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When Doing Something Falls Short of Doing Nothing

September 20th, 2011 . by economistmom

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About a month ago, the Brookings Institution’s Bill Gale made what I thought–and still think–is a brilliant analogy between budget baselines and weight loss goals at an event about the debt limit deal’s “super committee.” I liked it so much that I quoted from the transcript in my very next Tax Notes column (republished on the Concord Coalition site here), and I’d like to re-quote it here (emphasis added):

In terms of an example, think about this the following way: Suppose you’ve been eating badly the last, let’s say, 10 years, and you’ve been gaining a lot of weight and you want to lose weight and you want to lose 15 pounds. Well, we won’t go with 1.5 trillion pounds. You want to lose 15 pounds. The question is, compared to what?

Now, the way we’d usually think about it is, well, compared to where I am right now I want to lose 15 pounds. There’s another way to think about it, though, which is to say, well, I’ve been eating badly for 10 years. If I continue to eat badly the next 10 years I’m going to gain 45 more pounds, so I’m going to lose 15 pounds relative to that increase of 45 pounds that I’m going to do over the next decade.

Now, nobody that’s serious about losing weight builds in a 45-pound weight increase and then says, “I’m going to lose 15 pounds relative to that.” But using one of the baselines, the policy-extended one, as the standard for a deficit reduction goal would be the equivalent of increasing the deficit by $4.5 trillion and then saying, “I’m going to cut it by $1.5 trillion [in other words, increase it by $3 trillion relative to current law].”

In that same Tax Notes column of mine, called “Three Ways to the Current-Law Revenue Baseline,” I explained why I wanted the super committee to adopt a revenue goal of achieving a level of revenues consistent with the current-law baseline.  First, there are lots of ways to get there, and all aren’t too bad or so hard–the easiest option being the “do nothing” approach where Congress simply (goes home(?) and) avoids passing any new tax legislation–including any extension of any part of the Bush tax cuts, which have always been deficit financed.  Second, committing to those levels of revenues would insure getting our deficits down to clearly economically sustainable levels (not just borderline sustainable or “not quite” sustainable) over the next 10 to 20 years, while we’ll probably still be waiting for entitlement reform to either get done or materialize.  I pointed out that the super committee did not have to decide right now (or figure out how Congress and the Administration would actually agree to) the specific tax policy that would produce those current-law revenue levels.  All they would have to do is demand that the Bush tax cuts comply with strict pay-as-you-go rules going forward, such that any extension of any part of them would no longer be deficit financed.

In Bill’s lingo, they’d have to commit to not “eating” any more of those very fattening deficit-financed tax cuts.  In Bill’s lingo, that’s the way they’d really commit to changing their bad habits and thus not gain any more weight–not one pound of what would otherwise be a 45-pound weight increase.

Well, yesterday the President unveiled his deficit-reduction plan, one that has been characterized as qualifying as a “go big” approach–by the Administration, of course, but also by none other than Bill Gale, here, when he says (emphasis added):

The debt-limit deal signed in August had two parts. OMB estimates that the first part will reduce spending by $1.2 trillion (this may seem confusing, because the commonly-used figure for this part was $900 billion originally).

In combination with the debt-limit deal, then, the new proposals would (a) pay for the stimulus package the President proposed and (b) still reduce 10-year deficits by $4.4 trillion. Changes of this size constitute “going big” in current budget parlance and should be applauded.

In contrast, the Joint Select Committee needs to come up with “just” $1.5 trillion in deficit reduction to avoid the automatic second-round cuts. The president is asking Congress to go well beyond that and make a much more significant dent in the fiscal problem now.

Well, by the Administration’s own numbers, the plan’s revenue-gaining proposals raise nearly $1.6 trillion over ten years.  But that’s only after the Administration first cuts revenues by $3.9 trillion to adjust to their “policy-extended” baseline that assumes that under “business as usual” the entirety of the Bush(/Obama) tax cuts and Alternative Minimum Tax relief would be extended and deficit financed.  On net, this means that relative to current law (the purview of legislators, by the way), the President’s revenue proposals for “deficit reduction“–you know, his more “balanced” approach for deficit reduction because it supposedly includes higher revenue–would actually reduce revenues and increase deficits by $2.3 trillion ($3.9 trillion minus $1.6 trillion, from tables S-1 and S-2 in the Administration’s report) over ten years.

So, relating this to Bill Gale’s original analogy of someone who wants to change his ways and avoid what would otherwise be a 45-pound weight gain from his “eating as usual” diet that’s very heavy on deficit-financed tax cuts, the President’s new “diet plan” would indeed avoid the 45-pound weight gain, but would still lead to a 26.5-pound weight gain–as $2.3 trillion in deficit-financed tax cuts is 59 percent (still the bulk of) of the $3.9 trillion worth of all of the possible deficit-financed tax cuts, and 59 percent of 45 pounds is 26.5 pounds.

Now, I want to give credit where credit is due, and certainly the President’s plan is:

  • far better than the Republican approach of suggesting even more deficit-financed tax cuts coupled with draconian (I would call “heartless”) cuts in spending; and
  • considerably better than the “business as usual” policy-extended baseline–that worst-case scenario where all of the expiring tax cuts are all extended and deficit financed.

But I think we should all take note that for all the work and hard choices the Obama Administration put into this plan, it still is “worse”–still falls short of–deficit reduction under the “Do Nothing” approach where all the expiring tax cuts just actually expire.

If I actually had a personal goal of avoiding a 45-pound weight gain and was told I could achieve that by doing nothing versus going on a “tough” and specific alternative diet that would lead to “only” a 26.5-pound gain, I don’t think I’d be that persuaded to sign up for that diet.

And if I instead was told that I could just commit to the equivalent of “doing nothing” in terms of my weight gain, that instead of starving myself completely off my favorite bad-habits food (letting my access to that particular food disappear as scheduled, analogous to letting the tax cuts expire) I could keep some of that favorite yummy-but-fattening food in my diet, but add enough additional exercise to offset the caloric impact?….Well, then sticking to the “do nothing” weight-gain goal (and avoiding the full 45 additional pounds) wouldn’t seem so awful and austere after all.

(I eat a LOT of sweets by the way, but I also do a lot of yoga.)

So, Bill Gale and I have been having a little bit of a personal disagreement over whether I’m being too much a “Debbie (or Diane) Downer” on this.  I mean, can’t I emphasize my usual “glass is half full” perspective?  Well, in this case, no.  I’ve always thought that the current-law revenue baseline is the right goal for tax policy going forward, and I especially think that’s true now.  If the President wanted to “go big” with an approach that’s a big contrast to the Republican approach, he should have “gone bigger” with revenues.  Falling short of “doing nothing” is far from good enough.  And I say this not because I’m a pessimist, but because I’m an optimist and truly believe we can do much better than this.

10 Responses to “When Doing Something Falls Short of Doing Nothing”

  1. comment number 1 by: David J

    Maybe you should add the consideration to your metaphor that you’re are considering you weight problem at the same time you are battling a tricky, life-threatening illness. Yes you need to lose the weight, but do you really want to begin fasting with your system already weakened?

  2. comment number 2 by: David J

    wish I could fix my grammar…sorry.

  3. comment number 3 by: Animafon

    I am usually impressed with your writing, but in this essay, I feel your use of metaphor complicates more than it simplifies.

  4. comment number 4 by: Tim

    I enjoyed the post, but to talk simply about the deficit w/o even mentioning unemployment (the reason for all the stimulus), kind of misses the point of Obama’s plan. Decreasing unemployment must be discussed as a co-equal (or more pressing) goal than simply deficit reduction.

  5. comment number 5 by: AMTbuff

    Since health care spending growth causes approximately 100% of the long-term problem, any plan that does not bite down hard on that spending is doomed to fail.

    It’s like designing a diet in which you make all kinds of adjustments EXCEPT any reduction in your intake of the fast food that made you fat.The notion is absurd.

    Furthermore, Obama continues to promote the myth that America’s fiscal problems can be solved at the expense of the rich, without any serious middle class pain. This fantasy makes a fiscal collapse more likely. It’s a disservice to the middle class, not to mention the poor.

  6. comment number 6 by: Vivian Darkbloom

    Perhaps I’m being arithmetically challenged here, but as I read the administration’s proposal, their deficit reduction is *supposed to be* *on top of* the target to be met by the “Super Committee”. That Committee has been tasked to come up with a deficit reduction plan that targets $1.5 trillion over a 10-year period as measured against the *current law* baseline. So, let’s assume the Committee actually comes up with a plan that meets this target. If we layer the administration’s proposals *on top of that* (and these proposals do not duplicate the Super Committee’s own proposals), doesn’t that mean that such *additional* taxes or spending cuts reduce the defict dollar-for-dollar against that same current law baseline? Literally, I think this has to be true. Of course, any such *additional* deficit reduction should be offset by the $447 in additional stimulus spending and the bogus claim of reduction for the wars.

    The fallacy here, though, is that the administration is claiming their reductions are *on top of* what the Super Committee might come up with, which is unrealistic. Inside the Committee the Democratic contingent will almost certainly be pushing for the same agenda as in the administration’s proposals. The administration seems to be trying to put all the hard work on the Super Committee and then piggy back on that. Or, they want us to double count. Either way, this is smoke and mirrors.

    Someone, what am I missing here?

    Also, to the first three commenters, please note that the administration’s proposal increases the deficit by $300 billion in the first year and only reduces it by $23 billion in the second year. We’re talking here about 10-year budget projections. Do you actually think we need to increase deficit financed stimulus spending for another 10 years?

  7. comment number 7 by: AMTbuff

    Smoke and mirrors? No, it’s word games. Read the full story at http://keithhennessey.com/2011/09/20/a-fundamental-fiscal-deception/

  8. comment number 8 by: Ralph Musgrave

    Bill Gale is totally CLUELESS.

    What’s wrong with the deficit? Oh I know what your’re going to say: your going to tell me it increases the debt. Well that’s the conventional wisdom amongst economic illiterates. In fact as Keynes, Milton Friedman and numerous others pointed out (and as is obvious to anyone with a basic grasp of economics), a deficit can accumulate as extra monetary base rather than more debt.

    And don’t tell me extra base raises inflation. The US base has TREBBLED in the last three years. Where’s the inflation?

    Can I suggest you study some Modern Monetary Theory? Though I have doubts whether, simple as it is, you’d understand it.

  9. comment number 9 by: Josh

    I don’t understand why you keep harping on the federal budget issue. Yes, we have a fiscal problem in the out years. However, we have a major unemployment crisis RIGHT NOW! This seems to get little attention in your blog.

  10. comment number 10 by: Unsympathetic

    This analogy is a complete failure. There is no plausible “weight gain” analogue to the incontrovertible fact that the reason the US has deficits is because we cut taxes on business and the upper class because people like you (You, personally) have bought into the rhetoric of calling the super-rich the “job creators.” If you cut taxes on the rich but increase the taxes on the middle class, the rich are simply going to save more — rather than hire people.

    The Koch brothers have gone from $34 to $50B in total personal NW in the past 2 years, yet have cut over 3,000 jobs. Wealth is NOT job creation, because all job creation requires aggregate demand to sustain the output of each job.

    Please re-read and critique the testimony of the great Mariner Eccles, with the salient points highlighted on the London Banker blog: http://londonbanker.blogspot.com/2011/09/testimony-of-marriner-eccles-to.html

    Note that he was one of the richest men in the US at the time. “This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.”