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Expectations and Deficit Reduction

February 22nd, 2009 . by economistmom


2/21/09: Your Weekly Address from White House on Vimeo.

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.

One Response to “Expectations and Deficit Reduction”

  1. comment number 1 by: Jim Glass

    “We will cut the deficit in half … later”, hmmm, yes, familiar.

    Auerbach and Gale at Brookings are not so optimistic (.pdf)

    … under what we view as optimistic assumptions, the deficit is projected to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years.

    The longer-run picture is even bleaker. We estimate a fiscal gap – the immediate and permanent increase in taxes or reduction in spending that would keep the long-term debt/GDP ratio at its current level –about 7-9 percent of GDP, or between $1 trillion and $1.3 trillion per year in current dollars.

    Recent trends in credit default swap markets show a clearly discernable uptick in the perceived likelihood of default on 5-year U.S. senior Treasury debt, a notion that was virtually unthinkable in the past….

    One thing worth noting in the political debate is how many people who used to bash Bush-era budget projections for assuming the tax cuts would expire after 2010 as per law now are happy to assume the Obama stimulus spending programs will expire after two years. The dubiousness of that idea is noted …

    … just as it has proven difficult not to extend expiring tax provisions, it may well prove difficult to allow stimulus provisions to expire after two years.

    For example, the stimulus bill’s most significant tax provision is theMake Work Pay credit that was the centerpiece of President Obama’s tax plan as a candidate and was originally proposed as a permanent policy change. Other parts of the bill, such as provisions for health care, education, infrastructure, and energy, raise similar concerns, as they are items that the Administration would like to promote in the long-term, not just as stimulus.

    Anybody who thinks its easier to cut spending programs than to repeal tax cuts should say: “mohair subsidy”.