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A Budget Fitting for Valentine’s Day

February 14th, 2011 . by economistmom

Here’s OMB director Jack Lew explaining how the Obama Administration’s proposed budget (released this morning) will reduce the budget deficit over the next ten years–cutting it in half by 2013 and by two-thirds by 2020.  Problem is that that’s only relative to a “baseline” that builds in a lot of tax cuts that go beyond current law (extended beyond their expiration), and the President’s budget stays away from the major pressures on the federal budget–the growth of Medicare and Social Security spending and the lack of a solid enough revenue base to keep up with that spending.

I think it’s a fitting “Valentine’s Day” budget because it only pays “lip service” to the work of the President’s fiscal commission, writes a lot of “love notes” to those enduring Bush/Obama tax cuts, and still contains an awful lot of red ink.

More details later…

***UPDATE (1:30 pm):  A few quick observations from my (admitted) Bush/Obama-tax-cuts-obsessed perspective:

  • The “lip service” the Administration pays to the fiscal commission comes from very skinny, non-luscious lips (see Ezra Klein on this point!); absolutely nothing in the President’s message and only a mention about “reset[ting] the debate” in the chapter on the “sustainable fiscal path”
  • Budget does not achieve sustainability (below 3% of GDP deficits) by the end of the budget window; it is slightly above by 2020-21 (see Table S-1).  Problem with “almost sustainable” is that that’s still unsustainable.
  • Same table (S-1) shows as memo that IF we could pay for extended AMT relief we would get to sustainability by the second half of the budget window.  Just like IF we could pay for any other ongoing tax cuts or spending that we haven’t been in the practice of paying for.
  • Table S-2 makes it look like there is $2.2 trillion (over 10 years) in deficit reduction proposed in the President’s budget, including $665 billion in revenue raisers.  But that’s relative to their “adjusted baseline” which already assumes nearly $3.1 trillion in extended tax cuts that are not in current law (the “middle-class” cuts and 2009 estate tax law and AMT relief; see Table S-7).  In other words, their proposed spending cuts or revenue raisers fall short of even paying for the assumed tax cut extensions they are implicitly proposing (tucked away into their “adjusted baseline”), by nearly $1 trillion.
  • And although they want to be seen as more honest in not adding in all of the Bush/Obama tax cuts into their “adjusted baseline,” in the memo to Table S-2 they still try to characterize letting the high-end Bush tax cuts expire (after the current two-year extension) as deficit reduction (”costs avoided”).
  • Table S-8 lays out their tax proposals as containing just around $392 billion (over 10 years) in tax cuts, while tax increases (”revenue changes and loophole closers”) total $356 billion.  On net this looks as if they come close to revenue-neutral tax policy, but of course that doesn’t count the over $3 trillion in extended tax cuts already built into their baseline.
  • Note we are back to the same old story:  if Congress went home and didn’t pass any extensions of tax cuts, and the President didn’t sign any extended tax cuts into law (i.e., if they stopped doing the kind of “bipartisan compromise” they did in the lame duck session), we’d do way better at reducing the deficit than if we adopted the policies the President’s budget proposes.

20 Responses to “A Budget Fitting for Valentine’s Day”

  1. comment number 1 by: Gipper

    I think Mitch Daniels is the only politician with a national stage that has the moral character to address the “Red Menace” of our runaway federal budget.

    Obama is simply a joke when he proposes to spend tens of billions of dollars on high-speed rail projects. He’s not serious in the least. But it’s hard to work up too much anger when Republicans are in angst about how to cut $100 billion from the 2011 budget. This is a farce!

    If Daniels could make it through the Republican primaries, then it would be a great matchup in 201: The Pandering Adolescent versus The Adult. I’m worried that the electorate (and Economistmom) will go for the Adolescent.

  2. comment number 2 by: Laura Pelech

    “cutting [the deficit] in half by 2013 and by two-thirds by 2020.”

    Cutting the budget deficit to 2/3 by 2020 is not enough. An essential starting point for fiscal responsibility is a completely balanced budget. Please check out http://www.onecentsolution.org - a citizen initiative that can balance the budget by 2018.

  3. comment number 3 by: joetote

    While the President is feeding us his line of garbage as to cutting spending, it came to my attention yesterday that the FED is considering a QE3 package as the 1.2 trillion dollars of worthless money they’ve already printed hasn’t done what they though it would. All of the cuts in the world are not going to offset the hyper inflation and the costs that come with printing worthless money. M1 has grown 15.2% in less than 3 months and all of that is unbacked paper!

  4. comment number 4 by: Arne

    Why do people keep saying Social Security is a pressure on the federal budget? The adjustments needed to keep it operating within a separate funding stream are small enough that they should be made independently of the rest of the budget.

    The adjustments are needed to SS because people are living longer. If workers want to keep the same retirement age with the same “scheduled benefits”, it is going to cost more and they should pay more. There is no reason why making a decision to allow those costs to increase by 2 percent of GDP should have any significant impact on the rest of the budget. If workers want to spend their money now, resulting in SS benefits less than scheduled, the fact that SS costs do not go up should also have no impact on the rest of the budget.

  5. comment number 5 by: Centerist Cynic

    The sad thing is that most people I talk with would not mind tax increases that would be wisely used or be dedicated to certain catagories like education or infrastructure or even paying down the debt.

    Americans are realistic about what can be done with tax cuts. We understand spending for the future. We do it everyday when we send our kids to college or buy a new car because the one we have costs us $500 a month in repairs.

    What we don’t understand is standing around not talking about almost 90% of the budget.

  6. comment number 6 by: Vivian Darkbloom

    The political reality of this message, and the deficit problem generally, was revealed in the last 30 seconds of the presentation when Lew mentioned (twice) that “we need to work in a bipartisan manner”. What he really means is that the President is not willing to take the lead on making the difficult decisions that are needed to eliminate the deficit. The political cost of those hard decisions about significant spending reductions and tax increases need to be shared, in a bipartisan manner, of course. Sadly, the Republicans are no different. Both parties are perfectly willing to act in a non-partisan manner when handing out goodies like increasing entitlements and subsidies or reducing taxes, but when it comes to making the necessary but unpopular decisions to reverse them, it suddenly needs bipartisanship. Our elected representatives are not leaders; they are cowards.

  7. comment number 7 by: Gipper

    Vivian,

    I believe that Mitch Daniels is the exception. He wasn’t pandering at CPAC. His niche is fiscal truth telling because he cannot out pander Romney or go right of Palin. I think he could win New Hampshire and get some momentum and attention.

    Obama has great fear of Daniels. He scares their political operation.

  8. comment number 8 by: Vivian Darkbloom

    Gipper,

    I’m not that familiar with Mitch Daniels and I’ve read similar things about Chris Christie of NJ. It would be wonderful if a non-pandering politician would run for the presidency. After several decades of observing presidential elections, though, I’m not optimistic. The problem is that, without fail, the major party candidiates, when it comes to the real election, do pander. The few instances in which the type of realist, truth-telling message has been delivered on the national stage have all involved third party candidates. They can’t win a national election, and that’s why they can be truthful; but they can affect the nature of the discussion and in that way affect policy in a positive way. (I’m thinking here of John B. Andersen, for example, not George Wallace). I think it is time for such a third party candidate to emerge.

    BTW, I meant to write “willing to act in a partisan manner” in the penultimate sentence of the last post.

  9. comment number 9 by: Brooks

    Arne writes:

    Why do people keep saying Social Security is a pressure on the federal budget? The adjustments needed to keep it operating within a separate funding stream are small enough that they should be made independently of the rest of the budget.

    I won’t bother trying as I tried at length in the past to get him to understand this, but that comment reflects huge conceptual confusion.

    Our fiscal imbalance is the gap between projected OVERALL revenues and projected OVERALL spending. Period.

    So how much does Social Security spending contribute to the fiscal imbalance?

    As much as we spend on it, just like everything else.

    The fact that part of our overall taxation is dedicated to that program is irrelevant to the extent to which the spending contributes to the imbalance.

    And if we had carved out of overall taxation a dedicated “Defense Tax” to fund Defense spending, I rather doubt Arne would say that Defense spending were therefore not contributing to our fiscal imbalance (or that it were only contributing to whatever extent there were a gap between Defense revenues and Defense spending) or that we shouldn’t be thinking about reducing Defense spending in the context of reducing the fiscal imbalance.

    If Arne’s thinking were valid, all we’d have to do for spending on some program to be not at all a contributor to our fiscal imbalance would be to carve out of our overall taxation a dedicated tax for that program sufficient to “fund” that program. And presto! It would be a “fully-funded” program, “not contributing at all” to our fiscal imbalance. How wonderful.

  10. comment number 10 by: Vivian Darkbloom

    Here’s the first sentence of today’s article in the NYT by Jackie Calmes’:

    “President Obama said that any compromise to address Medicare, Medicaid and Social Security would first require an effort to build bipartisan trust.”

    This really confirms what I wrote in the comment above: it’s bipartisanship for the strong medicine and partisanship for handing out the candy. Any deal will need to be done behind closed doors.

    Also, I largely agree with what Brooks wrote regarding separate accounting for Social Security. Even if Social Security is fully funded (or overfunded) on a stand-alone basis, it has an enormous effect on the general budget. This is because those Social Security trust funds are invested solely in US government debt. To the extent Social Security is overfunded (at least on a current basis), it is a steady and cheap source of borrowing to finance “on-budget” deficits. There may be a silver lining, though. Ironically, to the extent Social Security needs to draw on that trust fund to meet current oblgligations, those funds are not available for the government to borrow and spend on other programs. So, current shortages in the Social Security cash flow may actually force government to make those difficult spending and taxing decisions on other budget matters sooner rather than later. I’m not a firm believer in the “Starve the Beast” theory simply because borrowing money has always been the third option. In this case, though, I think it may be somewhat valid. I would focus political capital and energy on fixing Medicare and Medicaid, which already draw significantly on general revenues. To the extent Social Security is “fixed”, it will likely merely exacerbate the problem in other areas of federal finance.

  11. comment number 11 by: Vivian Darkbloom

    Further to the above comment, per the 2012 budget proposal for the SSA, the trust fund balance at the start of the FY is estimated to be $2.48 trillion. The total federal borrowing from all trust funds is estimated to be about $4.3 trillion. This, basically, represents the amount borrowed by the government from the trust funds for other programs. Thus, the trust funds have, until now, “financed” almost 30 percent of our total federal debt.

    Per the budget, total actual tax receipts for OASI are expected to be $566 billion, whereas total outlays for benefits is expected to be $629 billion (this excludes the DI trust fund and other federal trust funds). While the budget shows a very small increase in the balance of the trust fund, that is solely because of certain “intra-governmental transfers”—primarily interest the government owes to the trust fund by borrowing from it. Thus, on a cash flow basis, the federal government can no longer borrow from its largest trust fund—to make current benefit payments the federal government needs to actually repay some of that interest on the trust fund debt and this necessarily needs to be financed by borrowing from the public (largely foreigners). Reports that the Social Security Trust fund is in surplus almost always include intra-government interest on the trust fund debt. If this is excluded and calculated on a cash flow basis, we’re already in deficit. See here Figure DI:

    http://www.cbo.gov/ftpdocs/108xx/doc10871/AppendixD.shtml

    The bottom line is that the government’s most reliable and cheap source of credit has already dried up and is actually demanding some of it’s money back in hard, albeit borrowed from other sources, cash.

    Details mentioned here on the OASI trust fund are summarized in the following FY 2012 budget document (see page 1179 under “status of funds”):

    http://www.socialsecurity.gov/budget/2012BudgetAppendix.pdf

  12. comment number 12 by: Arne

    “If Arne’s thinking were valid, all we’d have to do for spending on some program to be not at all a contributor to our fiscal imbalance would be to carve out of our overall taxation a dedicated tax for that program sufficient to “fund” that program. ”

    If every program had a dedicated tax then there would be no deficit. That is correct. Thanks for verifying that my point is valid.

  13. comment number 13 by: Arne

    “if we had carved out of overall taxation a dedicated “Defense Tax” to fund Defense spending, I rather doubt Arne would say that Defense spending were therefore not contributing to our fiscal imbalance”

    I am disappointed that you would say that since I have stated that a “War Tax” would be a good idea. No doubt apportioning such a task would be a political nightmare, but it would have economic benefits as well. Seeing that the cost of the wars increased taxes would provide a clearer incentive to the electorate to push for a reduction in those costs.

  14. comment number 14 by: Brooks

    Arne doubles down on his conceptual confusion.

    Sorry Arne, I’ve tried at great length with you in the past. I don’t want (at least at the moment) to spend time explaining the faults in your logic as you reply to my correction of your error.

    Perhaps others will try to help you out, not that you would want to be corrected.

  15. comment number 15 by: Brooks

    By the way, most people on both “sides” either are confused or are exploiting this conceptual confusion (the “solvency” thing).

    Folks who want to cut projected Social Security spending often say they are doing it to “save the program”. Well, all we would need to “save the program”, even without reducing projected spending on it, would be to…spend the money on it! And I’m not referring to raising FICA SS taxation. I mean that nothing would stop us from spending as much of general fund revenues on Social Security as we want (whether or not that requires new legislation).

    Social Security is just something we spend money on, just like everything else. We can spend as much or as little as we want (although we may be obligated to spend at least the couple of trillion “owed” to SS, which is just a fraction of what we plan to spend over the next few of decades, and which shouldn’t be confused, as it often is, with that amount PLUS projects FICA SS revenues as an obligation)

  16. comment number 16 by: Gipper

    Arne, Brooks,

    Like Santa Claus and the Easter Bunny, the electorate is under the spell of a myth first spun by FDR. That is that SS benefits represent a return of taxes invested for retirement. That’s the con propagated by the Democrats to get buy-in from the middle class so they wouldn’t perceive it as the wealth transferring Ponzi scheme that it truly is.

    The notion of a separate taxation stream and the Trust Fund are the props used to give the myth enduring power, but it is a myth. The fact is that SS is paid from the general fund and SS taxes go into the general fund. The Supreme Court ruled that SS taxpayers have no contractual claim to receive a specific level of benefits.

    A separate discussion about SS solvency is something that myth makers and believers need to support their superstitions.

    Myths help people create order and sense out of the world when empirical evidence and scientific reasoning are beyond their reach. For Brooks to engage Arne in this discussion is similar to Galileo trying to engage the pope in a discussion of why his telescope should be relied upon for celestial observation instead of biblical passages.

  17. comment number 17 by: Gipper

    The way to make SS an isolated self-supporting program is to convert it into a defined contribution plan. I’m repeating myself, but to do this, each taxpayer would contribute his SS taxes into a US Treasury Mutual Fund. The Treasury would use those SS taxes to purchase US Treasury Bills and Bonds. Each taxpayers would accumulate shares in the mutual fund that represents the value of his tax contributions plus interest earnings reinvested in the fund proportional to his overall share in the pool. In other words, it would look like a 401(k) plan or a privately managed mutual fund.

    Then a retiree would only receive what he contributed plus what he earned as a return from the fund over the years. Because a share in a mutual fund represents a contractual obligation for a specific sum of money, there would be no question about Congress altering the retirement age, altering the inflation index, changing benefit levels, specifying survivor benefits, etc. The retiree has his accumulated nest egg in the fun, and he can include it in his estate and pass it on to his heirs if any is left over when he dies.

    If we did this, then Arne would be correct. Because we don’t do this, and instead have a defined benefit plan, Brooks is correct.

  18. comment number 18 by: Arne

    Gipper ignores that SS is not an investment plan, it is insurance, another thing the Supreme Court has confirmed.

    Neither Brooks nor Gipper is willing to accept that although their ideas could be made to work, it does not mean that the current system does not work and does not even have some advantages.

  19. comment number 19 by: Gipper

    Arne,

    SS is a welfare program. Labeling it as an insurance program assumes that someone paid a premium in exchange for a contract to provide benefits. The Supreme Court decision you cited proves that there is no contractual obligation to an individual taxpayers. There’s only a political expectation of benefits.

    SS works so far, but it along with Medicare and Medicaid will bankrupt this nation. In 2030, I doubt anyone will be so lame as to claim any of these programs work. Eventually, the youth will refuse the massive intergenerational wealth transfer scam that these programs were built on. The Ponzi scheme falls apart once there are only 2 workers paying taxes for every entitlement recipient. The day of reckoning is near.

  20. comment number 20 by: Brooks

    Arne,

    How many levels deeper can you go in your confusion? Now you just added that you confuse my purely analytical/conceptual point (which it was) with policy advocacy (which it wasn’t). I was just correcting your conceptual error.