June 14, 1999
FOR IMMEDIATE RELEASE:
Monday, June 14, 1999, 12:01 a.m. (ET)
Last Minute "Technical" Change Turns Herger-Shaw
Lock-Box Bill into Measure That Increases the Risk of Recession
House Members Vote for Bill with No Information About the Last-Minute Change
by Robert Greenstein
On May 27, the House passed Social Security "lock-box" legislation sponsored by Reps. Wally Herger and Clay Shaw. This legislation contains three elements. First, it establishes a majority point of order in the House and a 60-vote point of order in the Senate against a budget resolution that shows a deficit for any year in the non-Social Security budget. Second, it establishes a point of order against any legislation that would either cause a deficit to emerge in the non-Social Security budget or enlarge such a deficit if one already exists. Third, it would make it illegal for any government document to show numbers in the same document for the Social Security and non-Social Security parts of the budget or to show unified budget totals.
The Herger-Shaw bill passed the House by an overwhelming 416 - 12 vote. Unfortunately, due to a last-minute drafting change that was made by the House parliamentarian for technical reasons but that has significant adverse policy implications and was not explained in the House floor debate many Members cast their votes on the bill under some misimpression of what the legislation would do. The actual legislation differs in a critical respect from what it was widely understood to do.
As originally introduced, the bill would establish a majority point of order in the House and a 60-vote point of order in the Senate against any bill, amendment conference report, or budget resolution that would either cause a deficit to emerge in the non-Social Security budget or enlarge such a deficit if one existed. The bill was designed in this manner to erect barriers against legislation that would result in the use of Social Security surpluses to finance deficits in the non-Social Security budget and to accomplish this without risking damage to the economy. The bill did not seek to erect barriers to the return of temporary deficits in the non-Social Security budget caused by an economic downturn or other developments beyond policymakers' control, such as a large drop in the stock market that could result in a decrease in capital gains revenues.
On the eve of the bill's coming to the House floor, however, the parliamentarian ruled the bill had a technical drafting problem. Since a budget resolution is not a law, the parliamentarian said, a budget resolution cannot bring back or enlarge deficits. The parliamentarian's ruling led to a change in the language of the bill with respect to the treatment of budget resolutions. As revised, the bill establishes a majority point of order in the House and a 60-vote point of order in the Senate against any budget resolution in which non-Social Security outlays are projected to exceed non-Social Security revenues. This point of order would apply regardless of the cause of a projected non-Social Security deficit. It would affect budget resolutions that show non-Social Security deficits that have been engendered by adverse developments in the economy.
In short, a seemingly technical change of a few words in the bill altered the legislation in a fundamental way. The bill now establishes a point of order that requires 60 votes in the Senate and 218 votes in the House to overcome against any budget resolution that shows an on-budget deficit (i.e., a deficit in the non-Social Security part of the budget), even if the economy is faltering and at risk of slipping into recession or is already in recession.
This change has turned the bill into a measure that represents unsound economic policy. Because of the change, the legislation would make the adoption of austerity policies more likely when the economy is weak. Such policies, however, would be counterproductive; cutting programs or raising taxes when the economy is on the brink of, or in, a recession or in a nascent recovery from a recession is a prescription for making recessions more frequent and deeper.
That the Herger-Shaw bill was seen as eschewing this type of provision was an important reason it secured such a strong bipartisan vote. The last-minute change made as a result of the parliamentarian's ruling was never mentioned in floor debate on the bill. It appears hardly any Members knew of the change.
This analysis examines this as well as lesser problems the Herger-Shaw bill poses. In addition, the analysis (see below) explains that the Herger-Shaw bill would add little to, and is essentially redundant with, current budget enforcement procedures related to legislation, except in recessions, wars, and emergencies. Those, however, are precisely the times when there needs to be flexibility in these rules. As the analysis also explains, the Herger-Shaw bill would not strengthen or improve the protection of Social Security finances (see box).
How the Bill Increases Risks of Recession
Later this year or next, Congress and the President may enact legislation that uses much or all of the projected non-Social Security surpluses for tax cuts, increases in the discretionary caps, and possibly other items. If this occurs, little of the projected non-Social Security surpluses may remain.
The recently adopted Congressional budget resolution is a case in point; it calls for using most of the projected non-Social Security surpluses for tax cuts. Many Members of Congress of both parties also are calling for using a portion of the surpluses to ease the unrealistic caps on discretionary spending. Some easing of these caps appears likely, especially in light of the bipartisan support for defense spending increases and the need to pass appropriations bills.
If Congress and the President pass legislation that consumes a substantial portion of the projected surpluses in the non-Social Security budget but the economy subsequently weakens, the non-Social Security budget is likely to slide back into deficit. When economic growth is sluggish, revenue growth slows while costs for programs like unemployment insurance rise.
Deficits also can emerge for other reasons. CBO has cautioned that its surplus forecasts could be off by large amounts, particularly if revenues grow more slowly than it has forecast. A drop in the stock market, for example, would result in lower-than-expected capital gains tax revenues, which could push the non-Social Security budget back into deficit. CBO warned this year in its annual report on the budget and the economy that "considerable uncertainty surrounds its budget estimates" and "actual budget outcomes almost certainly will differ from the baseline projections..." CBO added that the farther into the future one gets, the more uncertain its forecasts become and the larger the amount by which its forecasts are likely to prove to be incorrect. If the forecasts prove significantly too rosy a distinct possibility slow economic growth could lead to a deficit in the non-Social Security budget.
As altered to respond to the parliamentarian's ruling, the Herger-Shaw bill would block consideration of a budget resolution which shows a deficit that has emerged in the non-Social Security budget due to a weakening of the economy or a slacking of revenues, unless 60 Senators and 218 House members vote to quash the point of order against the resolution. The procedures to block such a budget resolution would apply irrespective of whether the unified budget remained in surplus.
The resulting need to produce budget resolutions showing balance in the non-Social Security budget would increase the likelihood of program cuts or tax increases being instituted in periods of slow growth and during the early stages of recessions, before it is clear a recession is underway. The more the economy slows, the larger the expenditure cuts or tax increases that could be required to prevent the non-Social Security budget from falling out of balance.
Bill Poses Risks for Appropriations Bills
The Herger-Shaw bill could place appropriations bills at risk. Suppose Congress approves a budget resolution that assumes enactment of program cuts or tax increases to eliminate a projected non-Social Security deficit that has emerged due to slower-than-forecast economic growth. Suppose Congress then is unable to pass the program cuts or tax increases or passes them but not in the full amount the budget resolution assumed. In such a circumstance, even if the Appropriations Committees have met all of their targets, the last appropriations bill or two would probably be said to "cause or increase" a non-Social Security deficit. (In determining whether legislation would cause or increase a deficit, the Herger-Shaw bill appears to measure any deficit that would result against the deficit, if any, set forth in the budget resolution.)
Such appropriations bills consequently would trigger a point of order under the Herger-Shaw legislation. The operation of the points of order in the legislation thus appears to be skewed against the appropriations process.
Imposing austerity measures when the economy slows, however, is the reverse of how sound fiscal policy should function. This provision of the Herger-Shaw proposal risks tipping a faltering economy into recession.
This provision also poses risks to the economy during the early stages of a recovery. The largest fiscal effects of an economic slowdown are a reduction in corporate and personal income taxes. These taxes often are paid with a lag in time. As a result, revenue collections usually remain low for awhile after a recession has ended and a recovery has started. Unemployment insurance and food stamp expenditures also often lag behind the slowdown and continue rising during the early part of the recovery. This reflects the fact that unemployment rates typically continue to rise after a recession has ended and recovery has begun. (The point at which a recession ends and a recovery begins is the part at which the economy hits bottom, stops falling, and begins to grow again. Thus, the point at which a recovery begins is the low point of the economic cycle; the economy often is quite weak at that time.)
As a result, we could experience non-Social Security deficits for a one or a few years after a recession is officially over. Yet the fact that the recession has ended could make it difficult to overcome the points of order the Herger-Shaw bill would create against a budget resolution that recognized the deficit. If such a point of order could not be overcome, Congress would find itself forced to cut programs or raise taxes. Yet that could abort the nascent recovery. (Alternatively, Congress could pass a budget resolution purporting to eliminate such a deficit and then violate the budget resolution.)
One of the nation's most respected economists, Robert Reischauer of the Brookings Institution, delivered testimony that bears on this issue in an appearance before the House Budget Committee in 1992 in his capacity as director of the Congressional Budget Office. Reischauer explained that when the economy is weak, the government acts automatically to stabilize it, since revenue collections automatically slow and spending on unemployment insurance and means-tested benefit programs automatically rises. Reischauer observed that "This automatic stabilizing occurs quickly and is self-limiting it goes away as the economy revives but it temporarily increases the deficit. It is an important factor that dampens the amplitude of our economic cycles."(1) Under a requirement that the budget resolution must show balance in the non-Social Security budget even if the economy is weak, the government's automatic stabilizing role would be cast into doubt.
To be sure, the bill would allow the budget resolution to show an on-budget deficit if three-fifths of the Senate and a majority of the House voted to allow that. But it is unlikely a three-fifths majority would materialize in the Senate (and it may be unlikely that 218 votes would materialize in the House) until after the economy was already in or very near a recession and overly restrictive fiscal policies had caused some damage. The Office of Management and Budget and the Congressional Budget Office have never forecast a recession before one started. We usually do not know we are in a recession until the downturn is at least several months old. As a result, these procedures could lead to stiffer austerity measures being taken in years when the economy was weakening but not yet in a full-blown recession. Such measures could result in a recession that otherwise would not have happened or not have happened so soon.
Problems Could be Solved with a Modest Change in Bill Language
If there is a will to do so, this problem in the Herger-Shaw bill would not be difficult to solve. Doing so would entail making a minor change in wording to restore the intent of the original Herger-Shaw legislation.
All that would be needed is to modify the language so that the point of order lies against a budget resolution which shows an on-budget deficit larger than the deficit, if any, that would occur under current policy. Alternatively, the point of order could lie against any budget resolution that assumes enactment of legislation that would bring back or enlarge an on-budget deficit. Either approach would accomplish what the original Herger-Shaw intended bill to do, while addressing the technical drafting problem with the original language.
Adding to this problem, a three-fifths majority could be particularly difficult to garner if a recession were regional rather than national in nature, as is usually the case at least at the start of an economic downturn. It might not be possible to obtain a three-fifths majority until a recession had spread to a substantial majority of states.
Past recessions generally have started in some regions and taken time to expand; they also have hit some regions much harder than others. In the last recession, New England and the mid-Atlantic states began experiencing declines in employment a full year before employment turned down in most of the rest of the country. If rising unemployment insurance costs and falling revenues in several regions threatened to push the non-Social Security budget out of balance, would enough Senators from states where economic problems were not yet evident be willing to allow a budget resolution to show a deficit in the budget? If not, fiscal retrenchment might be required that could make the downturn deeper, and regions needing federal recession relief might find it was not forthcoming when they needed it.
Economic downturns also tend to last longer in some regions than others. In the last recession, employment losses lasted two to four years in California and much of New England and the mid-Atlantic states, while a number of other states recouped their employment losses in a matter of months. This pattern was reversed in the recession of the early 1980s; that downturn was sharpest and lasted longest in the Midwest and South. The regional patterns that characterize economic downturns raise questions about the wisdom of enacting legislation that prohibits a budget resolution from showing a deficit in the non-Social Security budget and allows this stricture to be relaxed only if three-fifths of the Senate so approve.
The Temptation to "Cook the Books"
Because of these problems, this element of the Herger-Shaw bill also would be likely to produce another result use of heroic assumptions and dishonest estimates in budget resolutions so the resolutions did not show deficits in the non-Social Security budgets. We saw similar developments in the late 1980s, when unrealistic estimates were used to avert sequesters under the Gramm-Rudman-Hollings Act. With the advent of the Budget Enforcement Act of 1990, which enforces budget discipline through discretionary caps and pay-as-you-go rules rather than through rigid deficit targets that are not responsive to economic cycles, the budgets again reflected relatively honest numbers. The Herger-Shaw bill, as modified due to the parliamentarian's ruling, would likely usher in an era of budget resolutions using unreliable assumptions when problems emerged.
Polls indicate there is a widespread belief among the public that a primary reason Social Security faces long-term financing problems is that the reserves that were supposed to accumulate in the Social Security trust funds to help finance the benefits of future retirees have been depleted by use of Social Security revenues for other purposes. Lock-box proposals such as the Herger-Shaw bill are often portrayed as shoring up Social Security by ending these raids on the trust funds.
In fact, the Social Security trust funds have not been "raided," and such portrayals of lock-box legislation are incorrect. The Social Security trust funds now have reserves that equal $760 billion and are scheduled to rise to $4.5 trillion by2021. Social Security's long-term financing problems are the result of entirely different factors. Moreover, lock-box proposals such as the Herger-Shaw legislation would not shore up Social Security or address its long-term financing problems. Doing so entails tackling Social Security's long-term financial problems directly.
- When the Social Security trust funds take in more in revenues in a year than the trust funds need to pay Social Security benefits that year, the Treasury borrows the surplus funds and provides the trust funds with Treasury bonds in return. This occurs regardless of whether the non-Social Security budget is in deficit or in surplus. The Herger-Shaw bill does not change this.
If there is no deficit in the non-Social Security budget, the Treasury uses these surplus Social Security revenues to pay down the publicly held debt. If there is a deficit in the rest of the budget, the surplus Social Security revenues are used to cover that deficit, with any remaining surplus revenues going to pay down the debt. The Social Security trust funds receive the same amount of Treasury bonds regardless of whether the Treasury uses the surplus funds to help fund other government programs or to pay down debt. Social Security's assets increase by the same amount either way.
Deficits in the non-Social Security budget thus do not diminish the assets the Social Security trust funds hold and do not result in raids on trust funds. The existence of such deficits in recent years is not why Social Security faces long-term financing problems. Those problems are primarily due to demographic changes that will result in more retirees and slower labor force growth in future decades and to increases in average life expectancy.
- Since the trust funds do not lose assets when the Treasury uses surplus Social Security surpluses to cover deficits in the non-Social Security budget, the lock-box proposals would not alter the level of assets in the trust funds. As a result, such proposals do not extend the year now projected to be 2034 in which Social Security will become insolvent (i.e., will no longer be able to pay full benefits).
To be sure, using the Social Security surpluses to pay down debt is a sound idea; it is helpful both to the long-term prospects of the economy and to the nation's long-term fiscal health. Doing so increases national saving, which in turn should result in modest increases in the long-term economic growth rate. And a larger economy can more readily afford to provide the resources to finance Social Security, Medicare, and other needs in the future. Paying down debt also reduces the interest payments the federal government must make on the debt, thereby creating more room in the budget to help finance programs such as Social Security and Medicare in the decades ahead.
As explained elsewhere in this analysis, however, the Herger-Shaw bill's efforts to prevent Congress from passing legislation that results in the use of Social Security surpluses to fund other programs, rather than to pay down debt, largely duplicates provisions of current law. Except in economic downturns, emergencies, and wars, the legislation does not chart new ground here.
Other Weaknesses in the Legislation
The Herger-Shaw bill also raises several other concerns. In addition, it does little that current law does not already do (except in recessions, wars, or emergencies) to make it more difficult for Congress to pass legislation that uses Social Security surplus revenues to help finance other parts of the government.
1. The Bill's Large Loophole.
The Herger-Shaw bill exempts from the points of order it establishes any legislation that contains a sentence designating the legislation as "Social Security reform" or "Medicare reform." The Herger-Shaw proposal provides no definitions or standards to explain what these terms means. There is, for example, no requirement that to be designated as Social Security or Medicare reform legislation, a bill at least must reduce the long-term actuarial imbalance in Social Security or Medicare by some minimum amount.
The bill thus contains a large loophole, since the terms "Social Security reform" and "Medicare reform" would mean whatever Congress says they mean. A bill containing modest Social Security or Medicare reforms and a large tax cut would be exempt from the points of order against legislation that results in the return or enlargement of on-budget deficits if the bill included the magic words designating it as Social Security or Medicare reform legislation.
To take an extreme case, a bill that contained large payroll tax cuts to finance private accounts without including offsetting Social Security benefit reductions, and that also included income tax cuts, might be designated "Social Security reform." Yet such a bill could accelerate Social Security insolvency, bring back deficits in both the non-Social Security budget and the unified budget, and cause the national debt to be higher than would otherwise be the case.
2. The Herger-Shaw legislation would make it more difficult for Congress to fashion appropriate responses to recessions.
As noted, the bill could lead to fiscal retrenchment when the economy weakens. The bill also poses a second problem with respect to economic downturns. Suppose recession sets in and temporarily casts the non-Social Security budget back into deficit. Under the Herger-Shaw bill, a point of order would lie against legislation to provide a temporary extension of unemployment insurance, as well as against other temporary stimulus measures such as a temporary tax cut, because they would enlarge the deficit. Such measures would need a three-fifths majority to pass the Senate. The three-fifths requirement would hold even if the President and a majority of Congress agreed the legislation should have an emergency designation.
During a recession, measures such as these can help lessen hardship and prevent a decelerating economy from sinking further. So long as the measures are temporary, they would have little adverse long-term fiscal effect. Such measures ought not require a three-fifths vote to pass the Senate during economic downturns.
Most other relevant federal budget laws including the Budget Enforcement Act and its predecessor, the Gramm-Rudman-Hollings Act have contained provisions to suspend their procedures when the economy stumbles and real growth falls below one percent of GDP for two consecutive quarters (as well as when the nation is at war). The Abraham-Domenici and Kasich-Ryan lock-box bills contain provisions for suspending their rules when growth drops below one percent for two straight quarters or war occurs. The Herger-Shaw bill, however, does not.
3. The Herger-Shaw bill also may pose problems for other types of emergency legislation.
If the non-Social Security budget is in balance but not in surplus, as would be the case if Congress chooses to use up the surplus for such items as tax cuts and increases in the discretionary spending caps, emergency spending would bring back on-budget deficits. As a result, if the budget were in close balance and a sudden need arose to respond to a major natural disaster, the resulting emergency spending bill would face a point of order under the Herger-Shaw bill and would need a three-fifths vote to pass in the Senate, unless its costs were offset. This problem would be most acute during economic downturns that have caused a temporary re-emergence of an on-budget deficit; during such periods, any emergency spending to respond to a disaster or other unforeseen events requiring an urgent response would be subject to a point of order and require three-fifths Senate approval.(2)
Because the Herger-Shaw bill provides no exceptions to its point-of-order requirements during economic downturns or in the case of emergencies, it accords too much power to Senate minorities. In such circumstances, Senate minorities with the ability to stop a Senate majority from moving legislation the House had approved would enjoy substantial leverage over both their Senate colleagues and the Members of the House.
Bill Does Not Strengthen Current Enforcement Rules
Finally, the Herger-Shaw bill is generally presented as tightening current budget rules to make it more difficult for Congress to adopt legislation that would result in Social Security surpluses being used for other purposes. Current budget rules, however, already contain some safeguards against such action by Congress. The Herger-Shaw bill adds little to them, except in economic downturns, emergencies, or wars.
- The current pay-as-you-go rules and discretionary caps effectively preclude the enactment of legislation that would result in the use of projected surpluses including both the Social Security surplus and non-Social Security surpluses except in the case of emergencies, wars, or economic downturns. A violation of the pay-as-you-go rules or a breach of the discretionary caps triggers sequestration of a sufficient magnitude to ensure that the surpluses are not consumed.
- Until this year, Congressional budget resolutions have adhered to the pay-as-you-go rules and discretionary caps; doing otherwise invites sequestration, unless the pay-as-you-go rules are changed or the caps are raised. Since legislation that violates the budget resolution is subject to a point of order including a 60-vote point of order in the Senate any legislation that would cause the Social Security surpluses to be used for other purposes in coming years already is subject to a 60-vote point of order under current law.
- This year's budget resolution ignores the pay-as-you-go rules and includes a large tax cut without offsets. This tax cut would not be subject to a 60-vote Senate point of order for violating the budget resolution. But the tax cut would trigger sequestration. As a result, it still is effectively blocked, unless legislation were to be enacted altering or waiving the pay-as-you-go rules. Any such legislation to weaken the pay-as-you-go rules, however or for that matter, any legislation to raise the discretionary caps would itself either be subject to a 60-vote point of order or subject to a filibuster. (If such legislation is packaged so it cannot be filibustered, then it is subject to a 60-vote point of order, and vice versa.)
In short, under current law, legislation that would result in the return of, or the enlargement of, on-budget deficits and the consequent use of Social Security surpluses already requires 60 votes to pass the Senate. (So does legislation that would reduce non-Social Security surpluses, an area the Herger-Shaw bill does not address.) The Herger-Shaw bill thus does not tighten existing procedures and is essentially redundant with current safeguards, except in cases of economic downturns, emergencies, or wars. Those, however, are precisely the times when there ought to be flexibility in these rules.
Taking a Point to an Illogical Conclusion
The Herger-Shaw bill would make it illegal for any official government document to contain both on-budget and off-budget numbers. This prohibition would apply to Congressional Committees and individual Members alike. Thus, it would be illegal for a Member of Congress, in a newsletter to his or her constituents, to show both on-budget and off-budget deficits and surpluses, even if he refrains from adding them together. The Member could not inform his or her constituents of the level of unified budget deficits or surpluses without breaking the law. If the Member wanted to convey such information, he would have to write two different newsletters with one newsletter containing the on-budget numbers and the other containing off-budget numbers and trust the constituents to add the two sets of numbers together to get the unified budget totals.
(Moreover, if it is the intention of some the bill's backers that the bill ultimately should supplant the current pay-as-you-go rules, then the effect would be to weaken fiscal discipline. If the pay-as-you-go rules no longer applied with respect to projected on-budget surpluses, such surpluses could be used in full to pay for tax cuts and entitlement increases. If that occurred and the projected surpluses failed to materialize in substantial part, on-budget deficits could return, and Social Security surpluses would be used to cover those deficits.)
It also should be understood that the Herger-Shaw bill does not improve Social Security or Medicare solvency. The legislation does not extend the point at which either the Social Security trust funds or the Medicare Hospital Insurance trust fund are projected to become insolvent. Addressing those matters entails taking on directly the long-term financing problems that Social Security and Medicare face.
1. Statement of Robert D. Reischauer, Director, Congressional Budget Office, before the House Budget Committee, May 6, 1992.
2. The FY 2000 Congressional budget resolution establishes a 60-vote Senate point of order against an emergency designation for non-defense expenditures. This is not a permanent change in procedure. It is a one-year experiment that expires upon adoption of next year's budget resolution.