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Monthly Archives: February 2013

Just about everybody is familiar with the bureaucratic concept of “turf.”  As in, “That’s my turf.”  In other words, stay off.

However, experience indicates that there is an associated bureaucratic concept which is much less widely recognized: “grass.”  As in, “That’s my turf – so don’t you tell me that I need to cut the grass.”

Both “turf” and “grass” are at play in the current high-level dispute over the sequester of federal spending.  It is worth a review of the bidding thus far.

The sequester was written into law in the debt-limit deal of August 2011.  It was intended to be a fail-safe device in case the so-called “Supercommittee” failed to achieve its goal of $1.2 trillion of budget savings.  The Supercommittee duly failed.  The sequester was postponed from the beginning of this year to the beginning of this March – i.e., Friday.  The two parties in Washington argue over whose idea it was, who voted for it, and whose intransigence is causing it now to appear inevitable.  Those questions may be of academic interest, but not much more.

The importance of Who Shot the Federal Government As We Know It is limited because there is little dispute that the sequester is a Bad Thing.  Oh, there are some who say that there is a debt crisis going on, and so we must cut something.  But just about everyone recognizes that the sequester will not solve the problem.  More specifically, even those who would accept the sequester with the least remorse understand two facts:  First, if we do not have the sequester, the federal government’s finances will explode without fundamental reform of health care.  And second, if we do have the sequester, the federal government’s finances will explode without fundamental reform of health care.  The sequester will only buy time.  A little.

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In his State of the Union address, President Obama proposed to increase the federal minimum wage, from its current $7.25 per hour to $9.00 per hour.  So, in the words of the old union organizing song, “Which Side Are You On?”

It is an easy call if you are either (a) a strict libertarian or (b) an enthusiastic advocate of the less fortunate with limited concern about the scarcity of resources.  (If you belong to both of those groups, there is little advice that I can offer.)  However, in between those poles of opinion, things become rather murky, rather quickly.

In fact, the opening question emphasizes that policy analysis is hard to convey using spirit-rousing songs.  The reflex thought of what music would characterize analysis of this issue led me to Béla Bartók’s “Music for Strings, Percussion and Celesta,” which is typically played with two small string orchestras – divided by the percussion instruments – sitting on the opposite sides of the stage, spending about half of the piece shouting back and forth at one another.  (This is not to put you off if you have not heard the piece.  I enjoy it – which may be a predisposition, in that Bartók attended high school in the town where all of my grandparents were born and grew up, and at about the same time.)  As in the minimum wage debate, there are arguments on both sides, and the argument often becomes quite intense.

To start with the philosophical debate, but postponing the empirical question of results:  Libertarians tend to oppose restraints on voluntary agreements among responsible persons.  If a prospective worker finds it advantageous to offer labor at a low wage, and a prospective employer is willing to accept that offer, there is no reason for government to interfere.  Those who take the other side argue that such agreements are the result of unequal power, and facilitate injustice and abuse.

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Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances.

President Barack Obama
The State of the Union Address
February 12, 2013

Many years ago, a seasoned Capitol Hill professional cautioned me about giving any questionable number to a politician.  Many have fly-trap minds, and once you put something in, you never can get it out.  Any nuanced but only partially understood fact, like a discount-store blowtorch, could be misused with considerable ill effect at some later moment.

This bit of wisdom comes quickly to mind when one hears the current buzz about a mere $1.5 trillion of deficit reduction over ten years ending our budget woes.  Some reach that number by the roughest of arithmetic; others use more sophisticated analysis, and even provide important and subtle caveats.  But the number, even though it has some limited use, already has left the corral of qualification and analysis far behind.

The simple way to reach that number is the way the President did.  Three years ago, Erskine Bowles and Alan Simpson characterized our fiscal plight with a calculation that $4 trillion of deficit reduction would “stabilize the debt.”  As the President noted in his remarks, some have estimated subsequent budget action to have achieved $2.5 trillion of that.  $4 trillion minus $2.5 trillion equals $1.5 trillion, under either OMB (Office of Management and Budget) or CBO (Congressional Budget Office) scoring.

That little inside-Washington joke is not really a joke, however.  Bowles and Simpson’s $4 trillion was derivative of many complex and controversial assumptions, and was calculated at a particular time.  Let’s review the numerical spreadsheet, and its even-more-subtle and important conceptual underpinnings.

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As of last week, the danger in the new Congressional Budget Office (CBO) deficit outlook released on Tuesday was that it might lull some people into a false sense of security.  As it transpired, the good news was that there was so little good news that it was unlikely to distract many people from the bad news.

The headlines picked up that the deficit this fiscal year is likely to fall below $1 trillion for the first time since 2008.  Those looking energetically for sunshine would point out that the deficit in 2015 under current law is projected to fall to only $430 billion – a number that would have struck terror in the heart when I was a mere lad (of 40 or so), but that today looks surprisingly reassuring.

However, that is where the good news stops.

The budget deficit is projected to rise after 2015, reaching $978 billion – just short of that $1 trillion bogeyman – in 2023.  The debt relative to the economy would hit a peak of 77.7 percent of GDP at the end of 2014, then fall slightly to 73.1 percent at the end of 2018, but then climb again to 77.0 percent at the end of 2023.  So at that point, debt and debt service would be piling up on one another in a potentially never-ending spiral – which would prove very painful to stop, the longer we allowed it to build its own momentum.

Of course, CBO makes clear that their budget outlook is not a prediction strictly defined, but rather a projection of what would happen if current law remains unchanged and the economy precisely follows the forecast.  And that leads many folks to ask:  What are the major risks (using that term neutrally, meaning reasons why it could be better or worse) to that projection?  Given that the numbers are on their face troubling, is there a significant chance that we might be saved from that adverse outcome without taking action?

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