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What Is “Plausible” for the Fiscal Outlook?

August 29th, 2009 . by economistmom

washpost-deficits-graphic-082909

The first definition of “plausible” on dictionary.com is:

plausible

[plaw-zuh-buhl]

having an appearance of truth or reason; seemingly worthy of approval or acceptance; credible; believable: a plausible excuse; a plausible plot.

Note that it doesn’t say “likely” or “probable”–it connotes the notion of possibility not probability.  I bring this up because many folks, especially the media, want to interpret the “Concord Coalition Plausible Baseline” as our best forecast of what the fiscal outlook will turn out to be.  No, we’re not saying that’s the most likely outcome; we’re saying that’s a plausible, possible outcome.  And it’s a worst-case scenario, because that’s what we do at Concord: we warn about the possible really bad outcomes if we don’t start making more responsible choices–because we don’t want them to happen.

[*Note:  the following paragraph was revised late Saturday...]

On today’s front page of the Washington Post, Lori Montgomery does an excellent job of laying out the different projections of budget deficits over the next ten years (see the graphic above)–explaining how the CBO baseline shows deficits of $7.1 trillion, while OMB shows $9.[1] trillion (rounding up $9.051 trillion) based on their own economic forecast, while the cost of Obama Administration budget policy applied to CBO’s baseline suggests the larger figure of $10.3 trillion, while if all the (2001 and 2003) Bush tax cuts were made permanent the deficits would grow to $11.3 trillion.  (The latter two estimates come from Bill Gale of Brookings.)  Then there’s Concord’s “plausible” figure of $14.4 trillion, so one might wonder: what really is “plausible” out of all those estimates?

The answer is that they all are “plausible” estimates of the fiscal outlook going forward over the next ten years–the full $7.3 trillion range of possibilities is indeed all possible and all within the control of policymakers.  We’re not talking about re-writing history or even re-writing (repealing) current tax law.  The main point of Lori’s story was to highlight the thorny issue of what the Obama Administration will do about their campaign promises about tax policy now that the deficit outlook is so much worse and the Bush tax cuts seem even more unaffordable than they used to.  And in showing the different deficit projections and explaining what they have to do with the Bush tax cuts, Lori is pointing out the following facts, which really represent choices or different “plausible outcomes”:

  1. Current law commits to the Bush tax cuts only until the end of 2010 ($7.1 trillion in deficits);
  2. but President Obama has proposed to extend most of the Bush tax cuts in his budget proposal ($9.1 - $10.3 trillion); and
  3. therefore Obama Administration tax policy is not that different from where we’d end up if we extended all of the Bush tax cuts (as Senator McCain had wanted to do had he become president) ($11.3 trillion).

…and throw Concord’s “plausible baseline” into the mix, which relative to Bill Gale’s $11.3 trillion estimate adds in the permanent extension of all the other expiring tax cuts (over $2 trillion with interest costs) as well as a higher estimate for spending which assumes it grows with the economy (boosting spending by about $1 trillion on net after adjusting the baseline defense spending assumption downward), both as estimated by CBO in Table 1-7 of their outlook (pages 24-25), and you get $14.4 trillion in deficits as another possibility (”plausible outcome #4″), too.

So the full ($7.3 trillion) range of estimates–from $7.1 trillion in deficits all the way up to $14.4 trillion in deficits, is all “plausible” in my opinion.  Outcome #1 could happen if Congress and the Administration left town, didn’t enact any new policies, and let the nation continue on autopilot with the laws currently on the books.  OR outcome #1 could happen if any new spending or tax cuts that Congress and the Administration put into law (that’s ANY and ALL new stuff, not just the stuff covered under Congress’ “pay-as-you-go” rules which now exempt the Bush tax cuts and never included “discretionary” spending) were fully paid for/offset instead of being deficit financed.  At the opposite extreme is the Concord Plausible Baseline, which would occur if current policies were all to be permanently extended without paying for any of them–i.e., through continued deficit financing. To be clear and to be fair, this is not Concord’s estimate of deficits under the Obama Administration’s budget, because, as prime example, the Administration proposed: (i) to extend most, but not all, of the Bush tax cuts (still via deficit financing); and (ii) to permanently extend the Making Work Pay tax credit but in a fully offset manner using climate policy revenues.

My point is that these deficit projections are all uncomfortably large, but the Administration certainly has a wide “opportunity set” in front of them.  They could do anything from the one extreme of NOT extending any of the Bush tax cuts (or fully paying for whatever they choose to extend or whatever new tax cuts they’d rather have) all the way to the opposite extreme of making permanent all of the tax cuts currently in place and not paying for any of it.  There are many fiscal paths the Obama Administration can choose among, and choices over tax policy are a huge factor, as emphasized in the Washington Post story by both Bill Gale and Dave Walker (and my emphasis added):

“If you rule out inflating our way out of the problem and defaulting on the debt, there are two ways [to reduce the deficit]: Cut spending or raise taxes,” said William G. Gale, an expert on fiscal policy at the Brookings Institution. With more than 80 percent of federal spending devoted to politically untouchable programs such as Social Security, Medicare and Medicaid, he said, “it’s going to be really hard to make significant headway on the spending side. So that means you’ve got to think about taxes.”

“There’s no question in my view that Bush was the most fiscally irresponsible president in the history of the republic,” said David M. Walker, the comptroller general under Bush who now advocates for deficit reduction. Obama “was handed a bad deck,” he said. “But the question is, are you making it better or not? And so far the answer is no.”

Obama could raise taxes without taking any legislative action. If he let all the Bush tax cuts expire next year and refused to enact legislation to restrain the alternative minimum tax, deficits would be about $200 billion a year lower and the debt would stop growing as a percentage of the economy, according to Gale’s analysis of new data from the nonpartisan Congressional Budget Office. But that would mean big tax increases for most American families, violating Obama’s pledge

Although the deteriorating economy has certainly been a huge challenge to the fiscal outlook over the past year, what constrains which of these “plausible outcomes” can come true is not the economics as much as the politics–how much political courage the Administration and Congress can muster, hopefully bolstered by Americans who recognize it’s time to face up to tough choices.

10 Responses to “What Is “Plausible” for the Fiscal Outlook?”

  1. comment number 1 by: B Davis

    Note that it doesn’t say “likely” or “probable”–it connotes the notion of possibility not probability. I bring this up because many folks, especially the media, want to interpret the “Concord Coalition Plausible Baseline” as our best forecast of what the fiscal outlook will turn out to be. No, we’re not saying that’s the most likely outcome; we’re saying that’s a plausible, possible outcome. And it’s a worst-case scenario, because that’s what we do at Concord: we warn about the possible really bad outcomes if we don’t start making more responsible choices–because we don’t want them to happen.

    Agreed. The purpose of projections is not to predict the future but to project the outcome of continuing current policies. I recently looked at long-run projections at this link and quoted the following excerpt from the most recent U.S. Budget:

    These rising deficits would drive publicly held Federal debt as a ratio to GDP to levels well above the previous peak level reached at the end of World War II and beyond. Before the debt reaches the levels shown in the table, there would likely be a financial crisis that would force budgetary changes, although the timing of such a crisis and its resolution are impossible to predict. Timely reforms, especially those that lowered the trend of health care costs, could go far to avoid such a crisis.

    Hence, even the U.S. Budget says that these high projected debt levels will probably not be reached because they would likely trigger a financial crisis which would force budgetary changes. The purpose of the projections is simply to show where current policies are likely to lead us.

    Outcome #1 could happen if Congress and the Administration left town, didn’t enact any new policies, and let the nation continue on autopilot with the laws currently on the books. OR outcome #1 could happen if any new spending or tax cuts that Congress and the Administration put into law (that’s ANY and ALL new stuff, not just the stuff covered under Congress’ “pay-as-you-go” rules which now exempt the Bush tax cuts and never included “discretionary” spending) were fully paid for/offset instead of being deficit financed.

    Is there some reason that “pay-as-you-go” rules have never included “discretionary” spending? It seems important to limit the growth of mandatory spending since that is projected to be the larger long-run problem. Still, it would seem reasonable to place some sort of limitation on the growth of discretionary spending, perhaps limiting the growth in existing programs to the growth in inflation and population. Are there currently any such limits?

  2. comment number 2 by: economistmom

    B Davis asked: “Is there some reason that “pay-as-you-go” rules have never included “discretionary” spending?…it would seem reasonable to place some sort of limitation on the growth of discretionary spending…”

    Well, I think because discretionary spending is newly determined (”appropriated”) every year, it’s not viewed as as much of a policy commitment that could turn “unsustainable” if not paired with sufficient offsets. But in the 1990s we did have “caps” on discretionary spending that were largely viewed as “successful.”

  3. comment number 3 by: B Davis

    Well, I think because discretionary spending is newly determined (”appropriated”) every year, it’s not viewed as as much of a policy commitment that could turn “unsustainable” if not paired with sufficient offsets. But in the 1990s we did have “caps” on discretionary spending that were largely viewed as “successful.”

    True, it does seem that the government has had much more success in cutting back on discretionary programs than on mandatory programs or tax cuts (even those that are scheduled to expire). Still, it does seem wise to subject Congress’ discretion to a some sort of discipline! Anyhow, thanks for clarifying the issue.

  4. comment number 4 by: SteveinCH

    Not surprisingly I guess, I have a different view. By any measure I can think of, Obama (unless there are major changes) will ultimately be a more fiscally irresponsible President than Bush. You may like or the thngs he chooses to spend money on more or less (univeral insurance versus Iraq) but that actually has nothing to do with his level of fiscal repsonsibility.

    As I read the data, Obama will exceed the Bush deficit production over his 2 terms by roughly a factor of 2, assuming that he:

    1. Allows all of the current expiring tax cuts to expire

    2. Holds the rate of spending below the rate of GDP growth (pretty much has never happened except in periods of high growth)

    3. Gets a bit lucky on the rate of growth in the economy over the period.

    That’s the $7.1 trillion scenario.

    While this is plausible by the dictionary definition, I’d say it is only barely so. A more likely outcome is, I suspect, somewhere in the $10 to $11 trillion range (Congress extends tax cuts, growth closer to CBO and spending runs with GDP, not behind). It could be a lot worse (if spending continues to run up) but I very much doubt it will be a lot better without some crisis driving the solutoin

  5. comment number 5 by: AMTbuff

    “If you rule out inflating our way out of the problem and defaulting on the debt, there are two ways [to reduce the deficit]: Cut spending or raise taxes,”

    Why rule these out? They are the politically easiest exit strategies.

  6. comment number 6 by: Larry

    I would have loved to see a scenario that assumes we move to a sustainable annual deficit (starting, say in 2011) of 3% or so, just so we can see where sanity lies, as well as Krugman’s “it’ll be like WWII and the deficit will start going down as % of GDP” scenario…

  7. comment number 7 by: SteveinCH

    I think we would all love to see a scenario where annual deficits decline to a “sustainable” level (not sure whether 3% would fit the bill but that’s another debate entirely). The issue is that in order for that to happen, we would need to either

    1. Enact tax increases over and above allowing all existing tax cuts to lapse and/or

    2. Reduce the rate of growth of spending below that forecast by the administration, which, in and of itself, is most likely a lowball estimate without substantial reductions in programs and/or services.

    So while we would all like to see such a scenario, the people who put the numbers together can’t come up with any numbers that are supported by existing policy that would make it happen. In theory it’s easy (simply increase government receipts as a share of GDP by a couple of percentage points and you’ll get there). In practice it is quite difficult.

    Krugman’s argument, as I understand it, was more about debt/GDP than deficit to GDP although you cannot get the first without restraint on the second. Oddly, these days, he sounds like a bit of a dove on deficits in the famous we’ll grow our way out of them school.

    To get there, you need deficits that are below the rate of GDP growth as a percentage of GDP (more or less). If you believe that 2 to 3 percent is probably a reasonable LT growth rate for the US economy, you need the deficit to be below that and a lot of time to make an impact.

  8. comment number 8 by: SteveinCH

    Just to build on this further, I did some fun math on deleveraging the country. I used gross debt as a percentage of GDP because netting out debt held by the government is a dodge. The debt held by the government has to be converted into cash at some point so it’s no different than privately held debt.

    Using this ratio, the forecast for 2010 is 98.1%. This compares to about 120% in 1946 (the end of WWII).

    If we assume GDP growth of 3% per year (maybe a bit high but it’s only to make a point) and a deficit of 2% a year, the gross debt number goes to 77% by 2050. For context, that 77 percent has only been exceeded in 11 of the years between 1940 and today (1943 to 1951 and 2009 and 2010).

    In the post WWII era, gross federal debt was basically flat from 1946 to 1957 (2 billion increase across the whole period). It’s just not going to happen in my opinion

    Just goes to show that the grow your way out of the problem school takes a really long time to work. If anyone here wants to bet on the government running deficits at 2% for the next 40 years, I’m willing to make odds.

  9. comment number 9 by: Larry

    @Stevein - I don’t disagree with any of your points. But somehow we did get the annual deficit share below the rate of growth after the war. Given that the tax share is about the same today, doesn’t that suggest the ultimate solution lies with spending?

    I’m torn because since we’re richer than ever before, shouldn’t we need less government? Of course those same riches mean that we can afford more government if we choose…

  10. comment number 10 by: Brooks

    Steve,

    Re: I did some fun math on deleveraging the country. I used gross debt as a percentage of GDP because netting out debt held by the government is a dodge. The debt held by the government has to be converted into cash at some point so it’s no different than privately held debt.

    That’s incorrect. What matters for all practical purposes is the debt held by the public, not gross debt. “Trust fund” debt is essentially meaningless. At most (and perhaps not even this much, as Jim Glass has argued in comments on this blog on a previous thread) the balance of any of these intra-governmental “trust funds” (e.g.,. Social Security) represent the minimum amount we must eventually spend on the related program. But the largest of these, the Social Security trust fund balance(s), are less than $3 trillion dollars. Obviously we are going to spend much, much more than that amount on Social Security benefits over the next couple of decades, so this figure represents (at most) a minimum spending obligation that is far below any plausible level of spending that will occur anyway. It’s meaningless. Focus on debt held by the public, not gross debt.

    And as a tool for your “what if” analyses, remember that, for a given, consistent level of (1) deficits as a percent of GDP and (2) GDP growth rate, respectively, debt-to-GDP will approach and eventually stabilize at the ratio of #1 divided by #2. So regardless of your starting point, with deficits at 2% of GDP and GDP growth rate at 3%, debt-to-GDP will move toward and eventually stabilize at 66.7% (of course, the starting debt-to-GDP affects how long it takes to get there).

    By the way, Krugman is indeed adopting that “we can (and should) just grow our way out” position that used to be the (equally unrealistic and irresponsible) domain of tax-cutting republicans/conservatives. Over the past week or so, Krugman has been pathetically trying to defend his insincere (because he must know better) comparisons with the immediate post-WWII years as support for his belittling of the current and projected increase in debt-to-GDP, totally neglecting enormous, critical differences in context, most notably that our current context — driven by the retiring baby boomers and the excess cost growth of healthcare — is this http://www.cbo.gov/ftpdocs/104xx/doc10455/Long-TermOutlook_Testimony.1.1.shtm#1091064 (and, due to limitations of CBO’s methodology that they have acknowledged, even the Alternative Fiscal Scenario understates how rapidly our debt-to-
    GDP would rise under its assumptions, because it doesn’t factor in the upward pressure on interest rates — and resulting adverse impact on GDP and revenues — that would come as debt-to-GDP started to climb per that curve).

    But here’s what’s really funny (and sad). In a 2003 Krugman column in the NYT Krugman wrote:

    the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident — the fiscal train wreck — is already under way.

    How will the train wreck play itself out? …my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

    And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future. http://www.nytimes.com/2003/03/11/opinion/11KRUG.html

    Sure seems that Krugman’s politics drives his “economics”. Unless there’s some plausible honest explanation that seems very unlikely to me, it’s just shameful that someone in a position to educate us on what the trade-offs are (associated with one policy or another) is instead deliberately misleading people in order to advance policies he prefers and to please his primary audience (by telling them things they want to hear).