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The Congressional Budget Office’s new budget and economic outlook is out, and as usual, it really doesn’t seem all that bad when you look at their “baseline” numbers.  (Deficits as a share of GDP over the next ten years are still at economically sustainable–less than the growth rate of the economy–levels.)  Oh, except that the CBO baseline is (by law) a projection of current-law policies, which assume a lot of very optimistic (some might say “delusional”) things about Congress’s proclivity toward fiscally responsible behavior.

You see, in current law there are lots of costly policies that expire after a year or two…or nine, or two–as in the 2001 Bush tax cuts which were first scheduled to expire at the end of 2010 and now again are scheduled to expire at the end of 2012.  Expiring tax cuts have been the most fashionable way to deficit spend in this town ever since.

In their budget outlook, CBO assumes any tax cuts scheduled to expire actually expire.  That could mean CBO’s assuming they will actually expire, or it could mean (more realistically but still very optimistically) that if Congress and the president extend the tax cuts in the future, that they will fully offset their cost, by cutting spending or raising other taxes–a novel concept known as “pay as you go.”  Once upon a time, Congress followed strict pay as you go rules–on both tax cuts and mandatory spending–and they complied with discretionary spending caps, too.  By the way, that was the last time we were actually running budget surpluses, at the end of the Clinton Administration.

Now Congress prefers to make policies look less costly by making them “temporary,” with official expiration dates that CBO has to officially score as being less costly because they (are supposed to) expire.  But a more realistic “business as usual” projection would assume that these previously-always-extended-and-deficit-financed tax cuts will continue to be extended and deficit financed.

Enter the Concord Coalition’s “plausible baseline” (illustrated above), which we’ve been calculating for many years now, and which has told (really) the same old story for many years now, just the numbers keep getting worse because the fraction of the tax cuts that are on unofficial time (past expiration dates) vs. official time keeps growing.  Every year it seems that the multiple of the deficits under Concord’s plausible baseline relative to those under the CBO official baseline keeps swelling.  Last year I remember saying that the plausible baseline’s deficits were triple the CBO deficits.  This year it’s closer to quadruple.

Most of the $8.7 trillion ten-year difference, $6.5 trillion, is due to tax policy.  The (expiring) Bush tax cuts and associated Alternative Minimum Tax relief alone account for over $4.5 trillion of the difference, even without associated interest costs.  (With interest, the deficit-financed extension of the Bush tax cuts and AMT relief would add almost $5.4 trillion to the ten-year deficit numbers.)

Some of you might remember what the so-called “super committee” was trying to do: they were trying to “go big” and find, hmmm, maybe $4 trillion worth of deficit reduction relative to the “business as usual” or “policy-extended” baseline.  The “go big” solution is that which most economists feel is necessary to get deficits back down to economically-sustainable levels… like those very ones that are shown in this new CBO report.  So that would have been a piece of cake for the super committee–or anyone else in Congress who might want to be a fiscal superhero–if they just looked at the CBO baseline and figured out how to stick to it.  (Hint: PAYGO.)

So there’s not much new here.  The CBO report still provides us with a fiscal roadmap with one very clear route highlighted as the fastest one to the land of sustainability.  All the road signs point clearly to that one route, but all the policymakers keep missing that turnoff ramp, over and over again.  And none of them really want to talk about it.

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***Addendum:  Here’s the Concord Coalition’s press release on the CBO report.

It’s a proposal that has come up over and over again in President Obama’s budget, and one that I hope will come up yet again.  In my column in today’s Tax Notes (subscription-only access here), I remind readers that this is a great idea whose time has (been overdue to) come: the proposal to limit itemized deductions–to either 28 percent (the President’s version) or 15 percent (the more aggressive version suggested by CBO’s budget options volume). I like it because it’s a proposal to raise a lot of revenue (and reduce the deficit), yet by reducing a large tax expenditure in a progressive way.

How much revenue would the proposal likely raise?  A lot.  I refer to CBO estimates:

The CBO estimates the president’s proposal would raise $293 billion over 10 years. A more ambitious version limiting itemized deductions to a 15 percent rate, as presented in the CBO’s compendium of budget options, would raise $1.2 trillion over 10 years — in other words, equivalent to trimming overall tax expenditures [which are over $1 trillion per year] by about 10 percent through that one policy change alone.

A lot of people get confused about this proposal, thinking that it eliminates the tax subsidy for households above the limiting bracket, but it does far from that.  It only limits the size of the subsidy so that the richest households don’t get the biggest subsidies per level of the subsidized activities (in both percentage terms and dollar terms), which makes the proposal a very “progressive” way to reduce a (huge) tax expenditure.  Right now the subsidy is a regressive one, because for any given level of subsidized activity, higher-bracket households get the biggest subsidies.  I constructed the table above to make clearer how that upside-down subsidy works, and how the limit would level at least part of it–the upper end–out.  These proposals would not get rid of the regressivity below the limiting bracket, however, which could only be achieved if we went all the way to converting the deduction to a (refundable) credit.  Ideally, I would like to see all deductions converted to credits, but limiting deductions to 28 or 15 percent is a good step along that policy path.

And to counter arguments that this would kill the economic activities currently subsidized by the (full) itemized deduction, well, the evidence is actually very inconclusive about how much this tax subsidy actually makes a difference in the level of the subsidized activities (charitable giving, borrowing for homeownership), because it is always difficult to distinguish between real behavioral responses versus tax-strategic ones.  Often these tax subsidies just reward behavior rather than influence it, or they encourage something that is not quite the lofty social goal that policymakers had in mind.  As I point out in my column:

Assuming that the goal is in fact to encourage and steer resources to the activities that are subsidized, the case for the effectiveness of this particular form of subsidy depends on how much more responsive higher-income households are to the [price incentive] effect than are lower-income households. This is an empirical question that’s difficult to answer from the data because high-income households with the biggest price subsidies are also those with the greatest income capacity (who might donate the most to charity or buy the largest houses regardless of the itemized deduction). And while the evidence that’s out there shows some price responsiveness, it’s not always clear that it’s the type of responsiveness we would want. A larger charitable deduction might encourage more reported giving without increasing real giving, and a larger mortgage interest deduction might encourage people to buy larger houses rather than helping them to buy any house. And all of the deductions may merely reward behavior that would have taken place anyway.

So I put out my column as my strong endorsement of this proposal. The bottom line is that this is a way to raise substantial revenue from only higher-income households and would actually improve economic efficiency (reduce the distortions caused by the tax subsidies).  It’s a base-broadening, revenue-raising, deficit-reducing, yet government-shrinking proposal.  It’s consistent with the fiscal policy goals of both Democrats and Republicans.  It would also be a piece of cake to implement, unlike other base-broadening proposals that have similar economic advantages.  Why don’t we just do it, finally?!!

The Washington Post’s Ruth Marcus points out that if Mitt Romney really cares about the poor, he has a funny way of showing it–in this case, regarding his ideas for fiscal policy reforms:

“I’m concerned about the poor in this country,” Mitt Romney said the other day. “We have to make sure the safety net is strong and able to help those who can’t help themselves.”

I perked up at those words, because they were something of a departure from his usual stump speech and because they happened to come on a day when I had written about the dire implications of Romney’s proposals for the social safety net.

I don’t question his sincerity. The problem: This fine sentiment doesn’t square with his actual policies…

The impact of Romney’s approach on the safety net would go far beyond Medicaid. The brutal arithmetic of his stated plan to cap spending at 20 percent of gross domestic product — while, unlike Ryan, increasing defense funding — is that safety-net programs would have to be chopped significantly beyond where even Ryan would take them.

Romney’s tax plan would exacerbate the unfairness. He would continue the Bush tax cuts for the wealthiest Americans and provide extra breaks that would primarily help the rich…

At the same time, Romney would do away with recent increases in the child tax credit and the earned-income tax credit — provisions that help low-income families…

This is one way to make the necessary tough choices regarding the federal budget:  if we choose to keep taxes low and defense spending high, the rest of the budget has to give.  There’s a lot to be said for a politician being clear about his priorities and spelling out the policies consistent with those priorities.  But as Ruth points out, the consequences must be spelled out, too:  you can’t cut spending on the poor that dramatically and expect that the poor will be better off.  To do so is either the result of delusional beliefs about extreme “trickle down” economics, or a grossly exaggerated view of how much truly “wasteful” government spending now exists–unless one’s definition of “waste” is simply “that which does not benefit me personally.”

Well, this is going to raise some voters’ eyebrows:

“What’s the effective rate I’ve been paying? It’s probably closer to the 15 percent rate than anything,” Romney, a GOP presidential candidate, said. “My last 10 years, I’ve — my income comes overwhelmingly from some investments made in the past, whether ordinary income or earned annually. I got a little bit of income from my book, but I gave that all away. And then I get speaker’s fees from time to time, but not very much.”

(The “not very much” in speaker’s fees is apparently more than $360,000, by the way.)

Besides being good negative gossip on Romney, though, perhaps it will be a teaching moment for all of us about tax policy more generally.  It underscores the fact that even the preferential rate on capital gains and dividend income, even though it seems more an issue about tax rates than tax base, is a big tax expenditure–a big way we “spend” money via the tax code.  Relative to a comprehensive income tax base where all forms of income are taxed at the same rate, the lower rates on capital gains and dividends result in well over $100 billion a year in lost revenue.  (See Table 17-3 in the revenue section of the analytical perspectives of last year’s budget and note that just the first three capital gains provisions add up to $135 billion for just fiscal year 2012.)  So besides the distributional implications that are already unsavory, there are the budgetary implications that should make us question whether these tax preferences are worth their cost.

So let the gossip and thoughtful conversations begin!

In my column in this week’s Tax Notes–in which Grover Norquist has been named 2011 “tax person of the year,” by the way (more on that later)–I list a few new year’s resolutions for tax policy (emphasis and brief descriptions added):

[Here are] some New Year’s resolutions for those who make, study, and care about U.S. tax policy: (1) don’t view tax policy in a vacuum [recognize the interaction of tax policy with the rest of the federal budget and government's role in general]; (2) plan ahead for expiring provisions [look ahead to what's coming due in the next year, and start the policy debates and analysis now rather than in the 11th hour]; (3) accurately analyze short-term versus longer-term economic effects [how are the considered policies helpful or harmful to the economic goals of highest priority?]; (4) set revenue targets and stick to them [use the budget process and budget committees to bring tax policy into the deficit reduction effort]; (5) treat tax expenditures more like expenditures [recognize they're more like spending-side subsidies than simple tax cuts, and scrutinize them to evaluate whether their benefits are worth their costs]; (6) don’t be hypocritical about fiscal responsibility [don't fuss over the small-change items while giving a huge pass to the big-ticket ones]; (7) don’t be so afraid to agree with the other side [there's huge bipartisan common ground on goals for tax and fiscal reform if policymakers would only stop picking fights]; and (8) get specific about good tax policy [study, analyze, and better promote the specific tax policies that experts recognize as economically smart so that policymakers are forced to notice and respond].

Note that this list is more broadly applicable to fiscal policy–tax and spending–more generally, but I was writing for Tax Notes, of course.

The biggest item on this year’s expiring tax provisions list is of course (and yet again) the Bush tax cuts–or as I sometimes refer to them, the Bush/Obama tax cuts.  Who knows, if policymakers keep doing the same old thing with them, by next year they could become the “Bush/Obama/Romney [or Santorum or Gingrich or Paul]” tax cuts!

My Tax Notes column reprinted the CBO table above, just to highlight the point that these expiring tax cuts–just the ones set to expire by the end of this year–are worth $4 to $5 trillion over the next ten years, without interest costs.  (Remember the “go big” goal?)

Happy New Year to my EconomistMom readers!  More from me later this week.

In my latest column in the Christian Science Monitor, I complain about how our politicians often take extreme positions and claim they’re just representing the best interests of their constituents.  Like when Republicans (egged on by anti-tax lobbyists) claim that tax increases on the rich will kill the economy, or when Democrats (threatened by organizations like AARP) claim that Social Security recipients oppose Social Security reform.  I end with a favorite quote from Concord Coalition co-founder Paul Tsongas:

[T]he budget battles in Washington seem more to do with the fictional scripts inside politicians’ minds than the actual opinions of the voters. When the late Sen. Paul Tsongas helped start The Concord Coalition in 1992, he explained its grass-roots mission this way: “We are better than what we are being asked to be by our leaders.” It’s clear we still need to keep telling our leaders to live up to their duties – and our ideals.

I’m busy with holiday preparations, and frankly, there’s not much to say of substance about the (still depressing and still unresolved) payroll tax cut issue, but I thought I’d point readers to Washington Post fact-checker Glenn Kessler’s compilation of  “the biggest Pinocchios of 2011.” Glenn has a really nice defense of fact checking as a profession which makes me feel a kinship to him; those of us who advocate for fiscal responsibility are often attacked from both sides, too.  An excerpt from his “My name is Glenn, and I’m a fact checker” introduction:

My colleague Ezra Klein even opined that “the ‘fact checker’ model is probably unsustainable,” based on the questionable belief that “half of the public leans towards one party and about half of the public leans toward the other” and thus will tune out commentary with which they disagree. That’s a pretty depressing commentary on the state of our politics. Thankfully, it bears little relationship to the reality we experience every day at The Fact Checker. 

Yes, there are always partisans who, day after day, accuse us of either being left-wing hacks or right-wing crazies. But there are also many people who, every day, write notes of thanks–for explaining a difficult subject, opening their eyes to a new idea or providing the facts to a claim that had confused them. Many Americans are asking for more information, not less, and we are happy to help fill the void.

Some people are always going to be partisan. That fine, but that’s not the role of a reporter. We value the many comments we have received from our readers, the words of encouragement and also the criticism. Every day, we seek to live up to your expectations of a true, impartial seeker of the truth.

In fact, there is this strange myth out there that fact checkers aspire to be “referees” and strain to achieve a balance between the two parties. Not so. At The Fact Checker, we take a holistic approach to every fact we check. After more than 30 years of writing about Washington institutions, we truly find there is little difference between Democrats and Republicans in terms of twisting the facts and being misleading when it suits their political purposes.

You go, Glenn!  Keep handing out those Pinocchios!

The Washington Post’s Chris Cillizza stated the obvious in Sunday’s Washington Post:  “Congress is unpopular.”  And deservedly so, because as Chris explains (in print but also in a nice video on that web page):

Saying that Congress is unpopular is kind of like saying that water is wet or that big-time college football is corrupt. It’s so obvious as to be assumed. And yet, in 2011 Congress managed to underperform even the low regard in which the American people hold it.

It wasn’t just that lawmakers didn’t do much in 2011. It was that they didn’t do much in a year in which the economy continued to struggle, the nation’s collective anxiety soared and, for the first time in modern memory, our fiscal foundations seemed genuinely shaky.

The mismatch between the bigness of the country’s problems and the smallness of Congress drove the institution’s approval ratings down to used-car-dealer (or even journalist) levels.

Chris goes on to boil down the major failures of Congress this year to three areas:  (1) the budget “deal” in the spring; (2) the debt-ceiling “debate” in the summer; and (3) the (not so) “supercommittee” in the fall.  From my perspective, in all three cases: (1) the Obama Administration led by talking about the need for a “balanced” approach to deficit reduction that would involve both revenue increases and spending cuts (their “opening bid” effectively representing the compromise position they hoped to ultimately reach); (2) Republican leaders took a hard line position (pretty much “bullying”) on their Grover-mandated “no new taxes” stance; and (3) the Democrats in Congress and the Administration then cried “no fair, you mean bullies!”–but ultimately caved in and agreed to spending cuts only.

And now it’s gotten so bad that the two sides can’t even agree on passing a deficit-financed tax cut, the only kind of policy that we’ve seen them have no trouble agreeing on over the past, um, decade or so.  House Speaker John Boehner explains that the Senate-passed two-month (only) extension of the payroll tax cut does not provide Americans with the kind of “certainty” they need.  He’s right that the temporary extension is just another installment of kicking the can down the road, but Americans are very used to that kicking of the can.  I think Americans are more freaked out about the potential that Congress won’t even manage to kick the can–that they’ll miss it all together while they bicker for bickering sake–and we’ll all end up flat on our assets (and the body part that sounds like that).

(Hence, the Charlie Brown cartoon; just substitute “football” for “can.”)

Here’s a blog post of mine just published over on Concord’s blog, The Tabulation; I’m cross-posting it here:

The current debate over extending the payroll tax cut well demonstrates that policymakers often mean different things when referring to policies that “help” or “expand” the economy. I often hear the words “stimulus” and “growth” used interchangeably, but when economists use them, we typically are making a distinction between different economic goals that apply to different circumstances.

“Stimulus” usually refers to short-term policies to increase demand for goods and services in an economy  operating at less-than-full capacity — i.e., an economy with high unemployment. In such a recessionary economy, the problem is not a lack of productive resources (capital and labor), but a lack of demand for the goods and services that those resources produce. Under such conditions, public sector deficits — whether through tax cuts or direct spending — can be an effective way to increase demand (consumption) and the level of economic activity.

“Growth” usually refers to the long-term expansion of the “supply side” of the economy — that is, the supply of capital and labor. When the economy is at “full employment,” the binding constraint on it is not the demand for goods and services, but the supply of inputs to production. Fiscal policies that are good at growing the economy over the longer term are therefore those that encourage greater educational attainment, labor force participation, and saving. Instead of the recessionary goal of increasing consumption, we want the opposite over the longer term: We want to increase saving. Reducing tax rates is often emphasized as a good “supply side” policy because raising the net-of-tax return to working or saving can improve the private sector’s incentives to supply these resources. But any deficit-financing of such policies is counterproductive in dollar-for-dollar reducing the public sector’s contribution to national saving.

In the debate over the payroll tax cut, we are hearing arguments from both sides that muddle the distinctions between short-term, demand-side stimulus and longer-term, supply-side growth. Many Republicans argue that the payroll tax cut is not an effective way to expand the economy, but they are probably measuring it against their favored supply-side yardstick. The Congressional Budget Office (CBO) shows that a payroll tax cut is one of the most effective tax cuts in stimulating demand for goods and services in a recessionary economy — not as effective as direct spending on unemployment benefits but still far more effective than high-end income tax rate reductions.

Both Democrats and Republicans seem torn about paying for the payroll tax cut, for probably different, yet both valid, reasons. Democrats don’t want to offset the cost with immediate spending cuts that could largely negate the short-term stimulative effect of the tax cut. If spending cuts are fairly immediate and significantly affect lower-income households, they would likely offset the stimulative effect of the tax cut. Republicans don’t want to offset the cost with other tax increases because they worry that supply-side incentives would worsen. These concerns are legitimate when the offsetting tax increases stretch into the longer term (after the economy gets back to full employment) and to the extent that the tax offsets adversely affect the returns to working or saving.

As the Concord Coalition has emphasized many times before, it is possible to effectively stimulate the short-term economy while being fiscally responsible about the longer term. Deficit financing should ideally be limited to short-term policies that have high “bang per buck” in increasing demand for goods and services. Longer-term policies designed to grow the supply side of the economy when it is back to full employment ought to be paid for in ways that protect the incentives  to work and to save. And any offsets to the cost of stimulus policies should be designed to have minimal damage to short-term demand — by steering the burdens toward higher-income households or stretching the offsets over the longer term.

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Postscript:  To these issues of the stimulative effect of the payroll tax cut and whether and how the costs are offset, I’ll be adding the additional confusing issue of how the payroll tax cut affects the Social Security program–short answer, “not”–in my next Tax Notes column.

(video from Mediaite.com)

Back in October, CNN’s Erin Burnett interviewed Sesame Street’s Elmo, getting his advice on how Congress might actually stop bickering and get their work done. (CNN replayed this interview recently following the super committee’s disappointing failure.) From the CNN transcript of the original airing:

ERIN BURNETT, HOST, CNN’S “ERIN BURNETT’S OUTFRONT”: Elmo, you could solve the world’s problem right now.

ELMO: Really? How?

BURNETT: OK. So, in Washington –

ELMO: Yes?

BURNETT: — everybody hates each other. Nobody will do anything together.

ELMO: Really?

BURNETT: And it’s hurting America. How do you fix it, Elmo?

ELMO: Play dates.

BURNETT: Play dates?

ELMO: Yes, everybody has play dates.

BURNETT: Like put a Democrat and Republican play date?

ELMO: Play dates.

BURNETT: Harry Reid, John Boehner, play dates?

ELMO: Yes, play dates. And everybody brings their own food.

BURNETT: OK. Yes.

ELMO: And they have to sing songs.

BURNETT: I think that might solve it. It’s better than anything we tried so far, Elmo.

This reminds me of the Concord Coalition’s new “Two by Two” initiative, where–as Bob Bixby explained, also back in October (anticipating, like Elmo, that the super committee in the end would not play so well together):

Just as they did for the State of the Union Address, members of Congress should pair up. They should join together in “two-by-two” fiscal forums in which they present agreed-upon facts and engage with each others’ constituents about policy options. Public engagement is of little value if it just means listening to people who already agree with you…

Any number of formats could work so long as the goal is to broaden understanding of the issues and seek consensus solutions – and not to score a partisan “victory.”

A good example was set earlier this year by Senators Mark Warner (D-Va.) and Saxby Chambliss (R-Ga.), who held joint forums in Richmond and Atlanta. And this is just one model. Over the past six years, The Concord Coalition has brought together analysts and political leaders of diverse perspectives on our “Fiscal Wake-Up” and “Fiscal Solutions” tours.

Audiences across the country have been very receptive. They often express the wish that their political leaders would talk about the issues with the same appreciation of each other’s point of view. More importantly, audience members begin to accept the need for compromise.

The public is hungry for a nonpartisan dialogue on such big issues as the long-term fiscal challenges, and elected leaders need political cover to “do the right thing.” Two-by-two forums fit both needs. Indeed, if President Obama and Speaker Boehner had made their case for a “grand bargain” to the American people instead of vetting it with other party leaders, they surely would have found a more receptive audience.

In other words, playdates with “parallel playing” are not enough. You have to communicate and engage with your playmate–find out what toys and games he likes and what he does not, reconcile those preferences with yours, and find ways to play together that make both of you happy. As all parents and preschool teachers know, moving on from the parallel playing mode takes some maturity–getting beyond the “terrible twos” actually. We’ve been talking about the need for “adult conversation,” but maybe we can set the bar even lower for starters and just try to get past the temper tantrums!