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A Once-in-a-Generation Budget

February 26th, 2009 . by economistmom

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.

(UPDATE, 4:30 pm:  here is a Concord Coalition statement on the President’s budget, just released.)

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.

4 Responses to “A Once-in-a-Generation Budget”

  1. comment number 1 by: Principal Chair

    I’m not sure how to reconcile your comments with these from Heritage.

    http://blog.heritage.org/2009/02/26/quick-observations-on-president-obama%E2%80%99s-budget/

    All I know is that back of the envelope, the tax increases are going to make a material impact on my family’s ability to maintain its standard of living and stay in our house. (Not so happy)

  2. comment number 2 by: Jim Glass

    “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.”

    Also bigger than the last four years of Bush deficits, 2005-2008, which averaged 2.23% of GDP as per CBO, one might add. (2.6%, 1.9%, 1.2%, 3.2%)

    So what exactly is the promise to “cut the deficit in half” in relation to? When Obama’s goal of >3% deficits actually looks closer to 50% larger than those horrible, horrible Bush deficits?

    Revenue is moved up to “more sustainable” primarily by personal tax increases, plus corporate tax increases, plus carbon permit revenue which is the equivalent of a new carbon tax. And spending is moved up too.

    So the “new path” being hailed is spending increases and tax increases to produce a bigger government running bigger deficits than the last four years. Is this really an extraordinary departure from history? Any departure from history at all?

    I know it’s a stupid question, but if closing budget deficits is such an important issue, why is spending never moved down to “more sustainable”? Even by say a miserable piddling $100 billion? A government with $3 trillion of outlays can’t find a lousy $100 billion of low-quality stuff to cut? If it could, that would be a “new path”!

    I know it was a stupid question … ;-(

  3. comment number 3 by: John Bailey

    “In its budget, the administration predicted that the overall economy, as measured by the gross domestic product, will shrink by 1.2 percent this year but will grow by a solid 3.2 percent in 2010. That growth would be followed by even stronger increases of 4 percent in 2011, 4.6 percent in 2012 and 4.2 percent in 2013. ” - These assumptions are not honest.

    http://news.yahoo.com/s/ap/20090227/ap_on_go_pr_wh/budget_economy_3

    “President Barack Obama’s budget director said on Thursday that without a shift in policies the U.S. deficit would reach $9 trillion over the next decade.”

    The comment is honest, but there is no way that it can be financed

    http://news.yahoo.com/s/nm/20090227/pl_nm/us_obama_budget_orszag_2

  4. comment number 4 by: Jim Glass

    Re my earlier “what exactly is the promise to ‘cut the deficit in half’ in relation to?”…

    I’ll note that Mankiw notes that at 5% unemployment the Bush budgets produced three years of deficits at 2% of GDP, while the Obama budget projects that when they get back to 5% unemployment they’ll have a deficit of over 3% of GDP. Which rather looks like they are increasing the deficit by half rather than reducing it by half.

    Looking at the Obama budget projections of deficits starting at 12.3%(!) of GDP and falling to a target of that, larger than the Bush deficits, I am at a loss trying to find what a “budget hawk” would be happy about.

    (Unless “finally, tax increases” is taken by itself to equal “tough budgeting”.)

    In 2010 they project 3.2% GDP growth, the second highest rate in 10 years, and a trillion dollar deficit as a needed stimulus. Does that really add up coherently as stringent budgeting, such as to make a hawk happy? A trillion dollar deficit in a >3% growth year??