James Pethokoukis

Politics and policy from inside Washington

Study: U.S. budget deficit could average $1.4 trillion a year for a decade

Aug 26, 2009 19:44 UTC

Change a few assumptions and those government budget forecasts start to look scary. The Concord Coalition makes a few tweaks to the Congressional Budget Office model:

1) The Concord Coalition takes the CBO baseline and adjusts it to assume appropriations increase at the same rate as the economy (GDP growth). This increase is closer to the historical average rate of increase.

2) We also assume that supplemental appropriations do not continue indefinitely. For recent appropriations for the wars in Iraq and Afghanistan, we include realistic estimates from CBO about how much will be spent under a scenario where troop levels slowly decrease to about one-third of their level at the time of the estimate.

3) For taxes, we assume that all of the major tax cuts will be extended beyond 2010.

4) We also assume the one-year patches to the Alternative Minimum Tax will continue to be enacted, holding the level of taxpayers hit by the tax roughly constant throughout the baseline period.

5) Finally, we include a calculation for the increased debt service (interest payments) that these policies would cause by their increasing the deficit. We do not make any changes to CBO’s economic assumptions.

And here is what all that looks like as a pretty picture:



Maybe, the deficits could be raised from 1.4 to 14 trillion a decade, so that the Americans sustain their living standards without any need to work. This path is also suggested by the fact that the year 2010 in the graph has been upgraded to 20010. :-)

America’s perilous fiscal future: slow growth, high taxes

Aug 26, 2009 19:18 UTC

Howard Gleckman over at TaxVox does a great job on the new government budget forecasts. This is my favorite bit (bold is mine):

Even once the economy gets back on its feet, the White House projects spending will settle in at about 23 percent of Gross Domestic Product. That is a substantial increase from the average of 19 percent or so in recent decades, and significantly more than estimated tax revenues. We can try to run deficits of 4 percent of GDP as far as the eye can see, but only if the Chinese continue to help out.

Finally, take a look at both CBO and OMB forecasts of long-term trend economic growth: OMB figures it will be roughly 2.5 percent once all the effects of the recession and the stimulus package wash out. CBO is even more pessimistic. These forecasts are not new, but they are worth keeping in mind. Over the next decade and beyond, the economy will grow significantly more slowly than in recent years, in large part because many more Americans will be retiring than joining the workforce. And that will put growing pressure on fiscal policy.

When Budget Director Peter Orszag and others talk about medical costs being unsustainable, this mismatch between health spending and economic growth is exactly what they have in mind. In the decade 1998 to 2007, both Medicare and Medicaid grew at more than 7 percent per year. And you don’t need to be an economist to understand what will happen if medical costs keeping rising at 7 percent while the resources to pay for them grow at only 2.5 percent.


I suggest we put the “Logan’s Run” scenario on the table to fix this issue.

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The worrisome relationship between a strong stock market and a weak dollar

Aug 26, 2009 18:22 UTC

The dollar drops and stock rise. If the dollar is supposed to be a reflection of economic strength, this should tend not to happen.  David Goldman find this weird, too — and then explains it:

Something ominous is at work here. Typically, a stronger dollar goes together with a stronger stock market. That is what we observe prior to the bank bailout last fall. Starting in the third quarter of 2008 and going to the present, the correlation turns sharply and persistently negative. A cheaper dollar means higher stock prices, as US assets are marked down for global investors.

What we have is not a stock market rally but an adjustment to global market prices. Fully 80% of the movement in the S&P can be explained by the movement in the dollar index.

That is a profile well known to emerging market investors. Whenever the Brazilians would pull another currency devaluation, stock prices rose to compensate, as tradeable assets floated up to world market prices. The bank bailout has made Americans poorer relative to the rest of the world and created the illusion of a stock market recovery.

That does not necessarily mean that inflation will return to the US, as some analysts believe. Foreign investors are not likely to buy homes in Cleveland (although the dollar devaluation certainly should help real estate prices in New York or San Francisco). And the combination of high unemployment and deferred retirement (greeter jobs at Wal-Mart will be in great demand) will keep wages down. The price of international tradeables, though, will affect US inflation, which is why I continue to recommend classic commodity hedges (including gold and oil) rather than TIPS.

Republicans, the carbon tax and the 2010 election

Aug 26, 2009 18:15 UTC

My pal and superbrain Jon Henke got all excited for a minute when he thought that U.S. Senate candidate in Connecticut Rob Simmons was in favor of a carbon tax where the revenue would be used to eliminate payroll taxes. But then the Simmons campaign clarified the matter:

Never mind.  See the comment section at the news article, where the Simmons campaign manager says “Rob Simmons does not support a carbon tax. He does believe that supporters of “cap and trade” should be more straightforward about their intentions and propose a carbon tax if that is what they desire so the American people can make a clear judgment about the consequences of such a policy – a policy Rob opposes.”

Me:  GOP congressmen Jeff Flake and Bob Inglis have come out in favor of just such a proposal, only to get hammered by anti-tax groups in private.  But as one Republican economist told me recently, GOPers need to get into the game on climate change. And certainly this is one way of doing it that looks proactive, besides either a) denying climate change or b) calling for greater technological research. Here is a bit more from Henke:

We could eliminate the payroll tax and take this environmental issue off the table for Democrats. But no, Republicans are content to keep the payroll tax and settle for complaining about Democrats.


The Republican economist is right: a revenue-neutral carbon tax could and should be supported by a preponderance of Republicans. It’s a shame, really, that many seem to choose political expediency over good public policy.

10 reasons why the next budget debate will be a doozy

Aug 26, 2009 17:57 UTC

Maybe it should be a trillion reasons. But budget guru Stan Collender paints a picture of the future:

But regardless of who is to blame for the deficit, there’s no doubt that it’s Obama’s responsibility to deal with it. That leads to the most important result of the mid-session reviews: it’s now far more likely that the fiscal 2011 budget debate, which will start next year when the president submits his budget to Congress in late January or early February, will be among the most difficult, vicious, and painful of any that has taken place in the past 30 years.

Here’s why:

1. It will be an election year

2. Partisanship in Washington is much stronger now than it was during any of the previously budget figthts. This includes the Gramm-Rudman-Hollings debate in 1985 and the Clinton-Gingrich debate in the mid-1990s that resulted in government shutdowns.

3. The deficit is much larger now both nominally and as a percentage of GDP than it has been since World War II.

4. The national debt is much larger now than it was when GRH was debated and Clinton and Gingrich sparred. The much greater interest being paid on the national debt will put far more pressure on all other spending in the budget and tax increases.

5. More than 50 Blue Dog Democrats will push the White House to deal with the deficit.

6. The deficit will be a big issue for the first-term Democrats who were elected from what had been Republican districts. They will be facing what could be the toughest reelection battles of their careers and will need to show their constituents that, because of them and their party, some progress has been made on the deficit.

7. The bond market will push for deficit reductions.

8. Foreign creditors, especially the Chinese, will push for deficit reductions.

9. Some on Wall Street and elsewhere will express extreme concern about inflation and interest rates stopping the recovery in its tracks unless deficit reductions are put in place.

10. Obama, who promised deficit reductions once the economy started to recover, will be hard-pressed not to live up to that promise. He will be pressured to do so by the Blue Dogs, many of which supported the White House this year because they were told that the deficit would become a front burner.

No trillion-dollar healthcare tribute for Kennedy

Aug 26, 2009 17:32 UTC

The pleas for politicos and pundits to refrain from politicizing the passing of Sen. Edward Kennedy are actually quite charming in their naivete. The so-called Last Lion of the U.S. Senate was not even dead half of a day when the politicking began. Proponents of Democratic efforts to reform overhaul America’s troubled healthcare system quickly began urging passage as a tribute to Kennedy’s lifelong efforts on the issue.

Just a small sampling: Sen. Robert Byrd, Democrat from West Virginia, said he hoped that when legislation has been signed into law, it “will bear his name for his commitment to insuring the health of every American.” Andy Stern, president of the giant Service Employees International Union, noted Kennedy introduced his first healthcare reform bill 39 years ago: “Let us continue his cause. Let us take action this year to pass healthcare reform.” And in the Twitterverse, influential liberal blogger Markos Moulitsas used 58 characters this way: “Honor Kennedy’s legacy by passing real health care reform.”

Maybe they could even call it the Trillion Dollar Tribute for Teddy. But it will take more than nostalgia and sentiment to get healthcare reform passed. A new survey from Public Opinion Strategies finds that just 25 percent of Americans favor President Obama’s proposals, comparable to the scant 23 percent who favored Bill Clinton’s healthcare plan in 1994 as it imploded. Betting markets put the odds of passage of a public option at just one in three. And in its lead editorial today, the Washington Post said the new budget deficit numbers mean the Obamacrats should start from scratch and develop a more affordable approach.

The cold, hard politics of the situation is this: Kennedy’s death makes passing healthcare reform tougher not easier. His seat will likely remain vacant until late January since there will be no interim appointment in Massachusetts and state law calls only for a special election to be held within 145 to 160 days. That is one extra tough-to-find vote Democrats will need if they try and shut down any GOP filibuster attempts. And if Democrats try to ram through a bill under reconciliation, a special budget procedure, Kennedy could have been helpful in rallying squeamish Dems and lobbying groups for the tough parliamentary battle, points out veteran Capitol Hill watcher Pete Davis, who tracks Washington politics for financial institutions.

But maybe as the Kennedy tributes continue to pour in, someone will notice his role in deregulating the transportation sector in the 1970s. As a result, both the trucking and airline industries were exposed to market forces that lowered costs for moving both people and goods across the country. Likewise, more fully exposing the U.S. healthcare system to market forces is essential to lowering costs and ensuring continued technological innovation. Now that would be a fitting tribute to the totality of the Kennedy legacy.


To see the true Health Care Tax forum you must stop thinking in 3-D,This multi tax forum is against a $100 Trillion Dollar system.. …
To force pay into another system of failures within Health Care Insurance Groups.
This economy will not balance with this concept of a tax forum against the Health Care System. The issue of how to force pay into this system of Health Care may have worked but I am still troubled over the progressive tax forum within this Bill. It covers so many items and Countries that it only forces the system to adjust itself. In some areas, increases against the people and the troubled economy, and in other areas, less effects will be felt.
But this is my big problem, Government Officials seek help and they are to proud to ask us, “the true working force of Government.” It is understandable they have failed the People and within the United States Of America all we ask is to see us as who we are and not try to bring us into this world of the intellectual. I guess our Prime Directive is that of Star Trek, so it must be understood that for millions of people we are just as happy as can be making $13.00 per hour and we have no interest in this world of politics, and how to be a Enstine. Government Officials must understand that there is a level of people within different parts of this Country, that seek to be only that they find to make them happy.
As for this economy well, it is said that the U.S.A. Arms Division has created enough arsenal to destroy every last creature in the world 2 times over,built with tax dollars. This would be funny if not for the irony of it. And now as time has passed Government Officials keep failing. Before 9/11 all the way to today.
As it is in a world of a system, when employees continue to fail, one or two things happen, one; you get fired, two; if you see into a person a good, then it is political correct to implement a penalty or roll back in pay. But this implement of penalty is more favored in the course of action in the Federal Employment World. So how to fix the economy and unite it with the Health Care issue. It would be in the Countries best interest to implement a 10% per cent penalty against every State, County and Government Official within this Matrix of failures. Hey what is that old saying, what is good for the Goose is good for the Gander. I am serous about this, it is past due to show that our Government Officials they have failed, their system failure reaches into this world of warnings that they brush aside as if the information is not worthy noting. From Pearl Harbor to 9/11/2001 to 3/07/2010 of our tax system and Health Care Reform. This 10% per cent penalty should go into the Health Care Forum.
The big problem that Government Officials have is that they have no street credit. President Obama still has some but if he does not take his family and step away from these dueling Parties, that fight over this Health Care Dollar, and stand with Us he will lose all credit from the streets to the county.
President Obama, I would say to you, you have one last chance to regain the hopes and dreams of the American People. To reach out in a concept that states, if there is 250 million people in trouble because of these failures, I would give all my money to them and then I would say to all that I gave money to, “I have no money left, would you all please give me $1.00 back and then I would have $250. million dollars to start all over again.”

As for this $100,trillion dollar in site………….
Results 1 – 10 of about 685,000 for net worth of medicine development industry
Just to show how deep this Health Care Tax split petition reaches. The term split petition is used because of the Tax factor plan that is not seen because of the intent not to show a capital Taxing of close to a $100 trillion dollar package, a yearly system income, not profit…..

Some have stated that I clam to have spiritual in site or something of the sort. I assure you this is not true, so when I state that I asked God to help, it is my way of saying hey Bobby show me how to work on theses Chevy engines. But I do thank you for the consideration. Consider me a cross of Jethro Bodine from the Beverly Hill Billies with my 10th. Grade education and Vin Diesel from the move Pitch Black.
So drop on by and see page 100 at our site and follow the blue pill link

Health Care within a moral value, is to ,


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Kennedy’s death and the future of healthcare reform

Aug 26, 2009 14:16 UTC

My friend Washington analyst Pete Davis give his always-insightful two cents:

1) Senator Kennedy’s death is quite a blow to hopes for health care reform. No only could Kennedy rally the troops for the tough parliamentary battles ahead, his seat will sit vacant until late January.  Under Massachusetts law, a special election must be held within 145 to 160 days to fill the vacancy and there will be no interim appointment in the meantime.  That robs Senate Democrats of a vote until then, leaving them one short of the 60 they need to overcome a filibuster.

2) Reconciliation may be pursued, but it’s a tortuous path. President Obama and Senate Democratic leaders have talked about using reconciliation to pursue a  Democrats only health reform.  That would allow Senate passage by a majority vote, but it comes with a lot of downside risk.  First, it guarantees no Republican would support it, and there are some Democrats who oppose using reconciliation too.  So that could be a close vote as well.  Second, making health reform work under reconciliation is not easy.  The Senate Parliamentarian would work day and night to decide what provisions are “extraneous,” meaning they don’t affect the budget and must be jettisoned.

3) I’ve been surprised in recent discussions with Senate Democratic staff at how much they think they can get past the Parliamentarian, like a Medicare Advisory Council, but a lot of insurance reforms etc. would have to pass in a separate bill.  If you end up with one bill and not the other, you’ve got a mess.  Finally, using reconciliation in such a partisan manner would impair its use in the future to reduce the deficit.  That has always been its intended purpose, and we will surely need it.


Teddy Kennedy was a noxious drunk, a sexual deviant and an unrepentant murderer posing as a U.S. Senator. The world became a better place the moment he assumed room temperature.

For the media to attempt to gloss over his despicable character and promote Kennedy as a hero is akin to posthumously promoting Michael Jackson as a champion for the defense of little boys’ virginity.

The ONLY thing worse than trying to lionize Teddy Kennedy is the puerile and vulgar attempt to shame the Republican legislators into going along with the railroading of socialized medicine down the throats of Thinking Americans all in the name of Honoring this Fable.


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Kudlow on Bernanke and the dollar

Aug 26, 2009 14:04 UTC

The great Lawrence Kudlow is skittish about Ben Bernanke’s seeming disinterest in a robust greenback:

I have never heard Mr. Bernanke proselytize for a stable-dollar currency value of money. Never. Of course, like any central banker, he says he’s for price stability. But the question remains how to get there and what model to use. Supply-siders like myself strongly support a price-rule model, where markets tell government what to do. But all too often it seems like Mr. Bernanke — who has been out there buying Treasury and mortgage bonds in a futile attempt to control their yields — prefers the model where the government tells markets what to do. This is a loser, as we have painfully learned in the past.

Paul Volcker watched gold in the ’80s. So did Alan Greenspan for most of the ’90s. But I don’t think Mr. Bernanke watches gold at all. And I don’t think he worries much about the fate of the dollar.

A VW-shaped economic recovery?

Aug 26, 2009 14:00 UTC

That is the analysis of my pal Rich Karlgaard over at Forbes. (Insert joke about Obama and fahrvergnügen here.) Some sectors of the economy will boom as others muddle through or stay on the mat. Warren Buffett put it best: “When the tide goes out, you discover who’s been swimming naked.” Here’s a bit from the piece:

But here’s the thing. The American recovery may be U-shaped, on balance, but within that U will pockets of Vs and Ws. That’s why I call it the VW recovery.

The V part of the VW economy includes dynamic growth companies and large exporters. Apple is enjoying a V recovery. Salesforce.com just reported a big, booming V quarter on Friday. Mobile broadband is an entire industry that will enjoy sustained V growth. Low-tax states like Texas, Tennessee and North Dakota are experiencing V recoveries.

America’s W economy includes all those companies, industries, states, cities and personal careers where deteriorating value propositions were masked in good times. It always happens that way. Recessions unmask bad business models. … Today’s W economy: newspapers, McMansion builders, inefficient manufacturers, high-tax state and local governments, and workers unable to adapt, relearn and relocate.