Do You Think You Can Balance the Budget?

I have decided to share the Budget Simulation that I developed for my Pubic Policy class. I first created the simulation in 2007 to help students understand the various areas of the federal budget and the difficult choices involved in cutting programs or increasing taxes. Over the years I expanded and improved the simulation. It's very easy to use if you follow the directions. Your task is to get the deficit under control. The simulation contains actual budget data for FY 2013. Spending is organized by budget function and subfunction. If you place your mouse over any of the function or subfunction boxes a pop-up box will provide a description of the programs covered. You are free to increase or decrease spending. I have excluded Medicare and Social Security from simple percentage increases or decreases and instead provided specific reform options for you to review later in the simulation.

At the end of the spending changes you will find a tally box that reveals... your changes in spending and resultant changes in your deficit. The original values for each are also presented.

In the next section you are given the opportunity to change revenue by make changes to tax policy. You cannot propose specific tax rates, but what you can do is propose increases or decreases to the tax burden of different income groups - from the bottom 50% to the top 1%. The simulation shows how much income tax revenue is currently collected from each. If you mouse over the boxes for the income groups you will see additional information concerning their current share of income taxes paid. You can also change federal excise taxes and corporate taxes.

Next you're given the option to expand or decrease tax expenditures such as the home mortgage interest deduction, the earned income tax credit, and the employer deduction for health insurance costs. These popular deductions translate into lost revenue. Reducing them means more revenue and expanding them means less. Mouse over each option to learn more.

Finally, you have a selection of possible reforms to Medicare or Social Security. Here your choice is to either leave them alone or enact the specific proposal.

When you're done, return to the tally box to see how much you changed total federal revenue.

On the right side of the screen you'll see a table and graph - each tracks the effects of your changes relative to the total economy.

Give it a try, I'd love to know what you think.

The Problem is Collective Cowardice, not Collective Bargaining

In a report issued last year, the Pew center determined that there was a $1 trillion gap "at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises." Since then that gap has only grown and is estimated to now be closer to $2 trillion.

The report continued "In 2000, just over half the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four—Florida, New York, Washington and Wisconsin—could make that claim. In eight states—Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia—more than one-third of the total pension liability was unfunded. Two states—Illinois and Kansas—had less than 60 percent of the necessary assets on hand."

In Connecticut, the state government has $9.35 billion in assets in its pension fund, but $21.1 billion in obligations. In Maryland, the state pension and retiree health health benefit system is underfunded to the tune of $35 billion. In New Jersey, the state's pensions are underfunded to the tune of $54 billion.

The impact of these pension obligations have come to head recently in Wisconsin where Governor Scott Walker has introduced legislation to increase state employee contributions to their health care and pension programs. In Maryland, Governor O'Malley has proposed changes to the state's pension system as well - essentially telling state employees that they can either pay more to receive current benefit levels, or pay current amounts and receive less. New employees would simply face greater costs to fund their beneifits, and receive less than under the current system.

Indiana, New Jersey, New York and myriad other states are attempting to deal with these unfunded obligations - but in Wisconsin, Governor Walker has gone a step farther. In addition proposing that public employees contribute more toward their benefits, he is proposing to eliminate the right of public employees to engage in collective bargaining for non-wage benefits. He argues that this must be done to allow the state and local governments restore fiscal order.

The idea that the budget troubles in states like WI, NJ, NY and CA (or, well, everywhere) are the result of public sector unions and collective bargaining is ridiculous. Certainly states face tremendous deficits owing to the legacy costs of retiree pensions and health - but the fault does not lie with the unions, it rest solely with the governments that made the deals then chose to not fund them (or that chose to invest them, ignoring the risks of a down market).

States agreed to the retiree benefits, wages, and health benefits, states agreed to wage increases, states made promises to their workers and then chose to not fund those promises. Doing so during tight times would have meant tax increases, program cuts, or both. Instead state goverments, governors and legislators, promised the moon and stars to everyone - great benefits for state employees, low taxes and public services for the taxpayers.

Now, the bills are coming due. States are facing the harsh reality of their unfunded obligations and realizing they have run out of options. And the magnitude of the problem has grown to the point where there are no easy solutions. Increasing taxes to close the gaps would require significant tax increases, cutting programs or benefits would require dramatic cuts - the only real option is a combination of tax increases and spending cuts. Promised benefits will need to be curtailed, Americans who have enjoyed the services provided by government will now have to start paying off the debt incurred by habitually underfunding them.

But even if pensions and benefits are cut, even if taxes need to be raised - curtailing or eliminating collective bargaining rights accomplishes little. We have not come to this point because unions demanded too much, we're here because policymakers made promises they never paid for.

At the federal level we see the same issue with the looming funding crises for Social Security and Medicare, the problems stem from promises made that we chose to not fund. The Social Security unfunded liability, in other words, what government has promised compared to what we have committed to fund, is projected to be $17.5 trillion. For Medicare, the unfunded obligation is greater than $80 trillion. Social Security will begin to pay out in benefits more than it takes in this year. Medicare faces a solvency crisis in about 6 years.
 
The unfunded liabilities of Social Security and Medicare are no more the fault of workers and retirees than are the unfunded state pensions - they simply reflect promises made that have not been funded. It's a situation not unlike the decision to authorize wars in Iraq and Afghanistan at an annual cost of $200 billion while simultaneously reducing government revenue via tax reductions.
 
States face $2 trillion in unfunded obligations, the federal government tens of trillions, our current federal deficit is $1.6 trillion in a $3.7 trillion budget, our accumulated national debt stands at $14 trillion, and our interest payments on that debt are set to soar.
 
We cannot tax our way out of debt, we cannot cut our way out of debt, we cannot grow our way out of debt - the magnitude of the problem demands a combination of painful cuts and tax increases in the near term, coupled with reforms and ultimately reductions in entitlement programs (or, at the state level, retiree benefits) long term. Had we been more proactive and begun to deal with these problems sooner, it would have been less painful. Had we promised less, or actually funded the promises we made we would not be where we are... but we didn't, and we are.

How likely are we to make the tough decisions that are now required? At the federal level a very reasonable proposal from the National Commission on Fiscal Responsibility has already been rejected by Congress and the President that created the commission. Instead, Congress and the President agreed to extend the Bush era tax rates at a cost of $550 billion.

In the states, Republican governors like Chris Christie in New Jersey or Scott Walker in Wisconsin speak of fiscal discipline and budget cuts, all while cutting taxes and decreasing revenue. In Illinois, a Democratic legislature and governor raised income taxes by 66% to close a budget gap, but on the spending side merely restricted spending growth to 2% - a rate greater than the inflation rate. My award for political courage and common sense goes to Connecticut governor Daniel Malloy who has proposed solving his state's budget crisis with $1.8 billion in spending cuts and $1.5 billion in tax increases - neither Democrats nor Republicans are happy with his plan, which means it must be a pretty responsible and balanced plan. In Maryland, Governor O'Malley signed tax increases into law in 2007 and since then has submitted budget cuts totaling $6.6 billion, and has begun pension reform - other states need to follow the lead of Malloy and O'Malley.
 
In the end, the problem is not collective bargaining, the problem is a collective cowardice on the part of those who made easy promises and avoided tough decisions - and ultimately the collective willingness of the American public to believe that no bill would ever come due for all that we've enjoyed.