On the Concord Coalition’s “Tabulation” blog, we note that the federal government ran a deficit (of $20.9 billion) in April, which is actually a highly unusual fiscal circumstance. It’s not the deficit that’s unusual, it’s the April deficit that’s unusual. See, we usually get a surge in revenue in April because most people who owe taxes beyond what’s been withheld from their paychecks like to wait until April 15th to pay them. And revenues usually grow from year to year as the economy grows.
So two things worked against us this April in terms of the April deficit: (i) the economy is shrinking, not growing, and hence revenues have been falling, with the downward trend steep enough to more than offset the April 15th effect; and at the same time (ii) federal spending this April is dramatically higher than April spending usually is (17.5% higher than last April).
In fact, an April federal budget deficit is so unusual that the last time it happened was in 1983–the very spring I graduated from college. Which reminded me that our commencement speaker at my U. of Michigan graduation that spring was no other than Lee Iacocca, the CEO of Chrysler who had brought the automaker from the brink of bankruptcy in 1979 (when I started at U of M) back to profitability, with the help of a federal loan which Chrysler ended up paying off early, in 1983. Maybe everything’s cyclical and somehow these cycles move together?…
I usually cross-post some of my best fiscal policy commentaries here onto my Facebook profile, but here’s one (non-fiscal-policy commentary) that I posted on Facebook first. CNN-Money featured this great set of stories written by people who live in the Detroit area (where I grew up) about why they love Detroit–even now. I just spent the weekend there with old (uh, long-time, high school) friends–a sort of “warm-up” to our 30th(!) reunion which takes place in a couple months. As I prefaced on Facebook:
I was reminded this past weekend that why I love Detroit is for the people there and their love of life–even in these trying times. Maybe it’s that history of fast cars and fun music that helps.
You know the fiscal outlook’s gotten really challenging when the “peace dividend” isn’t a big enough “piece”–and we have to look to do bigger things than “just” ending the war. From today’s Washington Times by David Dickson:
Military spending is projected to fall to its lowest level as a percentage of gross domestic product since Bill Clinton was president, budget documents released Monday show. But unlike in the 1990s, when a post-Soviet “peace dividend” helped usher in a period of budget surpluses, the current cuts will barely dent the massive deficits foreseen long into the future.
The White House said that military spending, measured as a percentage of GDP, will drop to 3.1 percent in 2019, the lowest level since 2001. Yet the government’s red ink this fiscal year was estimated to reach a record $1.84 trillion, nearly $100 billion more than its previous projection.
“The peace dividend cannot bridge the deficit gap,” said Diane Lim Rogers of the nonpartisan Concord Coalition, which advocates fiscal restraint. “We have so many other spending needs and wants … that the situation is much worse” than a decade ago…
Just since September, the Congressional Budget Office’s (CBO) base-line revenue projections over 10 years collapsed by $3.3 trillion because of the deep recession, which has resulted in the evaporation of trillions of dollars in wealth and income, Ms. Rogers said. That will have a long-lasting effect on revenues, she said.
“Compared to the 1990s, we are in the opposite situation,” Ms. Rogers said. “Then, the revenue surprise was positive because of the booming economy. Now the revenue surprise is negative.”
Making matters worse, the president “has not shown a willingness to address tough choices on entitlements and revenue requirements,” she said.
To clarify and to be fair, President Obama has repeatedly expressed a general willingness to move toward greater fiscal responsibility as a general principle. He just hasn’t been willing to get very specific about the big-enough hard choices that will be needed to actually achieve fiscal sustainability in practice–choices that would effectively damp down net spending on Social Security and Medicare and that would substantially increase federal revenues (i.e., taxes). (And he’s definitely not been able to bring Congress on board for the first offer of specific tax increases that are contained in his budget–such as those designed to fund health care reform and the Making Work Pay credit. I do think Congress is behaving much more badly than the President…) Those “big-enough” choices are hard choices because they involve scaling back on things everyone doesn’t seem eager to scale back on, not just the easy and politically-cheap “waste, fraud, and abuse”-sounding things.
The Obama Administration released the “final installment” of their FY2010 budget today. The summary tables can be found here. OMB director Peter Orszag explains what’s changed from the February release on his blog today. Although the Administration has not revised the economic assumptions that go into the budget projections since their February release, they’ve still had to adjust downward their revenue forecast due to so-called “technical revisions”:
The change in the deficit estimates [compared with February, about $90 billion higher in each of FY2009 and FY2010, yet on net only about $140 billion higher for the full ten-year period] reflects upward technical revisions in light of new information regarding the collection of receipts, financial stabilization efforts, and other federal programs. (Technical revisions reflect additional data on, or expected changes in, government receipts or expenditures, other than because of changed assumptions about major macroeconomic variables such as the size of the economy, the rate of inflation, or the unemployment rate. The latter are called economic revisions.) Treasury now estimates that overall federal revenue will be less than was projected in February by between $30 billion and $50 billion in each of this year and next [and $124 billion lower over ten years, from Table S-8].
[Note from the same table (S-8) that the technical changes increase deficit spending and the associated net interest, which is now $193 billion higher (from these technical changes alone) over ten years.]
As a result of these technical revisions, the Administration has (already) had to look for a new source of revenue for the health reserve fund beyond the original proposal to limit itemized deductions (emphasis added):
Health reserve fund. The Administration has made a historic commitment to health reform by putting on the table $635 billion in savings to be devoted to paying for health reform this year. The health reserve fund is almost exactly the same size as it was in the in the February overview and is still about evenly divided between Medicare and Medicaid savings and additional revenue. But, as I have discussed elsewhere, the composition of the additional revenue measures has now changed somewhat, with the addition of new enforcement measures and loophole closers to make up for technical re-estimates of the original proposal.
It’s sort of like looking for spare change under the couch cushions, when what you really need to do is get off the couch and find a higher-paying job–and you don’t even know if you can count on hanging onto your lower-paying one. (It’s not like the proposal to limit itemized deductions has no other problem besides not raising as much revenue as we previously thought it might.)
And speaking of the one-year anniversary of this blog (today!)… That’s definitely one of the big fiscal-policy lessons I’ve learned in the past year while writing this blog. Changing policymaker and private citizen attitudes about the need to raise more revenue, and how to best accomplish it, is very hard to do–even with a new president who was elected to bring “change” (speaking of “spare change”).
It’s Mother’s Day today, and that means it’s been just about a year since I launched EconomistMom.com (last Mother’s Day, 5/11/08). I realize that over the past year (through the writing of 376 posts!) having this blog has taught me a lot of things, some of which (maybe the not-too-personal, mainly-fiscal-policy parts) I’d like to try to reflect upon here in the coming week. For today, I’m going to enjoy this day with my four kids.
To all the moms out there, including my own, Happy Mother’s Day!
House Majority Leader Steny Hoyer delivered the keynote address at a forum on fiscal responsibility hosted by the Bipartisan Policy Center on Wednesday. My favorite part of his speech (emphasis added):
…We will not bring our debt down if we do not reform entitlements and rein in the rapidly rising cost of healthcare. I am glad that we have a President who sees it that way. His talk of a “grand bargain” that encompasses issues from entitlements to healthcare to taxes shows a clear understanding of the tradeoffs and sacrifices that will be necessary. Given the gravity of our situation, we cannot afford to take any options off of the table, either on the spending or the revenue side. Of our entitlement programs, I believe we would have the easiest challenge in reforming Social Security. Here, the options are well and widely understood. We can bring in more revenues. We can restrain the growth of benefits, particularly for higher-income workers, while we strengthen the safety net for lower-income workers. And/or we can raise the retirement age, recognizing that our life expectancy is significantly higher today. What is missing here is not ideas—it is political will. The bipartisan trust we need for compromise has been sorely damaged. And both sides are guilty—Democrats for using Social Security as the “third rail” for political advantage, and Republicans for walking away from the table at the first mention of raising revenues…
And then Robert Borosage of the Campaign for America’s Future attacks Steny’s speech with these comments:
Wrong Way Steny Hoyer could become a political legend for going the wrong way on Social Security unless his own teammates tackle him.
Joining conservative hysteria about long-term deficits, Hoyer has decided that the way to solve the deficit problem is to focus on cutting entitlements. And the way to cut entitlements is to start with Social Security, cutting benefits for some, raising the retirement age again. And the way to get this done is to create a bipartisan commission, and fast track whatever it recommends through the Congress, trying to ramrod a vote with no amendments before the public gets wise to the deal…
OK, so it’s just a half of one percent of the $3.4 trillion budget, but the $17 billion in “terminations, reductions, and savings” proposed by the Obama Administration today still represents smarter governing, in that the Administration weighed costs against benefits, recommending cuts in those programs that didn’t look so worthwhile from that net benefit perspective. And unlike the Bush Administration’s similarly small list of proposed cuts (totaling $34 billion in last year’s budget), the Obama Administration’s list includes eliminating somelow-merit tax expenditures (specifically, some tax preferences for the oil and gas industry) and not just direct spending.
So these are low net-benefit cuts that don’t yield a whole lot of savings. Yet budget policy experts don’t seem very optimistic that Congress will go along with even these cuts:
Obama’s list of proposed cuts is less ambitious than the hit list former president George W. Bush produced last year, which targeted 151 programs for $34 billion in savings. Like most of the cuts Bush sought, congressional sources and independent budget analysts predict, Obama’s also are likely to prove a tough sell.
“Even if you got all of those things, it would be saving pennies, not dollars. And you’re not going to begin to get all of them,” said Isabel Sawhill, a Brookings Institution economist who waged her own battles with Congress as a senior official in the Clinton White House budget office. “This is a good government exercise without much prospect of putting a significant dent in spending.”…
[T]he more likely outcome, budget analysts said, is that few to none of the programs targeted by Obama will be terminated. Presidents from both parties have routinely rolled out long lists of spending cuts — and lawmakers from both parties routinely ignore them.
“You can go through the budget line by line, but there’s no line that says ‘waste, fraud and abuse,’” said Robert Bixby, executive director of the nonprofit Concord Coalition, which promotes deficit reduction. “What some people think is waste, other people think is a vital government service.”
If Congress is not willing to support even these cuts–given the demonstrated low net-benefit of these small programs and given the President’s recommendation/blessing on these cuts–then how are they supposed to go along with the really tough choices, to scale back on the major programs and the tax cuts that they love even more (and that cost far, far more)? It’s an early and easier test in fiscal responsibility that I’m still afraid our government might fail.
Maybe we ought to consider this policy tactic: renaming as many of our federal programs as we can the “waste, fraud and abuse” program.
Fred Bergsten, Director of the Peterson Institute for International Economics, gave an excellent presentation in Washington today explaining how his recent research with his Institute colleagues demonstrates that deficits do matter–even in a global economy where the U.S. is able to finance those deficits with a lot of foreign capital. Under a current-policy-extended type of scenario which the authors call the “fiscal erosion scenario”:
…by 2030, the deficit in trade in goods and services reaches $3 trillion; net investment income transfers to foreigners exceed $2.5 trillion despite the fact that American investments abroad continue to earn a much higher return than foreign investments in the United States; the current account deficit thus exceeds 15 percent of GDP (and could reach 25 percent on plausible estimates of induced effects on interest rates); and the country’s net foreign debt climbs to 140 to 175 percent of GDP. The main transmission mechanisms are a rise of 240 basis points in US interest rates, compared with the “benign baseline,” and a corresponding rise of more than 20 percent in the exchange rate of the dollar that severely undermines the international price competitiveness of US exports.
Note the mention of the 240 basis-point rise in interest rates. In other words, the U.S. bumps up against a limited supply of capital from which to borrow, even on the global capital market. And when there’s excess demand, the price of borrowing–i.e., the interest rate–rises.
Dean Baker seems to forget that there are two sides to the global capital market when he tries to suggest that current trends for deficit spending don’t imply high interest rates and that we’re maybe even lucky that other countries are in recession too:
This [New York Times] article [which suggests that rising interest rates imply rising concern about the budget deficit] also misrepresents some other aspects of the government’s financial situation. For example, it asserts that because most of the rest of the world is in recession there is less money to lend to the United States: “Most of the world is in recession, and other nations have rising borrowing needs as well.”
In fact, the opposite is the case. It would be harder for the United States to borrow if the rest of the world were growing rapidly and there were many competing demands for capital in both the public and private sectors.
But when crowding out happens, it’s due to excess demand for capital. Excess demand can occur when demand is too high, yes. But it can occur when supply is too low, as well. When other countries no longer have “savings gluts,” there’s less global capital available for the U.S. to borrow. And that’s what Fred Bergsten was explaining today, with these warnings about the “fiscal erosion” scenario:
The main conclusion is that the United States would face sizable costs and adjustment requirements under anything approaching this outcome. About 7 percent of GDP annually would be transferred to foreigners to service our huge international debt position, thus denying ourselves access to this sizable share of US output for either consumption or investment. At some point we would almost surely have to reduce the external deficits by contracting domestic demand by at least 13 percent of GDP annually, perhaps twice as great as the maximum impact of the current crisis.
The clear policy implication of this analysis is the need to restore the US budget position near or to balance over the course of the economic cycle, including achievement of at least modest surpluses during periods of strong economic growth (like 2003–06). Fiscal policy is the only tool that both is under the control of our governmental authorities and will clearly move the country’s international economic position in the right direction. Even if such a policy shift does not lead to an improvement in the external imbalance, as in fact the move to budget surplus in the Clinton years did not close the current account deficit, the stronger fiscal position would produce a more robust private investment environment that could generate the wherewithal to repay foreign creditors and still provide for domestic consumption. These global implications of fiscal policy thus add sharply to the case for early action, as soon as possible after recovery from the current crisis, to put the budget on a sustainable long-term trajectory.
…or even just outside of DC… Sometimes you just head out to grab a burger on your lunch hour, and you somehow end up dining with the President and Vice President. It really happened to three of my Concord Coalition colleagues today! (Our offices are down the street from Ray’s Hell Burger in Arlington, VA.)
Today the President unveiled a few more details about some of the revenue proposals in his budget–what he’s hoping are some of those rare tax increases that might sound good because they seem to punish “bad” behavior (you know, sort of like trying to tax away those AIG bonuses). This time it’s not exactly the bad behavior (ivory-towered) economists would prefer to tax (such as using carbon-intensive energy which contributes to global warming), but it’s the kind of bad behavior genuine American manufacturing workers (including maybe some autoworkers who have very recently lost their jobs) would like to see taxed and gone away. These are “anti-offshoring” tax increases, as the President explained:
Now, understand, one of the strengths of our economy is the global reach of our businesses. And I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens. This is something that I talked about again and again during the course of the campaign. The way we make our businesses competitive is not to reward American companies operating overseas with a roughly 2 percent tax rate on foreign profits; a rate that costs — that costs taxpayers tens of billions of dollars a year. The way to make American businesses competitive is not to let some citizens and businesses dodge their responsibilities while ordinary Americans pick up the slack…
For years, we’ve talked about ending tax breaks for companies that ship jobs overseas and giving tax breaks to companies that create jobs here in America. That’s what our budget will finally do. We will stop letting American companies that create jobs overseas take deductions on their expenses when they do not pay any American taxes on their profits. And we will use the savings to give tax cuts to companies that are investing in research and development here at home so that we can jump start job creation, foster innovation, and enhance America’s competitiveness…
[T]hese and other reforms will save American taxpayers $210 billion over the next 10 years — savings we can use to reduce the deficit, cut taxes for American businesses that are playing by the rules, and provide meaningful relief for hardworking families…
Today’s proposals elaborate on one line in Table S-6 (page 122) of the President’s initial budget blueprint issued in February–the line labeled “Implement international enforcement, reform deferral, and other tax reform policies” which contained unusually round numbers and added up to a revenue increase/deficit decrease of $210 billion over ten years (which incidentally offsets only about one-tenth the cost of Obama’s proposal to extend the bulk of the Bush tax cuts). Here’s how the $210 billion revenue increase was broken down for us today:
a revenue increase of $103.1 billion from reforming deferral rules ($60.1 billion) and “closing foreign tax credit loopholes” ($43.0 billion)–both provisions taking effect in 2011 (note: after the recession is expected to end);
a revenue decrease of $74.5 billion from making the research and experimentation tax credit “for investment in the United States” (which would otherwise expire at the end of this year) permanent;
a revenue increase of $95.2 billion from “getting tough on overseas tax havens”….”getting tough” by 2011 at least;
which adds up to $123.8 billion in tax increases, leaving 210.0 - 123.8 = $86.2 billion still to be explained in the next (more complete) version of the President’s budget coming out later this month.
Note that it really helps (politically) to throw in a popular tax cut such as the R&E credit (a little “treat” of sorts) even within a “tax reform” proposal that’s supposed to emphasize a broadening of the tax base.
Also note that although this was a line item in the President’s budget, this was a line in the budget that the Congressional Budget Office and the Joint Committee on Taxation did not do a revenue estimate on, presumably because there were not enough details on these proposals specified in the early budget document. It will be interesting to see how the CBO/JCT revenue estimates on these proposals eventually compare with the $210 billion the Obama Administration is hoping for, yet considers a “conservative” (low-balled) number.