The federal budget outlook has improved over the last year. The budget always moves with the economy, and there is a tendency for the numbers to move more than had been projected when a business cycle bends around a turning point. There are reasonably predictable relationships among output, employment, wages and profits, but financial market valuations and the incomes that flow from them are a bit of a wild card. For whatever reason, the swings in those incomes always tend to be sharper than the budget mavens expect when the economy changes direction — more sharply upward in good times, more sharply downward in bad times.
So right now we are in an upswing, and that is good news. However, every now and then the hosannas seem to be just a bit louder than appropriate. It may be useful to try to put the recent changes into context.
Last week, the White House released its annual Mid-Session Review of the budget (which I will call the MSR out of habit). It surprised most of the old budget hands in Washington – because it came without fanfare, it was actually early (the statutory due date is July 15), and for several years it has been delivered late (as was this year’s full budget). One element of the rollout that wasn’t much of a surprise was that the news surrounding the document sounded good. The story was that the deficit is down significantly from what had been expected, and that the outlook is for continued improvement. In fact, in just a couple of years, the annual deficit would decline sufficiently for the debt to begin to shrink, and to continue shrinking, relative to the size of the economy. At least, that was the spin on the document, that was what the press reported, and that was what most people heard.
As most of you would suspect, the superficial stories in the press put too much gloss on the true picture. Though we have been over this general territory before, the MSR is an important part of the annual budget process, and the interpretation of this year’s release could have significant influence on the public mood on this issue. So just to be sure, I’ll give you a rundown on some of the details. To summarize, the headlines focus solely on the very near term to the exclusion of the future (which is what the budget is really all about), and miss the subtleties of what the MSR and the Administration’s budget document really are. By the time we are done, you likely will take only the most limited comfort in the new information from the White House, and your concerns for the long run will be, if anything, a little greater.
There is no live option. In fact, all the options are dead on arrival. At this moment, there is no politically viable idea for addressing the nation’s looming budget problem.
So in a world of dead options, the task is to find the option that is least dead, and pump some life into it. That is why, several months ago, CED suggested the strategy of “saving Social Security first” [see here for a blog post on this topic, and here for a statement from CED's Trustees] to begin the difficult process of turning the nation’s rising debt burden around.
With the recent release of the revised budget outlook by the Congressional Budget Office (CBO), Washington’s interest in hard choices has waned even further. The deficit is projected to decline in dollar terms for two more years; the debt will fall as a share of the GDP from 2015 through 2018 – that is, until three elections cycles from now. The mentality of the body politic is to ignore such a long-term issue. After all, it might just go away.
So this blog post will put these two factors together. The budget problem is in remission, but not cured; and that makes the approach of fixing Social Security as a first step even more appropriate.
So point one: Why should the nation still be concerned about fiscal responsibility, even after CBO reduced its estimates of future deficits? Here are three simple reasons:
One can enunciate any number of criteria by which to judge this week’s budget resolution drafts from the House and Senate Budget Committees. But they all boil down to one: Do they help to solve the nation’s long-term budget problem?
And that is not to ask whether, if enacted, they would solve the problem. It is, rather, whether they move us toward enactment of a budget plan that will solve the problem.
By that simple, meaningful standard, the answer thus far is no; there is no reason to expect any positive movement resulting from the release of the two resolution drafts. (The House Budget Committee resolution draft was announced on Tuesday, though what was made public was a backup document, not the resolution itself. The resolution, with plenty of blanks for numbers not yet determined, came today. The Senate Budget Committee has not yet released its version; but by all accounts, the Senate resolution draft will not move us forward either.)
In fact, the lingering question is whether the net effect of all of the new paper might actually be retrograde. In this implicit, slow-moving negotiation, these two resolutions definitely are first offers, not at all best-and-final submissions. And they might even have a little of the air of insult first offers – where two sides who are obligated to negotiate for purposes of appearance go through the motions and put knowingly unacceptable gestures on the table to justify an end to the charade.
In sum, neither side will see anything that they have not seen already; and what they have seen already has not closed a deal. There is no reason to expect anything new or different going forward, barring some unexpected development.
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.
When I left the Office of Management and Budget after eight years, I e-mailed all my colleagues (then and still among the best public servants in the country) that after all of that experience and hard work, I had the OMB thing nailed. If you want to be successful here, I told them, just follow two simple rules:
- Don’t sweat the small stuff; and
- The devil is in the details.
Similarly today, if you believe some of the commentary about what appears to be an impending budget deal to forestall the “fiscal cliff,” our elected policymakers should follow just two simple rules:
- Get a deal that does as much as you can; and
- A bad deal is worse than no deal.
Clearly enough, in this instance as well as the earlier one, you have to choose your rule. And in this instance, I vote for rule number one – noting that it is not the end of the story.
There are still optimists in Washington. Many of them probably lean on the old adage attributed (probably wrongly) to Winston Churchill about “…after all of the other possibilities.” But we are running out of time, so we had better begin to discard those other possibilities at a faster rate.
One of the “other possibilities” would be the President’s insistence on increasing tax rates in the highest brackets of the income tax schedule. The President isn’t alone in this focus on tax rates; Nate Silver of the New York Times, who earned plaudits for the accuracy of his analysis of the presidential race this year, weighed in along the same lines on a rumored congressional proposal.
Hitherto, the standard position on both sides of the aisle with respect to taxes as a part of deficit reduction has leaned strongly toward tax “reform.” The word “reform” can mean anything that anyone wants it to mean, of course. But if the word has borne any content at all with respect to taxation, it has meant “broaden the base, and lower the rates” — in other words, close or narrow selective tax preferences, and use the resulting additional revenue to reduce tax rates for everyone.
Tax reform for deficit reduction, however, could reduce tax rates to give back only some, not all, of the revenue gained by cutting back tax preferences. The rest of the revenue gained would be kept by the federal government to reduce the deficit. (Some would assert that the rate reductions could return all of the revenue gain using static scoring, but that taxpayers would work harder and invest more, which would result in more revenue being collected at the end of the day — the classic argument for dynamic scoring. Large deficits in the 1980s and in the decade of the 2000s make that proposition suspect.)
But earlier this week, Senator Charles Schumer (D-NY), who has become involved in the “Gang of Six (or Eight, depending on who is counting)” budget discussions in the Congress, made a contrary speech. Senator Schumer says that Congress should give up on reducing tax rates, and instead use any tax-preference cutbacks purely to raise more revenue. He concludes that this path will be more likely to reduce the deficit, and will be better for the middle class.
After the election campaign, the nation likely will turn in one way, shape or form to dealing with the budget. Several analysts and bipartisan groups have had their say on what the ultimate plan should be. Among those statements is a paper by Andrew G. Biggs, Kevin A. Hassett and Matthew Jensen of the American Enterprise Institute, entitled “A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked.” This paper, released in December 2010, has received an enviable amount of attention for a fairly technical enterprise.
To tell you what I am going to tell you: The authors argue that the United States should reduce its deficit much more (they pick 85 percent) by reducing spending, and thus much less by raising revenues, than the most widely recognized bipartisan plans (which are at about 50-50). I think they overplay their statistical hand. This post gets a bit nerdy, but in my view the reasoning comes down to a fairly fundamental issue. So all but the faint of heart, please read on.
Over the last 72 hours, former Florida Governor Jeb Bush has done a messaging tap dance. First he made comments about the political behavior of former President Ronald Reagan and also his own father, former President George H.W. Bush. But then Governor Bush made a more-current substantive statement: that he would accept a deficit-reduction deal that included ten dollars of spending cuts for every one dollar of tax increases.
For that, he was immediately castigated by members of his own party. Among them, Republican activist Grover Norquist criticized Governor Bush by saying that “…he thinks he’s sophisticated by saying that he’d take a 10:1 promise. He doesn’t understand — he’s just agreed to walk down the same alley his dad did with the same gang. And he thinks he’s smart. You walk down that alley, you don’t come out. You certainly don’t come out with 2:1 or 10:1.” Norquist’s organization, Americans for Tax Reform, posted a statement saying that “When bipartisan deals are struck promising to cut spending and raise taxes, the spending cuts don’t materialize but the tax hikes do.”