British democracy is alive and well—the people seemed to have voted for Brexit with their hearts, not their immediate pocketbooks. UK voters instructed to their government to pull the plug on their nation’s membership in the grand experiment known as the European Union, which in turn weakened their buying power and roiled global financial markets.

Although polls had predicted a close election, markets had begun expecting (or perhaps aspiring) that British voters would follow the view of most economic experts and choose to remain in the EU, and as a result, rallied and closed higher in the run up to the vote. Because the markets were surprised by Brexit, the price adjustments were especially large and sudden. It was not a vote of confidence in the experts or for the Prime Minister, who quickly resigned. And the millions of Americans who own stocks or have their retirement in the market—took a hit today, with the market dropping over 3 percent, losing the entire amount that the Dow had gained so far in 2016.

Markets were volatile and huge swings in currencies, bonds, and sharp drops in stock markets followed early on Friday. Volatility eased back some over the day, as investors may have taken some comfort from the announcements of actual and potential central bank liquidity support. This vote will be one of the first big tests of global financial market structure and regulation since the new rules put in place after the financial crisis, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Stability Board, and the European Market Infrastructure Regulations.

Currency markets for large, developed nations are mammoth and usually highly stable, with small changes on a daily basis. On a normal day there are over $2 trillion of British pounds traded. This exchange is mostly the result of real economic and financial activity taking place as people buy and sell goods, services, investments, etc., between the United Kingdom and the rest of the world. Stable, liquid currency markets are essential for global trade as people need to know how much goods will cost them in their own currency, which depends on the exchange rate between their currency and the British pound.

As opposed to stocks of even ‘blue chip’ companies, which can swing in a day as a result of bad earnings or investor discontent, currencies like the pound or dollar rarely make sharp daily movements of more than 5 percent. Friday’s decline of over 8 percent by the Pound against the dollar was the second largest daily change between the dollar and any major currency on record. The British Pound Sterling hit its lowest level against the US dollar since 1985, when the Back to the Future was at the top of the box office and we could go see it for $2.75, Windows 1.0 was just released, and New Coke made it’s debut (with old Coke coming back 3 months later). We should expect to see American exports to Britain fall – in raw numbers, over 11 million US jobs are supported by exports, according to the International Trade Administration, and the UK is the 5^th largest destination for our goods.

Brexit has had an immediate impact on prosperity: The world is poorer today as a result of this choice. Stock market declines in Europe were even larger than in the US. Concerningly, spreads of other European countries debt widened with markets beginning wonder if there are more dominoes to fall if other countries consider following Britain’s exit path. British consumers will be immediately hurt as much of what they buy will become more expensive. Already the pound has lost 5 percent of its value against the Euro, making goods made Europe more expensive at the shelf in the UK. The global fall in equity markets erased a lot of wealth and the flight of capital to safe haven assets like government bonds is not indicative of a private market that expects strong economic growth in the UK. A recession in Britain was predicted by many experts if they voted to Brexit causing businesses to hold back on capital spending and households to factor in slower longer-run growth in incomes. We’ll see if the experts are right about the ramifications of Brexit even if they were wrong about the results of the referendum.

The referendum is a big step, but only a first step. With new elections for prime minister on the horizon and time to realize the economic ramifications of Brexit, it is possible that the people of the UK could change course. Remember that is what Congress did when it first voted down TARP as a response to the financial crisis only to reverse course in a few short weeks.

Naturally, the UK election casts a shadow of our November elections. Does it portend more support for Donald Trump’s anti-immigrant, anti-trade populism?  Or could 4 months of steady bad economic news from across the Pond help Hillary Clinton show the consequences of countries and continents dividing? Only time will tell.

Editor’s note: This piece originally appeared in U.S. News & World Report.

       

William Gale is the Arjay and Frances Miller Chair in Federal Economic Policy and a senior fellow in the Economic Studies Program at the Brookings Institution. His research focuses on tax policy, fiscal policy, pensions, and saving behavior. He is co-director of the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. He is also director of the Retirement Security Project, and currently serves as President of the National Tax Association.

Gale is the author of Fiscal Therapy: Curing America’s Debt Addiction and Investing in the Future (Oxford University Press, 2019).

He is also the co-editor of several books, including Automatic: Changing the Way America Saves (Brookings 2009); Aging Gracefully: Ideas to Improve Retirement Security in America (Century Foundation, 2006); The Evolving Pension System: Trends, Effects, and Proposals for Reform (Brookings, 2005); Private Pensions and Public Policy (Brookings, 2004); Rethinking Estate and Gift Taxation (Brookings, 2001), and Economic Effects of Fundamental Tax Reform (Brookings, 1996).

His research has been published in several scholarly journals, including the American Economic Review, Journal of Political Economy, and Quarterly Journal of Economics. In 2007, a paper he co-authored was awarded the TIAA-CREF Paul A. Samuelson Award Certificate of Excellence.

He has also written extensively in policy-related publications and newspapers, including op-eds in CNN, the Financial Times, Los Angeles Times, New York Times, Wall Street Journal, and Washington Post.

From 2006 to 2009, he served as Vice President of Brookings and Director of the Economic Studies Program. Prior to joining Brookings in 1992, he was an assistant professor in the Department of Economics at the University of California, Los Angeles, and a senior economist for the Council of Economic Advisers under President George H.W. Bush.

He is a member of the Macroeconomic Advisers Board of Advisors since 2016. Gale has consulted for the MSL Group and in 2017 was a panelist at the Center for Strategic Development’s Kingdom of Saudi Arabia Economic Reforms Workshop.

Gale attended Duke University and the London School of Economics and received his Ph.D. from Stanford University in 1987. He lives in Fairfax, Virginia, is an avid tennis player, and is a person who stutters. He is married to Diane Lim and is the father of two grown children.

       

William A. Galston holds the Ezra K. Zilkha Chair in the Brookings Institution’s Governance Studies Program, where he serves as a Senior Fellow.  Prior to January 2006 he was the Saul Stern Professor and Acting Dean at the School of Public Policy, University of Maryland, director of the Institute for Philosophy and Public Policy, founding director of the Center for Information and Research on Civic Learning and Engagement (CIRCLE), and executive director of the National Commission on Civic Renewal, co-chaired by former Secretary of Education William Bennett and former Senator Sam Nunn.  A participant in six presidential campaigns, he served from 1993 to 1995 as Deputy Assistant to President Clinton for Domestic Policy.

Galston is the author of nine books and more than 100 articles in the fields of political theory, public policy, and American politics.  His most recent books are Anti-Pluralism: The Populist Threat to Liberal Democracy (Yale, 2018), Public Matters (Rowman & Littlefield, 2005), and The Practice of Liberal Pluralism (Cambridge, 2004).  A winner of the American Political Science Association’s Hubert H. Humphrey Award, Galston was elected a Fellow of the American Academy of Arts and Sciences in 2004.

Galston has appeared on all the principal television networks and is frequently interviewed on NPR. He writes a weekly column for the Wall Street Journal.

       

Henry Aaron is currently Bruce and Virginia MacLaury Senior Fellow in the Economic Studies Program at the Brookings Institution. From 1990 through 1996 he was the Director of the Economic Studies Program.  He is a member and vice-chair of the District of Columbia Health Benefits Exchange and is a member and former chair of the Social Security Advisory Board.

He is a graduate of UCLA and holds a PhD in economics from Harvard University.  He taught at the University of Maryland from 1967 through 1989, except for 1977 and 1978 when he served as Assistant Secretary for Planning and Evaluation at the Department of Health, Education, and Welfare. He chaired the 1979 Advisory Council on Social Security. During the academic year 1996-97 he was a Guggenheim Fellow at the Center for Advanced Studies in the Behavioral Sciences at Stanford University.

He is a member of the Social Security Advisory Board, the Institute of Medicine, the American Academy of Arts and Sciences, the advisory committee of the Stanford Institute for Economic Policy Research, and the board directors of the Center on Budget and Policy Priorities. He is also Vice Chair of the D.C. Health Exchange. Aaron has been a member of the boards of directors of the College Retirement Equity Fund and Georgetown University.  He has been a member of the visiting committee of the Harvard Medical and Dental Schools and of the Harvard Department of Economics.  He was a member of the board of directors of Abt Associates;  a founding member, vice-president, and chair of the board of the National Academy of Social Insurance; vice-president and member of the executive committee of the American Economic Association; and president of the Association of Public Policy and Management.

       

Government spending on the elderly continues to climb.  Fueled by rapid growth in the number of Americans over age 65 and increased spending on benefits per person, public expenditures devoted to the elderly continue to edge up. A crucial question for future policy making is whether rising outlays on programs for the aged will squeeze out spending on programs for children, especially investments in their schooling. Many pessimists think this outcome is inevitable, and they urge us to reduce government commitments to the elderly to make room for spending on the young.

Federal spending is especially concentrated on the elderly. The Urban Institute publishes annual estimates of federal outlays on children and adults over 65. The estimates inevitably show a huge imbalance in spending on the two groups. In 2011, federal spending for the elderly amounted to almost $28,000 per person over 65.  In the same year, per capita spending on Americans under 19 amounted to just $4,900 per person. This means aged Americans received $5.72 in federal spending for every $1.00 received by a child 18 or younger.

The Urban Institute’s latest estimates show that federal spending on youngsters has trended down in recent years.  After reaching a peak of about $500 billion in 2010, expenditures on children fell 7 percent by 2012, and they have remained unchanged since then.

Future prospects are not encouraging. Urban Institute analysts predict that from 2014 to 2025, only 2 percent of federal spending growth will go to children. Almost 60 percent will be swallowed up by additional outlays on Social Security, Medicare, and Medicaid. Spending on many federal programs that provide benefits to children are financed out of discretionary programs. In contrast, big public programs for the aged seem to run on automatic pilot, with spending linked to changes in the cost of living and the size of the population past 65. Spending on most domestic discretionary programs is expected to be severely constrained as a result of Congressionally imposed budget caps. This is bad news for many federal programs targeted on children.

Focusing solely on federal government spending gives a misleading picture, however. While federal spending is heavily concentrated on the elderly, state and local spending tilts toward programs that help children, notably, through public school budgets.  Whereas aged Americans receive $5.72 in federal spending for each $1.00 received by someone under 19, those under 19 receive $10.11 in state and local spending for each $1.00 received by someone who is 65 or older. To be sure, total federal spending is considerably greater than that of state and local governments, but the imbalance of public spending on the young and the old is less extreme than federal budget statistics suggest.

Government spending on the aged is high because legislators (and voters) decided to establish government-backed pensions—through Social Security—in the 1930s and government-guaranteed health insurance for the elderly—through Medicare—in the 1960s.  In view of the overwhelming and enduring popularity of these two programs, most voters appear to think this was a sensible choice.  One implication of the policies is that Americans past 65 derive a sizable percentage of their retirement income, and an even bigger share of their health care, from public budgets.

The nation has not made an equivalent commitment to support the incomes or guarantee the health insurance of Americans under 65, except in special circumstances.  Those circumstances include temporary unemployment, a permanent work disability, and low household income.  Families headed by someone under 65 are expected to derive their support mainly from their jobs and from their own savings.  If non-aged families prosper, government spending on them falls.  If instead breadwinners become disabled or lose their jobs, government spending will increase as a result of higher disability payments, unemployment and food stamp benefits, and public assistance rolls.

Nearly all children are raised in families headed by someone under 65.  The government benefits they receive, except for free public schooling, increase in bad times and should decline when the unemployment rate falls.  The Urban Institute’s numbers are instructive.  Between 2007 and 2011, real federal spending on children increased 27 percent, or more than 6 percent a year, as the unemployment rate soared in the Great Recession. Federal spending on children then fell as unemployment—and outlays on government transfer payments—shrank.  For many categories of public spending on children, we cannot assume that lower spending signals a weaker commitment to children’s well-being. Instead it may signal a healthier private economy, a lower unemployment rate, and faster improvement in breadwinner incomes.

Of course, some components of government spending on children do not automatically rise in a slumping economy or shrink when breadwinners’ earnings improve.  Public investments in children’s preschool and K-12 education should be adjusted to reflect the needs of children for compensatory instruction and the expected payoff of added investment in schooling.  Statistics on public school budgets show that spending per pupil has increased considerably faster than inflation and faster than GDP per person over the past seven decades (see Chart 1). Whether spending has increased as fast as warranted is debatable, but rising government spending on the aged has not caused per-pupil spending on K-12 schools to shrink.

Government spending on children’s health has also increased over time as public insurance for children has been expanded.  In 2014 just 6 percent of Americans under age 19 lacked health insurance for the entire year.  The only age group with higher health insurance coverage was the population past 65, which is covered by Medicare (see Chart 2).  The main explanation for rising insurance coverage among children is that federal and state health insurance programs have been expanded to cover most low-income children.  Insurance coverage of children can and should be improved, but a sizeable expansion of public insurance has occurred despite the increase in public spending on the elderly.

The presumption that rising outlays on programs for Americans past 65 must come at the expense of spending on children rests on the unstated assumption that voters will zealously defend programs for the aged while tolerating cuts in programs that fund education, income protection, and health coverage for the young.  The trend toward higher public spending on the elderly has been underway for at least five decades, but the predicted cuts in spending on the young have yet to materialize.

Editor’s Note: this op-ed first appeared in Real Clear Markets.

       

Executive Summary

The annual appropriations process is in a state of collapse. A primary symptom is the decline of “regular order,” the budget procedure for debating and passing individual appropriations bills in each chamber. Today this procedure has been replaced by the passage of huge “omnibus” packages at the end of the session, with little scrutiny and opportunity for amendment.

While both chambers have some responsibility for the breakdown in this key part of federal budgeting, the Senate’s rules and procedures shoulder most of the blame.

It’s time to restore regular order. To do this the Senate would need to take several important steps, including:

• Reform the filibuster rule by allowing a simple majority of Senators to end debate on all matters related to appropriations bills.
• Utilize concurrent consideration of appropriations bills. This would allow the Senate to move on appropriations bills without waiting for the House to finish action and would permit greater time for Senate scrutiny.
• Restore limited earmarking. Despite the arguments for eliminating earmarking, doing so has had the unintended effect of making it harder to pass appropriations. A limited restoration of earmarks could help achieve agreement yet maintain a curb on wasteful spending.
• Reduce transparency. While open government is broadly supported, for many lawmakers the intense scrutiny of their votes makes them reticent to vote for any compromise. Members might be more inclined to cast tough votes on appropriations if only final tallies, not individual votes, were reported.

Introduction

The annual appropriations process is in a state of collapse, and it is time to take some serious steps to restore it to health. For the last year, I have been working with the National Budgeting Roundtable, a group of budget analysts and political scientists seeking ways to improve federal budgeting. My focus has been on possible improvements to the annual appropriations process based upon research I conducted for my book Too Weak to Govern: Majority Party Power and Appropriations in the U.S. Senate (Cambridge 2014).

A primary symptom of the collapse of appropriations is the decline of what is known as “regular order.” Regular order is a time-tested system in which a dozen or so (the exact number has varied) appropriations bills are debated and adopted on an individual basis by the House and Senate. It is advantageous because it breaks the budget into bite-sized pieces and facilitates oversight.

Today, a depressingly familiar pattern has replaced regular order. Most appropriations bills pass the House of Representatives only to die in the Senate. In response, lawmakers bundle appropriations bills together into massive “omnibus” packages near the end of a session. These packages may be thousands of pages long, include over a trillion dollars in spending, and are adopted with little debate or scrutiny. In fact, limiting scrutiny is the goal. Leaders count on end-of-session pressures and the fear of a government shutdown to allow adoption of the package with minimal debate. In their view, it’s the only way to push a budget through the gridlocked Senate floor.

The pattern is clear: both chambers have a hand in the   creation of omnibus legislation, but the Senate is disproportionately responsible for the breakdown in appropriations. The cost of its failure is high. Omnibus legislating prevents rank-and-file members from exercising genuine oversight over the budget. Unwise spending and policies are more likely to go uncontested. Funding is likely to be provided after the beginning of the fiscal year, forcing agencies to rely on temporary continuing resolutions that create waste and inefficiency. And, disruptive government shutdowns are larger and more likely.

It is time to restore regular order in appropriations. My research shows the following:

• Senators prefer regular order, but turn to omnibus packages because the Senate’s individualistic rules permit appropriations bills to be delayed or used to force votes on politically painful amendments.
• Lowering the threshold for cloture on appropriations bills to a simple majority would let the majority party better manage debate on the Senate floor to keep the trains running smoothly.
• Other reforms, such as easing transparency requirements and restoring earmarking, might also ease the path through Congress for these critical bills.

This paper, which summarizes a lengthier paper presented to the Roundtable (Hanson 2015b), explains the research behind these findings and makes the case for reform.

       

SUMMARY:

In spite of the current political and fiscal environment, presidential candidates should suggest a reallocation of infrastructure responsibilities within our system of federalism to help close the infrastructure gap, which has been plagued by underinvestment and is in dire need of upgrading and modernization, according to Brookings Senior Fellows William Galston and Robert Puentes. To be competitive in the global marketplace, the U.S. needs to build infrastructure that can reliably support the demands of a 21st century economy – a $150 billion dollar annual investment by some estimates. They note that the U.S. ranks 12th in the world for overall quality of infrastructure, with especially low marks for our roads, ports, railroads, air transport infrastructure and electricity supply.

Galston and Puentes write that states and localities may be more willing to tax themselves for projects if they can expect to reap the benefits directly, rather than shoring up broad national objectives. In addition, candidates should suggest a new partnership between the public and private sectors: mobilizing private dollars for public purposes should be an easier sell than commandeering those dollars through the tax system.

“Infrastructure does not typically garner headlines—until a bridge collapses or a dam bursts. It is, however, the foundation of a healthy economy and society. And it is an issue that leaders at every level of our federal system, including the president, will have no choice but to address, hopefully sooner rather than later. The need is great and growing. Working with governors, mayors, and the private sector, the next president must break the logjam and create a new model of infrastructure finance for the 21st century,” they conclude.

       

SUMMARY:

One issue above all others that remains a problem and should transcend partisan agendas is the unsustainable projected growth of the federal debt, write Bob Bixby of the Concord Coalition and Maya MacGuineas of the Committee for a Responsible Federal Budget. They warn that candidates “may be tempted to conclude that our fiscal problems are behind us. That would be a mistake,” given that, over the coming decade, the debt is on track to grow by more than $7 trillion and resume a long-term unsustainable path – which is “a matter of arithmetic, not ideology.” Bixby and MacGuineas argue that reducing the long-term debt is in fact an economic growth plan because government debt crowds out productive investments in people, machinery, technology, and new ventures, resulting in fewer job opportunities, lower wages, and slower GDP growth. Economic growth is crucial but alone can’t solve the debt problem, and candidates must be willing to explain the issues to voters: the real cause of projected deficit growth and rising debt is a built-in mismatch between projected revenues and popular benefit programs that operate on autopilot, especially Medicare, Medicaid, Social Security, and interest payment on the debt. They present a list of things candidates should pledge in their first budgets, with a focus on Social Security, health care, and taxes.

“In the past, we have seen some elections in which the candidates competed to be fiscally responsible, and other elections in which they pandered and ran from the issue. This is a critical moment for the United States and the debt; the next president, whoever he or she is, will have to face a number of looming fiscal issues from the depletion of the Social Security disability fund, to a likely increase in interest rates, to the ongoing extremely expensive retirement of the baby boom generation. Growing the economy is one of the themes of this campaign and yet it cannot happen without a sustainable fiscal plan. Citizens are willing to be part of sensible reforms that would help control the debt and grow the economy, but they will need presidential candidates—and ultimately a president—who is willing to honestly talk about and tackle the issue,” they conclude.

       

SUMMARY:

On defense, the presidential candidates should spell out the spending level they would seek as well as details about how the money would be spent – but there are no cuts to be had, according to Brookings Senior Fellow Michael O’Hanlon. Despite numerous mistakes and challenges, U.S defense has won the Cold War, prevented another 9/11, limited the scale of nuclear weapons proliferation, sustained a U.S.-led coalition accounting for two-thirds of global GDP and military spending, and maintained a mostly peaceful international environment conducive to trade and prosperity. Yet there will be further needs and there are ways to make American defense posture and policy more efficient with modest budgetary increases in the years ahead, O’Hanlon writes.

“Policymakers looking to achieve fiscal balance by cutting the defense budget will be disappointed. Defense spending is already down below 15 percent of total federal spending and equals just over 3 percent of GDP—very modest figures by post-World War II standards. Indeed, under my proposal, its share of federal spending and GDP would probably continue to decline. To be sure, at nearly $600 billion a year, defense spending will remain large. But the world is challenging and dangerous, and American military power is a generally stabilizing force within it. Thankfully, while the Pentagon cannot provide an easy panacea for fiscal reformers looking for painless budget cuts, its additional needs are eminently affordable as well,” he concludes.

       

SUMMARY:

With the U.S. poverty rate stuck at around 15 percent for years, it’s clear that something needs to change, and candidates need to focus on three pillars of economic advancement– education, work, family — to increase economic mobility, according to Brookings Senior Fellow Isabel Sawhill and Senior Research Assistant Edward Rodrigue.

“Economic success requires people’s initiative, but it also requires us, as a society, to untangle the web of disadvantages that make following the sequence difficult for some Americans. There are no silver bullets. Government cannot do this alone. But government has a role to play in motivating individuals and facilitating their climb up the economic ladder,” they write.

The pillar of work is the most urgent, they assert, with every candidate needing to have concrete jobs proposals. Closing the jobs gap (the difference in work rates between lower and higher income households) has a huge effect on the number of people in poverty, even if the new workers hold low-wage jobs. Work connects people to mainstream institutions, helps them learn new skills, provides structure to their lives, and provides a sense of self-sufficiency and self-respect, while at the aggregate level, it is one of the most important engines of economic growth. Specifically, the authors advocate for making work pay (EITC), a second-earner deduction, childcare assistance and paid leave, and transitional job programs. On the education front, they suggest investment in children at all stages of life: home visiting, early childhood education, new efforts in the primary grades, new kinds of high schools, and fresh policies aimed at helping students from poor families attend and graduate from post-secondary institutions. And for the third prong, stable families, Sawhill and Rodrique suggest changing social norms around the importance of responsible, two-person parenthood, as well as making the most effective forms of birth control (IUDs and implants) more widely available at no cost to women.

“Many of our proposals would not only improve the life prospects of less advantaged children; they would pay for themselves in higher taxes and less social spending. The candidates may have their own blend of responses, but we need to hear less rhetoric and more substantive proposals from all of them,” they conclude.