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.
- 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.
- 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.
- 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.
- 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.