Alice Rivlin, Washington’s premier budget expert, has long championed an idea near and dear to the heart of President Obama: A “Grand Bargain” of spending, entitlement and tax agreements that would put the government on a long-term path to economic stability.
But after years of partisan gridlock on Capitol Hill, bruising battles over the debt ceiling and taxes, and a gradual improvement in the economy and the deficit picture, Rivlin sees little impetus for a major budget or tax deal later this year.
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The diminutive deficit hawk acknowledges that CBO projections of declining deficits strengthen the hands of liberal groups and New York Times columnist Paul Krugman in arguing that austerity measures should be shelved until the economy is humming again. Yet she cautions that the long-term picture remains one of soaring deficits and mounting health care costs as baby boomers retire and Medicare and Social Security costs mount.
“I don’t think the [deficit] picture longer term has changed dramatically,” she said. “We still need to put Social Security on a firm foundation, and every year that passes makes it a little harder to do that.”
Rivlin frets that Congress and the White House will fail for the second year in a row to replace the sequester – those automatic spending cuts mandated by the 2011 Budget Control Act – with a more practical and sensible deficit reduction approach.
“If you look at the projections now, non-defense discretionary spending keeps slowing over time to levels lower than we’ve ever seen before,” Rivlin said. “And my worry is we squeeze down the basic functions of government.”
For decades, Rivlin has been at the forefront of efforts to impose rationality on the irrational congressional budget process. She was the first director of the Congressional Budget Office from 1975 to 1983, where she was a persistent critic of Reaganomics; director of the Office of Management and Budget under President Bill Clinton from 1994 to 1996; and vice chairman of the Fed between 1996 and 1999.
In early 2010, Obama appointed Rivlin to his National Commission on Fiscal Responsibility and Reform, the so-called Bowles-Simpson commission that prepared a plan for cutting the deficit by $4 trillion. Many consider that plan the gold standard for comprehensive deficit reduction and tax and entitlement reform, even though it was never formally embraced by Obama or Congress.
Around the same time, Rivlin joined forces with former Republican Senate Budget Committee Chairman Pete V. Domenici of New Mexico to write a similar report on deficit-reduction strategy for the Bipartisan Policy Center. She is a senior fellow in the Economic Studies Program at the Brookings Institution.
As Congress and the president return to Washington this week after a long Fourth of July observance, The Fiscal Times spoke with Rivlin on a wide range of budget and fiscal matters:
The Fiscal Times (TFT): What’s your general outlook for the economy and the deficit for the coming year?
Alice Rivlin (AR): The standard forecast of moderate growth in the two-and-a-half percent range for the rest of the year – maybe getting to 3 percent by the end – is right. If nothing bad happens, that’s sort of the standard forecast. It’s perking along; it’s not very rapid. But it does seem to be improving. And there seems to be considerable momentum in the private sector of the economy, considering that federal fiscal policy is so negative.
TFT: Are you encouraged by CBO projections of the deficit falling to $642 billion this fiscal year?
AR: We knew near-term deficits would come down as the economy improved. They’ve come down faster than anybody expected, but that’s mainly because of two temporary factors: One is that we got a lot of tax revenue in calendar 2012 because of the fiscal cliff and the anticipation that rates would go up in 2013, which they did. So a lot of people pushed income into calendar 2012. And the other was much bigger than anticipated repayments from Fannie Mae and Freddie Mac. But again, for the longer term, deficits will go up again as the demographics [of retiring baby boomers] come into play, in 2017, 2018 and so forth.
TFT: Paul Krugman and others on the left believe that with the deficit and the economy improving there’s no need for short-term action on entitlement reform and spending. What is your take?
AR: None of us thought there was a need for short-term action. The long-term action is still necessary and the sooner the better with these things. We still need to put Social Security on a firm foundation, and every year that passes makes it a little harder to do that. The liberals would argue that may be true, but it can wait. I think it’s better if it doesn’t wait, because the changes can be smaller if you don’t wait. Senator [Richard] Durbin has floated the idea of a Social Security commission with a fairly short timeline to separate it from the budget discussions. I think that’s quite a good idea; we ought to do it.
TFT: Is a comprehensive “Grand Bargain” budget approach basically a dead letter for the foreseeable future?
AR: I don’t think the chances are very high, but it would still be a good thing if we could get a serious bargain that included entitlement reform and tax reform. It’s encouraging that the [Senate and House] tax committees are both talking about serious tax reform. I don’t know where that will go. But the statement from [Senate Finance Committee] Chairman Baucus and [House Ways and Means Committee] Chairman Camp was very much in line with what we said in the Simpson-Bowles and Domenici-Rivlin commission reports: Namely, blow up the tax code and start over, and only put back the special provisions that can really be justified.
TFT: What are your expectations heading into the fall and a renewal of the debt ceiling controversy in Congress?
AR: Well, I hope we’ve learned lessons [from the 2011 debacle] and that we will get a compromise of some sort that will not have us threatening to default.
TFT: What about the fate of the sequester? Are we headed for a second year of deep spending cuts? Any sign Congress will try to replace those automatic cuts with something saner?
AR: That’s up to the appropriations committees, basically. The thing that worries me is that if you look at the projections now, non-defense discretionary spending keeps slowing over time to levels lower than we’ve ever seen before. And my worry is we squeeze down the basic functions of government. It’s also very hard on state and local government. And we aren’t thinking through what we want government to do or not do.
TFT: What’s your read on how well Chairman Ben Bernanke and the Fed are handling the tapering of quantitative easing? Are you concerned that without any other further stimulus from Congress we’re looking at another dip in the economy this fall as interest rates go up?
AR: I don’t think the Fed is going to taper off if they think it’s going to be damaging to the economy. Bernanke has made that very clear. The possible path to tapering off [the Fed’s bond] purchases is a gradual one. But it’s dependent on their moderately optimistic forecast for both unemployment and inflation.
TFT: Should we be concerned the Republican House and Democratic Senate cannot agree on a budget compromise? That they’re going lickety-split into the appropriations process without a compromise blueprint?
AR: We should be concerned that they can’t get together on a lot of things. The budget is a symbol, I think, of the breakdown of the congressional process. But I’m more concerned about their inability to, for example, come together around entitlement reform or tax reform, than about the budget itself.
