How to Talk Oneself Out of Keeping a Promise in Order to Do the Right Thing
November 6th, 2009 . by economistmomPresident Obama’s budget director, Peter Orszag, gave a really nice speech on the economy and fiscal policy this week. It reinforces my belief that: (1) Peter really doesn’t view the “legacy” of the deficit-financed Bush tax cuts as a good one; (2) Peter really doesn’t want the Bush tax cuts to become the most costly item in the Obama budget (and part of Obama’s “fiscal legacy”); and (3) Peter has a secret fantasy…about backing out of President Obama’s campaign promise to not raise taxes on households with incomes below $250,000. (Hey, he’s a budget geek; what did you expect?!)
Here are my favorite parts of Peter’s speech (emphasis added). Note that Obama Administration officials are still very disciplined about cracking the door open on tax increases without ever uttering the phrase “tax increase.” To the list of “factors” and “things” the Administration has been considering, we can now add “a number of proposals” and “a range of options”:
This is the responsibility that each subsequent generation of Americans must live up to – to build upon the legacy we have inherited and create an economy that is strong, vibrant, and able to sustain our nation long into the future.
All of us are keenly aware of the immediate struggles we face because of the current economic downturn. I’m sure many of your families are facing excruciating choices that, even a few years ago, would have been unimaginable.
But what may be less appreciated is the long-term impact of this crisis – on our economy, on our fiscal situation, and on our future.
So, as we move from rescuing the economy to rebuilding it, it’s essential that we keep these long-term effects in mind – because only by addressing them can we succeed in building a new foundation for stable economic growth…
Just a few weeks ago, the Administration released the year-end statement of the federal government – a final accounting of what we took in and what we spent for fiscal year 2009, which ended in September.
The results were not a surprise, but they were still sobering: the deficit for last fiscal year was $1.4 trillion, or 10 percent of our economy.
Next year’s deficit is expected to be about the same size, and current projections show $9 trillion in deficits over the next 10 years, averaging about 5 percent of GDP.
Deficits of this size are serious – and ultimately unsustainable.
So how did we get here?
Of the $9 trillion in deficits projected over the coming decade, nearly $5 trillion comes as a result of failing to pay in the past for just two policies — the 2001 and 2003 tax cuts and the creation of a Medicare prescription drug benefit.
The cost of the tax cuts will total about $4 trillion over the next decade, including the additional interest on the debt the federal government will have to pay since the tax cuts were deficit financed…
All told, the entire $9 trillion deficit reflects the failure to pay for policies in the past and the cost of the worst economic downturn since the Great Depression and the steps we had to take to combat it.
Now, assigning blame never solves a problem, but it is important to understand that we didn’t get where we are merely as a result of bad luck.
It was the result of decisions – conscious, but unfortunate – and it will take deliberate action for us to work our way out of this situation.
And it’s critically important that we do just that…
Once health reform is passed, however: the job of getting our nation back on a fiscally sustainable course will not be complete. Our current projections of 4 to 5 percent of GDP in budget deficits in the out-years are well above the fiscally sustainable level of roughly 3 percent.
To bring deficits down to a sustainable range, therefore, will require more action once the economy is into a recovery. We are currently considering a number of proposals to put our country back on firm fiscal footing, and to cut the deficit we inherited in half by the end of the President’s first term…
And, after years of failing to abide by the simple principle that you should pay for what you spend, the Administration has proposed statutory “pay-as-you-go,” or, as it’s often called, “PAYGO” legislation. PAYGO would require that any new tax cut or entitlement program be fully paid for—just as we are doing today with health reform.
In the 1990s, PAYGO’s commonsense approach encouraged the tough choices that helped transform large deficits into surpluses – and its absence over the past eight years accounts for the $5 trillion figure that I mentioned earlier.
These are all important steps to reining in waste and creating a government that uses taxpayer dollars more effectively and efficiently. But these steps alone will not fill the shortfall that we face. That is why the President and his economic team are busy working on a range of options as we prepare for the fiscal year 2011 budget to be released in February…
And as the economy recovers, we must pull together – as a nation – and make the tough decisions to put our country back on a solid fiscal foundation.
None of this will be easy.
After all, it took us years to dig ourselves into the current fiscal hole. And, it will take years for us to get out.
But I – along with the President and the rest of the Administration – all are committed to making our way – responsibly and rapidly – out of this fiscal hole.
“Now, assigning blame never solves a problem, but…”
That “but” comes in for some sharp criticism from Keith Hennessey.
Re: Orszag, I sure hope he and the Obama Administration are serious, but for now I’ll file all vague rhetoric about “making tough decisions” in the “Talk is Cheap” file.
FYI, check out this asinine Newsweek column http://www.newsweek.com/id/221272 I mean, I’m glad to see someone call out those who falsely claim to be fiscally responsible, but why it’s ridiculous for this idiot (Daniel Gross) to give readers the impression that the even the concern over our fiscal outlook expressed by non-partisan voices is overblown by saying moronic things like:
there’s a larger reason we shouldn’t let the deficit hawks ruffle our feathers: the situation is getting better.
And he seems to mock the Committee for a Responsible Federal Budget as “a bipartisan group that was worried about deficits back when we were running a surplus”, not mentioning that the (realistic) long-term fiscal outlook even then was terrible.
Refresh my memory. When has the federal government run out of money? When have tax increases helped the economy?
Gold bugs should read this: http://rodgermmitchell.wordpress.com/2009/10/28/fools-gold/
Second time I’ve seen Orzag’s speech referenced (as noted above Keith H also did a point/counterpoint on it). One thing that really bothers me that nobody seems to talk about is that pointing to one specific policy element as responsible for this percentage or that percentage of the future deficit is complet rubbish.
As an example, had Johnson never passed Medicare, the budget deficit over the next 10 years would be $X trillion smaller. So what? The argument that Bush or the Bush tax cuts caused the deficit is silly. If you want to argue that the tax cuts were a bad idea because they created the conditiions for a deficit by creating a spending constraint that Washington refused to live within, I can accpet that line of thinking. That is however greatly different than causation.
I find the argument advanced by Axelrod and consistently refreshed by the administration completely annoying. For Goodness sakes, Obama wanted the job. The tax structure was in place as was Medicare part D. If they want to harp on Bush for TARP, that would be a legit argument since they didn’t know about TARP when they decided to run.
It’s like saying you want to be the CEO of a company and then going to the board and saying we’re going to lose money for the next 2 decades but it’s really my predecessor’s fault so don’t blame me.
Memo to David: I don’t care whose fault it is: I want you to fix it. So far, you’ve made it worse. Let me know when you are going to make it better and what you are going to do to make that happen. Until then, please put the blame discussion away. It’s boring and annoying
Steve,
Re: It’s like saying you want to be the CEO of a company and then going to the board and saying we’re going to lose money for the next 2 decades but it’s really my predecessor’s fault so don’t blame me.
It’s even worse than that (as Diane’s done a great job of pointing out over the past few months). It’s like the new CEO saying “We’re going to lose money for the next 2 decades largely because I’m choosing to leave in place most of the policies of my predecessor“
Steve,
And…it’s actually even worse than my “even worse” illustration, because at least the CEO of a business could have the rationale that, although some strategy put in place by his predecessor was lousy, performance could be even worse if the company were to change course anytime soon (for a variety of potential reasons). The same doesn’t seem to apply to the hypothetical of Obama letting most of the Bush tax cuts expire rather than the reality of his extending most of them. Sure, raising taxes is politically tougher than not cutting them in the first place (which is irrelevant to what is wise, responsible policy), and perhaps there’s some degree of similar asymmetry in terms of economic impact, but I don’t think the latter (with regard to Obama having no plans [yet] to ditch much more of the Bush tax cuts at any point) amounts to the equivalent of the potentially legitimate (at least short/medium-term) excuse of the new CEO.
But Brooks, I guess my broader point is to point at the Bush tax cuts as opposed to any other policy choice of any other administration in the last however many years is disingenuous. Deficit is just the different between inflows and outflows. All inflow reducers and outflow increasers should count equally. To call one out doesn’t really make any sense.
That’s why Orzag’s argument and Diane’s defense of it is irritating to me. I meant what I said in the first paragraph above. Why not blame Johnson for instituting Medicare. In the absence of that, we probably wouldn’t have a long-term deficit problem. Medicare, after all, contributes more than $5 trillion of the $9 trillion in deficits over the next 10 years and it’s every bit as silly as thing to say as what Orzag said.
Steve,
Yes, I understood your point and it’s valid. I suppose one could argue that a more recently adopted exacerbating policy is somewhat more to blame in that longer-standing policies presumably have withstood opposition longer and thus may have more popular approval (other things equal), and also may be more a part of an established status quo from which deviation is more disruptive, and that problems we face today (e.g., the oncoming tsunamic of baby boomer entitlement spending) may have been more visible or immediate and with less time to adjust at the time more recently adopted policies, and one could also argue that in the particular case of any cuts in Medicare or Social Security benefits, fairness dictates a long lead time and phase in period, but for the most part I think you make a valid point.
Re: Diane, she’s done a great job (and in an admirably non-partisan, call ‘em as she sees ‘em manner) of calling the Obama administration on their frequent bogus excuse of “inheriting” much of the projected multi-year deficits, as if they were somehow forced to simply accept extension of most of the Bush tax cuts, which they presumably opposed or would have opposed in the first place, even as a higher priority than fiscal policies that would seem to better fit them ideologically. Diane may also favor expiration of more of the Bush tax cuts, but I think at least a large part of her criticism has been based on (1) the bogus implication that they are simply stuck with most of the Bush tax cuts and can’t possibly get more of them to expire, and (2) the dissonance between their protection of most of the Bush tax cuts and what one would expect to be their priorities.
But overall, I hear ya’ on the sentiment and the holistic, rational framework you’re suggesting. That’s why I always say that, although it would be quite a challenging undertaking, analytically and even more so politically, the most rational framework for fiscal policy choices would be comprehensive, holistic and long-term, so that all the trade-offs are visible rather than broken off into selected pieces. And that’s one reason I strongly support adopting legislation to create the SAFE Commission, which would take such an approach, or some such commission. Put all the trade-offs on the table, with a long-term view, and discuss/debate our priorities. That’s what a rational approach would look like.
Why not blame Johnson for instituting Medicare. In the absence of that, we probably wouldn’t have a long-term deficit problem. Medicare, after all, contributes more than $5 trillion…
Hennessey makes that point too.
Every single President since LBJ — really since FDR vetoed the changes to his original funded version of Social Security that turned it paygo, only to have the veto over-ridden by Congress — has stood aside and let entitlement liabilities grow and grow, knowingly. And since it is entitlements that are going to crush the fisc, they are all culpable. (See my earlier thoughts on the tragedy of the fiscal commons).
That most certainly includes Clinton, who in fact let the net liabilities of the US including entitlements grow steadily throughout his terms while claiming endless credit for having balanced the budget — knowing full well what was down the road for both Social Security and Medicare.
Especially Medicare — Clinton had the truly best chance to enact Medicare reform with the Breaux commission. He had bipartisan (it was divided govt at the time) forces on that who really wanted to do something about Medicare. He talked a lot about it … then walked away from it.
That may have been the last real bipartisan chance we’ll have for reform until the crisis hits — and one lesson from the last nine years has got to be that only bipartisan reform is possible for entitlements. If either one party tries to go it alone the other will demagogue it into oblivion. Not that either has any desire to stand up to seniors alone — see the last round of gratuitous $15 billion worth of $250 handouts.
So every President and Congress since FDR is contributorily culpable, in one way or another.
But as far as Orszag’s speech, “assigning blame never solves a problem, but…”, among a few really brazen things, yes, the truly brazen one was blaming Bush for the cost of those tax cuts that expire that, in spite of how horrible they are according to Orszag, the Democrats are going to vote to renew, with their voting to renew them is Bush’s fault. So the deficits that result will be Bush’s fault. I mean, good gosh.
I just watched Corzine outspend Christie 5 to 1 while putting a portrait of Bush over Chrisite’s head in TV commercial after TV commercial — and lose. We’re on the cusp of the time when the Democrats are going to have to stop blaming Bush for everything in the world and have to start answering for their own actions.
Those who are optimistic about Obama and the Democrats doing anything about the deficit situation except make it worse, please reconcile for me how that belief is squared with their actions as little as those totally gratuitous $15 billion of $250 handouts, and as big as the near $100 billion a year giveaway of carbon permit value to big businesses — which Orszag himself said, before it happened, would be “the biggest act of corporate welfare in history”.
For that matter, square the Obamaites supposed big concern with the deficit with Orszag’s own…
“After health reform is enacted, we’re really going to start being budget hawks!”
… while they are larding one budget-busting bogosity after another into their health reform. I mean, 40% of its cost is going to be covered by cuts to Medicare to be named later? We really believe that?
They are creating a whole new third underfunded massive entitlement, and while gaming for political reasons to cover the cost over 10 years, they are kicking unfunded cost out to beyond 10 years — exactly the worst thing to do, because that’s when the fiscal crush is going to hit!
After doing this … and after voting to renew the Bush cuts … and after giving away all that carbon permit money … then they really are going to start paying attention to closing the deficit as a top priority, really, truly!
Why does this remind me of Lee Marvin playing the drunk in Cat Ballou waving bottles of whiskey around in each hand swearing that after he finished them both off he was going to go on the wagon forever?
Brooks,
Thanks for the clarification. I guess my issue with what appears to me to be an overfocus on the Bush tax cuts is the implication that tax rates under Clinton were “right” and Bush somehow messed it up by making the rates lower. I’m not saying this is wrong but I am saying that it is an unprovable assumption.
Personally, I’d like to see a very simple discussion at every level of government. Let’s just have a simple vote on how much of our income we would like to give up to the government as a percentage of our total income. We could either do this at a national level or at a personal level. Having decided the income side of the equation, we could do two things…1. Figure out the most effective way to produce this revenue and 2. Decide what we want to spend the money on.
I do agree with Jim’s point above relative to Obama and the Democrats. I think Diane is far too optimistic about what Obama is likely to do. Peter Orzag is behaving like a political hack. He may be a very smart man but he certainly isn’t acting like one. What he’s putting out there doesn’t pass any reasonable person’s smell test.
Steve,
Re: Let’s just have a simple vote on how much of our income we would like to give up to the government as a percentage of our total income
I don’t know if you mean literally to start with just a number as an abstraction, devoid of context, and then work within that constraint, but if so, that wouldn’t be very rational. Perhaps you mean (more rationally) considering all the trade-offs, with a long-term and holistic perspective, prioritizing and deciding what we’re willing to pay for (via taxes and through the government).
I can’t just pull a target spending number (intended as a long-term policy) out of nowhere — e.g., 20% of GDP — without considering the policy implications and related consequences. Given long-term projections, driven largely by demographics and healthcare inflation, that would mean huge cuts in projected total spending in the coming decades. What would likely be cut by how much as a result of our political process? Would the Defense budget likely be cut in half, and if so, with what implications for our physical and economic security? Would it likely result in much lower quality education or crumbling infrastructure? And/or X millions of seniors losing so much more of their savings (via cuts in Social Security and Medicare) that they end up living in “bad” conditions (however defined) who otherwise would live in “decent” conditions? And/or millions of kids unable to go to college, or for that matter unable to get healthcare? And how would we likely collect those revenues of 20% of GDP? And what would be the trade-off between higher spending and taxation vs. economic growth (and thus aggregate and average income), and how would these trade-offs affect different population segments and on what basis? etc., etc. I don’t have the anything even remotely close to answers to these questions, and it would be a bear to come up with them (although presumably a SAFE Commission, if formed, would grapple with such questions), but my point is that, just as with a personal or family budget, the more one thinks long-term and holistically/comprehensively, identifies and “quantifies” trade-offs and sets priorities as the basis of overall spending as well as components and allocation, the more rational the approach.
If you truly want to understand the economy, go to http://csis.org/multimedia/audio-great-recessions-lessons-learned-japan and listen to Richard Koo.
I do agree with Jim’s point above relative to Obama and the Democrats. I think Diane is far too optimistic about what Obama is likely to do. Peter Orzag is behaving like a political hack.
I’ve no problem with Orszag, he’s always been four-square on fiscal issues. His problem is that now that he’s speaking for others he has to delivertheir message. In fact, he cannot in public offend any significant player in the entire Democratic establishment, in any faction of the Adminstration, Congress, any interest group, anywhere.
For instance, he went to Congress and warned it against giving the whole value of the carbon permits to the businesses affected (CBO said they’d be fully compensated with just 15% of the value) and said doing so would be “the biggest act of corporate welfare in history”. He was straight.
Congress blew him off and did it anyhow. What’s Orszag supposed to say after that?
“Dammit, I told you not to do that, it’s the shamefullest budget-busting act of corporate welfare in history!” ? Not unless he adds, “And I quit!” In which case, he’d better have a job as a professor lined up somewhere, because no Democratic-side organization would ever hire him again.
The only thing he can possibly say after that is: After we get this vitally important issue of carbon emmissions settled, then we’ll turn to controlling the deficit…
The problem, of course, is that with Congress’s and the Administration’s #1 priority always being getting the marginal votes in the next election, which is always within two years and closing, it becomes….
After we settle this vitally important issue of stimulating the economy … health care reform … carbon permits … bailing out Detroit/the UAW … throwing billions in subsidies out for home sales … giving $250 to every senior … tk … tk … tk …. then…
But that’s not Orszag’s fault — except that by putting himself inside the Administration, when he speaks for it in public he has to rationalize it all.
I may have mentioned before that there’s an interesting book, “What Do Economists Contribute?”, in which a bunch of big-name economists discuss their influence on politics and national policy.
Stigler says: We have no influence at all, politicians totally ignore us (except to use us), don’t worry about it, just do good economics.
But Coase says: No — look, if we save just 1% of gov’t spending from being wasted, compared to what we are paid, we are the most productive people in the world.
If Orszag operating on the inside is saving that 1%, then all the dubious rhetoric he’s required to throw around on the outside may be well worth it.
(Although that doesn’t change the nature of the rhetoric, or the substance of the other 99%.)
Maybe so Jim. But if it’s as you describe, Orzag is much better at holding his nose (figuratively) than I could ever be. He basically goes out and flat out attempts to mislead people about cause and effect and likely outcomes. Maybe for him it’s worth it to be able to go after the 1%, but it’s hard for me to understand how he stands it.
Maybe so Jim. But if it’s as you describe, Orzag is much better at holding his nose (figuratively) than I could ever be. He basically goes out and flat out attempts to mislead people about cause and effect and likely outcomes. Maybe for him it’s worth it to be able to go after the 1%, but it’s hard for me to understand how he stands it.
Brooks,
I get it’s complicated but I think that’s the problem. Once you make it so complicated as to become incomprehensible, you have no choice but to refer the hard choices to “a panel of experts”. The problem with that is the answer of the panel is likely to be some version of …
“We did a lot of very complex analysis that you’ll never understand and we concluded that the following is the best choice…” My point to you is that such a process will never be legitimate in the context of a country that has lost faith in its government.
To the contrary, I think the only choice is to make the process simple. I fully recognize that this oversimplifies but it relies on judgment as opposed to analysis and judgment is something all of us have. To take an example, within a family’s income constraint, people reach different perspectives on how much they are willing to spend on housing. This is not a utility maximization exercise, it’s a guessing game based on judgment.
There is no reason we could not do the same thing with government and it’s size relative to GDP. You might find the analysis insufficient but that doesn’t mean it wouldn’t work as a process. My issue with a SAFE commission is that it would prove incomprehensible to the average person, both because of the complexity of the analysis and the time requried to understand it even if one had the background.
The SAFE commission simply is a more complex version of determining the budget constraint, a way that simply cannot be understood. If this were a one time optimization exercise, maybe it would make sense. It’s not of course. We set a budget every year so frightening outcomes like starving people, etc are more rhetoric than reality if people really believed those things were important, the income constraing would be raised to allow them.
I spend a good chunk of my life doing complex analysis and I’m here to tell you that beyond a fairly simple level of analysis, people, even very talented people, do not grasp it and substitute their judgment for the complexity. For analysis to be effective, it needs to be simple unless you are in the business of writing academic papers in which case the more complex the better.
Sorry all for the double post
Did anyone truly want to understand the economy, and go to http://csis.org/multimedia/audio-great-recessions-lessons-learned-japan to listen to Richard Koo?