EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

The President’s Economic Report: Sticking to the Script on Tax Policy and the Fiscal Outlook

February 12th, 2010 . by economistmom

The Economic Report of the President came out yesterday.  (I was too busy digging out to notice.)  I’ll have more to say on it over the weekend, but if you check out Chapter 5, “Addressing the Long-Run Fiscal Challenge,” you’ll see the Council of Economic Advisers was very careful to stick to script on tax policy in the following ways:

  1. Deficit-financed Bush Administration policies are largely to blame. The Bush tax cuts (and AMT relief), the Medicare prescription drug benefit, and the wars were all deficit financed and account for about half of the long-run fiscal gap.  (Too bad most of those policies and their deficit financing are continued under the Obama budget.)
  2. The Obama Administration asserts it will stick to the President’s campaign promise of not raising taxes on households with incomes under $250,000. This is the policy prescription referred to as “restoring balance to the tax code”–the CEA writes that (emphasis added): “The President has consistently maintained that the tax cuts went too far in cutting taxes for people making more than $250,000 per year and that the country could not afford the tax breaks given to that group over the past eight years.”
  3. Even with those high-income tax increases, taxes will still be very low. There are several pages (pp. 152-155) written just to convince us that although the Bush Administration went too far in cutting taxes and although the Clinton Administration’s tax rates weren’t too high, the Obama Administration’s taxes will still be very low–closer to Bush taxes than Clinton taxes.
  4. The fiscal commission will be needed to take the necessary “further steps…to close the gap between noninterest expenditures and tax revenues.” The commission will be needed to get the gap down to 3 percent of GDP, because the Administration’s proposals only get to about 4.  They refer to the remaining gap without being clear that the only feasible way to close it is to close it from both sides.

More later this weekend in between more digging out!

Steve Pearlstein Is Snowed In and Fed Up

February 10th, 2010 . by economistmom

snowplow-in-front-of-capitol

In today’s Washington Post (not that I received it on my doorstep this morning, but just that I read online), Steve Pearlstein has an entertaining little rant about how ill-prepared the DC area is to handle this kind of snow:

Here’s a little thought experiment:

You’re sitting at home for the third straight day, unable to get to work because of the snow. Your kids are on the fourth day of a snow vacation that is likely to last through the end of the week. How much would you have been willing to pay to guarantee that the streets and sidewalks were clear and things could have run pretty much as normal? $10? $25? $50?

Or imagine that you own a business with 50 employees that is closed for three days because of the snow, but you still have to pay $30,000 in salaries for work they didn’t do. What would you have been willing to pay to have things running normally this week? $1,000? $2,500? $5,000?

My guess is that, given the benefit of hindsight and several days of house arrest, “snow insurance” sounds tempting…

Steve then argues that it would be reasonable for local policymakers to consider raising revenues (i.e., taxes or fees) to pay for this more adequate “snow insurance”–but the only reason that’s a fantasy is because of the “broken politics” that makes it so hard to raise taxes for any reason:

Republicans would immediate call it “the biggest tax increase in history” and declare unequivocally that it would send the economy into a tailspin while radically expanding the government. Chambers of commerce would issue news releases warning that the tax would particularly hurt small-business owners, who as we all know create every new job and would now be forced to cut their payrolls or close their doors. Virginia’s House of Delegates would move immediately to kill the proposal, thereby dooming consideration by all the other jurisdictions.

It is a measure of the dysfunction of our political system that we can no longer rationally debate whether it is penny-wise and pound-foolish not to spend a little more to try to keep the Capital of the Free World from grinding to a halt every time a snowflake descends from the heavens.

I realize there are lots of problems that cannot be solved just by throwing money at them, but snow removal is not one of them. We have the know-how, we have the technology and we have the money and economic self-interest to do it right. What we don’t seem to have is the leadership or political will.

Steve then goes on to do a “back-of-the envelope” calculation of how costly these lost days of work and school have been to this region, as evidence that government has not spent enough money on their snow-removal capabilities.

Yes, I agree with Steve that our local governments are ill-prepared to deal with these kinds of snowstorms.  Growing up in the Great Lakes region, I know that there are other parts of the country that do it much better and faster.

But we in DC are ill-prepared for this kind of snow, not so much because of our bad politics (I think politics over the rest of the country are just as bad, no?)–but because this kind of snow is such a low-probability event here.  Here’s a chart from a WashingtonPost.com weather blog (weather-blogger Matt Rogers)–as of before today’s blizzard which is supposed to add maybe a foot more!–showing the rarity of 2′+ snow seasons here in DC:

dcwinter09-10

Matt puts this in perspective:

With the impending storm for tomorrow and Wednesday, we have a legitimate chance for an all-time (since records have been kept in the late 1800s) seasonal snow record.

Our big weekend storm surged Reagan National Airport’s seasonal total to 45″ with the balance of February and March yet to go. This places our current winter in position number three for the snowiest winters on record, behind 1995-96 (46″) and the big one, 1898-99 (54.4″). Of course, that all-time record was set at a more downtown location (M Street), so some may argue the higher elevation and location away from the Potomac was an easier accomplishment. But in my mind, that makes this potential record season all the more notable.

The chart above tracks seasonal totals since the 1990-91 snow season. Just look at that volatility. Get this: our 45″ this season is more than the last four winters COMBINED (which was only 35.5″).

An economist would say we’ve got to make decisions about public infrastructure and contracted services from a cost-benefit perspective, which has to be evaluated under conditions of uncertainty–weighing expected marginal costs against expected marginal benefits.  Of course, from an “ex post” perspective (after the snow has fallen–e.g., Steve’s current view), it looks like local policymakers got it all wrong and spent way too little on snow-removal equipment and services.  But from an “ex ante” perspective (before the snow has fallen or any even long-term weather forecasts have been made, maybe with the exception of the farmer’s almanac) I can’t imagine that any cost-benefit analysis would suggest it makes sense for the DC area to gear up for the kind of major snowfall we’ve experienced this week–in terms of purchasing equipment or advance contracting for services or otherwise committing to spending their budgets on something they might not ever use.

Instead, what such low-probability-but-bad-outcome events suggest is the need for local governments to have adequate “rainy-day” (ok, “snowy-day”) funds in place, in order to be prepared for what this snowfall really is (in this part of the country): an unanticipated emergency.  That’s where the “broken politics” messes things up, because Steve is right: we can’t seem to raise taxes for any reason, especially if it is to be better prepared for the future–be it a big snowstorm or even our kids’ standard of living.

***UPDATE (5 pm):  We just broke the all-time record for the snowiest season in the DC area!  Here’s a new graphic from the WashingtonPost.com weather gang below.

record-snowfall-washingtonpost-021010

Why Worry About the Deficit: NBC Nightly News Edition

February 9th, 2010 . by economistmom

Visit msnbc.com for breaking news, world news, and news about the economy

Here’s a good NBC nightly news segment on the deficit problem that is a lot like a mini-version of IOUSA the movie. My boss Bob Bixby is in it.

A Snowball’s Chance In Hell

February 8th, 2010 . by economistmom

dupont-snowball-fight-huffpost-photo(Photo from HuffingtonPost)

So, I’ve been pretty much paralyzed with this snowstorm (”Snowmageddon” as they’ve dubbed it) here in DC.  We have a couple feet of snow on the ground!  It’s made it difficult for me to keep up any of my normal routine either as economist or mom, in fact, so I haven’t blogged since before the first flakes fell.  But with everything including my work place, my kids’ schools and the federal government closed today, no Economic Report of the President released yet (I think it was supposed to come out this week, maybe even today), and not much to do other than wait for the snow to thaw (but you know, we have another round of snow coming tomorrow?!), I thought I’d attempt this little post relating this weekend’s storm to the fiscal policy issues I manage to obsess about even in the middle of something as distracting as all this snow.

On Saturday I witnessed this amazing mass snowball fight in Dupont Circle (pictured above)–here are Washington Post and Huffington Post stories and videos on it.  It sort of reminded me of how well bipartisanship is going these days on Capitol Hill, especially when it comes to coming together on fiscal responsibility…

We have the House Republican Leader, John Boehner, arguing that the President’s notion of a bipartisan fiscal commission would actually be a “partisan” commission, mainly because it would allow revenue increases to be put on the table (emphasis added):

The commission proposed by President Obama would reportedly be barred from proposing cuts to any discretionary spending, which accounts for more than one-third of all federal spending.  With discretionary spending off the table, tax increases would represent a very large portion of the policy options for decreasing deficits.  By seeking to take the ‘comprehensive’ route on every issue except spending, the Obama Administration only reveals its unwillingness to end Washington Democrats’ spending binge.

Of course, unlike mandatory spending, discretionary spending is subject to annual review through the appropriations process and can be constrained through the use of spending caps.  If the Administration really were unwilling to tackle the growth in government spending, they would have taken the big mandatory spending programs (Medicare, Medicaid and Social Security) off the table, but they didn’t–even with some pressure from the more liberal parts of their party to do just that.

House Majority Leader Steny Hoyer responded to the Boehner statement with this (emphasis added):

I’m disappointed in Minority Leader Boehner’s response to a sincere attempt to establish a bipartisan mechanism to address the fiscal challenges facing our nation.  The Obama Administration has made fiscal responsibility a focus over both the short- and long-term. Their budget proposal included several immediate steps, such as the freeze on non-defense discretionary spending and a Financial Crisis Responsibility Fee to ensure taxpayers are repaid.  Additionally, the President will sign statutory ‘pay-as-you-go’ legislation into law soon, reinstating a proven tool for bringing discipline to the budget process.

Over the long-term, a bipartisan fiscal commission is key to setting a path toward sustained fiscal discipline.  The Administration has repeatedly indicated its openness to constructive suggestions on how a commission should be structured, as evidenced by Secretary Geithner’s outreach to Minority Leader Boehner.   I regret that Leader Boehner rejected the Administration’s overture asking for input…
I agree that all options for restoring fiscal balance should be on the table for the commission to consider.  However, budget experts from across the political spectrum agree that finding a solution to our long term fiscal challenges requires focusing on tough choices with regard to entitlement spending and revenues. Regardless of how discretionary spending is handled, the proposed freeze for the next fiscal year is a strong action.
That is the key component of any “bipartisan” effort to achieve a more sustainable budget outlook:  both entitlement programs (spending cuts) and revenues (tax increases) have to be on the table.  Steny Hoyer is brave enough to spell it out a bit more than the Administration is yet willing to.  It’s true that the President at least hinted at his post-State-of-the-Union meeting with House Republicans that he didn’t exactly agree with their notion that tax cuts are the key to fiscal responsibility (from a Wall Street Journal report):

Many Republicans say a tax cut would spur growth and revenue. Mr. Obama suggested it would cost revenue and drive up the deficit. “I’m going to want to take a look at your math, and see how that works,” he said.

But at the same time, his Cabinet members still have a hard time saying the phrase “tax increases.”  On Sunday’s “This Week” talk show, Jake Tapper had this exchange with Treasury Secretary Tim Geithner (emphasis added):
TAPPER: Do you think the fact that you guys are pushing the bipartisan commission is indicative of the fact that our political system is not capable of taking on the serious challenges our nation faces?  You and I know that the money, as Willie Sutton says, said, that — why do you rob banks? Because that’s where the money is. The money is in entitlement programs, Medicare, Medicaid, Social Security, things that you do not touch in this budget. The fact that you need a bipartisan commission to recommend cuts or tax increases, doesn’t that indicate that our political system is incapable of making these tough decisions?
GEITHNER: Jake, I am very confident in our ability as a country to bring people together and make sure we are solving these challenges and these problems. We’ve done it in the past. It is completely within our capacity to do as a country. But of course it requires you bringing people together across the aisle to step back from politics, to try to bring practical solutions to things that are very important to our future as a country. And the president is committed to do that. And we’re going to give the Republican Party the chance to share in the responsibility and the burden and the privilege of trying to fix the things that were broken in this country.
TAPPER: Republicans are afraid this is just a back door for tax increases. Are you willing to say that tax increases are off the table for this commission, let’s sit down and talk about the long-term structural problems with entitlement spending?
GEITHNER: The president’s view — and this is a view shared by many Republicans, and it builds on what we’ve seen with effective commissions in the past, like the Greenspan commission that President Reagan established to help restore the financial footing of Social Security — is that, for this to work, you’ve got to bring people together to step back from politics, day-to-day politics, and to bring fresh ideas to solve these kind of problems. That’s the only way to do it, we think, and we’re committed to doing that. We’ve got to do it on a bipartisan basis, and we’re deeply serious about doing this.
The right response to the last Tapper question should have been that “no, we’re not willing to take tax increases off the table, because without both the tax increases that are painful for Republicans and entitlement cuts that are painful for Democrats, there will be no bipartisan compromise that can actually reduce the longer-term deficit rather than increase it.”  But we’re still working with an Administration who, although believing deep down in their hearts that taxes must come up, aren’t yet willing to say it.  (They’re only willing to talk about “other factors,” “other things,” and now “fresh ideas.”)

That’s why right now I feel a lot like Jonathan Chait does in his New Republic column from a week ago entitled “The Impossibility of Fiscal Responsibility.” Jonathan argues that fiscal responsibility is impossible because the Republicans aren’t cooperating or even “engaging” (not even in a chaotic snowball fighting kind of way), and that:

[I]t’s very hard for one party to reduce the deficit by itself. I wouldn’t say that the entire Democratic Party is committed to serious deficit reduction. But major elements are, and nearly the whole party is committed to at least not making the problem worse. But a unilateral commitment to fiscal responsibility is a huge political handicap…

The more Democrats do to reduce the deficit, the easier they make it politically for Republicans to retake power, and the easier they make it fiscally for Republicans to wreck the budget when they do. So, why try?

So, because right now there’s no evidence that current Republicans in Congress will budge an inch on the issue of taxes, and at the same time little evidence that the Administration yet has the courage to take the lead with their own party on taxes (and saying very plainly that they must come up, eventually), today I look at all the snow around me feeling “stuck” and can’t help thinking that “bipartisan fiscal responsibility” has about a snowball’s chance in hell.

Why PAYGO Isn’t Enough–But Why We’ll Take It

February 4th, 2010 . by economistmom

With the successful but one-sided vote in the House, Congress passed a version of statutory pay-as-you-go budget rules today.  It’s not an ideal version of PAYGO, because it allows very costly policies to be exempted.  The fact that the bulk of these exempted tax policies are the Bush tax cuts, makes it all the more surprising (based on principle alone) that not a single House Republican supported it.  In the Washington Post, Lori Montgomery explains:

The budget that Obama laid out this week would add $8.5 trillion to the debt by 2020, some of it explicitly permitted under the new PAYGO rules. For example, the rules allow Obama to extend tax breaks for the middle class enacted during the George W. Bush administration without covering the cost. Over the next decade, that extension would add $1.3 trillion to the debt by Democratic estimates or as much as $1.9 trillion according to Republicans.

The rules also permit lawmakers to protect taxpayers from the expansion of the alternative minimum tax for two years, lower the estate tax for two years and protect doctors who serve Medicare patients from a scheduled pay cut through 2014.

OK–so it’s not perfect, but a weak PAYGO is still probably better than no PAYGO.  Today, the Concord Coalition issued this policy statement supporting even this imperfect version, explaining why the exemptions in the PAYGO rule make it all the more important that other tools of fiscal discipline (including those proposed by the Obama Administration in their budget) serve complementary roles:

Regardless of political reality, the economic reality remains the same. Persistent deficits of the size now projected under the President’s budget would harm the economy, increase our reliance on foreign borrowing, crowd out domestic investments, and lead to a spike in interest costs. Thus, if statutory PAYGO is adopted in the form currently proposed, policymakers must acknowledge the economic consequences of its exemptions and be prepared to deal with them. The cost of these policies will not go away simply because they are exempted from PAYGO. If not paid for now, they will be paid for later at a higher cost in interest payments and a less robust economy. That is why a fiscal commission with a broad mandate to tackle the structural deficit is a logical complement to PAYGO. Moreover, exempting any existing policies from PAYGO does not enact them into law. Legislation must still pass to extend these policies and those who advocate strict compliance with PAYGO can, and should, uphold this principle by voting against any extensions that are not paid for.

Finding a cure for the nation’s dire fiscal outlook will obviously require a lot more than a new budget rule, but enactment of statutory PAYGO would send a very positive signal that the federal government is beginning to take the problem seriously…

The Concord Coalition supports statutory PAYGO and believes that it must be assessed for what it is, not for what it isn’t. PAYGO is not a deficit reduction tool. It is not a spending freeze. It does not apply to discretionary spending or automatic increases in entitlement programs and tax expenditures. Holding PAYGO to a standard that assumes it is intended to do all these things (reduce the deficit, freeze spending, control “pork barrel” appropriations or rein in entitlements) sets up a conclusion that the rule would do no good. That is a false standard. PAYGO’s real value comes from its deterrent effect on entitlement expansions and tax cuts that would widen our structural deficit. This is certainly worth doing, even if other things are left to be done.

It’s basically what I was trying to say in this CNN-Money “panel” on what the President “got right” and “got wrong” in his budget–even though it might seem that my “wrongs” (and my worries) outnumber the “rights.”  I feel that the spirit and intent of the legislation (”in theory”) is often good, even if the execution (”in practice”) is far from flawless.

Why Care About the Deficit: Bob, Dave, & Peter Edition

February 3rd, 2010 . by economistmom


Bob (see ABC News video above):  Because the “trickle” of red ink has turned into a “flood”–and neither political party is doing enough to stem it.

david_walker03
Dave (from Politics Daily interview): Because it’s like a “super subprime” crisis that “mortgages the future” of our children and grandchildren.

Peter (a la the Washington Post’s Dana Milbank):  Because it’s “sexy”?…

Is the Obama Budget Half Full or Half Empty?

February 2nd, 2010 . by economistmom

glass-half-full1

Readers may be confused: is my (still developing) assessment of the Obama budget a net positive one, or not? Well, YES. Being the optimist I am, my “view” is that this budget glass is “half full.”  But it’s only (at best) half full.  That’s because from my perspective as a fiscal hawk, while the Obama budget qualitatively calls for a set of good fiscal discipline tools (statutory PAYGO, discretionary spending constraints, some decrease in inefficient tax expenditures, a fiscal commission, and health care reform) that have some potential to make a difference, it still fails to go far enough quantitatively with specific plans that would actually fill in–versus open up–the fiscal gap.  The failure to “follow through” in filling at least the ten-year budget glass, has mostly to do with the Administration’s unwillingness to make the necessary changes in tax policy–or even to talk about the possibility of such changes with the American public.

When I first look at the President’s budget, I avoid reading press stories on it and even the introductory words in the budget itself and instead go straight to the summary tables.  I figure sticking to the plain numbers and the few descriptive explanatory words in the rows of the tables will help me take in my first view of the budget without seeing it through either the clouded lenses of other budget analysts or the rose-colored lenses of the Administration.  But in this year’s budget, even the summary tables have a lot of art and spin to them.  In fact, there are so many ways of labeling and spinning the numbers–and the Administration demonstrates this well just in their tables–that it makes one dizzy and confused.

So here are some of my quick and fascinating details from the Obama budget, obtained from my perusal of just the summary tables alone.

In my mind, the place to start is Table S-7, the “bridge from budget enforcement act baseline to baseline projection of current policy”–because if you don’t start there, you won’t understand where the Obama Administration is starting from in proposing their budget policies.  Some of what you learn from that table:

  • The ten-year (FY2011-20) budget deficit under current law (i.e., if Congress and the Administration passed no new tax or spending policies over the next ten years) is $5.472 trillion.
  • Yet the Administration claims it is starting from a ten-year deficit that’s nearly double that: $10.640 trillion.  That’s because the Administration first adds in the cost of permanently extending (and fully deficit-financing) the following:  permanent relief from the alternative minimum tax ($659 billion), permanent extension of all of the 2001 and 2003 tax cuts ($3.097 trillion), and the “doc fix” to override scheduled reductions in Medicare physician payments ($371 billion).  Note: that’s $3.8 trillion worth of added deficits due to the assumed permanent extension of the tax cuts (AMT and Bush tax cuts) alone.

Then you can go to Tables S-1 (budget totals) and S-2 (effect of budget proposals on projected deficits) to understand how the policies proposed by the Obama Administration affect the deficit outlook.

  • Table S-2 suggests that a substantial amount of deficit reduction is achieved through increased revenues, because it shows $749 billion in additional revenue from “other revenue changes” (various tax increases on businesses I’ll detail further below) and $678 billion from letting the upper-income tax provisions in the Bush tax cuts expire.  Relative to the policy-extended starting point chosen by the Administration, this implies that tax policy provides around $1.5 trillion in deficit reduction out of the $2.1 trillion total deficit reduction shown.  (And yet interestingly, nowhere in this table does the phrase “tax increase” or even “revenue increase” appear; tax increases are labeled “changes” or “provisions”, while tax decreases are (more clearly) labeled as “cuts.”)
  • But the starting point for Table S-2 is the $10.6 trillion ten-year deficit under the policy extended baseline.  If you keep track from the current-law baseline (and its $5.5 trillion, ten-year deficit), the tax increases proposed in the Obama budget merely bring the net tax cuts in the Obama budget down from $3.8 trillion to around $2.6 trillion.  That’s a net tax cut relative to current law, of $2.6 trillion.
  • So Table S-1 shows that the Obama budget brings the ten-year deficit “down” to $8.5 trillion relative to the $10.6 trillion policy-extended baseline–a decrease of more than $2 trillion–while it actually brings the deficit “up” by more than $3 trillion relative to current law.

Confused?  Of course.  That’s exactly what these different baselines and poor labels are designed to encourage.  But let’s go on…

  • That opening table (Table S-1) in the summary tables section has an unusual amount of words in it, because it contains a box describing the fiscal commission, designed to reassure us that ultimately the Administration’s policies will get deficits down to a truly sustainable level–below the 3.9 percent of GDP shown in 2015 under the budget “without fiscal commission.”  It’s not exactly a glossary to help you identify the tax increases versus decreases, because the Administration sticks to its self-imposed rule of never uttering the words “higher” or “increase” next to the word “taxes.”  We can read of the goals of “balancing the budget” and “stabiliz[ing] the debt-to-GDP ratio” and “examin[ing] policies to meaningfully improve the long-run fiscal outlook”.  And we can even be warned of necessary “changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures.”  But to explicitly suggest that “tax increases” might be part of the strategy to reduce that gap?  Never!
  • The Obama budget does not in fact propose any overall increase in taxes.  If you look at the levels of revenue and spending in Table S-1 and compare with the CBO current-law baseline, you’ll see revenues in 2015 that are 0.8 percent of GDP lower than under current law, and spending that’s 0.6 percent of GDP higher–producing deficits under the Obama proposals in 2015 that are 1.3 percent of GDP higher than CBO shows for current law.

Next, make  your way down to Table S-8, showing “mandatory and receipt proposals.”  Again, with few words in these tables, the Administration manages to speak volumes about their fiscal policy and public relations strategies.  I’ve looked at the way they sort out and label their tax policies and notice the following:  First, any tax increases are never labeled such, and they always hit those who fall under one (or more) of these three categories: (i) bad corporations, (ii) tax cheats (or those who otherwise engage in tax waste, fraud and abuse), and (iii) rich people.  Second, any tax decreases are clearly (and proudly) labeled “tax cuts” and are for good things and people–such as for “recovery” and “families and individuals” and “small businesses.”

Using such labels, here’s how the bulk of the Administration’s proposed tax policies (apart from extension of the Bush tax cuts and AMT relief) break down–all relative to the Administration’s current-policy-extended baseline.  First, under the “happy tax cuts” category:

  • “Tax Cuts” that are part of the “Temporary Recovery Measures”:  $47.3 billion;
  • (Permanent) “Tax Cuts for Families and Individuals”: $143.4 billion;
  • (Permanent) “Tax Cuts for [small, main-street-type] Businesses”: $93.5 billion; and
  • “Continue certain expiring provisions through calendar year 2011″ [too diverse a group of provisions to come up with one happy label for or otherwise justify]:  $46.7 billion.

Then, under the “tax the evil ones” (but, shhhh… don’t call them “tax increases”) category:

  • the “financial crisis responsibility fee” (aka tax on “bad Wall Street firms”): $90.0 billion;
  • other tax increases that “reform treatment of financial institutions”: $3.3 billion;
  • “Reinstate Superfund taxes” (aka tax on polluters): $18.9 billion;
  • “Reform U.S. international tax system” (aka tax on multinational corps): $122.2 billion;
  • “Eliminate fossil fuel tax preferences” (aka tax on big oil polluters): $38.8 billion;
  • “Tax carried interest as ordinary income” (another tax on Wall Street): $24.0 billion;
  • “Reduce the tax gap” (aka get rid of “waste, fraud, and abuse” in the tax system and go after “tax cheats”): $49.4 billion;
  • “Reform treatment of insurance institutions” (aka tax on evil insurance companies);
  • “Upper-income provisions devoted to deficit reduction” - Bush tax cuts portion (aka, taxes on the rich–but the irony of the “deficit reduction” label being it can’t be counted as reducing the deficit for PAYGO purposes because these tax increases are already counted in current law): $678.3 billion; and
  • Limit on itemized deductions to 28 percent (another tax on the rich–quickly and soundly rejected by Congress when proposed last year as a way to fund health reform): $291.2 billion.

So the reason I think the Obama budget only fills the glass (or the bill) halfway at most is because there’s a lot left to be desired in terms of tax policy, which I continue to insist has got to be most of the strategy to get deficits down to sustainable levels within the ten-year budget window.  Still don’t believe me?  Just read Len Burman’s column in today’s Washington Post, where he explains how much further we would get if we froze tax expenditures instead of discretionary spending.  Or read Joann Weiner’s column over on Politics Daily (Joann being another tax policy expert) where she explains how the Obama budget really only tinkers around with tax policy and seems to contain many “self-inflicted wounds.”

The Administration’s fiscal commission will have a chance to recommend how to follow through on good intentions and more adequately “fill up” the budget, and we can expect that more fundamental tax reform and increased revenue (yes, “higher taxes”!) will have to “come out” as a big part of the solution.

The Obama Budget: A Delicate “Balancing Act”

February 2nd, 2010 . by economistmom

The Obama Administration released their FY2011 budget proposals on Monday morning.  I’ll be analyzing it further over the rest of this week, but in listening to the President’s remarks about it (video above) and from my initial read on how the whole budget is being pitched to the American public, it strikes me that the Administration is playing a very delicate “balancing act”–pun intended.

On the one hand, the Administration wants to appear sufficiently concerned about the short-term economy by proposing deficit-financed stimulus spending and tax cuts.  On the other hand, they want to appear sufficiently committed to fiscal responsibility and the idea that the government will get back to living within its means once the economy has recovered.  These are not inconsistent fiscal policy goals to be pursuing (even simultaneously), and in fact, concentrating on stimulus or deficit reduction alone would pose greater risk to the economy.  But it is still a challenge to find the optimal balance between these goals.

And on the one hand, the Obama Administration likes to blame the Bush Administration for the deficits they inherited.  But on the other hand, the Obama Administration continues to propose not only the extension of Bush policies in their own budget, but the deficit-financed extension of Bush policies in their own budget.  So they are choosing to continue the very behavior they have condemned, instead of coming up with their own (and better) behavior.  This is another delicate balancing act in terms of the “selling” of the Obama budget to the American people as something “new and improved” from the supposedly-awful Bush budgets of the past.

Related to both of these “balancing acts,” I worry that with all the Obama Administration’s recent emphasis on small business tax cuts as promoting “Main Street”-type business (versus evil “Wall Street”-type business), that pretty soon the Obama Administration will be convinced (by the Republicans with whom they’re trying to reach out to in the spirit of bipartisanship) that they can’t even let the upper-income Bush tax cuts expire, because those rich individual taxpayers became rich from their small businesses.  Might all of the “fiscally irresponsible and economically ineffective Bush tax cuts” become the “economically responsible and fiscally harmless Obama tax cuts” in the end?

So here’s how budget director Peter Orszag blogged about the budget on Monday morning.  In terms of the fiscal responsibility goal, Peter laid out the Administration’s strategy as involving four key elements.  I’m for all these ideas in principle, and I’m glad to see them in the Obama budget.  But I’m worried about how they’ll work out in practice.

  1. Reinstate the statutory pay-as-you-go rules to avoid new commitments to deficit-financed spending. Peter explains that such rules worked during the Clinton Administration and that:  “PAYGO forces us to live by a simple but important principle:  Congress can only spend a dollar on an entitlement increase or tax cut if it saves a dollar elsewhere.”  The problem is that the Administration’s concept of PAYGO (and embraced by Congress, albeit only in “unipartisan” manner) exempts over $3 trillion worth of (what would have to be newly enacted) policies, according to the Administration’s own numbers in Table S-7 of their budget; these exempted policies include AMT relief, extension of the bulk of the Bush tax cuts, and the Medicare “doc fix” (to avoid scheduled cuts to physician payments).  While the Administration isn’t proposing to extend all of the Bush tax cuts, they do propose to extend and deficit finance and exempt from PAYGO about $2.4 trillion out of the $3.1 trillion ten-year cost for the full complement.
  2. A “non-security” three-year discretionary spending freeze and some tax increases (on the rich and on fossil fuels) to get part of the way toward a sustainable budget deficit within the ten-year budget window. As Peter explains, these proposals could theoretically get deficits down to about 4 percent of GDP (vs 5 percent without them) by 2015.  But realistically and relative to current law, there’s just not much to grab onto here.  The spending “freeze” is not an across-the-board freeze, but more a bottom-line freeze–and is expected to save $250 billion (over ten years).  Of the tax increases Peter mentions, the largest (worth nearly $700 billion) would not reduce the deficit relative to current law because they are the high-income portions of the already-scheduled-to-expire Bush tax cuts, and the second largest (worth nearly $300 billion) is for the provision to limit itemized deductions–the proposal that Congress immediately rejected when the Administration presented it in last year’s budget.  (That this year it’s not being proposed as a way of funding health care reform isn’t going to make any difference.)  The proposals to reduce tax expenditures currently given to fossil fuels industries makes good policy sense (for both economic and environmental reasons), but these provisions would raise only less than $40 billion over ten years.
  3. A presidentially-appointed, bipartisan fiscal commission to get the rest of the way there. Peter explains that getting deficits down to 4 percent of GDP based on steps 1 & 2 above isn’t good enough to get to “sustainable”–that a commission will have to figure out the policies to get us the rest of the way down to 3-percent-of-GDP deficits.  The goal according to Peter? (emphasis added):  “to look at a range of proposals and put forward a bipartisan recommendation to balance the budget excluding interest payments on the debt by 2015.”  I think the first goal of the commission ought to be to help the President utter the phrase “higher taxes” (or at least “revenue enhancements”?) so that the tough choices can begin to be discussed in an open manner.  Whether telling it like it is about the need for everything (tax increases and spending cuts) to be on the table would be consistent with the goal of forming a truly bipartisan commission remains to be seen.  After all, the President needs to appoint this bipartisan commission because Congress can’t even agree in a bipartisan manner on the formation of such a commission–let alone on the tough choices the commission would consider and recommend.
  4. Enact health care reform for longer-term sustainability. (Well, we’ve seen how easy this part is…)  Peter’s always been right that it will be absolutely essential that we start “bending” the health care cost curve as soon as possible if we hope to achieve fiscal sustainability well beyond the ten-year budget window.  But this–and in fact entitlement reform more generally–has little to do with the goal of getting the deficit down to 3 percent of GDP by 2015.

So there is a lot for the Obama Administration to juggle and “balance” in this budget, in terms of the short-term versus longer-term economic goals, the continuation of Bush policies versus the fresh start of Obama policies, and speaking the easy “happy talk” versus telling it like it is about the necessary hard choices.  It will take courageous and forceful leadership on the part of President Obama to get this right.  Good intentions and ideas aren’t going to be enough.

(In response to the release of the budget, the Concord Coalition released this initial statement and posted these further observations on the “Tabulation” blog on Monday.)

Next Entries »