Kudos to Matt Miller for his explanation of how “Obamanomics” represents a major shift in fiscal philosophy that while “revolutionary” still won’t at all be easy to implement:
…Those of us who worked in Bill Clinton’s budget office thought we did a pretty good job cleaning up the mess we inherited, before the Florida debacle in 2000 gave the GOP a chance to play “Starve the Beast” for a decade more. But Clinton himself, who felt compelled after the GOP blowout in 1994 to declare that “the era of big government is over,” never really slipped the spiritual straitjacket off “Starve the Beast” in the first place.
With President Obama’s first budget we are therefore embarking on an epic new paradigm which deserves its own metaphor. Though it’s a little clunky, for symmetry’s sake we may as well call it “Feed the Beauty.”
In fiscal terms, the failed wager of “Starve the Beast” was that spending would eventually shrink to come in line with lower taxes. The tacit wager of “Feed the Beauty” is that taxes will eventually rise to come in line with higher spending. Why? Because Americans will, over time, come to realize that the government we want is actually worth paying for (as opposed to having our children borrow money from the Chinese to pay for it, the de facto “plan.”) The paradox of this revolution in governing philosophy is that its success relies on the same underlying political dynamic. Instead of fiscal sanity depending on pols doing something the American people won’t like (cutting popular programs), it will now depend on pols doing something the American people won’t like (raising taxes)…
And speaking of the Chinese and our children owing money to them, comedian Bill Maher has his own reasons for worrying about that… Watch if you want to know what the “Snuggie” has to do with fiscal responsibility. (Warning: not appropriate for younger children to watch due to language.)
Let’s face it. It’s not a claim or a forecast–it’s reality: our government is the only one buying things these days. Today’s GDP report estimates that our economy shrunk at an annual rate of 6.2% last quarter–far worse than the prior estimate of a 3.8% decline. And it breaks down this way:
Personal Consumption fell 4.3%, contributing 3.01 percentage points to the 6.2% overall decline (nearly half).
Private Investment fell 20.8%, contributing 3.11 percentage points to the overall decline (there’s the other half).
EXports fell 23.6% (contributing 3.44 percentage points), and IMports fell 16.0% (offsetting by 2.99 percentage points), so that net exports (X-M) contributed 0.46 percentage points to the overall decline.
Government purchases of goods and services rose by 1.6%, with federal purchases rising 6.7% and state and local purchases falling by 1.4%. Government was the only positive contributor to GDP last quarter, on net adding (just) 0.32 percentage points to the GDP growth rate. (Federal was +0.50; state and local was -0.18.)
The GDP data highlight the fact that despite federal government purchases rising at a 6.7% rate last quarter, it hardly made a difference. It only offset the massive 6.76% drop in the rest of GDP by a half of one percentage point. Why? Because federal government purchases of goods and services last quarter were just 7.8% of our total economic activity (GDP)–at an annual rate, just over $1 trillion out of a $14 trillion economy.
So people are complaining and will continue to complain about the federal government extending its reach and getting bigger and taking over the economy–but I ask: what choice do we have right now? The federal government is the only one able to demand and purchase the goods and services our country is already able to immediately produce–the only one with the resources to put that idle capacity to work.
So while the Republicans may not like this trend and the overall direction the Obama Administration will take our economy in terms of an expanding role of government, I fully expect that their complaining about the higher taxes required to fund the (inevitably) higher spending will only lead to bigger budget deficits and more fiscal irresponsibility–not to a smaller government than would otherwise be the case if they just kept quiet about it. And as Bruce Bartlett puts it today, when Republicans complain about higher taxes, it’s really just “crying wolf”:
Yesterday, President Obama issued his first detailed budget. Among its most controversial proposals is a significant increase in taxes, especially on those with upper incomes. Obama also proposes a cap-and-trade system to reduce pollution that is in essence a broad-based energy tax.
Republicans will undoubtedly make extravagant claims about the detrimental economic effect of these higher taxes. When one hears these claims, however, it is worth remembering that they said the same things in years past and none of their dire predictions came to pass.
So these same-old Republican complaints about how higher taxes will “kill” the economy are especially obstructionist and counterproductive today given our clear reliance on the federal government as the “spender of last resort.”
The President’s opening lines in his first budget plan, just released:
Throughout America’s history, there have been some years that appeared to roll into the next without much notice or fanfare. Budgets are proposed that offer some new programs or eliminate an initiative, but by and large continuity reigns.
Then there are the years that come along once in a generation, when we look at where the country has been and recognize that we need a break from a troubled past, that the problems we face demand that we begin charting a new path. This is one of those years.
Some of my quick observations (sort of like a “random things” list on Facebook):
$2 trillion in deficit reduction over ten years. (I like.)
That deficit reduction is off a “policy-extended” baseline, however, leaving us with a ten-year deficit that’s still $3 trillion higher than under current law. (Not so happy.)
As I expected, apart from assumptions about war costs, the largest contributor to the $2 trillion in deficit reduction is the $637 billion in tax increases on upper-income households. (I like, even though I’m one of them.)
As I suspected, a good chunk of additional revenue is through corporate tax increases (”loophole” and “shelter” closers)–about $350 billion over ten years. (I like.)
As I wondered, another good chunk (about $650 billion) comes from revenue from auctioned carbon permits, a policy the Obama Administration says would begin in fiscal year 2012, and would involve a “100 percent auction [no giveaways] to ensure that the biggest polluters do not enjoy windfall profits” (pg. 21). (I like.)
Those three revenue sources combined (upper-income tax increases, corporate base broadeners, and carbon charges) add up to $1.6 trillion in revenue over ten years, bringing federal revenues as a share of GDP up to 19 1/2 percent by 2019. (I like, because we know the 40-year historical average of 18.3 percent has already been inadequate.)
That $1.6 trillion in new revenue will be hard to come by, not in theory, but in practice (politically). And it still won’t quite make up the $2 trillion in revenue we have lost (in CBO budget projections) due to the recent (since Sept. 2008) deterioration in the economy. (I worry.)
Despite bringing revenues up to a more sustainable level, spending under the Obama budget (already at a starting point well above historical revenues) keeps rising above its own historical level. That leads to a deficit by the second half of the ten-year window that’s above 3 percent of GDP, i.e., bigger than the average (2 1/2 percent) deficit we’ve had over the past 40 years. Because those deficits would still exist and in fact keep rising under the Obama budget, the stock of federal debt relative to GDP will rise to more than two thirds by 2019. (Just the math.)
The Obama budget document is honest: I think the claim that their proposed policies could lead to a 2013 deficit of $533 billion is credible (the math adds up). That would be cutting the deficit by much more than half, by the way, compared with the current-year deficit of $1 1/2 to $1 3/4 trillion (which we know will be a reality, not just a high-balled projection). As a share of the economy, this year’s deficit will exceed 10 percent and could reach over 12 percent, but a deficit in the $500 billion to $600 billion range by 2013 would be just 3 to 3 1/2 percent of GDP (one fourth to one third the size).
The Obama budget is principled: the Administration is not putting off or hiding “the pain” (its tax increases and other cost savings); they in fact set up a mechanism to pursue health care reform in a fiscally responsible way, by proposing a health reform “reserve fund” that complies with the spirit of pay-go (deficit-neutral spending) which provides a $634 billion “opening deposit” (rather than a withdrawal/loan), using Medicare savings and a tax increase (on yes, again, higher-income households).
The Obama budget is nevertheless, and perhaps most importantly, inspiring–which is what is needed to translate the sound math and good policy theories into political reality. From the conclusion:
At this moment of economic crisis and uncertainty, our country is being tested. We can continue the irresponsible ways of the past and pretend that our problems are not there. We can put off for tomorrow what must be done today. And we can just concern ourselves with ourselves—pursuing profits without any regard for principles. Or we can take a new path, usher in a new era of responsibility, and renew America’s promise. We can jumpstart our economy and create or save millions of jobs. We can invest now to address the long-term drags on our economic competitiveness. And we can create a government that is open and responsive to the people it serves…
Overcoming the problems we have inherited will not be completed in one budget, in one month, or in one year. It will take months and years of ingenuity and innovation, courage and commitment. It will take all Americans, including those in Washington and beyond living up to the responsibilities we have to each other as neighbors and citizens. But if we come together and pull together, there is little doubt that America will be growing, innovating, and creating jobs for generations to come.
Over the past couple days I’ve been explaining to reporters that President Obama’s claim that his Administration will “cut the deficit in half” in four years is in fact credible, because it’s quite easy to see, in theory/on paper, how one could come up with a policy mix consistent with that goal. And the President himself has been very up front in explaining how that theory works, both during the campaign and since his inauguration.
The policy math is easy, as the Congressional Budget Office’s budget projections demonstrate. Under current law, the 2001 and 2003 tax cuts expire after December 31, 2010, and the Alternative Minimum Tax, still unindexed for inflation, continues to dip deeper down into the income distribution. As a result, under current law, CBO projects that the fiscal year 2013 deficit won’t be just half of the current fiscal year’s $1.37 trillion deficit (which includes the cost of the recovery package); it will be just $285 billion–or just over one fifth of the current year deficit.
Say you want to continue tax breaks for the “middle class” though–as President Obama wants to do. CBO estimates that extending the middle-income components of the 2001 tax cuts would cost $140 billion in 2013 (about half the cost of extending all of the 2001 and 2003 cuts). Continuing AMT relief would bring the total cost of extended tax relief in 2013 to $303 billion and the total deficit in 2013 to $588 billion. Hey, that’s closer to half of this year’s $1.37 trillion deficit, isn’t it?
The President is being honest in laying out his budget strategy by not pretending that he can afford to extend the entirety of the Bush tax cuts, given the new spending he wants to do, and even if that new spending were to adhere to (at least the spirit of) pay-as-you-go rules. If the entirety of the Bush tax cuts and AMT relief were extended, CBO estimates that the 2013 deficit would rise to $708 billion (slightly more than half of this year’s deficit, without any additional spending).
But I worry about how that honesty on tax policy is being framed/messaged. It still sounds like the old debate over the “Bush tax cuts” and which parts we should keep versus which parts we should let expire. Here’s how the President put it last night:
In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2 percent of Americans.
But the fact is that the President and the Congress don’t have to “end” those tax breaks. Those tax breaks are already going to end under current law. The President and the Congress only get to start (pass) new tax breaks.
So I think that President Obama should be emphasizing those new tax breaks for those 95 percent of Americans that his budget will propose, rather than reminding Republicans in Congress that the old (and failed) Bush tax cuts will be going away.
Reminding those Republicans that one doesn’t like (and probably never liked) the “Bush tax cuts for the rich” will only bring back that rhetorical, politically-charged Republican line on “the largest tax increase in American history.” And then forget getting bipartisan agreement on that tax increase. I don’t know how we could expect that vote to go any better than the vote on the recovery package.
President Obama seems to know this will be coming. Last night immediately after his acknowledgment about raising taxes on the rich, he said:
Now, let me be clear. Let me be absolutely clear, because I know you’ll end up hearing some of the same claims that rolling back these tax breaks means a massive tax increase on the American people. If your family earns less than $250,000 a year, a quarter-million dollars a year, you will not see your taxes increased a single dime. I repeat: not one single dime.
In fact — not a dime.
In fact — in fact, the recovery plan provides a tax cut — that’s right, a tax cut — for 95 percent of working families. And, by the way, these checks are on the way.
That’s the same defensiveness on the Bush tax cuts we’ve heard all too often among Congressional Democrats over the past eight years. I would think the President can and should take a bolder, braver position. Governor Jindal in his GOP response indicated the Republicans still are incapable of seeing deficit-financed tax cuts as having anything to do with our deficits:
Democratic leaders say their legislation will grow the economy. What it will do is grow the government, increase our taxes down the line, and saddle future generations with debt. Who among us would ask our children for a loan, so we could spend money we do not have, on things we do not need? That is precisely what the Democrats in Congress just did. It’s irresponsible. And it’s no way to strengthen our economy, create jobs, or build a prosperous future for our children.
Yet the Republicans cheered at the President’s remarks on fiscal responsibility last night (this from the transcript vs. prepared remarks):
And there is, of course, another responsibility we have to our children, and that’s the responsibility to ensure that we do not pass on to them a debt they cannot pay. That is critical. [CHEERS from both Republicans and Democrats]
I agree, absolutely.
See, I know we can get some consensus in here.
With the deficit we inherited, the cost of the crisis we face, and the long-term challenges we must meet, it has never been more important to ensure that, as our economy recovers, we do what it takes to bring this deficit down. That is critical…
So I think what President Obama and the Democrats in Congress need to do is stop talking about ending “the Bush tax cuts.” Start talking about moving forward with tax policy in a fiscally responsible and fair way, so that we are committed to paying for all the new and critically-needed investments our citizens and elected officials are interested in pursuing in a genuinely bipartisan or “post-partisan” way. The substance of what the Obama Administration wants to propose for tax policy need not change very much; I think it’s largely a question of how to frame and message it. And look at who we have to handle that message! He can do it.
Forget the idea that it’s the President’s “bully pulpit” that makes him the best person to champion bipartisanship and fiscal responsibility. I’m convinced it’s his charm and charisma that will get us there.
Here’s an ABC World News story from last night which shows this in action (as well as my network TV debut, but don’t blink!). And here is the transcript from the President’s Q and A with the summit attendees at the close of the day.
That president of ours–he’s quite a charmer. He’s got what it takes (if anyone has), and the polls already show it.
Thank you, Andrew Samwick, of Capital Gains and Games for clarifying what makes someone a “deficit hawk”–and what it is that those who deserve the title wish to eliminate:
In today’s Washington Post, Robert Kuttner laments that so-called* [go read Andrew's asterisk] deficit hawks in Congress are trying to make the link [between the current explosion in the deficit and the need to reform (or even destroy) Social Security and Medicare]. He opens with:
With the enactment of a large economic stimulus package, fiscal conservatives are using the temporary deficit increase to attack a perennial target — Social Security and Medicare.
It may be that the recent increase to the deficit is temporary. But even a temporary increase in the deficit is a permanent increase in the debt unless there is enacted some way to specifically repay that debt in the near future. Note the word “repay.” It is not enough to just stop running ridiculously high deficits. To repay them, we need to run surpluses. We are nowhere near that. What we got from the Obama Administration was yet another weak use of the phrase “cut the deficit in half” by 2013.
So Kuttner is out of his mind if he thinks that we haven’t permanently increased the debt burden on future generations. This is where the link to entitlement programs comes in (for those who need one). From the point of view of future taxpayers, a dollar of debt is a dollar of debt, whether it is debt held by the public or the unfunded obligations of entitlement programs that we refused to reform. This was a problem for President Bush, who insisted that we had a Social Security cost problem that we had to fix but refused to acknowledge that Medicare Part D that he signed into law and the deficits ensuing from the 2001 and 2003 tax cuts each created debt that was larger or comparable to the projected unfunded obligations in Social Security.
We deficit hawks want to attack the deficit–from all potential angles, whether it be by better controlling costs in Social Security and Medicare (even if via controlling health care costs in general), by reducing wasteful, unnecessary, or inefficient spending, or by raising a more adequate level of revenue. We do not point out the unsustainability of the entitlement programs in order to sabotage those programs. We point it out because we want to strengthen and hence sustain those programs. But I’ve tried to explain that before, to no avail with folks like Kuttner.
But thanks, Andrew, for trying.
UPDATE 2/24: Here is a response to the Kuttner op-ed from Dave Walker in a letter to the editor in today’s Washington Post.
The President’s weekly radio address and the front-page story in today’s Washington Post focus on the Obama Administration’s commitment to fiscal responsibility and (eventual) deficit reduction. The Post story explains:
President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.
In addition to tackling a deficit swollen by the $787 billion stimulus package and other efforts to ease the nation’s economic crisis, the budget blueprint will press aggressively for progress on the domestic agenda Obama outlined during the presidential campaign. This would include key changes to environmental policies and a major expansion of health coverage that he hopes to enact later this year.
A summary of Obama’s budget request for the fiscal year that begins in October will be delivered to Congress on Thursday, with the complete, multi-hundred-page document to follow in April. But Obama plans to unveil his goals for scaling back record deficits and rebuilding the nation’s costly and inefficient health care system tomorrow, when he addresses lawmakers and budget experts at a White House summit on restoring “fiscal responsibility” to Washington.
Yesterday in his weekly radio and Internet address, Obama said he is determined to “get exploding deficits under control” and said his budget request is “sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don’t, and restoring fiscal discipline.”
Reducing the deficit, he said, is critical: “We can’t generate sustained growth without getting our deficits under control.”
My boss, Bob Bixby, will be attending the “summit” tomorrow, representing the Concord Coalition. I think of this event not so much as a full-fledged “summit” (which the American Heritage Dictionary defines as “a conference or meeting of high-level leaders, usually called to shape a program of action“) but rather like the get-to-know-you party, or the “orientation,” to signal intent and kick off a working relationship that will eventually lead to some agreement on a “program of action.”
The “cut the deficit in half” goal is strangely reminiscent of the repeated Bush Administration promises over the years:
Obama proposes to dramatically reduce those numbers [on projected deficits], said White House budget director Peter Orszag: “We will cut the deficit in half by the end of the president’s first term.” The plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion by 2013, he said — still high but a more manageable 3 percent of the economy.
I’m reminded how the Democrats would ridicule such promises when they came from President Bush, remarking how it was like marking up prices just before claiming a “big sale.” I’m also reminded how all through the campaign, candidate Obama and his team tried so hard to get everyone to think the budget “baseline” (the “starting point” for considering and evaluating policy changes) was current policy, rather than current law, extended–in other words, where the Bush tax cuts and relief from the Alternative Minimum Tax were fully extended, so that Obama-proposed tax policy, by cutting taxes by less than full extension of the full complement of Bush tax policy, would look like it would reduce the deficit. The Washington Post’s print version of the story shows a chart that adopts this “policy extended” baseline perspective, showing the Obama Administration’s plan to “cut the deficit in half” as reducing the deficit relative to the baseline (what the Post labels “current projections” which corresponds to an all-tax-cuts-extended scenario).
But a $533 billion federal budget deficit by 2013 is more than double the current-law baseline for 2013, as well as about $100 billion above what Obama’s economic advisers were claiming the 2013 deficit would be under Obama policies during the campaign.
It seems it’s all about appearing to honor those pre-election “great expectations” while lowering expectations at the same time.
I’m traveling and so haven’t had much time (nor the internet connection) to study the Administration’s plan for the mortgage crisis, but I did catch the President’s remarks in Arizona and am just wondering how it’s possible that their plan can really do this:
And we will pursue the housing plan I’m outlining today. And through this plan, we will help between 7 and 9 million families restructure or refinance their mortgages so they can afford — avoid foreclosure. And we’re not just helping homeowners at risk of falling over the edge; we’re preventing their neighbors from being pulled over that edge, too — as defaults and foreclosures contribute to sinking home values, and failing local businesses, and lost jobs.
But I want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators — (applause) — it will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. (Applause.) It will not help dishonest lenders who acted irresponsibly, distorting the facts — (applause) — distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford. (Applause.) So I just want to make this clear: This plan will not save every home.
I mean, when the government intervenes (subsidizes), but doesn’t outright take over, a market, how can they know how much the suppliers vs. the buyers will benefit, and how much bad suppliers vs. good suppliers, or bad buyers vs. good buyers, will benefit?
Have you checked out where your (children’s) tax dollars are going?
(CNN) — In keeping with President Obama’s pledge of an administration that is “transparent and accountable,” the White House has launched a site that promises to show taxpayers where their stimulus-package dollars are being spent.
The site, Recovery.gov, allows visitors to track efforts to jump-start a teetering economy in the midst of a slumping housing market and massive job losses.
It breaks down the $787 billion package by category: $288 billion for tax relief, $59 billion for health care, and so on. The site promises that more detailed spending information will be posted once federal agencies decide how they are going to allocate the money…
GM and Chrysler submitted their “viability plans” today to the Treasury Department (as they asked for more than $20 billion more in aid). The Detroit Free Press provides links to the full GM plan, and to the highlights of the Chrysler plan. (UPDATE Wed. am: here’s a link to the Chrysler plan on Chrysler’s website.) Both suggest a lot of shared sacrifice… From GM’s summary/highlights:
GM’s Plan calls for considerable sacrifice from all stakeholders
-Bondholders and other debtors
-Hourly and salaried employees, executives and retirees
-Dealers and suppliers
and from a Nardelli email to Chrysler employees:
As we have indicated all along, shared sacrifice is necessary for Chrysler LLC’s survival. We will need to continue making tough choices in the days ahead, and it will be absolutely critical that every constituent—creditor groups, shareholders, suppliers, dealers, the UAW and our own employees—make concessions.
…and the plans clearly describe significant cost-cutting measures. Yet let’s face it, ”breaking even” isn’t even an option for several years, according to both reports. This is about minimizing the inevitable losses, rather than maximizing any gains. From a CNN-Money story:
“The most important issue is not what the automakers are going to do to cut costs, but rather what the government is going to do to stimulate car sales,” stated Jeremy Anwyl, CEO of car sales tracker Edmunds.com. “No automaker is viable under the current market conditions, and so far the spending package appears to spread money too thin to actually make much of a difference in any one area.”
Some economists argued that the problems detailed in the plans show that GM and Chrysler are already failed companies.
“When consumers refuse to buy your product, that’s the economy telling you you’re bankrupt,” said Rich Yamarone, director of research at Argus Research. ”
But Yamarone said it may make sense to give them the money they need, even if it’s good money after bad, because the battered U.S. economy can’t weather the halt of operations at GM and Chrysler right now.
I really hope the automakers aren’t counting on government policy alone to stimulate their auto sales; those ideas for how to produce things that people want to buy really have to come from the industry itself–or else there’s really no way to consider the industry truly viable. And I hope it indeed is good money going after bad, not bad money going after bad… Let’s hope the federal government is good for all this borrowed money; they’re borrowing it to lend to the automakers, after all. Did we mention “shared sacrifice” and “viability”?