Douglas Holtz-Eakin, director of the Congressional Budget Office and Trustee Professor of Economics at the Maxwell School of Syracuse University, gave a lecture titled "The Economic and Budget Outlook: Policies and Priorities" in the Hamilton College Chapel on April 11. Holtz-Eakin discussed the CBO's current budget projections and how they could be affected by policy changes. His lecture was part of the Arthur Levitt Public Affairs Center 2004-2005 series, "The U.S. Budget: Power, Politics and Priorities."
Holtz-Eakin began by discussing what the Congressional Budget Office (CBO) does and how it came to be. Created 30 years ago by the Budget and Empowerment Act of 1974, the CBO emerged out of a conflict between Congressional leaders and President Nixon over the implementation of the federal budget. The purpose of the CBO is to give Congress the ability to formulate, organize and track the U.S. Budget, independent from the Office of Management and Budget in the executive branch. Essentially, Holtz-Eakin said, the CBO is a high level consulting firm for the US Congress which provides analysis on the budgetary impact of every bill that comes out of committee. This comes to over 2000 estimates a year.
Holtz-Eakin outlined some of the major events and policy changes in the past several years which have had a large impact on the federal budget, including tax cuts, the No Child Left Behind act, 9/11, and the wars in Afghanistan and Iraq. There are an enormous array of policy initiatives in which economic knowledge needs to be considered, he said. For example, proposed changes in prescription drug regulations required the CBO to estimate costs in a market that did not yet exist with only vague outlines. To do this, they relied on research from academia, think tanks, and business. "Everything I've taught has turned out to be more real life than I ever dreamed," Holtz-Eakin said of being an economics professor. "You use the same tools to predict effects."
With the new Congress, Holtz-Eakin said, everything regarding the budget is on the table, including both taxing and spending policy. Currently, approximately 1/6 of the federal budget is military spending and 1/6 is other discretionary spending, while 2/3 of the budget is dedicated to entitlements and mandatory programs such as Social Security, Medicare, and Medicaid. The budget deficit for fiscal year 2004 was $412 billion -- an all time dollar high, though it represented a lower proportion of national income than deficits in the 1980s, he said.
Holtz-Eakin said "The CBO creates a baseline projection for the future budget outlook by asking what would happen if the government was on fiscal autopilot?" The current CBO projection shows a decrease in deficits over the coming years. It is important to consider what is and is not factored into the projection, he said. The current projection assumes above-trend economic recovery will continue, and also assumes that current tax changes will expire and not be renewed. Not included in the CBO projection are medicare changes which may increase spending, as well as future costs for the wars in Afghanistan and Iraq. It is difficult to make projections based on current law, Holtz-Eakin said, because current law does not reflect future policy directions. These policy directions cannot be predicted because of the vastly different priorities that exist in the political environment.
Holtz-Eakin went on to talk about some of the issues in the 2/3 of the budget which makes up entitlements such as Social Security, which he said is definitely an important issue to be addressed. The key policy problem with Social Security, he said, is that "benefits will be above revenues as far as the eye can see." We need to bring the system into alignment sooner rather than later, he said, so that people can plan ahead and less adjustment will be necessary to sustain the program. By law, Holtz-Eakin is not able to make policy recommendations as director of the CBO. However, he discussed some of the pros and cons of the prefunded and pay-as-you-go approaches to Social Security. Pay-as-you-go allows genuine social insurance for everyone, he said, and can have the effect of redistributing wealth. A prefunded system allows the possibility of higher returns as well as labor market and savings incentives. Both have the transitional cost problem of "getting from here to there," he said. In general, Holtz-Eakin said, policy goals should be considered first and then a system of finance should be determined to fit these goals, as the government has much more flexibility in its budget policy than a private corporation does.
Holtz-Eakin's lecture was part of the Arthur Levitt Public Affairs Center's 2004-2005 speaker series on "The U.S. Budget: Power, Politics and Priorities." The next speaker will be Dinesh D'Souza, Robert and Karen Rishwain Fellow at the Hoover Institution at Stanford University and senior domestic policy analyst in the Reagan White House.
-- by Caroline R. O'Shea '07
Holtz-Eakin began by discussing what the Congressional Budget Office (CBO) does and how it came to be. Created 30 years ago by the Budget and Empowerment Act of 1974, the CBO emerged out of a conflict between Congressional leaders and President Nixon over the implementation of the federal budget. The purpose of the CBO is to give Congress the ability to formulate, organize and track the U.S. Budget, independent from the Office of Management and Budget in the executive branch. Essentially, Holtz-Eakin said, the CBO is a high level consulting firm for the US Congress which provides analysis on the budgetary impact of every bill that comes out of committee. This comes to over 2000 estimates a year.
Holtz-Eakin outlined some of the major events and policy changes in the past several years which have had a large impact on the federal budget, including tax cuts, the No Child Left Behind act, 9/11, and the wars in Afghanistan and Iraq. There are an enormous array of policy initiatives in which economic knowledge needs to be considered, he said. For example, proposed changes in prescription drug regulations required the CBO to estimate costs in a market that did not yet exist with only vague outlines. To do this, they relied on research from academia, think tanks, and business. "Everything I've taught has turned out to be more real life than I ever dreamed," Holtz-Eakin said of being an economics professor. "You use the same tools to predict effects."
With the new Congress, Holtz-Eakin said, everything regarding the budget is on the table, including both taxing and spending policy. Currently, approximately 1/6 of the federal budget is military spending and 1/6 is other discretionary spending, while 2/3 of the budget is dedicated to entitlements and mandatory programs such as Social Security, Medicare, and Medicaid. The budget deficit for fiscal year 2004 was $412 billion -- an all time dollar high, though it represented a lower proportion of national income than deficits in the 1980s, he said.
Holtz-Eakin said "The CBO creates a baseline projection for the future budget outlook by asking what would happen if the government was on fiscal autopilot?" The current CBO projection shows a decrease in deficits over the coming years. It is important to consider what is and is not factored into the projection, he said. The current projection assumes above-trend economic recovery will continue, and also assumes that current tax changes will expire and not be renewed. Not included in the CBO projection are medicare changes which may increase spending, as well as future costs for the wars in Afghanistan and Iraq. It is difficult to make projections based on current law, Holtz-Eakin said, because current law does not reflect future policy directions. These policy directions cannot be predicted because of the vastly different priorities that exist in the political environment.
Holtz-Eakin went on to talk about some of the issues in the 2/3 of the budget which makes up entitlements such as Social Security, which he said is definitely an important issue to be addressed. The key policy problem with Social Security, he said, is that "benefits will be above revenues as far as the eye can see." We need to bring the system into alignment sooner rather than later, he said, so that people can plan ahead and less adjustment will be necessary to sustain the program. By law, Holtz-Eakin is not able to make policy recommendations as director of the CBO. However, he discussed some of the pros and cons of the prefunded and pay-as-you-go approaches to Social Security. Pay-as-you-go allows genuine social insurance for everyone, he said, and can have the effect of redistributing wealth. A prefunded system allows the possibility of higher returns as well as labor market and savings incentives. Both have the transitional cost problem of "getting from here to there," he said. In general, Holtz-Eakin said, policy goals should be considered first and then a system of finance should be determined to fit these goals, as the government has much more flexibility in its budget policy than a private corporation does.
Holtz-Eakin's lecture was part of the Arthur Levitt Public Affairs Center's 2004-2005 speaker series on "The U.S. Budget: Power, Politics and Priorities." The next speaker will be Dinesh D'Souza, Robert and Karen Rishwain Fellow at the Hoover Institution at Stanford University and senior domestic policy analyst in the Reagan White House.
-- by Caroline R. O'Shea '07
