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A $2 Trillion Make-Up Call

March 23rd, 2011 . by economistmom

Following up on my post from last Friday on CBO’s analysis of the President’s budget, let me explain that the Obama Administration’s seemingly low-ball estimates of deficits under their own proposals isn’t so much a case of (very) “dynamic scoring” as a sort of “make-up call.”

I thought I’d provide some apples-to-apples numbers to help see what’s going on.  Recall that CBO scores the ten-year deficit under the President’s proposals at $9.470 trillion, while OMB (the Administration) says it would be only $7.205 trillion–a more than $2.2 trillion difference.  It turns out that most of this difference is due to the Administration’s much rosier assumptions about the pre-policy baseline and the level of revenues that would be collected under current law.  The CBO and OMB estimates of the cost of the President’s tax proposals (or more accurately, the net revenue loss under the President’s budget compared with current law) are actually very similar.

So here are the relevant numbers, all for the ten-year period of fiscal years 2012-21. The CBO numbers come from their analysis linked above, and the OMB numbers come from the summary tables in the President’s budget:

  • CBO (all found in their Table 1):
    • Revenues under the current-law baseline:  $39.032 trillion;
    • Revenues under the President’s FY2012 budget:  $36.702 trillion; so…
    • Difference (net revenue cost of President’s proposals):  $2.330 trillion.
  • OMB:
    • Revenues under their “adjusted” baseline (from their Table S-3):  $37.928 trillion;
    • BUT this adjusted baseline took out $3.070 trillion in extended tax cuts that they count as “current policy” (see Table S-7); so…
    • Implied revenues under current law (add the $3.070 trillion back in):  $40.998 trillion;
    • Revenues under the President’s FY2012 budget (from Table S-1):  $38.747 trillion;
    • So, note, difference from current law due to the President’s proposals ($40.998 - $38.747): $2.251 trillion.  (Pretty darn close to CBO’s $2.330 trillion–only $79 billion (over ten years) apart.)
  • Difference between assumed current-law baseline revenues (OMB minus CBO):  $1.966 trillion.

So, out of the $2.2 trillion difference between CBO and OMB estimates of ten-year deficits under the President’s proposals, nearly $2.0 trillion comes not from differences in their cost estimates of the tax-cut proposals nor from differences in how effective those tax cuts might be in growing the economy/changing the economic forecast (”dynamic scoring”–which isn’t done in these budget forecasts anyway), but rather from the differences in how strong they think the economy and therefore the levels of revenues would be even with no change in tax policy.

So it’s not anything sneaky or sinister buried in the Administration’s estimates, but it’s just a very optimistic view, for sure, and it certainly serves as a sort of “make-up call” in that the $2.0 trillion in “rosier scenario” effectively covers about 85-90 percent of the cost of President Obama’s proposed extension of what used to be the (Obama-labeled “fiscally-irresponsible”) Bush tax cuts.

4 Responses to “A $2 Trillion Make-Up Call”

  1. comment number 1 by: AMTbuff

    This is a good example of why readers should ignore any conclusions that depend on a baseline, any baseline. Only the absolute gap is real. When you see the word “change” or “difference” relative to another policy, the numbers are usually manipulated. The absolute size of the gap between spending and revenue is more difficult to manipulate.

  2. comment number 2 by: markg

    So what’s your point economistmom? You throw the word “trillion” around a bunch of times but make no conclusion. Are these budget numbers going to cause an economic problem? Just what is that problem? I want to understand your economic phylosophy. If my algebra teacher wrote y=mx+b and failed to explain it I would learn nothing. Please explain what all these numbers mean.
    I could do the same thing. Trillion, trillion, trillion trillion. Can I have my PhD now?

  3. comment number 3 by: Jim Glass

    So what’s your point economistmom? … If my algebra teacher wrote y=mx+b and failed to explain it I would learn nothing. Please explain what all these numbers mean.

    I could do the same thing. Trillion, trillion, trillion trillion. Can I have my PhD now?

    markg, you sound frustrated. I’ll be helpful. From the Congressional Research Service paper I mentioned before, here’s a short explanation of the fundamentals others are taking for granted. Understand, and you’ll be up to speed.

    It’s not so difficult — it was written so even Congress can understand it!

    http://assets.opencrs.com/rpts/RL31235_20100202.pdf

    … In the long run, economic growth is determined primarily by three factors: growth in the labor force, the rate of technological advance, and the amount of capital available to the workforce.

    Of the three, the last one may be the most susceptible to the influence of policymakers. The larger the capital stock, the more productive the labor force tends to be.

    Although it may be possible for fiscal policy to have an effect on the rate of technological progress in the way public money is spent, it probably has a much larger effect on growth through its influence on the size of the domestic stock of capital and the amount of capital available to each worker in the labor force.

    How this comes about can be illustrated by a brief introduction to economic accounting.

    The total value of national output can be measured in two ways. Either the total value of the goods and services produced can be added up, or the total value of the incomes resulting from that production can be counted. These two accounts, at least in the abstract, add up to the same total.

    The measure of total output based on the value of production is typically subdivided into several categories of demand. Specifically, it is calculated as the sum of consumption spending (C), investment (I), government spending (G) and the difference between exports (X) and imports (M):

    GDP = C + I + G + (X - M).

    The alternative measure of total output is the sum of the various uses to which income is allocated. On this side of the economic accounting ledger the value of national output is expressed as the sum of consumption (C), private sector saving (S)8, and tax payments (T):

    GDP = C + S + T.

    Combining the two equations, and simplifying gives:

    I = S + (T - G) + (M - X).

    That is, total investment spending is equal to the sum of private saving (S), the government budget surplus (T - G, which, if it is negative, is a deficit), and the difference between imports and exports of goods and services (M - X).

    The last equation is an identity. In other words, investment is by definition equal to the sum of private saving, the budget surplus, and net capital inflows from abroad.

    Other things being equal, a reduction in public sector saving means less investment and slower growth in the capital stock.

    In the long run, a shift from a budget surplus to a deficit represents a reduction to national saving. Less saving means a shift from future to present consumption.

    Consuming more now means less investment now, a lower level of output of goods and services in the future, and thus, less to consume in the future than otherwise would have been the case…

    I suggest you read the whole thing.

  4. comment number 4 by: Matt Franko

    Jim,

    But aren’t we trying to grow GDP, not just ‘I’ per se? Is not that the goal?

    Or is our goal solely to just grow ‘I’, is that how we are supposed to think?

    And what about EMPLOYMENT?

    Look at your equation for I. We can have high I with huge imports, a balanced budget and decent savings….and that would result in MILLIONS OUT OF WORK!

    How do you guaranty the maximum employment with a sole focus on I ?

    Resp,