The last time we visited Obama’s budget, we were about to look at the proposals in the budget that would provide spending cuts and/or revenue increases in order to cut the deficit. We are picking up where we left off by filling in the blanks of the proposals outlined in the last blog.

Proposals include:

Find Savings in the Agricultural Sector.

“The Administration remains committed to a strong safety net for farmers, one that protects them from revenue losses that re­sult from low yields or price declines, and strong crop insurance programs. But there are programs and places where current support is unnecessary or too generous. To reduce the deficit, the Admin­istration proposes to eliminate or reduce those programs, while strengthening the safety net for those that need it most.”

The proposal would eliminate direct payments to farmers, for a savings of $23-billion over 10 years.

The proposal would reduce crop insurance subsidies: “… the program continues to be highly subsidized and costs the Government ap­proximately $10 billion a year to run: $3 billion per year for the private insurance companies to administer and underwrite the program and $7 billion per year in premium subsidy to the farmers. “ Reducing this subsidy, capping insurance administrative costs, and changing the premiums for catastrophic coverage policies would save $4.3 billion over 10 years.

“In addition, the Administration is proposing to reduce producers’ premium subsidy by 2 basis points for all but catastrophic crop in­surance … expected to save $3.3 billion over 10 years.”

“… the Administration proposes to reduce conservation funding by $1.8 billion over 10 years by better targeting conserva­tion funding to the most cost-effective and environmentally-beneficial programs and practices.“

 

Better Align Federal Worker and Military Retirement Programs.

$12.1 billion can be saved by increasing deductibles, capping benefits, and increasing enrollment fees for retirees.

“To recommend improve­ments to the military retirement system, the Administration is proposing to establish a Military Retirement Modernization Com­mission. Under the proposal, the President would appoint the Commissioners; DOD would transmit to the Commission initial recommendations to change the military re­tirement system; the Commission would hold hearings, make final recommendations, and draft legislation to implement its recommen­dations …“

“The Administration believes that any major military retirement reforms should include grandfathering provisions for cur­rent retirees and those currently serving in the military.“

Reform the Aviation Passenger Security Fee to Reflect the Costs of Aviation Secu­rity More Accurately.

“The Administration proposes to replace the current “per-enplanement” fee structure with a “per one-way trip” fee structure … remove the current statu­tory fee limit and replace it with a … minimum of $5.00 … annual incremental in­creases of 50 cents from 2014 to 2018, … allow the Secretary of Homeland Security to adjust the fee … through regulation when necessary. The proposed fee would collect an estimated $9 billion in additional fee revenue over five years, and $25.5 billion over 10 years. Of this amount, $18 billion will be deposited into the General Fund for debt reduction.”

Share Payments More Equitably for Air Traffic Services.

“To reduce the deficit and more eq­uitably share the cost of air traffic services across the aviation user community, the Administration proposes to create a $100 per flight fee, payable to the Federal Aviation Administration, by aviation operators who fly in controlled airspace.”

There are some exemptions to this fee, including exemptions for military aircraft.

This fee would generate $7.4 billion over 10 years.

Provide Postal Service Financial Relief and Undertake Reform.

“the President is proposing a … reform package that would: 1) re­structure Retiree Health Benefit pre-funding … 2) provide USPS with a refund over two years of the $10.9 billion positive credit balance … 3) … reduce delivery from six days to five days starting in 2013; 4) allow USPS to increase col­laboration with State and local governments; and 5) … better align the costs of postage with the costs of mail delivery … and … increase in postage rates …”

“…would produce savings of $25 billion over 11 years.”

Strengthen the Safety Net for Workers’ Retirement Benefits.

The Pension Benefit Guaranty Corporation “is responsible for paying current and future retirement benefits to more than 1.5 million workers and retirees. PBGC re­ceives no taxpayer financing and relies primarily on premiums paid by insured plans. PBGC pre­miums are currently much lower than what a pri­vate financial institution would charge for insur­ing the same risk and are insufficient for PBGC to meet its long-term obligations. As of the end of September 2011, PBGC faced a $26 billion deficit. The Administration proposes to encourage com­panies to fully fund their pension benefits and ensure PBGC’s continued financial soundness by giving the PBGC Board the authority to ad­just premiums …”

“This proposal … the single-employer flat-rate premium that will raise approximately $4 billion by 2022; …  the single-employer variable-rate pre­mium to raise $12 billion by 2022. This proposal would save $16 billion over the next decade.”

Restore the Solvency and Financial Integ­rity of the Unemployment Insurance System by Helping Employers Now and Restoring State Fiscal Responsibility.

“Currently, 28 States owe more than $37 billion to the Feder­al UI trust fund. As a result, employers … now facing automatic Federal tax in­creases, …States have little prospect of paying these loans back ... State UI programs … improper pay­ment rates—12 percent in fiscal year 2011. The Administration proposes to put the UI system back on the path to solvency and financial integ­rity by providing immediate relief to employers to encourage job creation now, reestablishing State fiscal responsibility going forward, and working closely with States to eliminate improper pay­ments.”

“…employers in indebted States would receive tax relief for two years.”

“the proposal would also raise the minimum level of wages subject to unemployment taxes”

Reform Abandoned Mine Lands (AML) Payments.

“The coal industry … is cur­rently held responsible for cleaning up abandoned coal mines by paying a fee that finances grants to States and Tribes for reclamation”

“… regular reclamation funds are not … targeted at the highest priority abandoned mine lands, … amounts are distributed by a production-based formula …funding goes to the States with the most coal production, not the greatest reclamation needs …”

“…the Administration proposes to terminate unrestricted payments [that] do not contribute to reclaiming abandoned coal mines…”

“Through a competitive grant program, a new AML Advisory Council will review and rank the abandoned mine lands sites, so that the Depart­ment of the Interior, in coordination with States and Tribes, can distribute grants to reclaim the highest priority coal sites each year.”

“The Administration proposes to create a parallel AML program for abandoned hardrock sites. … hardrock reclamation would be financed by a new AML fee on the production of hardrock miner­als on both public and private lands.”

“…this proposal will save $1.6 billion over the next 10 years.”

Provide a Better Return to Taxpayers from Mineral Development.

“The public received about $10 billion in 2011 from fees, royalties, and other payments related to oil, gas, coal, and other mineral development on Federal lands and wa­ters.”

“… taxpayers could earn a better return through more rigorous oversight and policy changes…”

“The Budget proposes …  charging a royalty on … hardrock minerals (such as silver, gold, and copper); ex­tending net receipt sharing … charging user fees to oil companies for processing oil and gas drilling permits and in­specting operations on Federal lands and waters… establishing fees for new non-producing oil and gas leases (both onshore and offshore) …  making administrative changes to Federal oil and gas royalties[i.e.] adjusting royalty rates and terminating the royalty-in-kind program. … these changes are expected to generate approximately $3 billion in savings over 10 years.”

Health Savings

“Health care comprises one-quarter of non-in­terest Federal spending, and is the major driver of future deficit growth.

“Affordable Care Act (ACA) which, ac­cording to the Congressional Budget Office’s lat­est analysis, will reduce the deficit by more than $1 trillion over the next two decades.”

And then there is this warning to the GOP: “Repealing or failing to implement health care reform would return the Nation to a path of rapidly increasing health care costs, and add tril­lions to deficits over the long run. The President is putting forward $364 billion in health savings that build on the ACA to strengthen Medicare, Medicaid, and other health programs by reducing wasteful spending and erroneous payments, and supporting reforms that boost the quality of care.”

“… Medicare …reimburses 70 percent of bad debts resulting from beneficiaries’ non-payment of de­ductibles and copayments …”

“the Budget proposes … reducing bad debt payments to 25 percent … over three years starting in 2013. This proposal will save approximately $36 billion over 10 years.”

“This proposal would reduce the IME adjustment by 10 percent beginning in 2014, and save approximately $10 billion over 10 years.” The IME adjustment evidently reimburses teaching hospitals for inefficiencies caused by interns.

“payment system is better targeted [in rural hospitals] will save approximately $2 billion over 10 years.”

“… the Administration supports policies that will save approximately $63 billion over 10 years … These include adjust­ing payment updates for certain post-acute care providers, equalizing payments for certain condi­tions commonly treated in IRFs and SNFs; en­couraging appropriate use of inpatient rehabili­tation hospitals; and adjusting SNF payments to reduce unnecessary hospital readmissions.”

By allowing Medicare to negotiate price with drug manufacturers “This proposal is estimated to save $156 billion over 10 years.”

“Beginning in 2017, the Administra­tion proposes to increase income-related premi­ums under Medicare Parts B and D by 15 percent”

“… the Administra­tion proposes … a $25 increase in the Part B deductible in 2017, 2019, and 2021 for new ben­eficiaries … save approximately $2 billion over 10 years.”

“This proposal would cre­ate a home health copayment of $100 per home health episode… This proposal will save approximately $350 million over 10 years.”

“… the Administration proposes a Part B premium surcharge equivalent to about 15 percent of the average Medigap premium (or about 30 percent of the Part B premium) for new beneficiaries that purchase Medigap policies with particularly low cost-sharing requirements, starting in 2017. Cur­rent beneficiaries and near-retirees would not be subject to the surcharge. This proposal will save approximately $2.5 billion over 10 years.”

 Fraud prevention is expected to  save nearly $5 billion over the next 10 years.

By changing how states are allowed to tax health care providers, this proposal is projected to save $21.8 billion over 10 years.

By changing how states are reimbursed for Medicare, Medicaid and CHIP programs this proposal is projected to save $17.9 billion over 10 years.

“The Medicare program … through the DME Competitive Bidding Program… is expected to save the Medicare program more than $25 bil­lion and Medicare beneficiaries approximately $17 billion over 10 years.”

“The Admin­istration proposes to increase the availability of generic drugs and biologics by authorizing the Federal Trade Commission to stop companies from entering into anti-competitive deals, known also as “pay for delay” agreements, intended to block consumer access to safe and effective ge­nerics.”

“… greater ac­cess to lower-cost generics and will generate $11 billion over 10 years in savings to Federal health programs including Medicare and Medicaid.”

“Beginning in 2013, this proposal would award brand biologic manufacturers seven years of exclusivity rather than 12 years … prohibit additional periods of ex­clusivity … due to minor changes in product formulations… The proposal will result in $4 billion in savings over 10 years to Federal health programs including Medicare and Medicaid.”

The last section in this part of the budget proposal deals with tax reform. We’ll save that for another day.

FYI, this blog reviewed pages 13 to 37 of the budget document.

 Homework

White House Budget

To hear Republicans talk, the Obama budget does nothing to cut waste or reduce the deficit, so I thought we’d look at the section titled “CUTTING WASTE, REDUCING THE DEFICIT, AND ASKING ALL TO PAY THEIR FAIR SHARE” today.

Not surprising, the opening paragraph is a campaign focused diatribe: “To construct an economy that is built to last and creates good jobs that pay well for genera­tions to come, it will take making investments in education, innovation, and infrastructure so that our entrepreneurs, scientists, and workers have the tools they need to succeed. To pay for those investments and free our economy from the bur­den of historic deficits and growing debt, we need to change how Washington does business, and restore responsibility for what we spend and ac­countability for how we spend it. For too long, Washington has spent money without identify­ing a way to pay for it. Indeed, the cost of the 2001 and 2003 tax cuts as well as the Medicare prescription drug benefit passed in the last ad­ministration contributed significantly to turning the surpluses of the 1990s into the record defi­cits of the following decade. The financial crisis and recession exacerbated our fiscal situation as revenue decreased and automatic Government outlays increased to counter the recession and cushion its impact. The result was that, upon taking office, the President faced an annual defi­cit of $1.3 trillion, or 9.2 percent of GDP, and a 10-year deficit of more than $8 trillion—and this figure grew even larger as the depth of the re­cession became clear. While the need to jump-start our economy through the Recovery Act and other measures added to the short-term deficit, these critical measures were temporary and did not have significant deficit effects beyond the recession.”

The budget document, in a section titled “Making Tough Choices to Restore Fiscal Discipline” lays out several proposals and guiding principles:

Reduce Discretionary Spending:  Obama expresses his intent to work within the guidelines contained within the bill passed in 2012 that defined budget cuts in order to get a cap to the debt limit passed.

Cut or Consolidate Programs: “In each of his first two bud­gets, the President put forward more than 120 terminations, reductions, and savings totaling approximately $20 billion in each year. In 2012, the Budget proposed more than 200 terminations, reductions, and savings, totaling approximately $30 billion in savings. This year, the Administra­tion is proposing cuts and consolidations across the Government in order to live within the caps established by the BCA. To achieve these savings, we went through the Budget carefully to identify programs that were either ineffective, duplica­tive, or outdated and thus needed to be cut or consolidated”

Implement the New Defense Strategy: “The overall defense budget, including overseas contingency operations reductions, will be down by 5 percent from the 2012 enacted level.”

Establish a Budget Cap on Overseas Con­tingency Operations (OCO) Spending: “…the BCA did not limit OCO funding. Leaving OCO funding un­constrained could allow future Administrations and Congresses to use it as a convenient vehicle to evade the fiscal discipline that the BCA caps require elsewhere in the Budget. …From 2013 through 2021, the Budget limits OCO appropriations to $450 billion.”

Require the Financial Services Industry to Pay Back Taxpayers: The Administration is calling for a Financial Crisis Responsibility Fee on the largest financial institutions to fully com­pensate taxpayers for the extraordinary support they provided to the financial sector, while dis­couraging excessive risk-taking. …The fee will be restricted to financial firms with assets over $50 billion. The Administration’s Financial Crisis Responsibility Fee meets the statutory requirement contained in the TARP legislation that requires the President to propose a way for the financial sector to pay back taxpayers so that not one penny of the Government’s TARP-related debt is passed on to the next generation. …This fee will reduce the deficit by $61 billion over the first 10 years.”

Restrain Increases in Federal Civilian Worker Pay: On his first day in office, the President froze salaries for all senior political appointees at the White House. In 2010, the President eliminated bonuses for all po­litical appointees across the Administration and last year cut back on performance awards to all other employees. Starting in 2011, the President has proposed and the Congress enacted a two-year pay freeze for all civilian Federal workers, which has saved approximately $3 billion and is projected to save more than $60 billion over the next 10 years.”

Reform Federal Civilian Worker Retire­ment: “In order to make reasonable changes to Federal worker retirement, while maintaining the ability to attract and retain highly qualified individuals, the Administration proposes to in­crease the employee contribution toward accru­ing retirement costs by 1.2 percent over three years beginning in 2013.”

Modernize Federal Personnel Policies: “the Administration recommends that the Congress establish a Commission on Federal Public Ser­vice Reform comprised of Members of Congress, representatives from the President’s Labor-Man­agement Council, members of the private sector, and academic experts. The Commission would de­velop recommendations on reforms to modernize Federal personnel policies and practices within fiscal constraints. Such reforms could include but would not be limited to compensation, staff devel­opment and mobility, and personnel performance and motivation.”

We’ll review the balance of this section in our next budget blog.  As a preview of coming attractions, the next section in the document is titled “Taking Responsibility for Long-TermChallenges to Our Fiscal Health” “…the President put forward hundreds of billions of dollars in savings over 10 years in mandatory programs as well as guidelines to generate $1.5 trillion in revenue from tax reform. … the President’s Budget includes $517 billion in mandatory savings over the next 10 years and a plan for tax reform to raise more than $1.5 trillion.” Proposals include:

Find Savings in the Agricultural Sector.

Better Align Federal Worker and Military Retirement Programs.

Reform the Aviation Passenger Security Fee to Reflect the Costs of Aviation Secu­rity More Accurately.

Share Payments More Equitably for Air Traffic Services.

Provide Postal Service Financial Relief and Undertake Reform.

Strengthen the Safety Net for Workers’ Retirement Benefits.

Restore the Solvency and Financial Integ­rity of the Unemployment Insurance System by Helping Employers Now and Restoring State Fiscal Responsibility.

Reform Abandoned Mine Lands (AML) Payments.

Provide a Better Return to Taxpayers from Mineral Development.

 Homework:

White House Budget

I’m very worried about my country. The two-political-party system is serving us badly. Don’t get me wrong, I’m a died-in-the-wool Democrat, but what I see happening is ideology trumping common sense.

Yesterday Boehner walked away from negotiations that were scheduled to continue at the White House today. Both Boehner and Obama had been working to find $4-trillion to be applied to reducing U.S. debt over the next 10 years. Both Democrats and Republicans are on board with reducing national debt over the long term, but the voter has little understanding of how U.S. debt actually works.

Most economists are saying that the level of debt as a percentage of GDP is unsustainable in the long term. Most are also saying that during periods of high unemployment, government needs to spend money in order to get people back to work. If consumers aren’t spending because they don’t have an income, the economy needs government spending. We need economic stimulus to get back to “full employment”—which used to be defined as 4% unemployment. We’ve been hovering around 9% unemployment for the past two years.

Then there is the structure of U.S. debt. There is no collateral on debt issued by the U.S. Government. It is “backed” by the full faith and credit of the U.S. Government. Except that if the debt ceiling is not raised the full faith and credit of the U.S. Government becomes worthless. With no collateral as a fall back in the event of default, investors will begin to see U.S. Government bonds as junk bonds. Either they will refuse to buy them, or they will demand extremely high interest rates to compensate for the increased risk.

That might be good news for Social Security, which is one of the largest holders of U.S. Debt. Social Security has no choice in investments for the money paid in by working Americans. Regardless of the risk inherent in Treasuries, Social Security has one option for placement of funds they are accumulating to eventually pay seniors. If the interest rate goes up, they will face cash flow problems later than they would otherwise. (Right now Social Security is predicted to tank in 2036.)

But that’s a really stupid reason to wish for interest rates to go up on the national debt. One of the reasons we aren’t borrowing even more money is because interest rates have been at historic lows for a very long time—actually since before the official start of the recession. Right now the government is paying a coupon rate of between 0% and 4.375% on its debt. Imagine if that rate increased to 20%, or 30%, or 40%. At some point all tax revenue would be going to make interest payments, and there would be zero ability to make any payments on the debt, or to buy military hardware, or to pay seniors.

Another structural piece of U.S. debt that people rarely think about is the timing of U.S. Government cash flow. Unlike working Americans, who get the same paycheck every month, the U.S. Government’s revenue fluctuates with some people only paying annually when tax returns are due. Sure they pay a penalty, but to them it is worth it to keep their money working until the last possible minute.

The Government’s outflows are steady, but their revenues fluctuate. They borrow on a short term basis in order to even out the cash flow. Businesses do the same thing with short term lines of credit. It is good business practice. Some debt is responsible; debt that eats all GDP is irresponsible. Long-term the U.S. is approaching the irresponsible level of debt.

So, we have two problems. One is short term—unemployment. One is long term—an unsustainable level of national debt. We need a short term surge in government spending in order to get Americans back to work. We need a long term fix to reduce annual deficits and the overall level of debt as a percentage of GDP. The two goals need not be mutually exclusive.

The GOP will not talk about any kind of spending to encourage full employment. The GOP will not talk about ending blank checks for military operations. The GOP will not talk about ending the Bush tax cuts, which are the single largest contributor to increases in annual deficits—that and continued spending on war. (What happened to the “peace dividend” when the Cold War ended?)

And the DEMS are too chicken to stand up and tell the truth about debt and deficits and economic stimulants that work and the wasteful spending on war. Howard Dean was right when he said that Democrats needed to grow a spine.

Homework

Time Article About Failure of Debt Ceiling Negotiations

Bloomberg Bond Rates

CliffNotes Definition of Full Employment

Moody's Analysis of the Relationship Between Interest Rates and Credit Risk

Charts Tracking US Debt Relative to GDP

Everything You Never Wanted to Know About the Social Security Trust Fund

Definition of Peace Dividend

Everything You Never Wanted to Know About the Purpose of a Spine

Recent attitudes in the liberal blogosphere regarding President Obama have been increasingly negative. He’s been criticized for not closing down Guantanamo, for escalating the war in Afghanistan, for giving away the store in negotiations with the U.S. House of Representatives, for not fighting hard enough for the middle class, and for caving in on an extension of the Bush tax cuts. Today the blogosphere is cautiously celebrating. The analysis at the link points out both the strengths and the weaknesses in the Obama plan for cutting deficits—which explains the caution in the celebration.

It is safe to say that the speech President Obama gave yesterday was his first speech in his bid for reelection. Liberals were afraid that he would move so far to the right in his reelection campaign that they’d have permanent bus-tire-tracks on their ideals. Instead, Obama delivered a hair-on-fire pro-values speech, albeit with a calm and measured delivery. No Drama Obama.

The Obama plan reduces deficits by $4 trillion over the next 12 years, and limits the growth of national debt to economic growth. The point that conservatives will most likely attack vigorously is the fact that taxes will have to increase if we are ever going to pay down the national debt. As usual, they will look at only one side of the budget equation. Any balanced budget requires that Revenues equal Expenses. The Paul Ryan plan provides for a decrease in revenues and decreases in spending, so long as the decreases in spending don’t touch the military industrial complex. Revenue is already down, thanks to continued high unemployment, and the refusal of the Republicans to allow the Bush tax cuts to expire--as originally planned when they were passed. Any further decrease in revenues will require extraordinary spending cuts, which will all fall on programs that support the very young, the very old, and the infirm if the military/industrial complex can’t be included in the mix for cuts.

The GOP has gotten so used to saying that taxes need to be cut that they are unable to see that there might be another way to balance the budget. When a family has trouble making ends meet, they often send a family member out to find a job, thus increasing revenues. It is time that the GOP looked at the revenue side of the equation for a change. Obama is a realist. People living in a fantasy world are those who think one can balance a budget by allowing the wealthy to pay a smaller and smaller share of taxes, by playing games with accounting for two wars, and by thinking that the only thing hurting the budget is schools for kids, health care for seniors and people with disabilities, and transportation that moves goods to market and people to work. This fantasy world came crashing down in 2008. It is time for a healthy dose of reality.

Homework

CBPP Analysis of Obama's Budget Plan

Text of Speech as Prepared for Delivery