In Good Times and Bad: Designing Legislation That Responds to Fiscal Uncertainty David Kamin Assistant Professor of Law, NYU Presentation at Brookings Hutchins Center on Fiscal and Monetary Policy 12/15/14 1 Policy Drift: Simple Illustration Policy Drift as Time Passes and New Information Is Received Threshold for correction by Congress Actual policy based on current information Intended policy based on information at time of enactment Threshold for correction by Congress 2 The Great Recession: Initial Expectations Versus Reality 3 1983 Social Security Projection Versus Today’s Social Security Security Balance, Intermediate Trustees Projection* 4.0% 3.0% 1983 Projection 2.0% 2014 Projection 1.0% 0.0% TF Solvent Through 2060 -1.0% -2.0% TF Solvent Through 2033 -3.0% -4.0% -5.0% 2058 2053 2048 2043 2038 2033 2028 2023 2018 2013 2008 2003 1998 1993 1988 1983 Note: * The 1983 Trustees report gave two intermediate projections. This shows the more pessimistic of the two. Source: 1983 and 1984 Social Security Trustees Reports. 4 Unemployment Rate as Trigger On average, unemployment rate over a 6 month period increased by 0.5 percentage points in 3.5 months after the start of a recession and crossed below the threshold in 5 months after the end. 6 Month Change in the Unemployment Rate (Shaded Areas Show Periods of Recession as Designated by the NBER) 3 2 1 0 -1 Source: Author’s calculations based on BLS data. Nov-13 Jul-11 Mar-09 Nov-06 Jul-04 Mar-02 Nov-99 Jul-97 Mar-95 Nov-92 Jul-90 Mar-88 Nov-85 Jul-83 Mar-81 Nov-78 Jul-76 Mar-74 Nov-71 Jul-69 Mar-67 Nov-64 Jul-62 Mar-60 Nov-57 Jul-55 Mar-53 Nov-50 -3 Jul-48 -2 5 Making Payroll Taxes and Income Taxes Responsive to Health Cost Growth Payroll Taxes as a Percent of Gross Medicare Under Current Law 45% 40% Payroll Taxes, % of Medicare: Zero ECG 35% Payroll Taxes, % of Medicare: Extended Baseline 30% 25% 20% 15% By contrast: In both scenarios, Medicare premiums would remain roughly constant at 10 percent of gross Medicare spending. 10% 5% 2089 2084 2079 2074 2069 2064 2059 2054 2049 2044 2039 2034 2029 2024 2019 2014 0% Source: Author’s calculations based on the 2014 CBO Long-Term Outlook. 6 Family of Tools for Addressing Policy Drift: Some Better Than Others • Priority should be given to automatic-adjustment triggers, though not appropriate in all circumstances (see Medicare reimbursement and benefits). • Alarm-bell triggers should be used with caution—can worsen drift if Congress fails to respond. 7 Budget Policy Moving in Fits and Starts 180 Annual Real Percent Change in Budget Authority by Subfunction, 1947-2013 160 140 120 100 80 60 40 20 -100 -92 -84 -76 -68 -60 -52 -44 -36 -28 -20 -12 -4 4 12 20 28 36 44 52 60 68 76 84 92 100 108 116 124 0 Source: This is a version of Figure 4.14 in Jones and Baumgartner (2005). It relies on updated data made available here: http://www.policyagendas.org. 8