James Pethokoukis

Politics and policy from inside Washington

Hacking Obama’s black box budget

Apr 20, 2011 02:08 UTC

On Wall Street, calling some strategy a “black box” is an epithet. The term implies financial flimflammery may be at play. Opacity may conceal trickery. Bernie Madoff had a black-box model that supposedly helped him pick winning stocks. The deception was in the details, or, rather, the lack of them.

Treasury Secretary Timothy Geithner, former president of the New York Fed, knows about black boxes. So, too, White House budget chief Jack Lew, formerly of Citigroup. And it can’t be a foreign concept to Bill Daley, Obama’s top aide and a former executive at JPMorgan.

obama

You can now count President Obama in that group, too. When he made his big budget speech last week, it wasn’t at all clear from where his numbers were coming — nor in what direction they were heading. A “fact sheet” on his “Framework for Shared Prosperity and Shared Fiscal Responsibility” gave a few more specifics, but little or no context to make real sense of them. Even for seasoned budget experts, it was a puzzlement.

Now, a week later, some tantalizing clues have begun to emerge. And even if they don’t fully illuminate Obama’s black box budget, they at least help explain why the White House chose to be so cryptic.

1) Why no economic numbers? The Obama Framework failed to reveal its underlying economic assumptions. House Budget Chairman Paul Ryan based his “Path to Prosperity” on the economic forecast of the Congressional Budget Office.

But budget experts think Obama used his own (via the White House Office of Management and Budget) much more optimistic numbers, just as he did in his February budget. From 2012-2015, Obama sees the economy growing at a pace of 3.6 percent, 4.4 percent, 4.3 percent and 3.8 percent. The CBO sees slower growth, 3.1 percent, 3.1 percent, 3.5 percent, 3.8 percent. For the rest of the decade, Obama assumes GDP growth an average of 0.2 percentage point faster than the CBO.

How big an advantage does the Obama Framework’s rosy scenario give it over the Ryan Path? Consider this: When CBO ran Obama’s numbers with its own growth forecast, it found that Obama raised $1.7 trillion less than his OMB had predicted due to those differing economic assumptions. Even worse, Obama assumes those higher growth rates would be possible despite the heavier tax burden.

2) Why no budget baseline? Obama says his budget plan saves $4 trillion. But is that compared to his forecast or the CBO’s? And which CBO forecast, since it has more than one? When you don’t know the baseline, it’s impossible to really compare the bottom-line savings of the Obama Framework vs. the Ryan Plan.

Well, the econ team at Goldman Sachs took a shot at backing out the numbers and they think Obama was measuring his savings against the CBO’s estimate of what it considers the most likely budget path. Over ten years, Obama’s plan saves about $2.2 trillion less than Ryan’s — and that’s still giving Obama his rosy forecast from above.

3) Why so little data about annual levels of revenue and spending? The 15-page Obama Framework fact sheet is all text. The Ryan Path is full of charts, tables and graphs. If Obama had been as thorough, it would be obvious that the following statement from his speech is incomplete:

This is my approach to reduce the deficit by $4 trillion over the next twelve years. It’s an approach that achieves about $2 trillion in spending cuts across the budget. It will lower our interest payments on the debt by $1 trillion. It calls for tax reform to cut about $1 trillion in spending from the tax code. And it achieves these goals while protecting the middle class, our commitment to seniors, and our investments in the future.

Except that earlier in the speech, Obama reiterated his pledge to let $1 trillion worth of top-end Bush tax cuts expire. That means Obama is actually calling for $2 trillion worth of tax hikes, not $1 trillion.

4) Why a 12-year budget instead of a customary 10-year plan? I’m going to hand this one over to former Bush II economic adviser Keith Hennessey:

It’s fairly easy to see what’s going on here. The President decided on about $3 trillion of deficit reduction over 10 years, maybe a little less. He wanted to claim that he was “matching” the Ryan plan in deficit reduction, but was just achieving that same goal in a better way. Matching Republican deficit reduction is a lynchpin of the President’s fiscal argument. He was short by a trillion dollars or more, so he and his team decided to measure his proposal over a different timeframe and hope no one would notice. They lengthened the window by which they would measure the President’s deficit reduction until they matched the $4 trillion over 10 years in the Ryan plan and came up with 12 years.

The President’s new budget plan provides insufficient detail to support his claim of $4 trillion of deficit reduction over 12 years. But if we stipulate that amount, it is likely that the President’s new budget proposal would result in $1 trillion more debt over the next ten years compared to the House-passed Ryan plan, and maybe more.

5) Why does the Obama budget only go out to 2023? The Ryan Path extends to 2050 when the total U.S. federal debt is just a minuscule 10 percent of the economy. The plan accomplishes this by dramatically reducing the projected growth of healthcare spending. If you don’t do that, you get a chart like this:

newcbo

The chart shows that balancing the budget long-term requires either reducing projected healthcare spending or creating dramatically higher tax revenue. And to increase revenue anywhere near those levels without an incredible burst of economic growth would require broad, new taxes on the middle class, probably using a value-added tax. Cranking up taxes on only the rich is insufficient. (And this assumes no economic impact from such an enormous tax burden.) U.S tax revenue has never even hit 21 percent of GDP, much less the 25+ percent needed to make the numbers in the chart balance.

For Obama to keep spending above that level — which his budget does — and also reduce debt means admitting the need to break his tax pledge. But he avoids this revelation by ignoring those out decades.

Even by the low financial standards of Washington — here we call Enron-like legerdemain “best practices” —  shifting timeframes, hidden tax increases, and mystery baselines are pretty pathetic. This is no way to begin a serious debate on preventing fiscal crisis and collapse.

COMMENT

So what would you suggest Mr. Pethokoukis, Paul Ryan’s version which is as dubious and is nothing more than a shell game.The reality is that the average wealthy person only pays an effective tax rate of 17% according to the Department of the Treasury and IRS. We have government run by the oligarchs for the oligarchs who demonize the average working person and tell them that they must sacrifice further to reduce the debt. Sorry but I already gave at the office. It is now pats due for the wealthiest 10% to give a little more. This is class warfare so get used to it.

Posted by seattlesh | Report as abusive

Why U.S. debt shouldn’t be AAA rated: It’s actually worse than Spain’s

Apr 19, 2011 15:33 UTC

Credit rating agencies such as S&P really place a lot of emphasis on two financial metrics:  the ratio of net debt to GDP and the ratio of net interest payments to government revenues. When you look at those two factors, Goldman Sachs concludes “that the US is already at the outer edge of AAA territory. ” (Thank goodness for the supremacy of the dollar.) Look at the pretty chart from GS:

gschart2

COMMENT

If the USD Index continues to fall over time, how would this affect the position of the US icon on this graph ? It would seem to me that the ‘current political/financial’ pressures are for the icon to move up vertically and tend to move to the right as well. What is not clear to me is how the various currency evaluations might interact regarding this graph.

Posted by lwmaus | Report as abusive

S&P doesn’t like any of the debt plans out there

Apr 19, 2011 13:59 UTC

Here’s the thing: S&P seems to want Washington to cut much faster than any of the plans currently circulating. As Goldman Sachs notes:

Most scenarios would take the U.S. further into risk of a downgrade using the rating agencies’ stated criteria (for instance, Moody’s has in the past indicated that the edge of its “reversibility band” for a downgrade from AAA is an interest to revenue ratio of 14%; the definition and coverage of the measures in the chart may differ somewhat but the implication is similar).  … Most official forecasts show greater deterioration of these measures. Interestingly, the highest profile reform proposals, from the co-chairs of the President’s Fiscal Commission, Sen. Alan Simpson (R-WY) and Erskine Bowles (D) and, separately, from Rep. Paul Ryan (R-WI) would result in a much more benign path for the debt/GDP ratio, but would still allow the interest to revenue ratio to increase to levels that the rating agencies would likely view as problematic.

spchart

COMMENT

You always do a great job at taking this complex topic and turning it into something understandable.
This graphing that you do should be on all three nightly news stations, educating the public that only watch advertisements to make their judgements on econ issues.

I’ve been hearing about these large money holders that are planning on turning “vigilante,” if the US government starts getting political with this serious issue of US survival formatting plan.

One “soft vigilante” that is included in this is China. Since February last year, they have been rolling back– slowly, as to not jolt the US too much. They are most definitely divesting themselves of our debt in search of less risky foreign markets. It is a slow, deliberate “protest” that they do not like the way Obama is operating….spending 1 & 1/2 years on a giant unaffordable, spending bill instead of working on changing Wall Street’s damage-bent behavior and repairing pure misery.
And now, Obama’s off campaigning, promising that the next term will be just like the first two years, totally oblivious to what the crisis at hand is.

I’m glad the S & P is getting tough. Hello, Administration….time to stop show-boating and time to get real!

Will the Administration get serious and on task?
Well, the vigilantes are ready to pounce.

I moved all my stuff into safe savings accounts to wait it out. I’d suggest everyone else does that too.

Posted by limapie | Report as abusive
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