— Few tasks are more painful for members of Congress than cutting spending.
That’s why Congress sometimes resorts to automatic, “hands-free” devices that cut spending and reduce deficits without requiring an actual vote by the members.
Like the automatic vegetable chopping gadgets so often seen in cable TV ads, sometimes these deficit-cutting devices work, but sometimes they leave a sloppy mess.
Faced with warnings of a federal debt crisis from economists, investors, the Standard & Poor’s rating agency, and the nonpartisan Congressional Budget Office, President Obama and Congress are now considering another automatic mechanism to cut federal debt if they can’t bring themselves to cut spending and raise taxes.
Congress could vote to enact such a mechanism as part of an accord that would pave the way for a vote to raise the federal debt ceiling. Congressional Republicans have insisted on some budget cutting as a pre-condition to voting to raise the debt limit.
Obama has proposed a “debt fail-safe” device that would force spending cuts in 2014 if federal debt does not decrease as a share of gross domestic product (GDP). But Obama would exempt Social Security, Medicare and benefits for low-income people.
Senate ponders deficit-cutting devices
Several automatic deficit-cutting measures have been deployed since the mid-1980s.
The Gramm-Rudman-Hollings law of 1985 was the first measure of its kind; other automatic cost-cutting plans enacted by Congress include the Base Realignment and Closure Commission, (BRAC) first used in 1989, and the Sustainable Growth Rate for Medicare spending, enacted in 1997.
If lawmakers decide to take another stab at instituting a pre-programmed deficit measure, it might look something like this:
Congress could set a target for the ratio of federal debt to GDP, for instance, 50 percent of GDP by 2014, instead of 75 percent of GDP which the Congressional Budget Office now projects it will be in 2014.
If debt-to-GDP ratio exceeded 50 percent in 2014, spending would automatically be cut by a certain percentage and a surtax would automatically be imposed on taxpayers in order to reach the target the following year.
And if the debt-to-GDP target wasn’t hit, taxpayers’ tax deductions and tax breaks like the child care tax credit and the mortgage interest deduction for homeowners would automatically be reduced by a certain amount, 15 percent, for instance. This, in effect, would be a tax increase on those parents and homeowners.
One device that has gained bipartisan support is the proposal by Sen. Bob Corker, R- Tenn., and Sen. Claire McCaskill, D-Mo., to reduce spending from its current level of nearly 25 percent of GDP, to the 40-year historical average of 20.6 percent of GDP.
The Corker-McCaskill plan would take 10 years to reach its goal. If Congress failed to keep spending under an annual limit, the Office of Management and Budget would make cuts throughout the budget to bring spending to a pre-determined level in order to get to the 20.6 percent goal.
To raise or not to raise taxes?
On Wednesday the Senate Finance Committee heard from experts, including former Texas Sen. Phil Gramm, now an investment banker with UBS, and one of the architects of the automatic deficit-cutting device that bears his name.
One question the committee debated was: should an automatic deficit cutting mechanism only force spending cuts — or should it also mandate tax increases?
Gramm said tax increases should not be part of an automatic deficit reduction mechanism, telling committee member Sen. Ben Cardin, D- Md., “To suggest to working families that if you (in Congress) don’t get your job done, if the president and the Congress cannot work out some way to deal with this (deficit) problem, that part of the solution is going to be taking money away from them, I’m glad you’re going to be trying sell that and not me.”
He argued that the risks of an automated cutting mechanism would be unpalatable to voters if tax hikes were a possible outcome.
“When you start saying ‘because Congress failed, we’re raising your taxes’ … I just don’t think they’ll stand for it," he said. "And (they) shouldn’t.”
Cardin responded that voters also wouldn’t like students’ loan programs or medical clinics being cut back if automatic spending cuts took effect.
Susan Irving, a budget analyst for the nonpartisan Government Accountability Office, disagreed with Gramm.
“I think that the problem is too large, that you will be unable to solve it without dealing with both sides,” she said.
“It is a mistake to pretend that spending is just a group of politicians spending money against the will of the people,” she added, noting that outlays for natural disaster relief and other items are widely popular. “People love spending and hate paying for it.”
Do they work?
Even though spending cuts and tax hikes associated with such a measure would likely ruffle feathers in the long run, passage of an automatic deficit-reduction mechanism could have political benefits for the president in the short term. If Obama agrees to a plan that financial markets and voters think is credible — even if it failed in the long run — then he would likely deprive the 2012 Republican presidential nominee of an issue to use against him.
There could be benefits for members of Congress on both sides of the aisle as well.
Some automatic measures have insulated members from voter retribution. If a military base in his district is closed, a House member can blame the BRAC and say he never voted for that specific base to be closed.
But sometimes such devices don’t get a chance to work at all, because Congress gets cold feet. Congress can enact spending caps but decide to ignore or override them after an election cycle.
Case in point: The Sustainable Growth Rate for Medicare spending, which was enacted in 1997. The intention was that Medicare’s payments to doctors would grow no faster than the growth rate of the overall economy. If Medicare spending on doctors’ services exceeded the Sustainable Growth Rate, doctors’ reimbursements would automatically be cut.
In 2002, Medicare cut the payment rates for doctors by 4.8 percent, as the Sustainable Growth Rate provision required.
But in subsequent years, Congress voted to postpone the cuts, because they proved to be simply unsustainable. Members of Congress feared that big cuts in reimbursements to doctors’ would lead some of them to stop treating Medicare patients.
The Sustainable Growth Rate device “has been a total failure,” said Rudolph Penner, the former head of the Congressional Budget Office who is now an analyst at the Urban Institute. “The reimbursement cuts that it requires are totally unrealistic and are therefore cancelled.”
As the SGR’s failure shows, the outcome all depends on the fortitude not merely of one Congress in one given year, but of successive Congresses in the succeeding years. What seemed like a fine idea in 1997 seemed unbearable just five years later.
Base closings save money
One automatic chopper that has been at least partly successful has been the BRAC - the Base Realignment and Closure Commission.
Under the BRAC law, a bipartisan commission makes recommendations to the president and Congress as to which military bases ought to be closed.
Once the list is submitted to Congress, the closings take effect unless Congress passes specific legislation disapproving them.
According to a 2009 report by the Government Accountability Office, the savings from the 2005 BRAC round of base closings will be about $11 billion over 20 years.
Looking at list of automatic devices that included BRAC, Gramm-Rudman-Hollings, and the 1990 and 1993 budget laws, Stan Collender, a former Senate Budget Committee staffer and now an analyst at Qorvis Communications, a Washington consulting firm, said, “BRAC is the obvious winner among the choices."
But, he added, “It’s also the easiest."
"BRAC was asked to do one very specific thing: determine which facilities should be eliminated after the decision was made to eliminate some bases," Collender said. "All of the others dealt with much broader issues and so largely failed. Nothing like BRAC will work in reducing the deficit.”
Penner, the former CBO head, said that if Congress does enact an automatic debt/deficit chopper, “The action that is triggered should not be so painful politically that it is routinely rejected by the Congress” — as happened with the Sustainable Growth Rate.
Penner would put a limit on the automatic cut, for example, one-half of one percent of GDP, “so that there less of a temptation to waive it if it gets too large.”