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News Analysis: Balanced Budget Fight Is Philosophical and Fiscal

March 12, 2013 by Leave a Comment

That question is at the heart of the warring Republican and Democratic budget plans coming out this week — with Representative Paul D. Ryan of Wisconsin vowing to eliminate the federal deficit within 10 years, and Senator Patty Murray of Washington State setting a more modest goal of bringing spending closer in line with revenue over time.

While economists generally agree that narrowing the government’s deficit and limiting the size of the debt are necessary in the long run, most argue that balancing the budget would not restore the nation’s still-weak economy to health in the near term. Indeed, rushing to do so with unemployment still elevated and the economy growing at only a sluggish pace could even set back the effort to reduce the deficit.

“There’s nothing magic about exact balance,” said Alice M. Rivlin, a Democratic economist at the Brookings Institution who has worked with Republicans like former Senator Pete V. Domenici on bipartisan deficit-reduction proposals. “The really important thing is to keep the debt from growing faster than the economy.”

The question of whether to balance the budget and when is a new staging ground in the long-running fiscal fight between Republicans and the White House. Mr. Ryan, whose previous budget proposals did not bring spending below revenue for decades, vowed this time to do so by 2023, in part to satisfy the demands of the more conservative members of the Republican Caucus.

Democratic proposals — both the Senate Democratic plan to be released on Wednesday and the White House budget coming next month — are both expected to narrow the deficit substantially without balancing the budget or running a surplus.

This week, each side accused the other of fiscal imprudence. Republicans accused the White House of “never” balancing the budget, and Mr. Ryan argued that ending deficits would foster a healthier and faster-growing economy.

“This is an invitation. Show us how to balance the budget,” Mr. Ryan said. “If you don’t like the way we’re proposing to balance our budget, how do you propose to balance the budget?”

Democrats argued that Mr. Ryan’s budget would balance only on the backs of the poor, cutting taxes for the wealthy while eviscerating the social safety net. Mr. Ryan’s plan does not “plausibly deal with deficit reduction,” Jay Carney, the White House press secretary, said Tuesday. “It is important to bring our deficits down and to reduce our deficit-to-G.D.P. But they are part of — those goals are part of the broader purpose here, which is to grow the economy and strengthen the middle class.”

Economists offered more nuanced views. Closing the budget gap over the longer term could be vital to sustaining economic health, some stressed, by ensuring that the government did not crowd out private investment and by helping to keep interest rates low. But that does not make it an immediate necessity.

“Over a long period of time, you’d have a higher standard of living if you moved to a balanced budget and stayed there,” said Joel Prakken, a senior managing director at Macroeconomic Advisers, a forecasting firm in St. Louis. “But you suffer some short-run pain, and you don’t want to inflict that when the unemployment rate is already high, the economy is still recovering from the legacy of the Great Recession, and the Federal Reserve has used up most of what’s in its quiver.”

Other goals — including stabilizing debt as a proportion of economic output, rationalizing the tax code and tackling the long-term fiscal challenge posed by entitlement programs — might prove more important in the coming years, several experts said.

“We need to do fundamental reforms to the system, and if we did fundamental reforms to the system, that would help so much that we wouldn’t need to worry about the deficit as much,” said Kenneth Rogoff of Harvard.

As sensible as a balanced budget might sound — much like a balanced checkbook for a family — countries are generally able to run modest deficits for years on end while still keeping debt stable as a share of economic output. One year’s deficit is effectively paid off by later economic growth, especially if a government is investing in public goods like roads and schools.

But several right-leaning fiscal experts described a balanced budget as a tool to force a fractious Congress to tackle the nation’s long-term budget problems.

Article source: http://www.nytimes.com/2013/03/13/us/politics/balanced-budget-fight-is-philosophical-and-fiscal.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Municipalities Fight a Proposal to Tax Muni Bond Interest

December 19, 2012 by Leave a Comment

The average annual property tax bill in his affluent suburban Washington county would ultimately rise by at least $100, he estimates, as a consequence of a proposal by the Obama administration to modestly tax the interest that wealthy investors receive from municipal bonds. That’s because, he says, if investors see less of a tax break, they will demand higher interest to make up the loss, and higher interest rates will mean higher borrowing costs for governments.

Mr. Firestine is on the front lines of a lobbying campaign by local and state governments, bond dealers, insurers and underwriters that is trying to pre-empt any attempt to limit or even kill the tax exemption. The administration has proposed capping the tax break that America’s highest earners now receive from municipal bonds, as part of its campaign to close loopholes and enlist more of the rich in fighting the federal deficit. Analysts expect such a cap to be part of a comprehensive tax overhaul package that Congress will take up next year, under a broad fiscal framework now being negotiated by President Obama and House Speaker John A. Boehner.

“This is the most serious threat to tax-exempt bonds since Roosevelt, in the late 1930s, tried to repeal the exemption across the board,” said John L. Buckley, a professor of taxation at Georgetown University and former chief counsel to the House Ways and Means Committee.

At present, the federal government forgoes about $32 billion a year in taxes by exempting the interest that investors earn from municipal bonds.

A wealthy couple in the highest tax bracket who receive $100,000 a year in municipal bond interest currently pay tax on none of it, effectively lowering their total tax bill by $35,000 under the current rates. But under the administration proposal to limit tax breaks for households whose taxable income is more than $250,000, the same couple would see the savings on their tax bill reduced to $28,000, effectively resulting in a $7,000 tax payment. (People in lower tax brackets would not be affected by the change.)

There are other proposals for taxing muni interest. The National Commission on Fiscal Responsibility and Reform, known as the Simpson-Bowles commission, has suggested taxing all municipal bond interest, not just the interest paid to people in the top bracket. Other experts have suggested taking the exemption away from municipal bonds that raise money for business, while still allowing it for bonds that finance public works.

Mr. Firestine, the president-elect of the Government Finance Officers Association, has been following developments, through conference calls arranged by the White House, and calling members of Congress.

Officials of some other government groups, like the New York City Housing Development Corporation, have formed a coalition with Wall Street groups like the Bond Dealers of America to lobby on the issue. But there is the sense of an uphill battle. Last week, Mr. Boehner said he accepted Mr. Obama’s proposal to limit various tax deductions and exemptions to the value now received by people in the 28 percent bracket. By implication, that includes municipal bonds.

President Obama’s proposal would not “grandfather” existing bonds, but would apply to all of the $3.7 trillion worth of municipal bonds now outstanding, most of them held by individual investors, directly or through mutual funds.

High-bracket investors who hold them would have to start paying an effective tax of 7 percent of the interest — or even more if the highest tax bracket increases from the current 35 percent.

“This would be the first time that a tax law has affected existing debt,” said Chris Mauro, head of municipal bond strategy at RBC Capital Markets.

Investors are anxious because they bought the bonds, often issued for 20 to 30 years, in the expectation that they would be tax-exempt until maturity.

Article source: http://www.nytimes.com/2012/12/20/business/municipalities-fight-a-proposal-to-tax-muni-bond-interest.html?partner=rss&emc=rss

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Bernanke Urges Obama and Congress to Do More for Economy

October 5, 2011 by Leave a Comment

Mr. Bernanke described the nation’s economic health in bleak terms, saying that “the recovery is close to faltering,” and suggested that avoiding another recession might require fresh government action. “We need to make sure that the recovery continues and doesn’t drop back,” he said.

Such talk from a Fed chairman usually means the central bank is preparing to reduce interest rates, and Mr. Bernanke said that the Fed was not ruling out such a step. But on Tuesday, as at other recent appearances, he made clear that his remarks were aimed at the rest of the government.

“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” Mr. Bernanke said. “Fostering healthy growth and job creation is a shared responsibility of all economic policy makers.”

Mr. Bernanke has repeatedly called on Congress to adopt a plan for paying down the federal debt, as well as for reducing inequities and loopholes in the corporate tax code, two ideas that enjoy wide support among economists. On Tuesday he also focused on housing policy, suggesting that the government could help underwater homeowners refinance and also improve the availability of mortgages for potential buyers.

However, the Fed chairman sidestepped a number of questions from Republicans and Democrats seeking his support for specific legislative proposals to reduce the federal deficit or to encourage job creation.

Mr. Bernanke’s critique of Congress mirrors mounting frustrations among some lawmakers over his leadership of the central bank. Some liberals want the Fed to try harder to increase growth by further reducing interest rates or injecting money directly into the economy. Conservatives, meanwhile, warn that any new efforts by the Fed are more likely to harm the economy.

Members of the Joint Economic Committee, where Mr. Bernanke answered questions for about 90 minutes Tuesday, pressed both of those arguments. But Mr. Bernanke remained firm in his position that the Fed already had done a great deal, and that it might do more — but not right now.

The central bank, he said, “is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability.”

In recent speeches, Mr. Bernanke had suggested that the economy did not need much more help, and that growth would pick up speed so long as the government did not interfere, for example, by making sharp cuts to short-term spending. But the Fed, like many private sector forecasters, has been too optimistic in its predictions over the last two years, repeatedly overestimating the pace of growth.

On Tuesday, Mr. Bernanke reiterated the Fed’s forecast that the health of the economy would probably improve, but suggested there was also a significant risk of a second recession unless the government acted to increase growth.

He suggested that Congress should keep four goals in mind: Reducing debts to a sustainable level, avoiding short-term spending cuts that could impede recovery, adjusting spending and tax policies to support growth, and improving the government’s decision-making process.

“There is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy,” Mr. Bernanke said.

Representative Mick Mulvaney, a South Carolina Republican, said that the central bank’s policy of maintaining low interest rates had made it irresistible for Congress to keep borrowing money rather than rein in federal spending.

“We’re able to borrow so much money right now at a reduced rate; there’s a very strong impetus here to simply put off the tough decisions,” he said.

Mr. Bernanke responded that the Fed was holding down interest rates, but “I don’t think that eliminates the responsibility of Congress to take its own action.”

The Fed’s own recent efforts to increase growth have been modest in scope. The central bank announced in August that it intended to maintain short-term interest rates near zero for at least two more years. In September, it announced an effort to further reduce long-term interest rates by moving $400 billion from investments in short-term Treasury securities to longer-term Treasury securities. Both policies are aimed at reducing borrowing costs for businesses and consumers.

Mr. Bernanke said on Tuesday that the Fed estimated the September program would reduce the interest rate on Treasury securities by about 0.2 percentage points. Analysts estimate that the August program will have a similar impact.

“We think that this is a meaningful but not an enormous support to the economy,” Mr. Bernanke said. “It should help somewhat on job creation and growth.”

But the efforts also have highlighted the limits of the Fed’s power. While it can reduce the cost of borrowing, it has not made it easier for consumers and businesses to qualify for loans. Mr. Bernanke noted the example of mortgage loans, saying that lower interest rates had not increased the volume of new loans.

Article source: http://www.nytimes.com/2011/10/05/business/economy/fed-chief-raises-doubts-on-recovery.html?partner=rss&emc=rss

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Amid Skepticism, Debt Panel Is Pressed for a Deal

August 17, 2011 by Leave a Comment

On the heels of a nasty showdown that led the nation to near default, a joint Congressional committee is preparing to try to devise a deficit-reduction plan that both parties can live with — a goal that has eluded Congressional leaders, a cadre of senators and the president of the United States.

The difficulty that this new committee will have scaling the steep walls of ideology and partisan mistrust is lost on few, including its own members.

“I approach this task like all tasks in Washington, with high hopes and tempered expectations, ” said Representative Jeb Hensarling, a Texas Republican and co-chairman of the Joint Select Committee on Deficit Reduction, whose six Senate members and six House members are divided evenly by party. “This committee has very serious work to do, but it should not be confused with Captain America or any other superhero.”

The impediments to the committee’s work lie as much in the way its success markers are defined as in the inherent partisan rancor — and substantial financial conflicts — among its members.

Under the legislation written to raise the debt ceiling this month, if the committee fails to come up with a plan by Nov. 23 to cut the federal deficit by $1.2 trillion over 10 years, or if its proposals are not approved by Congress roughly a month later, the government will automatically cut spending across a vast area of its operations, including the Pentagon.

But the cuts would not be made until January 2013, nearly a year after the trigger is hit, leaving members of Congress to devise ways to avoid the fallout, even as they wrestle during the middle of a presidential campaign with a main component of the deficit debate: the Bush tax cuts that are set to expire at the end of 2012.

“The trigger can get pulled,” said Josh Barro, a senior fellow and federal fiscal expert at the Manhattan Institute, a conservative research organization. “But then there is a substantial amount of time to unpull the trigger. When you look at the committee picks, it is really hard-core partisan people who are not likely to compromise, and some would prefer the trigger rather than the fight over the campaign season to come up with a plan.”

Privately, Republicans and Democrats are pondering which party would be more hurt by across-the-board cuts.

The committee members say there has been a political shift since the Obama administration and Congress failed to come up with a more sweeping plan to deal with the nation’s debt, lending more urgency to their work. After the debt ceiling was lifted, Standard Poor’s downgraded the nation’s credit, the stock market took a wild dip and polls demonstrated that voters have lost patience with Washington infighting.

“There is just a lot more pressure now to accomplish something,” said Senator Patrick J. Toomey of Pennsylvania, a Republican on the committee. “The dynamics are just different this time around.”

Having the debt ceiling issue resolved also helps. “I think that since the economic nuclear bomb has been taken off the table,” said Representative Chris Van Hollen of Maryland, a Democratic committee member, “people can focus on this in a little fresh way.”

But many impediments remain. None of the Republicans on the committee have indicated that there is much wiggle room on the revenue side of the ledger, beyond a willingness to end tax subsidies for some industries, like ethanol. For their part, the Democrats chosen for the panel are largely protective of the entitlement programs that represent the biggest part of the federal budget.

“I don’t think this committee is going to achieve a full fix to our problems, because Democrats have never wanted to put their health care bill on the table,” Representative Paul D. Ryan, a Wisconsin Republican who leads the House Budget Committee and studiously avoided assignment to the new panel, said in a recent interview on “Fox News Sunday.”

The central area of agreement between the two parties — a need for major changes to the tax code — is unlikely in the short time before the committee’s deadline.

Further, it is clear that there is some residual unpleasantness after the bitter debt ceiling fight. “Some of the members I know, some I don’t, but I think I will keep my opinions of them to myself,” Mr. Hensarling said.

Separate from the internal dynamics of the committee, each of the dozen members has favorite causes or industry allies, which could influence their opinions on cutting spending or raising revenue.

For instance, Senator Patty Murray of Washington, a Democratic member, has long promoted the interests of Boeing, one of the largest military contractors, taking in more than $172,000 in donations from the company or its executives during her career. Mrs. Murray once ran a television advertisement boasting about how she helped Boeing win a $40 billion Air Force contract for its aerial-refueling tankers.

Mr. Hensarling, a member of the House Financial Services Committee, has pulled in hundreds of thousands of dollars from banks and Wall Street firms, including $57,800 in the last election cycle from Goldman Sachs.

Further, special interest groups are waiting in the wings. “The sense around here is a lobbying bonanza,” said Jonathan Collegio, a spokesman for American Crossroads, the influential Republican advocacy group formed by Karl Rove.

Watching with particular interest are groups that defend entitlement programs. “We’ve had all these different gangs all looking basically at these same issues,” David Certner, the legislative policy director for AARP, which is pushing to protect Medicare, Social Security and other programs affecting older Americans. “We’re just going to keep doing the things we’ve been doing — the same lobbying, the same strategy, the same message.”

All six Republicans on the committee have signed the pledge not to raise taxes dictated by Grover Norquist, a leading conservative who heads Americans for Tax Reform. Now, Mr. Norquist said, he will focus on keeping the Democrats in line. “The Republicans are serious budget reformers; the lady from Washington,” Mr. Norquist said of Mrs. Murray, “doesn’t do budgets.”

It is these kinds of statements that worry proponents of a deficit overhaul. “If these guys can’t get it done,” said Alan Simpson, the co-chairman of President Obama’s National Commission on Fiscal Responsibility and Reform, “and are in thrall to the AARP and Grover Norquist, we ain’t got a prayer.”

Eric Lipton and Eric Lichtblau contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=a77580e404db2d490aee8978d3623761

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DealBook: An Addition to the List of Tax Loopholes

July 12, 2011 by Leave a Comment

President Obama at his news briefing on Monday on the nation's deficit. Mr. Obama has called for cutting a variety of tax loopholes.Pablo Martinez Monsivais/Associated PressPresident Obama at his news briefing on Monday on the nation’s deficit. Mr. Obama has called for ending a variety of tax loopholes.

As the White House and Congress wrangle over raising the debt ceiling and reducing the federal deficit, tax loopholes would seem to be an easy target for compromise.

President Obama has talked about eliminating breaks for partners at hedge funds and private equity firms — along with corporate jet owners, oil companies and others taking advantage of quirks in the tax codes.

Here’s another little-known group of tax code beneficiaries that he might want to add to the list: day traders and speculators who buy and sell futures contracts.

For years, futures contracts, which are essentially bets on the price of commodities, stock indexes and the like, have received a more favorable tax treatment than stocks. A trader who buys and sells an oil contract in less than a year — even in a matter of minutes — pays no more than a 23 percent tax on the profits.

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Compare that with the bill for flipping shares of Google, General Electric or even a diversified mutual fund in the same time period. Those short-term investment gains are treated like ordinary income, meaning the rate can run as high as 35 percent.

“There are so many ways to attack the logic of it,” Warren E. Buffett, the chairman of Berkshire Hathaway, said in an interview on Monday about of the futures tax break. “It doesn’t make sense.”

What does the tax loophole cost the federal government? Each year, the United States gives up roughly $2 billion in lost revenue, according to the Congressional Research Service, a federal agency.

While that number may seem insignificant against the backdrop of the country’s $55 trillion debt load, tax inequities like this start to add up when considered collectively. Based on data from the Office of Management and Budget, the United States could put another $20 billion in its coffers over 10 years if it taxed the investment gains of hedge funds and private equity executives as ordinary income. The so-called carried interest is treated like capital gains, which is taxed at a much lower rate. The corporate jet break amounts to about $2 billion to $3 billion in a decade.

Perhaps the tax break on futures contracts wouldn’t be so irksome if it simply helped farmers protecting the value of their corn crops, airlines dealing with the rising cost of oil or even individuals hedging the risks in their portfolio.

But the biggest beneficiaries seem to be day traders and speculators. Long-term investors account for only 20 percent of the activity in the commodities future market, according to a report published last week by the Commodity Futures Trading Commission, the industry regulator.

When I called Robert Green, a tax specialist whose clients include traders on the Chicago Mercantile Exchange, the hub of commodities futures contracts, he seemed genuinely taken aback.

“I’ve been dreading getting a call like this,” he said, apparently worried that any publicity of the tax break could put pressure on lawmakers to revisit the rule. “No one has shot something across the bow.”

Still, he acknowledged that it would be hard for President Obama to justify lower tax rates “to benefit futures traders and commodities exchanges in his home state, while pushing hard to raise taxes on securities hedge fund managers — often in Connecticut and New York City.”

The genesis of the tax break on futures goes back to 1981, when the government tried to close another tax loophole. At the time, some big investors were using the contracts to skirt taxes by creating what was called a straddle transaction, which allowed investors to roll over their profits into the next year. So a rule was written that forced traders to mark their positions to market and pay taxes on unrealized gains.

In an effort to appease the investment community, a break was offered by Dan Rostenkowski, a Democrat from Chicago who was then the chairman of the House Ways and Means Committee and later went to prison for corruption. In part, the break was meant to offset the risks associated with paying taxes on paper profits. He persuaded Congress that traders should pay a blended rate, paying 60 percent of the long-term capital gains rate and 40 percent of the ordinary income rate. Today, the combination amounts to about 23 percent, assuming the top tax bracket for ordinary income is 35 percent and the long-term capital gains rate is 15 percent.

The break has been on the chopping block in recent years. In his budget proposals for 2010 and 2011, President Obama recommended ending the special tax treatment for dealers of futures contracts, although not for all investors. But the plans lost momentum and neither was incorporated into the final budgets.

Eric J. Toder, an economist at the Tax Policy Center, a research organization, said that the tax break might have made sense a generation ago when the market was mainly investors protecting their long-term profits. But with speculators betting on short-term price movements, the loophole is just that — a loophole.

“It seemed like a reasonable compromise at the time to stop the straddle transactions,” Mr. Toder said. “In retrospect, if the trading is so short term, it seems a little silly to give them preferential treatment.”

Article source: http://feeds.nytimes.com/click.phdo?i=8dd4e8bce342824c31716b15607cf45f

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Panel to Scrutinize Causes Behind Weak State Budgets

June 24, 2011 by Leave a Comment

Americans who have wondered whether Illinois, California and other troubled states are slouching toward the fate of Greece may get their answer in the coming months.

Richard Ravitch, who won an emergency appointment as New York’s lieutenant governor during the 2009 budget impasse, announced a high-level new project Thursday to untangle the finances of the states and shine a light on their hidden debts.

“Whereas there is enormous public attention to the federal deficit, the problems of the states are very serious and nowhere near very well understood,” he said in an interview. “People have to understand this, and address it with the same degree of gravitas as the federal deficit problem.”

Mr. Ravitch will lead the project together with Paul A. Volcker, the former Federal Reserve chairman who is credited with wringing double-digit inflation out of the United States economy in the 1980s.

The project will look into the causes of the current fiscal problems of the states, to what extent they are the result of the 2008 financial crisis, and to what extent they are structural. The difference is important because structural problems will not necessarily go away as soon as the economy picks up again.

In his 17 months as lieutenant governor, Mr. Ravitch expressed concern that New York State’s annual budget dramas had become a self-sustaining chain reaction, with each year’s batch of accounting gimmicks and one-offs feeding an even bigger deficit the following year. Weaknesses in governmental accounting were making the accumulating shortfalls hard to see.

The new research team will also look at the way states are carrying out “mandates,” the services they are required to provide under America’s federalist system, like health care for the indigent. Since the 2008 crisis, the states have complained that they are legally bound by mandates they no longer have the resources to carry out. With the Obama administration’s fiscal stimulus running out this summer, the stage is being set for a major challenge of federalism.

In addition to studying the cause of the states’ problems, the research team will explore possible solutions, but not prescribe any course of action. States are considered sovereigns under law, and imposing new requirements on them is difficult, as the Obama administration has learned through the current court battle over the health care overhaul.

To keep the research from becoming unwieldy, the group will start by studying just five states: New York, Illinois, California, Texas and Virginia. Texas was chosen because it is prosperous but still has a significant budget deficit. Virginia was added to the mix because many observers believe it has the best fiscal practices. Illinois and California are on the list because of their low credit ratings.

New York State is on the agenda because of the size and complexity of its system of public authorities, which operate enterprises like hospital systems and toll roads, and are not bound by the rules that limit the amount of debt the state itself can issue.

Mr. Ravitch became interested in tracking state indebtedness during his abbreviated term as lieutenant governor. Known as a skilled negotiator who helped New York City avert bankruptcy in the mid-1970s, he was brought in to help with a budgeting process that had broken down. He dug into the state’s finances, saw that years of budget sleight-of-hand had papered over a major imbalance, and drafted a broad fiscal reform proposal.

His approach was to allow limited borrowing to cover operating expenses only if the state broke with the accounting skullduggery of the past. But his ideas were rejected by Gov. David A. Paterson and then by Andrew M. Cuomo, who was attorney general before becoming governor.

Sidelined, Mr. Ravitch continued to investigate New York State’s finances and to look for parallels with other states. He discovered an array of unsound practices, like using long-term debt to pay for short-term expenditures. In some cases, officials were violating conventional accounting practices, like selling public assets and treating the proceeds as found money.

In other cases, special accounting rules for governments were themselves at fault, making it possible for states to promise valuable retirement benefits to their workers without recording the true cost. (The accounting rule-making board for governments is slowly working on changes.)

Mr. Ravitch was surprised at how little uniform, accurate data existed, and eventually he decided to compile a database himself. Since completing his term as lieutenant governor in December, he has been raising the money from nonprofit foundations.

He and Mr. Volcker have assembled an advisory board from both political parties that includes several former cabinet members, Nicholas F. Brady, Joseph A. Califano Jr. and George P. Schulz, and the creator of revenue-sharing, Richard Nathan, among others.

The project will be led by Donald J. Boyd, currently a senior fellow at the Rockefeller Institute of Government in Albany.

Mr. Ravitch unveiled the research initiative in a speech Thursday at the Federal Reserve Bank of Chicago, which is holding a conference on the issue of fiscal sustainability.

Article source: http://feeds.nytimes.com/click.phdo?i=1d7c8dfc921e7a95c9521adf56789fe2

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Farm Subsidies Become Target Amid Spending Cuts

May 7, 2011 by Leave a Comment

This week, Representative Paul D. Ryan, Republican of Wisconsin and the chairman of the House Budget Committee, told reporters, “We shouldn’t be giving corporate farms, these large agribusiness companies, subsidies. I strongly believe that.”

His budget proposal would take $30 billion out of the farm program over the next decade.

Representative Eric Cantor, Republican of Virginia and the majority leader, attended the first session of debt-limit negotiations on Thursday with a list of areas where he saw a potential agreement between Republicans and the White House, including farm subsidies.

A confluence of factors have lined up against the farm programs. While the rest of the economy remains largely stagnant, commodities prices and farm incomes have remained at a protracted high. The House Agriculture Committee, while still dominated by farm state members, is now peppered with freshmen who view cuts to these programs as an essential part of the broader attack on the federal deficit, the centerpiece of their campaigns.

Further, after taking a beating from constituents concerning their Medicare proposal last month, Republicans are eager to find an area of common ground with Democrats. Farm subsidies seem to fit the bill; conservatives condemn them as intrusions into the free market, liberals denounce them for encouraging environmentally harmful overfarming, and both sides see them as a form of corporate welfare.

What is more, some subsidies have placed the nation in violation of trade agreements, and members from both sides of the aisle have questioned why, with biofuel mandates creating such demand for ethanol, the government needs to subsidize it.

Powerful interests and political traditions continue to constrain efforts to cut subsidies. While all the free-market Republicans back reducing subsidies in general, some continue to support targeted aid like the subsidies long enjoyed by ethanol. Newt Gingrich, the former Republican House speaker and likely presidential candidate, has been assertively arguing in favor of maintaining ethanol subsidies in the face of intense criticism from backers of market reforms like the editorial page of The Wall Street Journal.

But in both parties there is a sense that support for subsidies is waning. This year, Senator Richard J. Durbin, Democrat of Illinois, one of the nation’s biggest farming states, told the state’s farm bureau to expect cuts. Senator Debbie Stabenow, Democrat of Michigan and chairwoman of the Senate Committee on Agriculture, Nutrition and Forestry, told reporters at a state agriculture conference that “making sure that we’re doing our part in being fiscally responsible” would be the biggest challenge in the next farm bill.

Others are thinking in a similar vein.

“I have been telling folks that the pie is getting smaller,” said Representative Reid Ribble, a Republican freshman from Wisconsin who sits on the House Agriculture Committee. “I am hearing from constituents back home that they want to see the government have less involvement in the pricing. There is a kind of a tenor right now that will allow us to have a significant change.”

Farm advocates say they hope they can stave off the worst.

“The scrutiny of farm programs is stronger than ever,” said Chuck Conner, president of the National Council of Farmer Cooperatives. “It’s not that farmers don’t want to participate in deficit reduction,  but at the same time, we hope people appreciate that all other federal programs have skyrocketed, which is why we are in this mess, and farm subsidies have not.”

Historically, federal farm subsidies have operated like piles of laundry: there are constant efforts to make them go away, but they always rise right up again.

The program is rooted in the response to the Great Depression, when the nation enjoyed a largely agrarian economy and the federal government recognized that farmers lacked a safety net.

The program has evolved over the years into a series of direct payments, insurance programs, low-cost loans and other benefits. The programs come up for reauthorization every five years, and farm advocates lobby hard against efforts to meaningfully reduce them, though some have been reformed over the years.

“Substantial cuts to agriculture have already been made,” Ms. Stabenow said in an e-mail. “And we’ll continue measuring the performance of every program to reduce the deficit and maximize effectiveness.”

In 2011, taxpayers are projected to pay roughly $16 billion in aid to farmers through various programs, according to figures from the Congressional Budget Office.

The most controversial of these programs are the $5 billion in annual so-called direct payments to farmers of corn, soybeans and other crops, awarded simply for owning tillable farm land, even if they do not plant on it.

“If we can’t figure out a way at this point to trim these payments,” said Representative Ron Kind, Democrat of Wisconsin, who has long fought against farm subsidies, “then it is just embarrassing.”

Large cuts to the agriculture subsidies will not go far in taming federal spending.

“Cutting farm subsidies doesn’t bring that kind of ongoing savings,” said  Tyler Cowen, a professor of economics at George Mason University, comparing cuts to farm programs with longer term restructuring to entitlement programs like Medicare. “Still, it is a great one-time gain, and it means lower prices for consumers and is a good idea all around.”

Farmers and their advocates insist that the subsidies have been demonized and overstated.

“Every time you read an article saying Congress better be looking at farm programs I am scratching my head,” Mr. Conner said. “When people think of the U.S.D.A. budget they think of farm programs, but it is really more a rounding error.”

But Mr. Kind and others say the push for broad budget cuts is working in their favor.

“The political dynamics have shifted in light of deficit reduction,” he said. “I am cautiously optimistic.”

Article source: http://feeds.nytimes.com/click.phdo?i=b6eb80eae52dac9725b83ab7cdfe9097

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