Tag Archives: Jim Musser

The CAP Act: A Glass Half-Full?

Aaron Merrill is “very pessimistic” about the new “CAP Act” proposal. I’m mildly pessimistic.

First, a few things that I think are good signs:

  1. Unlike PAYGO, the law isn’t just about making sure spending is paid for. It is an attempt to actually limit spending. Also unlike PAYGO, the law targets existing, not just new programs.
  2. In the event that Congress can’t agree on where to cut, the act would trigger automatic, evenly distributed cuts across all categories of spending. This is good. Across-the-board cuts are sufficiently unpleasant to make legislators want to prioritize. But since the cuts will be evenly-distributed, Congress won’t have a strong incentive to scuttle the bill altogether. The last time something like this was tried (the Gramm-Rudman-Hollings (GRH) Act of 1985), a number of programs were exempted from the automatic cuts. These included: Social Security (which was actually in surplus at the time), veterans’ pensions, the earned income tax credit, the president’s compensation, the postal service, welfare payments, and (for the most part) Medicare. This meant that the cuts had to be concentrated on a relatively few programs. David Primo writes (p. 111) that: “At one point, GRH authorized the [office of management and budget (OMB)] to make cuts of over 30 percent to both defense and unprotected discretionary spending.” Faced with this option, Congress found it much more palatable to simply repeal GRH.
  3. It is smart to give OMB—an executive branch agency—the authority to execute the automatic cuts. The goal here is to tie legislators’ hands so that they don’t have to police themselves. GRH initially gave Congress’s Government Accountability Office the authority to execute the automatic cuts. But when a court struck that provision down, the fallback provision was for a joint committee of Congress to execute the cuts. As Primo explained (p. 111), this meant that Congress had “to pass legislation each time it wanted to trigger a sequester.” You can imagine how eager they were to do that. Ultimately, GRH was amended so that the OMB would make the cuts. And to me, that makes sense.   
  4. The CAP Act would permit legislators to avoid the cuts if they can muster a supermajority in both houses. This, too, is a step in the right direction, though I share Aaron’s concern that it is not enough. Normal legislation, of course, can always be repealed with 60 votes in the Senate and a simple majority in the House, plus the President’s signature. By requiring a supermajority in both chambers, this raises the hurdle a bit. But I would be much happier if it were a higher bar (90% of lawmakers?). Of course, even a 90% hurdle could be overcome by repealing the law. In the end, a Constitutional Amendment may be the only way to really bind.    
  5. The cuts are gradual which means that they are more likely to happen. As the GRH experience shows, spending reduction plans that call for cuts that are too dramatic often end up being repealed or ignored.

But it isn’t all sunlight and rainbows. I still have some concerns:

  1. As Aaron points out, the bill is enforced via a “budgetary point of order.” As my friend Jim Musser explained to me, the House Rules Committee can and often does waive all points of order when they consider certain pieces of legislation. In this case, this evidently means that a simple majority of a committee can basically suspend this rule whenever it so chooses.
  2. The reductions are not enough to solve the problem. They want to get spending down to its historical average, but I’d point out that the historical spending average is greater than the historical revenue average and this is a formula of unsustainable debt accumulation.
  3. The reduction in the growth of spending doesn’t start until 2013 and even then, the glide path is so shallow that after 10 years, the national debt will still be well above 100 percent of GDP (assuming revenue remains at its 10 year average).
  4. It is possible that the CAP Act could—perversely—act as an excuse to spend up to the limit. 20.6% may have been the norm for the last 40 years, but I don’t think it is the ideal by any stretch.

Tim Pawlenty on Public-Sector Unions

Minnesota’s Governor has an op-ed in today’s Wall Street Journal, arguing that the growth of public-sector unions presents a major problem for any small-government reformers.

Federal employees receive an average of $123,049 annually in pay and benefits, twice the average of the private sector. And across the country, at every level of government, the pattern is the same: Unionized public employees are making more money, receiving more generous benefits, and enjoying greater job security than the working families forced to pay for it with ever-higher taxes, deficits and debt.

Governor Pawlenty notes three principals he’d like reformers to consider. First, normalize pay between the private and public sectors.

Second, get the numbers right. Government should start using the same established accounting standards that private businesses are required to use, so we can accurately assess unfunded liabilities.

Third, we need to end defined-benefit retirement plans for government employees. Defined-benefit systems have created a financial albatross for taxpayers. The private sector dropped them years ago in favor of the clarity and predictability of defined-contribution models such as 401(k) plans. This change alone can save taxpayers trillions of dollars.

Our own Eileen Norcross champions both these policies. Her recent paper, The Crisis in Public Sector Pension Plans, co-authored with AEI’s Andrew Biggs, uses New Jersey’s public-sector unions as a case study for the growing government work-force. They also discuss the moral hazard inherent in defined benefit plans:

From the perspective of workers, defined benefit pensions in the public sector are risk-free; they are guaranteed benefits by the state, which has the power to tax. This means, of course, that from the perspective of the taxpayer, the liability is a near-certainty. The discount rate chosen to value future liabilities in the plan, therefore, should reflect the low-risk character of the benefits promised to workers.

From the government’s perspective, it is appealing to use a higher discount rate to estimate plan liabilities because it produces a lower annual contribution. By contrast, a low discount rate will result in a higher annual contribution required by the employer (in this case, the government) to fund pension obligations.

Eileen and Andrew were also part of a Mercatus panel discussion with Utah State Senator Dan Liljenquist, Scott Pattison of the National Association of State Budget Officers and Jim Musser of Mercatus. Today she also released another paper, Getting an Accurate Picture of State Pension Liabilities.

Last year I addressed the incentive for governments to gamble with public employees’ retirement savings in an op-ed. Giving public employees control of their own savings is essential for any kind of fair relationship between governments, their employees, and the taxpayers. An accurate accounting system is crucial to any fiscally responsible discussion.

Correction: In my AOL piece there is an error: I wrote “Then there was New Jersey Gov. Christie Todd Whitman, who from 1998 to 2003 held “pension holidays,” suspending employee payments into the pension system so workers could spend the money elsewhere. . . . Today, New Jersey’s public pensions lack billions of dollars in funding, and both public employees and taxpayers will suffer.” Instead, the piece should read “so employers“, i.e, the state of New Jersey, could spend the funds elsewhere. Thanks to reader John for bringing that misstatement to my attention.