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Good News, Bad News on the Deficit from the OMB

July 28th, 2008 . by economistmom

As reported by CQ’s David Clarke, from the Administration’s Office of Management and Budget in their “Midsession Review“…First, the good(?) news:

The deficit number for the current fiscal year [FY2008], which ends Sept. 30, is now projected to be $389 billion, or 2.7 percent of GDP. That is down from the $410 billion projected initially. But it is still higher than the final fiscal 2007 deficit of $162.8 billion and [the increase from 2007] is mostly due to the economic slowdown.

(Note that although the $389 billion is down from the Administration’s earlier projection of a $410 billion deficit for this fiscal year, it’s up from CBO’s March projection of $357 billion.  Some cynics have pointed to the Administration’s past track record of repeated overstating of the deficit as a strategy designed to give the appearance of fiscal responsibility.)

…and now, the bad news:

The Bush administration is now projecting a budget deficit of $482 billion in fiscal 2009 — a record high in dollar terms.

The previous record was $412.7 billion in fiscal 2004.

David is quick to point out (as does the Administration) the fallacy in considering this a real record, however:

The better way to gauge the size of the deficit, according to economists, is as a percentage of gross domestic product (GDP). Deficits in the mid-1980s were in the 5 percent range. In that light, the fiscal 2004 figure, 3.6 percent of GDP, was not particularly high by historical standards. The projected 2009 deficit would be 3.3 percent of GDP.

The Administration’s new projection of a $482 billion FY2009 deficit represents a $75 billion increase from their February projection of $407 billion–$49 billion coming from lower revenues (a combination of the cost of the stimulus and assumptions of a weaker economy) and $26 billion from higher outlays (mostly from the supplemental appropriations act which included war funding, emergency funding, and veterans’ educational benefits).  I haven’t yet read enough of the report to be able to say if that number seems like a “low ball” or a “high ball” number.

UPDATE (10 pm):  Apparently former Treasury Secretary Paul O’Neill thinks it’s a “low ball” number, according to Jonathan Weisman’s story in Tuesday’s Washington Post:

“That’s not the real number,” former Bush Treasury secretary Paul H. O’Neill said of the $482 billion deficit forecast. “It’s upward of $500 billion and counting. It’s a mind-boggling number.”

…and here’s a link to a CNN video story featuring Concord’s Bob Bixby (aka my boss).

The Administration still claims their policies would produce a small budget surplus in fiscal years 2012 and 2013, but that’s calculated on a baseline that assumes an ever-growing Alternative Minimum Tax and conservative growth in discretionary spending (including war spending).  With the usual adjustments for realistic policy, I think it’s more likely that there would remain a deficit in 2013 of over $400 billion.

Note that with the current year deficit a bit lower than $400 billion now, that tightens the Obama campaign’s 2013 deficit target a bit, given that Austan Goolsbee had claimed an Obama Administration would achieve a lower (nominal) deficit in 2013 than the current year deficit.  On the other hand, the Obama campaign has also adopted the realistic “policy extended” baseline as their baseline, and has only pledged to pay for their new initiatives relative to this baseline.  (No matter that this won’t help them when it comes to actually legislating under the PAYGO rules, which calibrate to the current law baseline.)  So under either benchmark, the Obama campaign seems to be fairly consistently setting a target 2013 deficit of right around $400 billion–maybe plus or minus $50 billion.

More later. 

6 Responses to “Good News, Bad News on the Deficit from the OMB”

  1. comment number 1 by: Bruce Webb

    “Plus or minus $50 billion”
    Interestingly (at least to me) 2013 is right at the point where the fiscal projections of Social Security Intermediate Cost and Low Cost alternatives start to strongly diverge. If we just take the difference between cash in and cost out we are looking at a difference of $46 billion in that year from this program alone. Table IV.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Years 2003-17 1 [Amounts in billions]
    My interest in Social Security only starts with defending the program from fundamental changes in the form of personal accounts, they end up wanting to engage in an open discussion of what implications Low Cost outcomes (which in my argument are more likely than not) would be for overall fiscal policy.

    In trading terms our policy has priced in a structural debt for Social Security based on outcomes that may not (and in my argument probably will not) come about at all. These are not trivial numbers by 2017 the difference between Intermediate Cost and Low Cost is just over $100 billion. Which would mean that depending simply on what set of assumptions you use for Social Security the Unified Budget deficit could potentially end up 10-20% under current projections.

    So it is not all about shouting ‘FDR si!’ there are some seriously underexplored issues relating to the possibilities for Low Cost outcomes. I raised this issue with Prof. Samwick (of the LMS Plan) only to be dismissed and had some more extended discussion with Andrew Biggs on the base issue of Intermediate Cost vs Low Cost. But no one seems to want to explore even on a theoretical basis what would have to change in our views on such things as the Long Bond and viability of tax cuts under Low Cost outcomes.

    Under Intermediate Cost the Social Security Trust Fund transforms from an interest earning savings account to to an account where that interest has to start be drawn down in 2017 and then in 2023 transforms into a amoratizing loan with a balance of about $5.7 trillion all to be paid off by 2041.

    Under Low Cost we don’t have to tap the interest until 2023, do so at a much reduced and steady rate compared to Intermediate Cost and never have to pay down the principal at all. It is the difference between rolling into 2042 with a zero balance and a 22% gap between income and cost as opposed to rolling into 2042 with a $12 trillion (constant 2008) TF balance and no gap between total income and cost, in fact we would only need to pay 40% of the actual interest due.

    Those are pretty stark differences. On one hand we have a huge baloon payment on accumulated principle starting in 2023 with interest payments starting six years befor that. On the other we have an interest only loan coming due for the first time in 2023 with the principle never having to be paid off.

    Nothing about Low Cost is inevitable and there may be reasons to dismiss it as too optimistic. But outcomes between IC and LC are certainly possible and in fact have been the norm and such outcomes have big implications for medium and long term deficits, ultimately we are talking differences in the trillions.

    We could put it in terms familiar to Concord. Under Intermediate Cost assumptions the PV of the unfunded liability is $4.3 trillion over the standard 75 year actuarial window and $13.6 trillion over the Infinite Horizon (which seems to be the currently preferred measure). Under Low Cost not only is that unfunded liability reduced to zero in both cases but Social Security returns to cash surpluses after 2055, which is to say the General Fund is no longer on the hook for anything including interest payments.

    But pretty much all discussion of this in the context of the larger deficit/budget arena seems to assume that Intermediate Cost outcomes came down from Sinai with the Commandments. Whereas in the actual Social Security arena we know that the projections are a heck of a lot more dynamic. Somehow there is a disconnect there. But try as I can I have not yet been able to get people to focus on it.

    In any event Social Security solvency would have implications far beyond the system itself. It would change almost everything relating to government borrowing. But Low Cost remains the invisible and almost soundless elephant in the room, if he ever actually manifests himself it will be very good news indeed.

  2. comment number 2 by: Bruce Webb

    The edit function is a little cranky. It works but in the interim sends you an error message that makes it appear the comment has disappeared all together. When you open the site in a new window you see that the comment is not only still there but appears in its edited form. In case your webmaster or the site host needs to know the message reads:
    (Fatal error: Call to undefined function: mb_convert_encoding() in /services/webpages/util/e/c/ on line 576)

    I hope that including this in the text doesn’t screw things up by itself triggering an error message.

  3. comment number 3 by: economistmom

    Bruce: On comment #1, yes, I totally understand that the range of uncertainty in our long-term budget projections is quite wide, and yes, I also understand that many experts think the low-cost assumptions are not at all far fetched and could possibly be more likely than the intermediate-cost assumptions. But we don’t know that (the nasty feature of uncertainty), and when faced with such uncertainty I think it’s better to err on the cautious, rather than optimistic, side. I say that because I think the potential costs of being too cautious and saving more and/or sooner than we might end up needing to (if future economic growth turns out to be better than expected), are less than the potential costs of being too optimistic and saving less and/or later than we might end up needing to. It’s just a lot easier to adjust for “too much” saving later on (if there’s reason to view it as “too much” given the condition of the future economy) than to adjust for “too little” saving when we’re making up for lost time. Yes, it’s a cautious, long-range approach, and sure, I understand that you might feel otherwise and be able to make a case for taking a less cautious, wait-and-see approach. And sure, I’ve seen that some may think those of us proposing the more “cautious” approach are really trying to dupe Social Security advocates into a policy that would undermine political support for Social Security. There’s nothing I can do with folks perceiving my motives in that way other than to say it’s not true.

    On comment #2, yes, the edit function on this blog has never worked right and always gives folks those error messages that you should just ignore, because if you save the edits and get the error but then refresh the page or go back to home page, you’ll see the next time you’re there on the comments page that everything’s just fine despite all the drama. Come to think of it, perhaps that could have been my response to your comment #1, too… ;)

  4. comment number 4 by: M Gilleland

    It’s sad that we have to hope and pray for the low cost scenario when a much more secure future was firmly in our grasp had strengthening reforms been made (e.g., additional mandatory personal savings above and beyond the current payroll tax–perhaps even through rebating the social security surplus on a slightly progressive basis.)

    I hate crying over spilt milk but when it looks like matters are only going to get worse because of delayed corrective action it is depressing.

    Hopefully, I.O.U.S.A. will initiate some meaningful action in the next 2-3 years before the increasing likelihood of a financial meltdown — global financial markets are non-linear and unforgiving and the federal government will be powerless to correct the situation anytime soon. I guess we’ll need the New Deal phase II — wait a minute, that’s how this situation got started.

  5. comment number 5 by: Bruce Webb

    Diane advocates of tax cuts have oversold the reinvestment and hence productivity and hence revenue effects. At least per the numbers. Many of those same people have endorsed Intermediate Cost outcomes that since 1997 have been too pessimistic. To suggest there is some sort of imperative to act on the side of caution when it comes to Social Security in the face of actual historical results while arguing that we need to stick the course based on unproved hope for continuing tax cuts seems like special pleading.

    Based on the actual numbers the 1983 Social Security reform delivered while the 2003 tax cut didn’t. Per those wild and wacky guys at SSA, BLS, and BEA. Can we take this to official numbers?

  6. comment number 6 by: Bruce Webb

    Diane if it were all about ‘too much saving’ vs ‘too little saving’ it might make sense to approach this on a basis that called for more current sacrifice in the way of tax increases. After all per the Trustees we only need the equivalent of a 1.7% increase in payroll to backfill the whole gap. The ‘cautious’ solution would be to build in a targeted set of tax increases and benefit cuts equalli g the payroll gap and adjusting that as actual results came in ahead or behind the baseline. Instead privatizers insist on us ignoring the very small and on balance shrinking payroll gap in favor of radical reform.

    Is it simply crazy to ask economists to deal with actual numbers in historical context?