Budget Deal: Vintage Wshington

On reflection, it shows how far down Washington has fallen. The recent budget deal, though resisted in some circles, received much praise as an example of needed compromise. No doubt it was a step up, but it was nonetheless far from what the country needs or wants. On the contrary, the deal is vintage Washington: immediate spending increases, payment postponed, and many gimmicks in the accomplishment.

Markets, investors, and business planners should see some good in the compromise. By suspending questions of debt ceilings for the next two years, they can look for relief from the periodic waves of uncertainty that develop whenever the actual debt numbers approach the limit. The compromise also presumably buys time for the White House and Congress to tackle other pressing issues, such as corporate tax reform, entitlements reform, and the nation’s need to refurbish its infrastructure, though the record hardly suggests that they will do this.

Suspending the sequester offers a more mixed picture. It allows outlays to rise $50 billion above where the caps would have permitted in fiscal 2016 and $30 billion above them in fiscal 2017. Though the monies are evenly shared between defense and non-defense discretionary spending, defense gets an extra $57.4 billion through off-budget monies allocated to it under the Overseas Contingency Operations (OCO) fund. This vehicle, originally meant to pay for the unforeseen demands of military emergencies, has turned into something of a slush fund. But dubious as the spending increases might be, relief from rigid sequester caps does offer a chance for a less arbitrary apportioning of Washington’s financial resources. On a side note, the budgetary agreement offers one especially well-conceived spending consideration. It explicitly forbids the Treasury during this time of sequester relief from building its own slush fund to use should the sequester caps return in two years.

In deference to concepts of budget restraint, the deal identifies a grab bag of ways to pay for this additional spending, some of it dubious and just about all of it less than immediate. Primary as a source of revenues is the plan to sell 58 million of barrels of crude oil from the strategic petroleum reserve. Given Washington’s past reluctance to sell from the reserve, this is an unusual move, especially since it comes at a time of global crude surpluses. The Energy Department has stated that despite today’s relatively low prices, the government will turn a profit on the sale, claiming that it paid on average only $29.70 a barrel for the oil it plans to sell. Adjusted for inflation, however, that purchase price in today’s dollars comes closer to $74 a barrel. (It is a good thing that the federal government does not operate under the jaundiced eye of the Securities Exchange Commission, much less the Bureau of Financial Consumer Protection.)

The deal will also look to raise funds from a renegotiation of the Standard Reinsurance Agreement, a subsidized arrangement in which taxpayers insure farmer revenues through private companies. It would also auction off portions of the government-owned broadcast spectrum; presumably improve federal debt collection by amending the original 1934 law to permit “the use of automated telephone equipment to call cellular telephones;” force single-payer pension plans to pay marginally higher premiums to the government’s Pension Benefit Guaranty Corporation; cut back on disability fraud by excluding evidence submitted by sanctioned and unlicensed health-care providers and by imposing new and stronger penalties on those found guilty of fraud; and raise an estimated $11 billion over time by making it easier for the IRS to audit hedge funds and private equity firms.

Though the legislation focuses a lot of attention on Social Security and Medicare, none of it even hints at the fundamental reform these programs so urgently need. The only cost savings occur at the margins. The legislation would force generic drug producers to pay Medicare an additional rebate if the drug’s price rises faster than inflation, something brand drugs already do. It also imposes a 2 percent cut in Medicare provider payments and constrains hospitals from buying offsite locations in order to increase pricier outpatient services. It would also end the practice of “file and suspend.” This widely accessed loophole had allowed couples to file for Social Security so that one could collect spousal benefits while the other deferred his or her benefits until a later date when the system pays at a higher rate.

None of this comes near financing the additional outlays and forgone revenues scheduled in the legislation. Because the Social Security disability fund faces an impeding insolvency, the legislation would continue benefits in that program by directing more than the usual part of payroll taxes into it. This would, it estimates, stave off the fund’s insolvency until 2022. Though this move would deny the general retirement portion of Social Security monies it would otherwise receive, the legislation makes no mention of how much closer to insolvency it will bring this part of the system.

The legislation denies Medicare revenues by blocking a premium increase scheduled in Part B of the program. The various algorithms used to calculate costs on this insurance had called for a 52 percent premium hike in 2016 for some 8 million Part B enrollees, about 30 percent of the total. The deal holds those premium hikes to 15 percent. It would pay for the lost revenue by allowing the Medicare Trust Fund to borrow from the Treasury, looking for repayment over the longer run by asking those beneficiaries who would have seen the larger premium increase to pay an extra $3 each month until that very distant date when the debt is repaid.

Though outlays during the next two years are now planned to rise $111 billion over where they otherwise would have been and revenues, particularly on Medicare premiums, will fall shorter than they otherwise would have, the Congressional Budget Office estimates that over the next ten years all the various means of paying for this initial largess will shrink the cumulative deficit by $80 billion. This sounds good on the surface, but, it is wise to remember that these matters seldom work out quite so tidily. Because this deal, as always with Washington, puts the additional expenses up front and waits years sometimes to pay for them, it leaves ample time for Congress and the president, this one or the next, to alter the budget landscape yet again.


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