by Ryan Greenfield and Chris Schreck
Alice Rivlin is currently a senior fellow at the Brookings Institution and a visiting professor at the Georgetown Public Policy Institute. Formerly Chair of the Congressional Budget Office during the ‘70’s and ‘80’s, Director of the Office of Management and Budget under President Clinton, and Vice Chair of the Federal Reserve Board, Rivlin was asked to join President Obama’s debt and deficit commission. The commission’s findings were released in December 2010. Rivlin also contributed to an additional proposal to address the nation’s debt as co-chair of the Bipartisan Policy Center’s Debt Reduction Task Force. The Georgetown Public Policy Institute spoke with Alice Rivlin to hear in greater detail how she envisions reforming the federal government to make it fiscally sustainable.
GPPR: Right off the bat, thanks for all the work you’ve done coming up with solutions for the deficit and debt. As young people especially, we’re certainly appreciative.
AR: Yes, you’re the people who are going to benefit.
GPPR: Generally speaking, what kinds of things did you hope to accomplish by serving on the debt commissions?
AR: I actually agreed to serve with my old friend, Pete Domenici, the former senator from New Mexico and chair the Bipartisan Policy’s debt reduction group, before I knew about the President’s commission. I agreed to do that because I feel really strongly that the rising debt is a threat to our future prosperity. We have to get on top of it, and only a bipartisan coalition can do that. Now clearly, it’s got to be done by the political process, but we thought that a bipartisan group of leaders who have cared about the budget in the past could show that a bipartisan solution was possible- that a group of people could work on this thing and find some things that they could agree on. So that was the genesis of the bipartisan commission.
Subsequent to that, the President asked if I would serve on the national commission, and I thought first, “How can I do both? It will be too much work.” Then I thought, “Why not?” If it’s alright with the White House and the Bipartisan Policy Center, I’ll do both. I was the only overlap, so I was kind of a bridge between to the two.
GPPR: And if the President asks you…
GPPR: How immediate is this fiscal problem? Do you think that in the near future it could crowd out private investment, lead to higher interest rates, and at what point do we get to a sustainable deficit and debt burden?
AR: Well, we don’t know. What we do know is that the federal budget is on an unsustainable course now. Federal spending is projected to rise considerably faster than the economy can possibly grow. Revenues grow at about the same rate as the economy grows at any set of tax rates. So, if you have the spending growing faster than the economy and revenues growing at about the same rate, obviously you’ve got a problem. You’ve got a growing wedge between spending and revenues. These numbers are very large. Nobody knows exactly how long we’ll be able to go on borrowing money, but the idea that we can borrow more and more money every year without consequences does not seem right.
So what could the consequences be? They could clearly be loss of the confidence of our creditors, which would be very serious. We borrow about half of our debt overseas. The Chinese, the Japanese, and the oil rich countries have been accumulating an enormous amount of American debt. Now they’ve been willing to do that over the years, and Treasury securities have been regarded as the safest assets in the world. But in a sense, that has been a false paradise for the United States because it has led us to believe we can just go on borrowing forever at low interest rates. There will come a time, we don’t know exactly when, when that is no longer true. I think the example of the European countries has shown us that when people lose confidence in a government’s credit, they lose it very rapidly, and the consequences are dire. If there were a loss of confidence in US Treasuries, then interest rates would spike, possibly to a very high level, and the dollar would plummet on world markets. That would cause enormous disruption to the United States economy. Some people fear inflation as a consequence. I am more worried that it would be a major new recession, probably worse than the one we are just pulling out of. Nobody knows exactly when that could happen. What we do know for certain is this can’t go on this way, and once we get to the tipping point, it is too late to take action.
GPPR: The new development was that the President’s commission was unable to get the 14 votes that would have transferred it over to Congress, who was willing to consider it as a broad package.
AR: I think there’s been much too much focus on these 14 votes. It is press mythology. It’s true that the executive order said that with 14 votes it would go to the floor for a vote, but that suggests that it would be a legislative package. This report is not a legislative package. I think there was little significance to the 14 votes. It did get a majority- it got 11 out of 18. But I think even more importantly, it got very considerable support in broad outline, even from people who didn’t vote for it.
Some said they were certainly aware of the urgency of the problem, they supported the main outlines, but they couldn’t support one piece or some other piece. I read the response in the commission itself, and also to some extent in the rest of the congress, as broadly supportive, rather than negative.
GPPR: How do you think that, in spite of not reaching an arbitrary level of support, your proposals will be taken into the legislative process and considered in the near to mid future?
AR: I think lots of different ways. The first is the President. The President has got to send a budget to Congress in February, and he’s got to have a position on deficit reduction. I don’t know how he will approach that, but he certainly has to look at the various deficit reduction options- the President’s own commission, the Domenici-Rivlin group, other groups that are putting forth proposals- and make up his mind what he would like to put in his budget. His budget will be a negotiating position. He won’t necessarily put in his bottom line. He’ll put in an opening bid, and then the negotiation with Congress will start.
The other decision point is the budget resolution. That’s done by the Congressional budget committees, and that will reflect the budget committee’s views of what ought to be done. Then there are all the other committees. They have narrower jurisdiction, but I think the tax proposals will receive some consideration in the tax writing committees. The proposals for discretionary spending freezes will be discussed in the appropriations committees, and so forth. Social Security goes to Ways and Means and Finance. There won’t necessarily be action on Social Security, but I actually think there might. I think it’s one of the easier things to deal with, and might command a majority across the parties.
GPPR: With the new Congress, there is split control, with Republicans controlling the House and Democrats continuing to control The White House and the Senate. Are you optimistic about being able to reach consensus on some of these issues? Do you fear that there will be gridlock?
AR: I don’t know. I lived through this once before. I was President Clinton’s budget director when the Democrats lost control of the House in 1994 going into 1995. That was very contentious, but eventually things got done. The Republican leadership, led by Speaker Gingrich, made a mistake, actually. They refused to vote a budget and closed down the government twice. They thought that would be popular in the country. I don’t know what they were thinking. All of a sudden they had people deluging them with phone calls- “I can’t get my passport renewed. I can’t get my student loan. I can’t take my kids to the National Park.” It was a real outpouring of realization that the government does things people like to have done. The public in general blamed the Congress. I think that was the miscalculation that Gingrich made. He thought they would blame the President, but they didn’t. I don’t think that the new leadership in the Congress will make that mistake again. Mr. Boehner was there at the time, and I think he probably realizes that was not a good move. After we lived through that, which took about a year, things settled down a bit. I wouldn’t call it consensus, but things did get done. Negotiations occurred. Budgets got passed. Welfare reform got passed. It wasn’t that people agreed on everything. It was more that they had to do something.
The President actually very skillfully used the veto and the threat of vetoes as a tool. When there was an appropriations bill that the Clinton administration didn’t like, the President’s office, the Office of Management and Budget, would issue a veto threat. The low level threat would say, “If you don’t change this, the secretary of X, the director of OMB, or both, will recommend that he veto.” Sometimes, when the administration really didn’t like it, we’d say, “The President will veto.” That was a very strong threat, and of course if they didn’t do it, he would have to veto. But sometimes he did. He vetoed the welfare reform twice before it passed, and it wasn’t that he wasn’t for welfare reform. He had indeed initiated welfare reform. But he felt that the provisions were too punitive, and the provisions for training and childcare were not sufficiently generous. So basically he kept vetoing until he got what he wanted, or he got something acceptable. In a situation like that nobody gets what they want. But it was not gridlock. It wasn’t friendly either, but it wasn’t gridlock.
GPPR: One difference between then and now is that the economy was certainly better in the 1990s. Some people have made the argument that the near term might be too early to start either raising taxes or cutting spending due to the weakness of the economy. What do you think about that argument?
AR: That’s absolutely right, and this is a fragile economy. Employment has been growing for quite a long time now but very slowly. We can’t afford to derail the recovery. I favor a payroll tax holiday, which I think would stimulate the economy up front, but at the same time, I favor putting in place deficit reduction measures. The people who say we can’t even think about it until the economy recovers don’t understand what a threat to the recovery this overhang of uncertainty about a debt crisis is.
So I have favored for quite a while, but more so every day, doing two things at once: stimulating the economy to keep the recovery going and putting into place deficit reduction measures that you phase in gradually over time. You enact them now so that people know you are serious, and our creditors know we’re serious. I think that will actually help the recovery. It doesn’t damage it. Now, not everybody agrees with that. I think we need to take these two kinds of seemingly contradictory actions at the same time legislatively, but the deficit reduction measures phase in very slowly. That’s true anyway because most of the things that you need to do to reduce the deficit over the long term take time. They have to take time to phase in, particularly anything you do with entitlements- and also with taxes. You can’t rewrite the tax code overnight.
GPPR: The Federal Reserve projection is that we’ll still be at 9% unemployment through 2011 and possibly 8% through 2012. If the recovery is weaker than that, are there ways to alter course? Are there other stimulus measures besides a payroll tax holiday that you support?
AR: Oh, there are certainly other possibilities for stimulus, but I don’t think delaying the deficit reduction is the right thing to do. I think the chance that we might have a debt crisis in the next several years is not zero. I don’t know exactly what it is, but it’s certainly not zero; if we delay and delay, the probability goes up. So, I don’t think we can afford to take that chance.
GPPR: There has recently been a proposal to cut the size of the federal workforce and to freeze pay for federal employees. Do you think these measures risk making public service less attractive to talented people? Federal employees already make less than their equivalents in the private sector, and it doesn’t appear that there will be a reduction in the amount of work being done by the federal government in the coming years.
AR: Well, I am worried about the quality of the future workforce because I think we have a lot retirements coming up. In the federal government there’s sort of a bulge. It’s the baby boom phenomenon reflected in the federal workforce. But I think freezing federal pay, which is what’s on the table at the moment, is a perfectly sensible idea right now. Federal workers of comparable education level may not make as much money, but they don’t bear as much risk. They have much more secure jobs. What’s happened over the last few years is that federal pay, because it has built in cost of living and other kinds of increases, has gone up faster than private sector pay has. So, it does seem to me appropriate right now to have a federal pay freeze. It doesn’t mean you can’t be promoted. If you do good work, you’ll get a higher level job. But I think freezing federal pay is a reasonable thing to do right now. It’s also symbolic. People think the private sector shouldn’t be asked to sacrifice unless the government itself is willing to sacrifice, and freezing federal pay is a symbol of that.
GPPR: I’d like to switch gears to some questions about the tax provisions of the President’s deficit commission. If I understand correctly, the crux of the changes would be to lower tax rates but get rid of most of the deductions and tax expenditures that a lot of people get. Particularly on the home mortgage interest deduction and turning that into a 12% credit, is there a risk to doing that while the housing market is still weak?
AR: Oh, there are risks in all of these things, but having a mortgage interest deduction turned into a credit is a very good thing to do as a matter of tax policy. The current deduction benefits upper income people much more than lower or middle income people. People who don’t itemize, which is most people, don’t get any benefit at all, and people who pay higher marginal rates get more benefit than people who pay lower marginal rates. Now that’s crazy. This is the moment to turn that around, whether you phase it out or have it apply only to new mortgages rather existing mortgages, which is what I presume you would do. It’s time to get rid of some of this unfairness in the tax code, and I would argue that this is a good moment to do it because we just demonstrated that we have built too many high-end houses. One of the reasons we did that was that the tax code was so favorable to upper income people who wanted to buy houses. We have too many big houses now.
GPPR: Generally, reducing rates and getting rid of reductions is a great way to increase the economic efficiency of the tax code because you don’t have money being channeled in unproductive ways. But is there evidence that the marginal tax rate needs to be lowered in addition to getting rid of deductions? Is there evidence that tax rates are stifling growth in some way right now?
AR: I think that the reason for doing both at the same time is largely political. You can’t get support for eliminating the tax expenditures unless you lower the rates. There’s some evidence that lower marginal rates are pro-growth. In the ranges that we’re in, it’s not overwhelming. After WWII, top bracket rates were over 90%. In the Reagan era, he brought the top bracket rates from 70% to 50%. That’s a lot. There certainly was evidence that the high marginal rates were leading to enormous efforts on the part of upper income people to shelter their income and to do relatively unproductive things with it, because of the tax advantages. It was wild. People who weren’t farmers were buying farms to get agricultural deductions. Movie production, for reasons I’ve forgotten, was a very popular thing to put your money in if you had a lot of it. Some of that went away after the Reagan tax cuts and the tax reform of 1986.
So, there’s evidence that high tax rates are kind of distortionary. I don’t think, personally, that bringing down the rates in the range that we’re now in will necessarily make much difference, but some people think it will. Certainly the advantage of fewer deductions and tax expenditures generally is simplification. There’s a huge industry devoted to helping people evade and avoid taxes. Those people could be more productively employed.
GPPR: Do you worry that some of these proposals could aggravate income inequality? The recent statistics are that income inequality is somewhere close to where it was just prior to the Great Depression. It seems like the top earners get a larger cut in their tax rate.
AR: In their rate, but not in the tax. It’s a more progressive tax than the existing system. So no, I’m not worried about that. Could one do all of this tax simplification and reduction of tax expenditures and retain a more steeply progressive tax structure? Yes, one could. And I would favor that if I thought it was politically feasible. But I don’t think that the proposals, either in the President’s commission or in the Domici-Rivlin proposal, make the income distribution less equal. They make it marginally more equal, but maybe not enough.
GPPR: So, the commissions did consider the redistributive impacts of the changes to the tax code.
AR: Oh yes. There are tables in both reports that show both of the new plans are slightly more progressive, but not very.
GPPR: You’ve spoken about how the proposal includes a tax revenue cap at 21% of GDP and how that might not be sustainable because of demographic changes like the baby boomers retiring.
AR: Yes, I’ve expressed my opposition to that. I don’t even know how you’d enforce it. I think it was sort of symbolic. I think it’s neither feasible, nor desirable. Suppose we have a big boom and raise more revenue, what are you going to do about it?
GPPR: Generally when you tax you want to tax things that create negative externalities. I was wondering why things like a carbon tax or financial transactions tax, which would tax these systematic risks to the economy and environment, weren’t put into the proposal.
AR: Well, the President’s commission has an increase in the gas tax of fifteen cents. I would have preferred a carbon tax, and a larger one. There didn’t seem to be support for that. In the context of the Domenici-Rivlin committee, we had a lot of discussion about the carbon tax and a good deal of support for it. But we also had support for a broad based consumption tax. In the end we decided we shouldn’t do both. We decided that putting in two new taxes, in addition to the reform of the income tax, was sort of a bridge too far. We felt we should choose between the general consumption tax and the carbon tax. We chose the general consumption tax because it raises more money.
GPPR: And the financial transactions tax?
AR: A financial transactions tax is a funny thing. The argument against it is that it drives the transactions overseas and that if we want to have people trading in US venues, like the NYSE, that a transactions tax is not the way to go. On the other hand, they actually have a transactions tax in London, and London is still a major money center. So, I’m not sure where I come out on this. But in any case, it was not seriously considered in either group.
GPPR: You mentioned the consumption tax. Why do you think that’s an important element of tax reform? It raises a lot of revenue, but there are arguments that it is somewhat regressive.
AR: We combined it with a very progressive reform of the income tax. When I said that the tax package was progressive, it was including the income tax reform and the sales tax. Sales tax by itself is regressive, but in combination with a quite progressive income tax reform, I think it is a good thing to do. We’re the only major country in the world that doesn’t have one, and I think we’re going to need another revenue source. This reflects my belief that we’re actually going to have to have higher federal expenditures as the baby boomer generation retires. Hopefully the growth of medical care expenditures slows, but it’s not going to slow enough. That combination means that we need another source of revenue, and putting taxes on consumption, rather than on income, is I think more conducive to growth and competitiveness in world markets.
GPPR: You mentioned healthcare costs. Some people have said that is our deficit problem, and that the per beneficiary costs of Medicare and Medicaid are big drivers of the deficit.
AR: They’re bigger drivers than the age of the population, actually.
GPPR: Do you think there was a reluctance to take on healthcare explicitly in your commissions because of the divisive fight over healthcare reform earlier this year?
AR: Actually, we took on healthcare quite explicitly in both commissions. There are a considerable number of proposals. In Domenici-Rivlin, we actually had quite a drastic reform of Medicare, although phasing in in 2018 and beyond. That’s a shift of Medicare to a premium support program where Medicare beneficiaries would get a choice between staying in the fee-for-service Medicare or taking the subsidy and buying a healthcare plan on an organized exchange. But in no case could the total federal subsidy go up faster than the GDP plus 1%. So you would hope that you are getting savings, both from the competition on the exchanges, and from capping the subsidy at a given level. It’s feasible to do that if the Congress will do that. It’s not feasible to cap fee-for-service Medicare because you don’t know what it’s going to cost. So this seems to us a good thing. It didn’t make it into the President’s plan. Rep. Ryan and I worked out a different version of premium support, which we proposed. I actually like the Domenici-Rivlin plan better than the Rivlin-Ryan, but they aren’t that different. But we didn’t get it into the main report. It survives as a pilot program for federal employees.
GPPR: Can you speak more about the premium support model in the Bipartisan Policy Center’s proposal? Is it means tested in any way?
AR: We didn’t means test it, but it would have to be risk adjusted. The health plan wouldn’t get a flat fee. They’d get a risk adjusted fee because clearly it’s more expensive to take care of someone who has serious chronic ailments than somebody who doesn’t, on the average.
GPPR: The sustainable growth rate (SGR) for physician services for Medicare, is phased out over time with the President’s commission.
AR: Yes, but they put in various things that will save the money instead of that.
GPPR: The thinking seemed to be that it wasn’t something we were sticking to anyway.
AR: Yes, but getting this out is a good thing, if you can find other ways of saving money.
GPPR: You mentioned earlier that you that there might be political will to reform Social Security. Can you talk a little bit about why you think that is the case and what reforms you envision taking place?
AR: Well, I may be being overoptimistic about this. But I think Social Security is relatively easy to reform, in the sense that there are a limited number of things you can do. Everybody knows what they are, and a compromise can be worked out that has some revenue increase and some long-term spending cut, preferably in a progressive manor. Both of the packages in these two plans do that. Now they’re different, but they aren’t that different. I think they are illustrations of the fact that this is a manageable problem. I think that more and more people recognize that. Now, some people have recognized it for a while. Back in the Bush administration, there was gridlock over the individual accounts. But that’s gone away. The Financial Crisis convinced almost everybody that carve-out accounts weren’t a good idea. On top of that, they’re very expensive. If you’re carving out some of the revenue, you have to replace what you’re losing. So, I think that’s gone away, and that creates an opportunity to tackle the Social Security problem and get it done. It would be very nice if we didn’t have to think about it again for 75 years. Even you guys wouldn’t have to deal with it.
GPPR: Is the question then less an issue of how to address it and more a question of how redistributive or progressive to make it?
AR: Well, that’s the policy question. The political question is how to convince people that it’s a good thing to do, to reassure young people that they will get their Social Security, and not get all the blow back from people who are already retired and who erroneously think that they’re not going to get their benefits. That’s a big communication problem, and the Social Security issue is very emotional. Most of us on the commission have been getting quite a lot of hate mail, which is totally irrational, because it is probably coming from people who are already retired, and they’re not going to lose their benefits. In fact, nobody is going to lose their benefits, but they would be adjusted in a moderate way fairly far in the future. So, I think it’s an education and communication problem.
GPPR: The President’s commission includes a provision for increasing the retirement age but also including a hardship exemption for people who are unable to work beyond 62. Can you talk a little bit about what the criteria for a hardship exemption might be, and is there any risk that applying for one might be stigmatized?
AR: Well, I don’t know about the stigma. There’s certainly a risk for abuse. It’s comparable to the disability problem that we already have. Somebody has to make a judgment, “Is this person really too disabled to work in the kind of job that they actually could get?” I think that’s difficult but not impossible. Another alternative, and this is what we did in the Domenici-Rivlin, is not to raise the retirement age, but instead to index the benefits so that they decline slightly as longevity increases. It accomplishes the same dollar goal, but it doesn’t force you to come to grips with this yes-or-no age problem.