A $2 Trillion Make-Up Call
March 23rd, 2011 . by economistmomFollowing 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.
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.
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?
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
I suggest you read the whole thing.
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,