Thursday, June 13, 2013

Ron Johnson’s Transformative Proposal

At his March dinner at the Jefferson Hotel with a small group of Senate Republicans, President Obama made something of an admission.

“The problem you have reforming Medicare is that for every dollar Americans pay into the system, they’re going to get three dollars out in benefits. Americans don’t understand that,” Obama said, citing a study from the Urban Institute.

“You’re right about Medicare. We’ve been quoting that exact same study,” Senator Ron Johnson responded, according to attendees. “We’re pretty small little voices compared to your platform. It would be enormously helpful if you use that bully pulpit and start telling the American people the truth.”

Three months later, Johnson and his fellow Senate Republicans are working with top White House officials to define how big the entitlement problem really is. Their proposal is to agree on the size of the problem before tackling the reforms that would solve it.

White House chief of staff Dennis McDonough, congressional liaison Rob Nabors, and other Obama officials came into the initial meetings on the Hill reiterating the president’s position that $4 trillion in deficit reduction would basically solve the problem for now.

But according to GOP deficit projections subsequently prepared by Johnson and obtained by National Review Online, the true size of the problem is staggering, and surprised even many of the seasoned budget negotiators involved.

$4 trillion? Try $106 trillion, the medium estimate. That’s $106,954,000,000,000. Even the lowest, extremely conservative estimate comes in at $72 trillion; the highest is over $120 trillion.

The amounts are so large that some controversial reforms appear inconsequential in comparison. Take Obama’s “chained CPI” proposal: it would save an estimated $89 billion over ten years, or 1.3 percent of the total deficit over those same ten years.

Part of the difference is time. The Congressional Budget Office pegs its cost estimates of bills to ten years. Not only has that led to a sort of CBO-score arms race on Capitol Hill, where legislation — Obamacare being the best example — is designed to exploit the ten-year window to produce a lower cost estimate. It also obscures the scope of the long-term entitlement crisis and the savings of reforms that would compound in the second and third decade.

The Senate GOP projection is for 30 years, which encompasses the retirement of the baby boomers — a far more significant problem than the deficits of the past few years.

“In all of these budget negotiations, we’re really trapped by this ten-year budget window, which, truthfully, minimizes the problem,” Johnson observes.

Another difference is the assumptions behind the projection. CBO’s long-term budget outlook, for example, offers two estimates: the “baseline” scenario and “alternative fiscal scenario.”

Baseline is according to current law, including all of the gimmicks Congress has put in current law to game their CBO scores. According to that, we’re totally fine — the debt will slowly go down without Congress’s having to do anything. It’s also fantasy.

The other scenario is more realistic. In it, debt begins to really ramp up around 2025, and quickly becomes unwieldy — even insurmountable — by 2040, when the graph ends.

The third difference between a single, staggering, 30-year deficit figure and most of the current efforts to quantify the problem is presentation.

Wednesday, White House officials came back to Republicans, having reviewed the $106 trillion projection, with their own figures. But theirs weren’t dollar amounts, they were percentages of GDP (and much smaller).

That’s the same way CBO presents its long-term estimate. It may be more useful to experts, but it’s also less palpable to the average person. It’s also easier to think about matching up reforms, by their cost savings, to the total deficit.

One potential criticism is that a single number offers a false sense of precision.

“I used to joke that the estimate was based on whatever my mood was in the shower that morning,” says former CBO director Douglas Holtz-Eakin. That is, by tinkering with the assumptions, you can essentially come up with whatever number you want.

While that’s true, it doesn’t really matter if Republicans and Obama were to agree on a figure. The Senate GOP’s projections are based on CBO’s cost projections and generally conservative. The range is well within where experts would peg the problem. It would just be a useful vehicle to help Americans understand the scope of the problem and a measuring stick for the savings of reform proposals.

“I think it was a very good exercise that he went through and very helpful to understand the order of magnitude that we’re dealing with,” says Senator Bob Corker.

It’s not a grand bargain, but it could be a significant first step.

“The one thing that has to be established is an agreement on where we are, number wise, before you can ever have an agreement on how you’re going to solve the problem,” says Senator Saxby Chambliss, noting that he began working on bipartisan debt negotiations with Senator Mark Warner three years ago next month.

“We haven’t come very far in that three years,” Chambliss adds. “Just getting an agreement on the numbers is a major step that moves us forward.”


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