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I’m fascinated by the ideological chart that Brad DeLong features in this post.  Brad’s point is that Barack Obama is not very liberal relative to other Democrats, and insignificantly more liberal than Hillary Clinton.  But what fascinates me, besides the relatively huge difference between Bush and McCain in how conservative they are, is how far apart the Democrats and Republicans are–that is, the tiny, tiny fraction of Democrats and Republicans who overlap on the ideological spectrum, in the center.

No wonder why we’re having such a hard time with “bipartisanship” and working together with our common concerns and priorities to come up with consensus policy solutions.  There’s not much there in common after all.

I always thought politicians had the incentive to move toward the center when it comes to winning elections, but maybe that model doesn’t work in practice.  I suppose the most vocal participants in the political process tend to come from the extremes and try to lure the politicians and policymakers toward those extremes, not toward the center.  And if you’re someone who tries to stay in the center, well, maybe you’re not exactly in the “middle” of lots of friends.

This polarization of opinions seems especially apparent in the blogosphere.  I noticed that in today’s Washington Post article about Netroots Nation, the liberal bloggers convention which took place this past weekend, Obama is made to sound ”not liberal enough.”

Of course, we at the Concord Coalition are used to being lonely and unpopular in staying in the center of fiscal policy, pointing out that getting the fiscal outlook in order will require everything to be on the table–both revenue increases and spending restraint.  We get conservative, supply-siders who accuse us of wanting to close the fiscal gap entirely through raising taxes and who say we don’t care about crippling the economy for the sake of deficit reduction.  And we get liberal champions of Social Security accusing us of laying all the blame on entitlement spending and wanting to destroy the programs.   Honestly, we are at neither extreme because neither extreme would produce a realistic, thoughtful strategy to reduce the budget deficit.  Only a centrist approach can get us there.  

It seems to me that until we get more of our politicians willing to come to the middle, there’s not going to be any common ground from which to work.  And until ordinary people (the voters) encourage politicians to come toward the middle, the politicians will be more inclined to listen to those loudest voices who are trying to pull them toward the extremes.

At Senate Budget Committee Chairman Kent Conrad’s request, CBO just issued an analysis of the long-term budget outlook under deficit-financed tax cuts–answering the following:  What happens to budget deficits and the economy over the longer run (or even over the not-so-long run) if we go along with repeated violations/waivers of PAYGO as has been insisted on by the Bush Administration and many members of Congress (most recently, the Senate Republicans in the report I cited yesterday)?

Check out Table 1 on page 3 of the report.  Under current law (with expiring tax cuts OR with extended tax cuts that comply with PAYGO), the deficit as a share of the economy (GDP) would actually fall from 1.2% in 2007 to 1.0% in 2030, but would then start to grow (even with expired tax cuts) to 4.6% by 2050, and to 18.1% by 2082.  (The dramatic rise of the deficit in later years, despite revenues as a share of GDP growing from 18.8% in 2007 to 25.5% by 2082, shows that the longer-term problem is much more from rising health care costs than from deficient revenue.)  But under the scenario where extension of the Bush tax cuts and AMT relief is entirely deficit financed, deficits/GDP rise to 6.1% in 2030 (more than 6 times the 1.0% when paid for), 15.0% in 2050 (more than 3 times the 4.6% when paid for), and 39.3% by 2082 (more than 2 times the 18.1% when paid for).   (Note the difference shrinks over time when health costs become the far largest challenge.)

What difference do these deficits make for the economy?  CBO Director Peter Orszag lifts a couple paragraphs from the analysis onto his blog:

…simulations using one model—a textbook growth model that incorporates the assumption that deficits affect capital investment in the future as they have in the past—indicate that the rising federal budget deficits created by deficit financing of the indexation of the AMT would reduce real GNP per person by 6 percent in 2050 and by about 37 percent in 2080. If both the AMT were indexed and EGTRRA’s and JGTRRA’s personal income tax provisions were extended, and those changes were financed by additional borrowing, the economic costs would be even larger. By CBO’s estimates, real GNP per person would decline by 13 percent in 2050. Beyond 2073, projected deficits under those tax policies would become so large and unsustainable that the model cannot calculate their effects.

Despite the substantial economic costs generated by deficits in that model, such estimates may significantly understate the potential loss to economic growth under deficit financing of the tax changes…

Just as with CBO’s earlier analysis at Congressman Ryan’s request (my commentary on that posted here), the analysis focuses on the macroeconomic effects of budget deficits, rather than the potential microeconomic effects of the particular tax or spending policies on household or firm behavior.  In this particular analysis of deficit-financed vs. paid-for tax cuts, Peter Orszag explains that the microeconomic, incentive effects are the same under both scenarios for the tax cut in question…

To assess the economic effects, CBO compared a scenario with the tax changes financed through deficits with an alternative scenario in which the tax changes were financed fully from the start via changes in other policies. Because the analysis assumes that the tax changes are enacted in either case, the difference between the two scenarios highlights the effects of using deficits to finance them.

…although it should be pointed out that the microeconomic, incentive effects of the mix of policies used to pay for the tax cuts in the paygo-compliant (extended baseline) case are not simulated, just as in the CBO analysis for Congressman Ryan, the potential micro-behavioral effects from the drop in health care spending were not simulated.

According to this new policy paper on the Senate Republican Policy Committee’s website, the reason (or rather the latest reason) the Senate Republicans have refused to pay for tax cuts a la the PAYGO rules is not “just because,” and not because they don’t believe in fiscal responsibility, but because PAYGO isn’t fair to tax cuts. 

Apparently they buy into the line of argument made on the Tax Policy Center’s TaxVox blog by Rudy Penner, and maybe didn’t read my post on this topic here on EconomistMom.com, nor BlueDog’s comment on TaxVox, nor Rudy’s follow-up post.

There’s so much to point out that’s wrong in this piece that I don’t know where to begin.  Most of it should be clear if you reread my earlier post.  But apart from the additional budget geeky things I could point out (like paying for things with cuts in discretionary spending does not “count” as PAYGO compliant–and for good reason), what I really want to scream about is their last couple paragraphs in the executive summary, where they first chastise Democratic lawmakers for not complying with PAYGO “again and again” (gee, why was that?…) and then scold those same lawmakers for complying with PAYGO with increased taxes (aha, there’s the real problem…).

And then the last paragraph in the summary refers to lawmakers using PAYGO as just a “mask of fiscal responsibility.”  Mask?  That would mean a facade–something used to hide one’s true character, as if those members of Congress who have been insisting on PAYGO (such as the Blue Dogs) are actually engaged in some grand deception, fooling the American public into liking them for their popular(?) positions on raising taxes and restraining spending, when all they really want to do is increase the deficit.  Wow.  Really?

I like to think of PAYGO as a “fig leaf” rather than a “mask.”  It seems that it’s the only shred of anything to cover our vulnerable fiscal parts, the only little thing that’s keeping the fiscal situation from getting even more obscene. 

***UPDATE (Tuesday 4 pm):  Here’s the link to the video on C-SPAN.org.  I have no idea when it actually aired.  I’m sure I will cringe at a few of my words, but I’ll try to redeem myself with clarifying posts in the next few days.  AARP will post a written transcript and link to the video on their site soon; I’ll provide a link when it’s available.***

So, I’m speaking at an AARP lunch forum today, appearing with economic advisors from the two campaigns (Doug Holtz-Eakin for the McCain campaign, and Jeff Liebman for the Obama campaign), AARP’s policy director John Rother, and David Wessel of the Wall Street Journal. 

David plans to ask me how the candidates’ economic plans “add up” regarding the federal budget.  I plan to respond that that depends on how you define “add” as well as how you define “up.” 

I’m unable to “add” anything in a strict, quantitative sense, because I have not seen precise and definitive cost estimates of the candidates’ proposals–in fact, I haven’t seen much that would be considered a precise description of specific proposals.  In a qualitative, “sizing-up” sense, I’m looking at how the candidates’ plans seem to compare to both the official CBO (current-law) baseline, as well as a more “realistic” baseline of “current policy extended” (which can be derived from CBO estimates of the cost of policy alternatives not included in the official baseline/current law–table 1-5 in their budget outlook report).

And so how you define “up” matters a lot, because I think both candidates are explicitly (Obama) or implicitly (McCain) pitching a form of fiscal responsibility that starts from a “Bush policy extended” budget path.  That means that when the Obama campaign establishes a policy goal to “pay for” all their new initiatives, that means they’ll only not worsen the deficit relative to that “policy extended” baseline.  That’s very different from sticking to a strict pay-go rule that’s tied to the current-law baseline, because the current-law baseline gets us to budget balance at the end of a first term, but the policy-extended baseline gets us to a deficit of around 3% of GDP ($500-$600 billion in 2013).

But the McCain campaign is claiming something quite explicit and precise, saying that a McCain administration would balance the budget in four years.  Balance means zero unified deficit, so even if they’re thinking in “policy extended” pay-go terms, they’re really talking in “current law” pay-go terms.  When you pay attention to the list of new and extended tax cuts the McCain campaign is proposing, it seems like they couldn’t possibly land at much better than the policy-extended deficits of 3% of GDP–that by starting out at revenue levels even lower than the policy-extended baseline, they’ve got even more to make up on the spending side–amounts that seem far from realistic. 

The Washington Post wonders about this math, too, in today’s editorial.  (Here’s what the McCain campaign shared with them.)  I can’t wait to hear how Doug Holtz-Eakin explains it today.  Hopefully David Wessel won’t waste too much time asking me questions, because obviously I’m not the one with the answers–just more questions!

Will update you all later today on what we learned.

No deep philosophical discussion; just wanted to point out that in my print copy of the Washington Post, I’m looking at this column by Amity Shlaes in defense of Phil Gramm’s “mental recession” comment, which segues into this praise for Senator McCain’s fiscal responsibility (my emphasis added):

Social Security and Medicare also need rewriting — and Gramm put forth one of the better proposals on Social Security in the 1990s.

In short, to fix it all, we need a frank conversation about the economy. McCain, in fact, inaugurated one back in 2006 when he gave a speech that was downright Gramm-like at the Economic Club of New York.

In that speech, McCain said that on entitlements, hard choices were necessary. He concluded: “Any politician who tells you otherwise, Democrat or Republican, is lying.”

This was McCain at his best. Many voters knew it, too.

The way to strengthen the economy right now is to elect leaders who dare to talk about problems in precise and even technical terms — and then act on them. McCain has that capacity, but only if he can transcend Campaign Econ.

And just to the left, on the same page of my print edition, this cartoon by Boston Globe cartoonist Dan Wasserman appears:

Playing more catch up… I had this clarified to me (by Obama advisor Jason Furman) earlier this week, and it was also corrected in a Washington Post story:  the “donut” in Obama’s proposal to restructure Social Security taxes (lift the taxable maximum) isn’t really a symmetric “donut.”  From the corrected version of the Post story:

Under current law, income up to $102,000 a year is taxed for Social Security. Obama would create a “doughnut hole” by not imposing new Social Security taxes on income between $102,000 and $250,000. His aides said income exceeding $250,000 would be taxed at a rate of 2 percent to 4 percent, rather than the 6 percent tax that people pay toward Social Security on income below the $102,000 cutoff, which is matched by their employer’s paying a 6 percent tax. Employers would probably pay an additional tax, but the total tax paid by both employee and employer would not exceed 4 percent of the amount of income earned over $250,000. 

On the one hand, this avoids the 50% marginal tax rate problem, but on the other hand, this:  (i) makes the new structure less progressive in the $102,000 and up range (and more regressive comparing the above-$250,000 folks with the below-$102,000 folks), and (ii) raises less revenue, which is an important consideration when one is relying on the tax side of the Social Security system in one’s plans to close the long-term gap.  Tradeoffs, tradeoffs.

Just picture my original photo of the donut hole with the chocolate frosting scraped off one half!

…Well, sort of.  I just got back from his speech and town hall meeting in Fairfax, VA, on the topic of women and economic security. 

I brought daughter #2, the daughter of “allowance trust fund” fame:

We were sitting pretty far away; here’s the view from my seat:

…but he did speak about the deficit, and I was listening. 

He didn’t speak that much about it during the speech, which laid out lots of new spending with just quick mention that every new initiative is paid for under his plan (the pay-go relative to policy baseline position)…

And I was afraid it wouldn’t come up in the Q and A, until he took the very last question, and an African American woman introduced herself as someone who had grown up in southeast DC and yet had overcome her obstacles to get into Georgetown University.  Her question surprised me–she said, “My question is about national security.  What are we going to do about the federal debt?”  (And my daughter smiled at me, and inside I was saying “hooray, hooray” and was wondering if this woman had somehow seen the I.O.U.S.A. movie.)

Obama responded that the debt was indeed a mess of a problem and that George W. Bush had managed to almost double the debt and that it was obvious the Bush Administration has failed in the fiscal stewardship department.  He mentioned that the deficit this year was over $400 billion (and I heard people gasp). 

But then he said he had to be honest with everyone–that under an Obama Administration, the deficit probably wouldn’t be eliminated in a first term, and probably not even by the end of a second term.  (He contrasted this honesty with what Senator McCain is claiming he can do by cutting earmarks.)  The crowd grew very quiet.  My daughter remarked to me that the crowd’s disappointment seemed palpable, and I agreed.

But then Senator Obama tried to cheer us up, reiterating his commitment to being fiscally responsible, using the old saying that the first thing one ought to do when in a hole is stop digging.  He listed four ways an Obama Administration would achieve deficit reduction:

1. End the war.
2. Let the Bush tax cuts for the wealthy expire.
3. Cut waste, fraud, and abuse (improve efficiency in how government operates).
4. Engage in major reform of our health care system.

My quick analysis of this list?  Senator Obama is right that even with this list of good, fiscally-responsible things to do, it’s still not realistic to expect this to add up to a shrinking budget deficit–certainly not a disappearing one.  1 is hard to do quickly, and the savings are already implicit in the (current-law, CBO) baseline.  2 is not so hard, but again, the savings are already in the baseline.  3 should be easy, but is peanuts.  And 4 is super hard but of course is the big Kahuna, with huge potential to improve the long-term outlook, so we’ve got to try really hard to land on the brighter side of the uncertain forecast range.

I guess I should try to get myself to a McCain town hall meeting next, to be fair…

Brad DeLong speaks of “real fiscal responsibility” in his post on a new policy paper/statement put out by the Center on Budget and Policy Priorities (CBPP), onto which Brad is one of the fiscal policy experts who have signed.  The paper was designed as a counterpoint to a Brookings-Heritage paper, “Taking Back Our Fiscal Future” (TBOFF) released earlier this year, signed by another large group of fiscal policy experts, including Concord’s Bob Bixby.  Brad summarizes the CBPP group’s criticism of the Brookings-Heritage paper this way:

[T]he methods set forth in the Brookings/Heritage/Concord “Taking Back Our Fiscal Future” proposal strike us as misguided.

Specifically:

• TBOFF subjects Social Security, Medicare, and Medicaid to the threat of automatic cuts while giving a free pass to regressive open-ended tax-loophole and tax-break entitlements.
• TBOFF thus departs from the “shared sacrifice” approach that characterized the only successful budget deficit reduction efforts–those of 1990 and 1993.
• TBOFF does not focus adequate attention on the main driver of the forthcoming budget crisis: rising health care costs everywhere, not just in the public programs.
• Thus TBOFF’s attempts to restrain public health care spending growth without taking measures to alter the dynamics of the private health care markets are misguided.
• Thus TBOFF places a large share of the burden of adjustment on the poorer members of American society: it hits the weak claimants, rather than those who have weak claims on federal spending and on tax expenditures.
• Moreover, TBOFF’s strategy relies on automatic cuts–and [C]ongress has never in the past been willing to actually let the automatic cuts written into law take effect.

We believe that rather than spending time trying to design complicated budget procedures of dubious merit and effectiveness, we should focus on concrete legislative steps: policies that raise more revenue, increase economic growth, slow the rate of health care spending systemwide and nationwide, reform Medicare, and bring Social Security expenditures into balance with Social Security resources.

I very largely agree with the policy recommendations in the CBPP paper, and I believe anyone from the Concord Coalition could have signed onto the substance in that paper just as Bob signed onto TBOFF.  (Note that Concord often gets mistakenly lumped into the Brookings-Heritage mix because of our working with both groups via the Fiscal Wake-Up Tour.)  But I have these observations…

First, it’s a lot easier to arrive at a list of more specific policy solutions when: (i) the group involved thinks alike and is not very ideologically, politically diverse, and (ii) you use an effective majority rule criterion to determine the set of “group-endorsed” proposals (what the CBPP paper seems to describe) rather than the unanimous consent criterion (”least common denominator” approach) that I think TBOFF/Brookings-Heritage used.  The CBPP group is largely (entirely?) comprised of fiscal experts who lean Democratic/left, while the TBOFF group includes a much wider spectrum of experts, most notably, the very conservative Heritage Foundation.  Having participated in the meetings of the TBOFF group in its first year (when I worked for Brookings), and having worked with Heritage in other capacities, I know that Heritage analysts must stay true to their organization’s mission, which in their own words is “to formulate and promote conservative public policies.”  When it comes to promoting fiscal responsibility and working with Heritage, there’s always been a tension between the Fiscal Wake-Up Tour’s message that everything is on the table (the need to consider both spending restraint and revenue increases to address the long-term fiscal challenge), and the (mandated) resistance of the conservative members of the tour toward tax increases.  So moving to the “least common denominator” in terms of solutions will naturally mean that the group as a whole becomes a bit too silent on tax policy.  (Note:  Nowhere in the Brookings mission does it utter the word “liberal”, suggesting that the Brookings-Heritage partnerships are naturally going to fail to be as balanced as one might wish.) 

Second, I have been surprised that people have gotten so worked up about the TBOFF paper and in particular, have attached some sort of malicious intent to the budget process proposal.  I honestly think the process proposal was a lot more a ”fallback” position, the strongest policy recommendation the group as a whole could unanimously agree on.  I think you’d find many people in the TBOFF group who would agree with the specific proposals in the CBPP paper (I would have been one of them)–in fact, probably as many as those in the CBPP group who agree with the entirety of them (vs. just most of them). 

Obviously substantive reform to the entitlement and tax programs would be better than just budget process reform–the TBOFF (Brookings-Heritage) group would agree.  But getting to specifics is difficult in practice when you have to work across the aisle, and I think that’s the lesson we should take away in comparing the TBOFF paper with the CBPP paper.  If people come to the policy negotiation table with preconditions about what they cannot bring to the table (e.g., Heritage having trouble bringing the Bush tax cuts to the table), then the “bipartisanship” won’t produce anything of heavy substance–just something like TBOFF. 

That’s why I’m hoping that it’s not really true that Senator Obama and Senator McCain bring nothing in common to the Social Security reform table.  (Does Obama really rule out benefit cuts, while McCain rules out tax increases?  We have a problem here.)  Or if it is true that there’s nothing currently on the common table, I hope that that’s just for the campaign season (to make clear the truly divergent philosophies of the two candidates) and won’t be the case from their future positions in the White House and (back in) the Senate, when they get down to actually negotiating and legislating.

So really, real fiscal responsibility is hard to do… unless you’re a benevolent dictator.

The media are starting to paint a contrast between the Obama and McCain economic plans in terms of fiscal responsibility, pointing out that while “McCain promises to balance budget” (the headline of Mike Allen’s Politico article on Monday), “Obama won’t try for McCain’s budget goal” (the headline of Nedra Pickler’s AP analysis filed last night).

While deeper in, both articles express skepticism about Senator McCain’s ability to come through with said pledge, citing the Obama campaign as well as fiscal experts, it still seems that the opening lines and the first few paragraphs of each story–i.e., the most noticed parts–lean favorably toward Senator McCain, suggesting the winning (at least short-term) strategy with the press is to make a claim that sounds bold and impressive, even if it might ultimately be viewed as incredible. 

The Cliff Notes take-away as you skim the openings of both stories is of a stark choice:  A McCain Administration that would (make tough choices to) eliminate the budget deficit, versus an Obama Administration that would increase government spending (on “critical investments”).

The opening lines of the AP piece seem to almost bully Obama…

Barack Obama says John McCain’s plan to balance the budget doesn’t add up. Easy for him to say: It’s not a goal he’s even trying to reach.

Not only does Obama say he won’t eliminate the deficit in his first term, as McCain aims to do, he frankly says he’s not sure he’d bring it down at all in four years, considering his own spending plans.

“I do not make a promise that we can reduce it by 2013 because I think it is important for us to make some critical investments right now in America’s families,” Obama told reporters this week when asked if he’d match McCain’s pledge.

…and then goes on to suggest the stark choice voters face:

So what is more important in tough economic times? For the government to spend more to help hard-hit Americans or to eliminate a deficit that can lead to higher borrowing costs and slow the economy?

I find this contrast a bit misleading and unfair given that in reality, the Obama proposals for new SPENDING and new tax cuts aren’t necessarily more expensive than the McCain proposals for new spending and new TAX CUTS (and at this largely-theoretical point, could be even less expensive).  It’s just that the Obama campaign is acknowledging that it’s a mathematical impossibility to both increase government spending and reduce the deficit, while the McCain campaign is claiming it’s not a mathematical impossibility to both cut taxes and reduce the deficit.

(Sidenote that really could be another post:  By the way, acknowledging the difficulty in achieving these policy goals simultaneously doesn’t mean you have to abandon any of the goals.  The Obama campaign continues to emphasize fiscal responsibility as one of their economic policy principles, and they stress that they honor that goal with specific plans on how they’ll pay for each of their new initiatives–i.e., that they follow “pay go,” at least relative to a baseline of current policy extended.  As I’ve cautioned here before though, the definition of that baseline matters.)

As I said yesterday, just claiming you will eliminate the deficit, in four (or maybe eight?) years, doesn’t make you a deficit hawk.  But the bold claim might be enough to have you play a deficit hawk in the media.

Meanwhile, admitting you can’t live up to the other guy’s claim, well, it kind of makes you look like a fiscal wimp.

So unfortunately, fiscal honesty doesn’t seem to pay, not with the press at least.  We’ll have to see how it goes over with the voters.

Today’s New York Times poses this question in a nice article by Michael Cooper.  To which I say, isn’t it obvious?  I mean, have you been listening to him at the town hall meetings or being interviewed on CNN?  Or in the article itself, just pay attention to this McCain quote, which even seems milder than what he says lately:

[W]hen Mr. McCain first outlined his tax cut proposals shortly before the South Carolina primary in January, he highlighted his new enthusiasm for supply-side economics. “Don’t listen to this siren song about cutting taxes,” Mr. McCain said then. “Every time in history we have raised taxes it has cut revenues.”

But in the Cooper article, the best clue that McCain is indeed a “supply sider” now comes from this quote from Doug Holtz-Eakin, McCain’s economic advisor, that at least in my mind proves that even Doug, formerly known as the lonely deficit hawk among the rest of McCain’s advisors who are supply siders, is a supply sider now:

Deficit hawks believe that keeping the budget balanced will put downward pressure on interest rates, helping the economy. [I want to add that more importantly, we deficit hawks believe that reducing the deficit raises national saving and hence is good for longer-term economic growth.]  Many supply-siders believe that balancing the budget is a misguided goal, except to the extent that it shrinks government, which is a somewhat different goal. Supply-siders believe that lower taxes will spur economic growth, and that while lower taxes may lead to bigger deficits in the short term, they will eventually produce more revenue and lead to balanced budgets.

But one of Mr. McCain’s top economic advisers, Douglas Holtz-Eakin, who said on Monday that Mr. McCain’s “plan is to balance the budget by the end of his first term in 2013,” suggested that the two arguments are not incompatible. “You’ll never have successful deficit reduction,” he said, “without strong economic growth.”

Just because the McCain campaign says they plan to eliminate the deficit doesn’t make them deficit hawks, especially if the claim lacks credibility and is incompatible with the rest of their supply-side plans.  If Doug Holtz-Eakin sees any potential compatibility rather than incompatibility, his quote still reveals him to be (at least in his current incarnation) a supply sider more than a deficit hawk, through the causal relationship he describes:  strong economic growth reduces deficits.  How would I, a true “fiscal hawk,” put the compatibility differently?  This is what I would say:

“You’ll never have strong economic growth, without thoughtful deficit reduction” (EconomistMom says).

See the difference?