, here’s our deal, don’t worry about the CR*, it’s going to be fine. That would be a very ideal outcome.

Somehow I doubt that it will happen. I think more likely they’ll come out of the debt limit negotiations with like a target of spending maybe for going forward, some kind of enforcement mechanism, and maybe a few specific cuts. But you would still, I think, see some fights over spending on different things going into the sort 2012 appropriations debate. I think you’ll see a lot of the freshman in the House put those policy riders back on, where they would say no funding for NPR, no funding for Planned Parenthood, no funding for the healthcare plan, all of those things. I think those fights are going to continue past the debt limit and into the 2012 spending discussion. Yeah.

MODERATOR: All right. Thank you very much.

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