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Later today President Obama will announce the details of his spending plan for 2014. The President’s plan will include cuts to the growth of Social Security, a 28 percent cap on tax deductions for wealthy Americans and an increased tobacco tax. President Obama’s plan has already been criticized by some in his own party. They say he’s made too many concessions on the spending side, but supporters claim his plan reflects a willingness to compromise, a move they hope Republicans will reciprocate. Please join us to discuss the 2014 federal budget.
- Kevin Hassett director of economic policy studies, American Enterprise Institute.
- Dean Baker co-director of the Center for Economic and Policy Research, blogger at "Beat the Press" and author of "The End of Loser Liberalism: Making Markets Progressive."
- Nancy Cook reporter, National Journal.
- Robert Greenstein founder and executive director, Center on Budget and Policy Priorities.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. President Obama lays out his fiscal 2014 budget plan later today. It includes cuts to the growth of spending on Social Security and limits on tax deductions for the rich.
MS. DIANE REHMJoining me to talk about his budget and there is a possible compromise with congressional Republicans: Nancy Cook of National Journal magazine, Kevin Hassett of the American Enterprise Institute, Dean Baker of the Center for Economic and Policy Research and Robert Greenstein of the Center on Budget and Policy Priorities. Do join us with your questions and comments. Call us on 800-433-8850. Send an email to email@example.com. Feel free to follow us on Facebook or send us a tweet. Good morning to all of you.
MR. KEVIN HASSETTGood morning.
MR. DEAN BAKERGood morning.
MS. NANCY COOKGood morning.
MR. ROBERT GREENSTEINGood morning, Diane.
REHMGood to see you all. Nancy Cook, if I could start with you, we have already heard some of the broad outlines. Give us some of the specifics.
COOKSure. So the biggest news out of the president's budget that he's going to release at around 11:15 today is really the cuts to Social Security that he's proposing. So that would be about $230 billion in cuts to government benefits, including Social Security, and this is something that the Republicans have long sought.
COOKIt's not necessarily a new idea for the administration because the had talked about it during the fiscal cliff deal, but the president is really formalizing the offer by putting it in the budget. There are some other sort of top line numbers or is about $400 billion in cuts to Medicare. And then there's about $580 billion in new revenue that would come through limiting some tax breaks for the rich.
REHMTell me about those Medicare cuts. Aren't they reduced payments to providers?
COOKExactly. So they'll reduce payments to providers and also to hospitals. And so this is a key tenant of the Democrat strategy so far in proposing any cuts to entitlements. They're really not cutting benefits themselves. They're still trying to make those cuts to the people that provide the care rather than the people who are receiving it.
REHMAnd what about limits to IRAs?
COOKThat's another thing that the president wants to do, and that's really goes along with this theme that the president did during the 2012 presidential campaign which is this idea of making the wealthy pay more, and this would limit IRA accounts. And that's a key thing because Mitt Romney, during the presidential campaign, it was revealed in his tax return that he had this huge amount of money stashed in an IRA account, and this would be one way to limit them.
REHMNancy Cook of National Journal. How much of what has already been laid out has he proposed before, and how much is new?
COOKI would say much of it has been proposed before. The Medicare cuts have been proposed before. The Social Security cuts have been proposed before but not in a budget. There are a few new things like he wants to, you know, pay for a new universal pre-kindergarten that would be paid for through increased taxes on tobacco. That's a new idea. He's going to pull in some state of the union ideas like raising the minimum wage. That would not be paid for by the federal government.
COOKThat would, of course, have to be paid for by the private sector. So those are some new ideas at the margins. But overall, it's a lot of what we have seen before. The key thing is, really, a political point that he is trying to make a point to the Republicans that he is willing to make some cuts to Social Security, is willing to make some cuts to Medicare and that he's serious. He's trying to portray himself as serious on creating a budget deal.
REHMBob Greenstein, how much does the president get just right?
GREENSTEINWell, I think it's important to understand, as the president's keeps saying, that this isn't really his preferred budget. This is -- this budget has two pieces. We've never seen a budget constructed like this before. The core piece is his final offer to Speaker Boehner and the budget negotiations in December.
GREENSTEINCompared to his opening offer to Speaker Boehner which reflect Obama's preferred position, it had 400 billion less in revenue increases, 200 billion more in cuts in non-entitlement programs, somewhat larger Medicare cuts and the proposal Nancy mentioned regarding adjustments and how the cost of living the inflation adjustment is done, both in the tax code and in Social Security. None of that was in his original offer to Boehner, and most of those things are not things that Democrats in general are comfortable with.
GREENSTEINSo he's actually doing something unusual. He's saying, I'm going to make my budget my final offer in the negotiations. That part of the budget would reduce deficits by $1.8 trillion over 10 years. Then he has a second part of the budget. And in the second part of the budget, he has a series of initiatives, all of which are paid for. They're deficit neutral. So he proposes more funding for preschool, particularly for low and moderate-income children, and then he pays for it by raising tobacco taxes.
GREENSTEINAnd what the White House is saying is we support all of these deficit-neutral initiatives, but we are not making them a condition of the core offer we made Speaker Boehner. But we are making the core offer we made Speaker Boehner indivisible. In other words, Republicans can't say, we want the Medicare and Social Security cuts. But we don't want the loophole closers and the related revenue increases.
REHMRobert Greenstein, founder and executive director of the Center on Budget and Policy Priorities. Kevin Hassett, how do you interpret what you've seen? How do you react to it?
HASSETTI think the first headline, which is a really refreshing one, is that we have actually moved, as Speaker Boehner intended, the whole budget debate out into the open. And so instead of having people meeting at the White House and coming out looking grumpy and we're all wondering, well, what's going on, we're in a position now where the normal order, the, you know, really the founder's design is actually working.
HASSETTPeople are saying what they want to do. They're putting their cards on the table in public. And then we're going to have a public debate about, well, should we do this, should we do that. I think that's really refreshing. I think that it actually is a sign that there might be hope for a big deal this year because we're kind of now at the point where the Senate has a budget, the House has a budget, the president has a budget. And they're all a little bit different. But they are in play, and they're out in view.
HASSETTAnd so I think that the headline for me is that the president is playing the game. And as Bob said, I think he played it responsibly. Again, we'll go into the details that I don't like, but he put down his final offer in this sort of closed-door negotiations. He said here's what I was willing to give in December, and I'm still willing to give those things. And I think that the thing that's unique about that is that probably if we go back and think about these presidential budgets, usually they don't matter.
HASSETTUsually, whichever party has the White House, that party is reluctant to put the president's budget to a vote. They don't even want it to go to the floor. I mean, we've seen, you know, President Obama's budget has been put to the floor and not gotten any Democratic votes in the past. So the-- usually the budget is the thing that shows what the president would do in an ideal world, not what people, like, would necessarily want to pass as a budget. I think this one's different, like you could actually see this one going to the floor.
REHMKevin Hassett, director of economic policy studies at the American Enterprise Institute. Is this one serious, Dean Baker? And does it have a chance of really beginning the debate?
BAKERWell, in terms of the politics, I mean, I think I'd probably agree largely with Kevin that it's, you know, it's obviously a serious offer putting it on the table. Now, the question is, you know, is it good? I mean, is this where, I think, people want to see it go? And I just raised two points in that, one, again, the issue about Social Security that, I think, certainly will be front and center. I think you're a little hard-pressed to see seniors as somehow the big winners in this economy. The median income for people over 65 is $20,000 a year.
BAKERSo any cut to their income, however modest -- and we'll have to see what this ends up looking like, but the chained CPI basically is a cut of about 3.5 percent of Social Security income. I should point out it's a bigger hit to the typical senior than the tax increases were to the typical wealthy person affected. So...
REHMAre you saying that that would be on those currently receiving Social...
BAKERThe -- yeah. As it stands, the chained CPI, this means you would reduce the benefit, the cost of living adjustment you'd get next year, the year after, the year after. So it would affect people who are currently getting benefits. So that would hit in immediately. So I think that's a big deal. The other part -- and again, I think this, to my mind, is the biggest part of the story. The president really lost control of the debate. The budget, first and center -- foremost, is an economic document.
BAKERAnd, you know, we have large deficits because the economy collapsed. That's not ambiguous. You know, we had relatively small deficits. We could say they were bigger than we wanted if you like, but, you know, '05, '06, 07, deficits were just over 1 percent of the GDP. We got large deficits because the economy collapsed. So instead of focusing and getting the economy going again, we now have people running around Washington like chickens with their heads cut off. We have to get the deficit down.
BAKERAnd the reality is if you actually look at the interest burden, which is probably the better measure, interest burden is at a post-war low. It's about 1 percent of GDP. And if you subtract off what the Fed refunds to the Treasury in interest each year, it's half of 1 percent GDP. It's the lowest it's been since before the -- since the Great Depression. So we shouldn't be worried about the deficit. But I know president Obama feels boxed in. He's got to say that. And unfortunately, that means we're condemned to appear to slow growth and high unemployment.
REHMDean Baker of the Economic -- Center for Economic and Policy Research and author of "The End of Loser Liberalism: Making Markets Progressive." And back to you, Nancy Cook. How does the president's proposal -- how is it similar to or different from the House budget, what the House proposed?
COOKWell, it's very different in a number of broad ways. You know, the president really wants to continue to go after getting more revenue. He thinks that's a very key part of this equation and really is only willing to make cuts to Medicare and Social Security if there's more revenue on the table. And he thinks that a great way to do that is by capping tax deductions for the wealthy and then also instituting this minimum tax called the Buffett Rule.
COOKThe House Republican budget takes a really different tact and would, you know, slash tax rates. It would call for tax reform, of course, and get rid of some unspecified tax breaks. But it would really bring down, you know, both the corporate tax rate and the individual tax rate in the individual side to two brackets. So that's a huge point.
COOKSome other highlights of the Republican budget is it really cuts non-defense, domestic, discretionary spending, which is the spending on things like education, transportation, housing assistance. So that becomes a much smaller share of the budget in the long run, and that's not really where most of the money goes towards. So there's a bunch of key differences.
REHMNancy Cook, a reporter for National Journal. Short break here. We have many callers on the line. We'll try to get to as many as we can. Stay with us.
REHMAnd welcome back. As we talk about the president's proposed fiscal 2014 budget, which is being sent to the Congress today, here in the studio: Robert Greenstein, Dean Baker, Kevin Hassett and Nancy Cook. Dean Baker, the president said he wanted to specifically seek to protect some groups. How do you read that?
BAKERWell, it's a mixed bag. I mean, Bob's more up-to-date on the latest proposal, and I know there are some provisions to protect some of the programs, for example, supplemental security income. My understanding is that it will continue to be raised. The cost of living adjustment would be raised in accordance with the old CPI. So that means beneficiaries on that program would not be affected. So there's a few other programs, and again, Bob, I'm sure, can give more detail. But I still see anything like this being very limited for two reasons.
BAKEROne is you have a large population of seniors that maybe they won't be poor. Let's say, people get by in 11, 12,000 a year, but they would still be hit by this. The other part, and I don't see a way around is, the poverty line itself is going to follow the consumer price index. And that -- that's going to rise more rapidly, which means that people would otherwise qualify for various programs: Medicaid -- 10 of our programs are tied to the poverty line. Those people, when we get out five, 10 years, you have a lot of people that will not qualify for those programs.
REHMBob Greenstein, you're shaking your head.
GREENSTEINWell, it's reasonable that Dean would've assumed that was the case, but it's not the fact because when the plan rolls out in a couple of hours, we will see that programs targeted on low-income people, including those related to the poverty line measure, will be exempt from the new chained CPI. So it will not have the effect on low-income people that Dean just mentioned. What's most interesting is Social Security.
GREENSTEINSo I'm going to make two statements that people will find puzzling, given everything they've heard about the chained CPI. The president's proposal on balance will result in a slight reduction in poverty among very old seniors. And a number of current beneficiaries will end up being better off not worse off. How can that be? Because the president's proposal has an adjustment staring at age 76, phased in over 10 years, where benefits will be adjusted by 5 percent of the average Social Security benefit.
GREENSTEINSo bear with me for a moment. The chained CPI will rise about a quarter of a percentage point more slowly than the regular CPI. Let's say you start getting at 65. You've been getting benefits for 20 years at 85, 20 years, a quarter of a point less per year. That's a 5 percent benefit reduction. But you'll have a 5 percent benefit increase. So at age 85, the two will offset each other, and you'll be about even.
GREENSTEINNow, the adjustment is 5 percent of the average Social Security benefit. But low-income seniors have a below average Social Security benefit, so the adjustment is more than 5 percent for them. And this is why you actually get a very small -- I don't want to overstate it -- a very small effect on average for low-income seniors in very old age.
REHMKevin Hassett, how do you read that?
HASSETTYeah. I can see the logic and the design. They're trying to cut Social Security benefits, and they're trying to cut them in a progressive way so that the folks will have money on the bank, get a bigger cut than the folks who maybe have less money in the bank. And so if I were going to cut Social Security, you know, I would look for bigger cuts over the long run than what we've got in the president's proposal. But a formula like that is a clever way to make sure that the folks, you know, at the bottom, the folks closer to poverty are not pushed down into poverty because of the cuts.
REHMWhat are your biggest -- what do see as the biggest drawbacks to the president's plan?
HASSETTWell, again -- I think that as an offer, it's a solid offer. I think that Republicans are extremely weary of having yet another tax increase. If you look at tax revenue over the next decade, it's going to be high by historical standards. By the end of the decade, it'll be about, you know, as high as we've ever seen. And so if you're already looking at very, very high revenues relative to GDP, then having a tax increase on top of that seems like a place that Republicans will fight very, very hard this year.
REHMSo who is going to be hit with those higher taxes?
HASSETTThe president's proposal would hit high-income people the most.
HASSETTThat -- yeah, I haven't seen the proposal out yet, but I do know exactly, 250?
REHMYeah. It would start at 250, $250,000 for a family, and that's where you would start to cap -- itemize deductions for people.
REHMAnd does that make sense, Dean Baker?
BAKERYeah. I mean, I think the idea of capping the deductions at a lower rate, 28 percent, is much, much better than what many of the Republicans put on the table for the simple reason that we have -- and I'm sure Kevin would jump on this right away. But you have states, say, New York state, California, that have fairly high state income tax is 11 percent at the high end. And as it stands now, basically the government picks up 40 percent of that.
BAKERIf you were to absolutely cap that, then basically there'd be a lot of pressure, state and local governments, the tax would be a full 11 percent. There'd be a lot of pressure from them to lower their taxes. So I think the 28 percent route is a much better way to go. Let me just quickly say something on the CPI. I'm glad to hear what, you know, what Bob was saying.
BAKERAnd I certainly hope that, you know, insofar as you ameliorate it, that's a very good thing to cut Social Security. But I should still point out, you have a lot of people. They won't even live long enough to get these bump up. So, you know, those people will not be affected by that. You know, again, it's good they're in there. I'm glad for that. But again, you're still talking about a big hit to a lot of people.
REHMAll right. We've got lots of callers with questions. So let's put headphones on and see if we can answer their questions. First to Aberdeen, N.C. Good morning, Marianne. You're on the air.
MARIANNEWell, good morning, Diane. Thank you for taking my call.
MARIANNEWell, I recently read a lengthy profile of Eric Cantor in The New Yorker titled "House of Pain" in which is was stated and, you know, revealed. I didn't realize this that actually when -- after John Boehner had secretly negotiated with the president on the "grand bargain," he decided to bring Eric Cantor into, you know, the discussion.
MARIANNEAnd Cantor refused to back the grand bargain, so that's when Boehner -- Speaker Boehner dropped that negotiation. OK. So now we have another attempt. What is the position now of Eric Cantor and the Tea Party? How do they fit into this? He's been very quiet recently.
HASSETTSure. I think that dynamic there is not something, you know, I wasn't talking to the folks while they were participating on this negotiation. There are a couple of different stories about what happened. There are people who are mad that the president changed his offer after sort of asserting that it's final. Bob Woodward discovered that.
HASSETTBut I do know that Mr. Boehner has a tough job. He's got to work out a deal that passes a budget that is, you know, I think, has to give cover to people who just voted on tax increases and have pretty much told them no tax revenue is going to be on the table as we do the spending part.
HASSETTThe way I can see it working out is that if the House and the Senate pass spending reductions, maybe, you know, repair the sequester and so on and work on some of the ideas of spending reduction that the president has and then they agree to have a tax reform later in the year that has a certain amount of revenue as the sort of entry price for tax reform, then I could see a deal happening. But I think that the budget as proposed by the president is something you could never get through the House because right now, they want spending cuts before they're willing to talk about revenue.
GREENSTEINWe've been talking about the fact the president's budget is actually a compromised budget. It was his final offer to Speaker Boehner. Not only did Speaker Boehner walk out of the negotiations in December but his position is no longer his final offer back to the president. His position -- Mitch McConnell's position, the Senate Minority Leader -- is no revenues at all. Boehner's final offer in December had 400 billion more in revenue than Congress passed at the beginning of January.
GREENSTEINBoehner had tentatively agreed to the 28 percent limitation, this cap on itemized deductions that we've just talked about. So I do think there's something troubling here. People were saying, well, you know, the president was good to his final offer. He left it on the table. I think the question now is, what about the Republicans? They now need to show some movement as well. The president, as we're seeing in the paper, has really taken on many people in his own party in his base. They're very angry of him.
REHMDean Baker, would you agree with that?
GREENSTEINAnd I was just going to say, and the Republicans have retreated and are completely embedded back in their base and saying no revenue at all.
BAKERYeah. Well, I certainly would say President Obama has made very large concessions to Social Security cuts being, you know, first and foremost. But the other part, and I don't think we should ignore this, is a very a big deal. He's basically proposed on domestic discretionary spending. This is the area of the budget that involves most infrastructure, research and development, most of what we think of the federal government doing.
BAKERThat proposal is having that cut by 35 percent as a share of GDP over the next decade. So that's a very, very big hit to a large section of the federal government. Now, how that pans out if you envision going out over the next decade of course we don't know. But to act as though that's not a big concession, that of course is and one I'm not very happy about.
HASSETTYeah. And the response to what Bob and Dean were just saying would be this, just that the deal at the turn of year was basically a tax deal. And so we were negotiating about spending reductions and tax increases and increases that the Republicans didn't want to have happen and so on. And then we ended up with a tax deal that was focused on taxes. And what they want to do now is have a spending deal, and then a tax reform, and they want to do it in two steps.
HASSETTBut I think that if you go back and look that basically none of the spending acts really happened at the turn of the year, that they, in the end, focused on the taxes, it suggests that their position is a fully reasonable one. So let's go through those spending things that we couldn't agree on last time. Let's settle those, and then let's have a tax reform.
REHMAll right. Nancy Cook, I want to ask you, what about the projections under the president's budget as to deficit reduction? What would we see under his plan?
COOKSure. So the White House has estimated that -- and, again, I haven't seen the full budget, but the White House has told the reporters that the deficit for the next fiscal year would come down to about $744 billion. And, you know, the deficit is supposed to keep going down over the next few years.
COOKThe problem is, at the end of the next decade, the deficit is going to start rising just because of the cost of this health care, you know, the health care programs like Medicare and Medicaid that are expanding. More people are taking advantage of them. So the president's budget certainly brings down the deficit in the short run.
REHMAre we going to come down to a flat-out political battle that has nothing to do with the American people at all, but has everything to do with Republicans versus Democrats?
COOKI think that we may because I think that although, increasingly, Americans tell pollsters that they're really interested in the idea of deficit reduction -- and Pew Research Center has done some great polling that shows that -- really -- they really diverge on the details of how they want to see that done. And so what you have happening is Americans increasingly outside of Washington really concerned about jobs and the economy, and they want that to keep going. They want to see the economy get better. They want the unemployment rate to go down.
COOKBut meanwhile, the conversation in Washington for the last two years has really been dominated by this idea of the deficit and fiscal responsibility, and we're continuing on that path. I think one of the fascinating political dynamics -- and we've hinted at this a little bit in these conversations -- is that the president basically is alienating some of his Democratic base by proposing these Social Security cuts and, you know, causing a rift in the party.
COOKBut also there's a rift in the Republican Party, too, on economic issues, and they can't quite decide: Should they keep up with this agenda of austerity or emphasize some other things?
REHMNancy Cook, a reporter for National Journal. And you're listening to "The Diane Rehm Show." Dean Baker, you wanted to add to that?
BAKERYeah. Just a quick point in terms of, you know, the politics, at least around the country. I mean, there have been a number of polls that show that when you look at, you know, the core, you know, programs, Social Security and Medicare, those enjoy huge amounts of bipartisan support. So the differences in support for Social Security and Medicare between Democrats, Republicans, even self-identified Tea Party supporters, actually is very small. None of those groups want to see cuts. So this is a case where you're kind of a Washington against the rest of the country.
REHMWhat is your primary objection to the president's budget plan?
BAKERWell, I should say, I think the priority at this point really should be on jobs and growth, and getting the deficit down goes in the opposite direction. We might love the private sector. We might want to see a lot more investment. I'd love to see it. But realistically, that's not going to happen. If you look at the investment share of GDP, equipment and software have never been much over 8 percent in GDP. We're close to that today.
BAKERThe idea somehow we're going to see some big surge there, that there'll be a big surge in consumption when the savings rate is already lower than its historical average, it's not going to happen. So if we want to see growth, it really has to be led by the government at this point, and we're just being derelict on that.
REHMAll right. Let's take a call from St. Louis, Mo. Good morning, Terry. You're on the air.
TERRYGood morning. I actually have two questions after listening along a little while. Number one, I -- I'm wondering whether Mr. Cook doesn't understand or...
REHMMr. Cook. Now, that's Nancy Cook.
TERRYDean Cook. I'm sorry. No. I meant...
REHMMaybe you mean Dean Baker?
TERRYI do, and I apologize for that.
TERRYWhether he doesn't understand that this change in cost of living is not actually a cut, which I think seniors hear cut and they think you mean you're going to reduce my current benefit. It is a reduction in the increase going forward. Benefits will continue to increase, but at a lesser rate. The other question that I had was what is -- why does it seem that so many people on the left of this discussion are opposed to the fact that many seniors sacrificed and saved over their working lives so that they wouldn't be totally dependent on Social Security?
BAKERThose are good questions. First off, I'm trying to avoid semantics. We have scheduled benefit increases. This reduces -- scheduled benefits increases to keep benefits in line with the cost of living. Now, we're debating over what the cost of living is, and, you know, again, I don't think there's evidence that the current adjustment overstates it for seniors, for other people. It may well -- the evidence suggests it may actually understate it for seniors.
BAKERSemantic -- I shouldn't say a semantic issue, a technical issue I'd have to go into. I don't think Diane wants me to right now. So I'm trying not to get into semantics. We're reducing the benefits, what's currently there in law. Now, as far as seniors who saved, I mean, I think that's wonderful, but we have the data on this. Most seniors actually do not have very much.
BAKERThe Social Security benefit is more than half of the income for about 70 percent of seniors, and, you know, you could say they should have saved more. The reality was the economy, I think, was a lot worse than most seniors expected. Maybe they should have known we'd have a bad economy, but that's how it ended up.
REHMDean, I think that what Terry is arguing, if I can take this on, is that when you talk about cuts, you are frightening seniors into believing that what they're receiving now is going to be cut. And what the president is saying is that the rate of growth will be reduced by a fraction in order to begin to balance and to make sure that everybody gets what they need.
BAKERWell, again, I don't want to get into the semantics of it. The logic of the way the program is currently structured, benefits are supposed to rise to keep the real level of benefits constant. So we know we have inflation year by year, you know...
REHMBut everybody is going to have to give in this debate, and I think that that's what Terry is arguing. And those on the left, those on the right, everybody is going to have to give...
BAKERWell, that's actually, I think, a questionable proposition. That's...
REHM...to -- OK. And we'll take a short break.
REHMAnd we're back, talking about the ins and outs of a very complicated presidential budget that is being released today. Here's an email from Aaron in Indianapolis, "Does President Obama's proposed budget address the sequester currently in effect?" Bob Greenstein.
GREENSTEINIt repeals sequestration. This is something we should point out that right now, sequestration is in law. It's starting to cause problems. We're seeing people lose certain kinds of cancer treatments. The problems are going to deepen. The cuts will get deeper in the new fiscal year starting on October if sequestration stays in effect.
GREENSTEINAnd the president's budget, part of how it should be understood, is replacing sequestration with, in my view, a much more balanced set of changes. The other key point -- Dean mentioned jobs -- is how this affects the economy. The Congressional Budget Office has said that if sequestration stays in effect, we'll have three-quarter of a million fewer jobs by this fall than we otherwise would. The president repeals sequestration.
GREENSTEINHe has more than makes up for it in savings, but his savings are phased in the deeper discretionary cuts, which neither Dean or I like very much. But they don't start till 2017. And he has about 175 billion in infrastructure investment, 50 billion of it right up front. So the immediate effect on the economy relative to keeping sequestration in place will be hundreds of thousands more jobs.
REHMKevin Hassett, what does the president propose as to defense spending?
HASSETTThe defense spending part, I haven't seen yet because it doesn't come out -- I mean, Nancy, have you seen it?
COOKWell, we just know sort of the top-line stuff, but part of replacing the sequester would be still having some cuts to defense. But it would be a lot less than what we're having now. It would be, I think, about $100 billion rather than sort of these indiscriminate cuts now. And so the way that the president replaces the sequester is partly through, you know, raising a bunch of new taxes and then partly in making smaller and more nuance cuts to all these different programs.
REHMAll right. And here's a Facebook comment from Erin, who says, "Mark my words, next year, Republicans will be campaigning on the Obama cuts to Social Security. They've cleverly gotten Obama to commit to cuts without themselves committing to cuts so they can use it as an issue. They don't really care about reducing Social Security. They only care about keeping taxes on the wealthy low." Is that your prediction, Kevin?
HASSETTI think that there are some historical truth to that on both sides, that whenever anybody -- that's why they call it the third rail, right, that when somebody tries to put the programs into a balanced situation by, you know, phasing in cuts or slower growth over time...
REHMAnd yet isn't...
HASSETT...the other party attacks them. In fact, we, you know, even President Obama was attacked on the cuts to Medicare in the last election in a way that I...
REHMBut isn't that...
HASSETT...I disagreed with. I thought he was...
REHMIsn't that precisely what Republicans have called for right along?
HASSETTIt's going -- yeah. I mean, the point is -- that's why this is so tricky. There's a temptation for both sides to start to be partisan as opposed to responsible.
REHMDean Baker, what do you expect?
BAKERWell, I would expect them to do that, yeah. And, you know, again, Social Security is hugely popular across the local spectrum, and these cuts are going to be, you know, they're very unpopular among Democrats but they're popular among Republicans and independents. They're unpopular across the board. People do not want to see that program cut.
REHMAll right. Let's go to Nicholas in Houston, Texas. Good morning to you.
NICHOLASGood morning, Diane Rehm. Thank you for having me on the show.
NICHOLASI just wanted to say during the market crash in the Great Depression, Herbert Hoover went to the private industry. They tried cutting and cutting and it just got worse and worse, wasn't it, until FDR came in and started spending. Every businessman I've ever heard is you have to spend money to make money. Shouldn't we be spending and investing and getting more people back to work instead of worrying about doing little cuts 'cause then we'll bring in more revenue?
HASSETTWell, we are running big deficits right now, which is a sort of textbook metric of whether the government on net is stimulating. They're spending a lot more than they're taxing. The government has its foot on the accelerator. The fact is, though, that this debate -- and this is where Nicholas is really hitting the nail on the head. This debate would be much different if the economy were growing at 3.5 or 4 percent right now than in the economy that we have where we just had a really disappointing jobs report and we're wondering whether we're going to slow down to one, 1 1/2 again.
HASSETTAnd so I think that it's exactly right that we're still in this place where people are trying to thread the needle where growth is unacceptable, unemployment is unacceptably high. We were worried about the long-run impact of deficits but worried also that we need to stimulate in the short term. And so it's a very difficult thing to balance.
REHMDean Baker, how did the two parties differ on their outlook on the deficit?
BAKERI'm not sure there's a huge difference. I think that's a really big problem. I mean, at the moment, you know, I disagree with Kevin in a sense that the deficit's about 4.5 percent of GDP. That's not, to my view, nearly large enough. Over the longer term, you know, when we talk about the long-term deficit picture, as (word?) was saying earlier, it's a health care story, and we've actually gotten very good news in health care recently.
BAKERHealth care costs have been growing very, very slowly if that continues. I don't know that it will, but if that continues, we don't have a long-term deficit problem either. So here we are, running around like chickens with our heads cut off not doing what we need to do to get the economy growing again over a problem that may not even exist even in the long term.
REHMAll right. To Ethan in Raleigh, N.C. Good morning.
ETHANGood morning. Thank you so much for having me on the line.
REHMSure. Go right ahead, please.
ETHANOK. As I've been listening, I might have sort of answered my question, but I think it's an important issue for us to think about. So earlier in the show, it was mentioned that the general public generally agrees that cuts need to be made in spending the deficit needs to be reduced. However, I don't know if it's a reflection of Washington or if Washington is a reflection of this dynamic.
ETHANThere's wide disagreement on how those things need to be done. Now, it's understandable because the general public are not professionals in terms of how they're educated about public policy issues and the implementation of social programs and how the federal government spends their money. Understandable. However, people...
REHMEthan, give me your question if you would, please.
ETHANI'm sorry. I don't mean to waste time.
REHMThat's all right. I just need your question.
ETHANRight. And so my question is how do you, Diane, and I guess the rest of your panel, propose that we might be able to -- as the general public, become more educated about how -- what really does -- what the real issues are? Like, programs like this are a great example, but not everyone listens to programs like this.
ETHANThey should. I absolutely agree.
REHMAll right. Bob Greenstein, how do you propose people educate themselves, not only about what the president is proposing but also about how Republicans are receiving that proposal?
GREENSTEINI don't have a magic answer here. I do think listening to the show is part of it. I mean, part of the problem in the news media these days is we don't have enough in-depth exploration. People like Nancy write longer, more detailed articles. If you just watch cable TV, it isn't clear whether you kind of know more or maybe you get mislead and know a little bit less sometimes. Also, a number of organizations -- ours, Dean's, Kevin's -- we don't agree with each other on all of these issues, but we all post Brookings, we all post more extensive analyses of these on our websites.
REHMAnd that's why we bring you all together. Good luck, Ethan. Let's go to Cincinnati, Ohio. Sally, you're on the air.
SALLYThanks, Diane. Long-time listener, first-time caller.
REHMI'm glad. Thank you.
SALLYNancy made a comment in the beginning of the show about Mitt Romney's IRA. And it sounded like she was saying it shouldn't be that large. And I think that's very misleading to people. It comes across as judgmental. His IRA is his IRA. My IRA is my IRA. I happen to know that the rules are pretty much the same for people. He had a larger corporate salary. He had a larger corporate benefit. He rolled it into his IRA. His IRA is large, you know? So I'm just cautioning her on using rhetoric like that.
REHMAll right. Nancy.
COOKYeah. Thanks for that comment. I didn't mean to imply that Mitt Romney shouldn't have a large IRA. The point that I was trying to make is really that the president very successfully, during the 2012 campaign, ran against Mitt Romney by painting him as this out-of-touch rich person. It was very successful in putting the Republicans on the offensive about that. And he is continuing to do that with this budget by still calling into account, trying to limit the IRA, by taxing rich people, and it's sort of this continuing theme of we need to tax rich people to reduce the deficits. So I think it's a continuing...
REHMHow would IRAs be limited, Dean?
BAKERWell, I don't know the specifics of the proposal, but just getting to the point, the IRA was designed as a middle class retirement program. When you have -- I believe it was -- $100 million, clearly, that's not middle class. Now, again, maybe Mitt Romney did nothing at all improper, but that's a problem with the way the law is structured if that's possible.
REHMDean Baker -- sorry -- Bob Greenstein.
GREENSTEINI mean, look, the IRA essentially provide -- it's a tax break, it's a tax shelter for part of your retirement savings. We've said we're going to create this tax shelter to help, as Dean said, middle-income people have enough savings for retirement. Romney used accountants and tax lawyers. I've talked to tax lawyers who told me that Romney went so far. They wouldn't advice it for their clients. It was not explicitly illegal. It's in that grey area.
GREENSTEINBut you've got to ask the question, how do we ask people on Social Security to take somewhat less of a cost of living adjustment? How do we make cuts in areas like education and say we're going to keep tax shelters for 50 million, $100 million IRA's when they're absolutely unnecessary for someone like Romney to have enough to live on in retirement?
REHMGood question. Kevin Hassett.
HASSETTYeah. And I've got a good answer.
HASSETTYou know, the bottom line is that if society is going to grow, if we're going to have more consumption in the future, then the way we have to do that is we have to acquire more assets. It could be physical assets like machines. It could be human capital 'cause we invest in education and so on. But over time, consumption growth is only going to come if we have more assets to draw from, to produce with.
HASSETTAnd one of the ways that we own future assets or acquire future assets is we put money in the bank. And so, you know, optimal tax theory in every textbook teaches that we need to encourage people, the Mitt Romneys, to put money in the back because then the bank could lend that to people to buy machines and so on.
HASSETTAnd so we need to that. It's optimal tax policy to encourage people to invest in the future.
REHMIf only 1 percent of the population can do that to the tune of $100 million, that raises questions.
HASSETTNo. But we want capitals so that workers have machines to work with so they can have higher wages. And we -- and we're not going to...
REHMWhat are these people using their capital for, Dean Baker?
BAKERYeah. I think it's -- well, one, we don't have a shortage capital right now. The problem is we actually have more and no one wants to use it, so that's hardly the issue, you know, in the current economy. But the point more generally is this was a tax scam. So, you know, by all means, we want, you know, wealthy people to invest their money.
BAKERBut this is a tax scam. So one could argue -- and I know Kevin would argue to this. He wants lower tax rates on the wealthy in general, but to have this tax scam where you could shelter your money completely from taxation for over many years until he withdraws that, that's not the purpose of IRAs.
REHMAnd to Mike in Pensacola, Fla. Good morning. You're on the air.
MIKEGood morning. Thanks for the show and my access to it. I have -- I'd like to ask comments on two sides of the same issue. One, that the premise that increased tax rates will raise more revenues then leaving rates to the same or -- and on the other hand, that decreasing tax rates will lower revenue. And all of this seems to be preying -- the rhetoric seems to prey on the ignorant, those people that, you know, can't do their own income tax, that have no clue that they don't pay income tax. Those people who...
REHMI have a feeling that great many people who pay no income tax are not ignorant but rather pretty darn smart. And you're listening to "The Diane Rehm Show." Bob Greenstein.
GREENSTEINWell, I'm not sure exactly what the caller was trying to say. But if he was trying to say that raising rates doesn't increase revenue and lowering rates doesn't lose revenue, virtually no reputable analyst believe that. In fact, in 2007, I think it was, the George W. Bush Treasury Department studied this, and I think in their most optimistic scenario where you lowered the rates and fully paid for it by cutting spending, you know, maybe a tenth of it came back in higher revenues from a higher growth and something like 90 percent of it was just a revenue loss.
COOKI think one key thing to remember is that no ones fighting over tax rates right now. What we're fighting over is limiting tax breaks for wealthy people. And one interesting area where all the parties agree -- actually the Senate Democrats budget talked about this, the House Republican budget, the president's budget -- is this idea of somehow limiting or getting rid of tax breaks.
COOKAnd they disagree on how to go about doing that, which ones are bad ones. But there does seem to be this emphasis on all the budgets on weeding through this huge number of tax breaks that cost the federal government over $1 trillion a year.
REHMKevin Hassett, what do Republicans risk by doing nothing? There has been some talk about the GOP that maybe they simply do absolutely nothing and let the president's budget die.
HASSETTWell, I think that that's certainly an outcome that's almost as likely as any other that we just sort of muddle through. And the Republicans decided that the sequester cuts are all they're going to get, and then they're going to get much more, and then they just keep sort of continuing resolution or wait to the next election.
REHMBut is that a political judgment? Or is that a sound financial?
HASSETTI think that getting ahead of the curve on spending, as they did in the previous agreement, was a good idea. I think that there are better ways to do it, and it would be great if people could be adults and come to an agreement about how to do it. So, for example, on the tax revenue side, I absolutely agree that the president's proposal to, you know, reduce itemized deductions to put, you know, broaden the base is a good one.
HASSETTIt's, you know, that if I were going to start a tax reform then the limitation on itemized deductions would be the first place I would look to get the revenue I need to have a tax reform. But to -- again, to make it clear where the debate is now, that's not really what the proposal is exactly. It's -- the president wants to spend a lot more money on these things, and he's going to raise revenue with what I think is the entry ticket to tax reform. And that, I think, would short circuit the kind of fixes that we really need.
GREENSTEINActually, I think what the president is proposing is what conservative Harvard economist Martin Feldstein, who was Ronald Reagan's chief economics adviser, has written. Feldstein has said, Republicans want to reduce the deficit all on by cutting spending, Democrats want to mix. Here is the way you do both. You get some savings from reducing program spending and you get the rest of the savings by reducing spending in the tax code, subsidies in the tax code, the tax expenditures Nancy talked about. And that's exactly what the president's budget would do.
REHMRobert Greenstein of the Center on Budget and Policy Priorities, Dean Baker of the Center for Economic and Policy Research, Kevin Hassett of the American Enterprise Institute, Nancy Cook, a reporter of National Journal. Thank you all so much for clarifying some portions of these muddy, muddy waters. Thanks for listening. I'm Diane Rehm.
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