James Pethokoukis

Politics and policy from inside Washington

Obama’s wildly dangerous budget

March 22, 2011

President Barack Obama’s 2012 budget plan is dead on arrival — and rightfully so, it turns out. U.S. fiscal scorekeepers calculate it taking federal debt levels into dangerous territory. Meanwhile, both parties in Congress are showing tentative new signs of embracing fiscal responsibility. But without some leadership from the White House, nothing will get done.

The headline number from the Congressional Budget Office finds the White House budget adding $9.5 trillion to the U.S. national debt over the next decade against the administration’s estimate of $7.2 trillion. The two rarely agree, but the gap this time is particularly large. And both sets of predictions remain uncomfortably dependent on low and stable interest rates.

That’s a questionable assumption:

1) The CBO’s take suggests bond markets have reason to grow queasy about rising U.S. borrowing. Public debt as a share of the economy would hit 87 percent by 2021 — uncomfortably close to the 90 percent level economists Carmen Reinhart and Kenneth Rogoff have found crimps economic growth. And slower growth makes it harder to pay down debt. Recall that Obama had been promoting his budget as stabilizing the debt-GDP ratio at around 77 percent.

2) The CBO also determined interest payments would absorb 18 percent of federal revenue in 2018. Moody’s Investors Service has previously identified such a threshold as triggering downward pressure on Uncle Sam’s credit rating. U.S. debt service hasn’t been so high since 1980. Then, though, interest rates were high, and when they declined servicing the debt became more affordable. This time, rates are already low and it’s the sheer quantity of debt that’s the problem.

3) Even a slight rise in rates above White House forecasts — say, a single percentage point — would add $1.3 trillion to the 10-year debt number. And as the great folks at e21 point out

In the Administration’s baseline estimate, the public debt will rise from 62.2% of GDP in 2010 ($9 trillion) to 77% of GDP in 2021 ($18.9 trillion). … Over this period, the effective interest rate implied by the ratio of net interest expense to public debt is 3.5%. (This happens to be the average for the 5-year constant maturity Treasury rate over the past 10 years.)

However, the average 5-year borrowing cost for the 10 years ending in January 2000 was 6.3%, while the average 5-year borrowing cost for the 10 years ending in 1990 was 10.4%. If the average effective interest rate on the debt were to climb to the 10.4% average of the 10 years ending in January 1990, the public debt would explode to nearly 150% of GDP by 2021. Under the more modest 6.3% assumption of the 1990s, the debt ratio would exceed 100% of GDP by the end of the decade. Rather than doubling, as assumed by OMB, the public debt would quadruple over ten years to more than $36 trillion.

Obama’s budget anyway didn’t begin to address long-term healthcare and Social Security spending commitments. The word is that his political advisers think he should stall. A bit better news from Capitol Hill, though. Bipartisan support seems to be growing for the deficit reduction measures proposed late last year by Obama’s debt commission. And more Republicans, including the ranking member of the Senate Budget Committee, are sounding willing to consider higher taxes in exchange for deep spending cuts.

But history suggests no major fiscal fixes will become law without presidential involvement. The White House was a full partner in restoring Social Security’s solvency in the 1980s and balancing the budget in the 1990s. No wonder 64 senators, 32 from each party, just sent Obama a letter urging he “engage” on the budget.

Obama should learn from his recent involvement with the U.N. Security Council and Libya. Nothing gets done there or in Congress without presidential leadership.  Of course, maybe  the U.S. can wait until after the next election before taking action on its debt woes. Bu that, like Obama’s budget, is a terribly risky proposition.

Comments

US debt is the biggest worry in the world.

Portugal will fall to debt tomorrow but it can get a bailout. The US cannot.

A bailout for Portugal just means a surrender of sovereignty. The lender calls the tune in the form of the conditions of the loan. The debt will not be written off except by austerity forced on them by the lenders.

US debt is disgusting.

-You were allowing 80% of Treasuries to be owned by foreigners. You didn’t think that could lead to problems.

-The Japanese bought them because domestic interest rates were zero for seven years and the Chinese bought them to lower the Yuan. You didn’t think that could lead to problems.

You need a Piped Piper rather than jam today. You need anyone who has read Mr. MacCauber’s advise.

But instead you get a presidential candidate who grabs all the jam on offer from all the other candidates and offers jam today big time.

“Vote for me and 95% of you will get a tax cut. Vote for me and you will all get a free National Health Service(yes, even the 2m of you who are over 40 stone). Vote for me and I will increase the NMW”.

You will only control the debt that you intend to pass on to your children and grandchildren by working and not lining up around the block for freebies as you did on voting day.

You shouldn’t expect the Chinese to save so that you can borrow from them when you earn, on average, 22 times more than them. You shouldn’t think it is cool to run up debt buying goods from China when they get $2 a day making cars that you will only make for $30 per hour.

The world is changing fast. Buying US Treasuries is becoming out of favour as better returns are available in the BRIC economies and equites lead over Treasuries and property. Even PIMCO agrees.

The cost of US debt has been mitigated thus far but it is going to rise in the future and there are no bailout options like there are for Portugal.

Posted by objectiveknow | Report as abusive
 

What is most interesting in Mr. Pethokoukis’ analysis & are his omissions of fact & CBO assumptions!

1. Compare – Obama Budget Expense Levels: 2010/$4.2 trillion, 2011/$3.69 trillion, 2012/$3.73 trillion with
Bush Budget Expense Levels: 2007/$3.25 trillion, 2008/$3.89 trillion, 2009/$3.74 trillion.

The big difference? 2007 & 2008 Federal Tax Revenues were $2.6 trillion, plunging to $2.1 trillion+ in 2009 & 2010 – - an almost $500 billion drop in Fed Tax Revenues, adding $1 trillion to Deficit

2. Obama’s “Wildly Dangerous 2011/2012 $3.69T/$3.73T Budgets” are slightly lower than Bush 2008/2009 $3.89T/$3.74T & he had estimated higher fed revenues for both, now diminshed by extending Bush Tax Cuts

3. Mr. P omitted CBO stated: “CBO’s baseline projections largely reflect the assumption that current tax and spending laws will remain unchanged” – hopefully not since Bush Tax Cuts added $2.7T to US Debt, plus heaps of interest/debt service cost.

Bush Tax Cuts:
2011 & 2012 Deficits will include $80 billion tax cuts for Top 2% Richest. Americans earning $200,000+ increased under Bush, and so those who pay ZERO tax…from 2,959 in 2002 to 22,256 in 2008! Top 0.01%, who earn between $3 million & $37 million annually got big tax breaks -How can anyone take Republican deficit-cutting seriously, especially when all $61 billion cuts punish the middle-class, poor, children, unemployed, public education, women & children’s health, national security, PBS, etc….whereas ending Bush Tax Cuts & tax avoidance loopholes for CEO’s, Hedge Fund, Richest Americans & Big Biz would save 10x as many billions & not hurt anyone or deprive poor children of food stamps?

Corporate Tax Gap:
Republicans whine about 35% US corp. tax rate – in 2010 despite record pre-tax profits of $1.67T US corps paid a total $1.7B tax! In 2009/2010 US Corp.Tax Gap totalled $700B (Bush gave Wall St xtra $140B tax break in Oct 2008). Bush expanded tax breaks also allowed 1/3rd of Top 275 US corps. to pay ZERO tax between 2001-2003. GOP/Bush tax gifts to corp. buddies reduced Fed Revenues by $2T.

Role of Estate Tax:
CBO claimed “President proposes, beg in January 2013, that estate and gift taxes return permanently to the rates and exemption levels that were in effect in CY09″ which “would reduce tax revenues and boost outlays for refundable tax credits more than $3.0 trillion over the next decade” – GOP are defenders of Estate Taxes, not Dems…is Obama pandering to Republicans? If so, Obama must not.

If Obama is allowed to implement individ/corp tax reforms/increases he campaigned on, Fed Revenues will increase from 2013 on – best deficit reduction strategy.

3.GOP Blockage of Revenue-boosting Obama Policy:
CBO has shown Obama Health Care Reform will reduce Deficit by $143 billion over first decade – GOP want to repeal! CBO claims repealing the SuperFund Energy Tax Rebate would save $200 billion – GOP refuses are blocking repeal. GOP have blocked 2 of Obama bills to close offshore tax haven loopholes & tax incentives for offshoring US jobs & close some Big Oil tax subsidies. These would increase federal revenue by over $160B a year or $1T over next decade.

Only a few examples above of GOP obstruction, adding to the Deficit & Debt every year & keeping federal tax revenues at lowest level in 60 years plus killing US economy & America’s middle-class!

Posted by Truthfairy | Report as abusive
 

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