James Pethokoukis

Politics and policy from inside Washington

Kudlow on Washington’s spending problem

Jul 7, 2011 19:41 UTC

Larry Kudlow breaks it down, even has a chart!:

The blue line you see is President Obama’s budget. The green line is Congressman Paul Ryan’s budget.

Now, Paul Ryan’s is of course a couple of trillion dollars lower than Obama’s over the next ten years. But what do they both have in common? They both go up. As in spending more, not less. As in, roughly $40-45 trillion dollars more. That’s a whole lot of taxpayer money, folks. Now why is this? It’s because of something called the “current services baseline” which includes population and inflation increases built into the budget. Entitlements have their own formulas. So when you hear a politician tell you they’re cutting spending, they’re actually referring only to reducing the growth of spending. Rarely, if ever, do they actually reduce the level of spending.

Here’s yet another scam: big budget deals say they “cut” (there’s that word again) a couple of trillion dollars over ten years. But most of it is targeted for the last couple of years, as in years eight, nine, and ten. So basically it’ll never happen. It’s four or five congresses from now. Laws change. Deals are broken. At the end of the day, the only thing that really matters is next year’s budget. Will it be cut?

When I look at this budget stuff, I focus on spending, taxes, interest and debt as a share of the economy. That way I don’t get dragged down into the world of comparing baselines. Here, for instance, is how the CBO looks at the Ryan plan:


Ezra Klein accidentally argues against GOP accepting tax hikes

Jul 7, 2011 19:39 UTC

The WaPo’s Ezra Klein has cooked up a chart attempting to show previous debt deals had plenty of tax increases in them, even more than what Obama is demanding:


As you can see on the graph, in each case, taxes were at least a third of the total, and in Reagan’s case, his massive tax cuts were followed by deficit-reduction deals that actually relied on tax increases. Today, tea party conservatives would be begging Sen. Jim DeMint to primary the Gipper. … The one-third rule doesn’t break down until you get to the deal Obama reportedly offered Republicans in the first round of debt-ceiling talks: $2 trillion in spending cuts for $400 billion in taxes, or an 83:17 split. And that, if anything, understates how good of a deal Republicans are getting.

This isn’t going to persuade conservatives of anything, the bit about Reagan in particular. The Gipper was promised big spending cuts in 1982 that never materialized. And the Bush deal has gone down in infamy among those on the right. Here is Grover Norquist:

The spending interests in Washington, D.C., convinced President Ronald Reagan in 1982 that they would cut $3 of spending for every $1 of tax increase that Reagan would permit. The tax hikes were real, painful and permanent; the spending restraint never materialized. Then only eight years later, the same spending interests concocted the infamous Andrews Air Force Base budget summit that negotiated a supposed deficit reduction deal with President George H.W. Bush. It was to cut spending by $2 for every dollar of tax increase. Again, the tax hikes were real and spending increased more rapidly after the deal than before.

As for the Obama offer, I have no idea what that red line is supposed to represent. How much, for instance,  is baseline tinkering due to the wind down of the wars in Iraq and Afghanistan? That could account for as much as $1.4 trillion of the $2.0 trillion in cuts Obama is offering. Permanent tax increases in exchange for accounting chicanery?

U.S. debt crisis might be on fast track

Jul 7, 2011 15:59 UTC

One of the outside economic-analysis firms that the White House likes to quote is Macroeconomic Advisers. Here’s what the firm said yesterday about where the U.S. economy is heading (bold is mine):

Assuming current fiscal policies remain in force, our economic model suggests that interest rates will rise considerably over the next decade, with the yield on the 10-year Treasury note reaching nearly 9% by 2021.

– Private interest rates will rise as federal borrowing competes for saving that might otherwise finance private investment.

– In addition, yields could rise if there is growing risk associated with current fiscal policy.  If such risk is systemic, it raises yields generally.  If it reflects a growing probability of sovereign default, it raises Treasury yields relative to private yields.

Rising rates would be a precursor to something worse: a full-fledged fiscal crisis with further sharp increases in yields, declines in stock prices, and a plummeting dollar.

This is bad. Really bad. The official budget forecasts ones typically hears about in the media are from the Congressional Budget Office. And those forecasts assume Uncle Same can borrow at low interest rates, like, forever. The super-cautious CBO baseline predicts the U.S. government will add an additional $6.8 trillion in debt over the next decade, bringing cumulative debt held by the public to $18.2 trillion. Debt as a share of the economy would be 76.7 percent. The forecast also assumes short-term interest rates average 3.3 percent, long-term 4.8 percent.

But MA thinks long rates will hit 9 percent. This would cause U.S. indebtedness to explode. The CBO, at the request of Rep. Paul Ryan, recently looked at how various interest rate scenarios would affect U.S. debt (chart and graph via the Committee for a Responsible Federal Budget):

Note the scenarios that has interest rates at close to 9 percent. It would add an additional $5 trillion to the national debt by 2021. That would push the U.S. debt-to-GDP ratio to an alarming 98 percent of GDP.

But those calculations tend to understate the problem because they are based on the CBO’s baseline forecast. Its “alternative fiscal scenario” – which many budgeteers think is a more accurate – assumes debt-to-GDP will already be 101 percent in 2021.

But again, this is assuming low interest rates. The MA scenario could push that level even higher. And again, this also assumes all that debt would not effect economic growth. Here is how the CBO says various economic variables affects its forecasts

CBO estimated that 1 percent higher interest rates each year could increase deficits by $1.3 trillion over ten years. CBO also estimated a few other “rules of thumb” to show how changes in inflation and economic growth have significant impacts on budget forecasts. The projections show that lower economic growth of just 0.1 percentage point each year could increase deficits by $310 billion over ten years, while 1 percentage point higher inflation each year could add almost $900 billion to deficits.

Turns out, the CBO looked at how at the deluge of debt from its “alternative fiscal scenario” would impact the economy (and, in turn, total indebtedness). The results are absolutely frightening:

Of course, the U.S. would have a debt crisis long before we hit that 250 percent of GDP level. And if MA is right,  the crisis might come sooner rather than later.


Credit Writedowns responded with an article entitled Scared To Death.
http://www.creditwritedowns.com/2011/07/ scared-to-death.html

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Obama’s $4 trillion Grand Bargain

Jul 7, 2011 13:44 UTC

The president says it’s time to go big (via Reuters):

After weeks of impasse, President Barack Obama and top congressional leaders are aiming for “something big” as they resume budget talks on Thursday to avert an imminent default. With Republicans showing new flexibility on taxes, Democrats say Obama will push negotiators to double their target to $4 trillion in budget savings over 10 years. That would be an ambitious goal, but there have been a few hints of progress since talks hit a brick wall two weeks ago.

1) If Obama wants a $4 trillion debt reduction package, how about the one his own debt commission produced last December:


2) But I don’t think Obama will agree to  or propose anything as sweeping as that. Instead, I would expect more than $1 trillion in savings from defense cuts, most of which will be tweaking the baseline of projected spending, which assumed perpetual war in Iraq and Afghanistan. Along with interest savings, that would be put you right around $2 trillion. Republicans may be offering $200 billion in new revenue from user fees and asset sales.

3) So how to close the remaining gap of roughly $2 trillion? Maybe another $400 billion in Medicare and Medicare savings.  And tweaks in how you measure inflation for Social Security benefits and tax brackets gets you another $150 billion, assuming Rs don’t view that as a tax hike.  And in his April speech, Obama called for $770 billion in non-security discretionary spending cuts over 12 years. To me, it still looks close to $1 trillion gap.

4) And recall that Obama’s debt speech which called for $4 trillion in debt cuts over 12 years would actually cut debt by just $2.5 trillion over ten years.

Does Obama want to cut the deficit?

Jul 7, 2011 00:54 UTC

Let’s keep in mind that if President Obama had his druthers, the debt ceiling would’ve already been raised some $2 trillion via a “clean vote” in Congress. No spending cuts. Yes, I know  Obama said the following this earlier this week:

I believe that right now we’ve got a unique opportunity to do something big — to tackle our deficit in a way that forces our government to live within its means, that puts our economy on a stronger footing for the future, and still allows us to invest in that future.

But that’s Obama trying to make it sound like it was his goal all along to link a debt-limit bill with deficit reduction. Of course, it was Republicans who forced him to accept such a linkage. This was Team Obama in April (via The Hill):

White House press secretary Jay Carney said it is “imperative” that a debt-limit vote not be “held hostage to any other action, because of the consequences of not raising the debt ceiling.” Jack Lew, the director of the Office of Management and Budget, struck a similar tone in an interview airing this weekend. “Our very strong view is that the debt limit should be passed as a clean, standalone bill,” he said in an interview with Bloomberg TV’s “Political Capital With Al Hunt.”

Also keep in mind that since the November elections, Obama has a) blown off his own debt reduction commission, b) offered an official budget that added $10 trillion in new debt over 10 years, c) had to be nudged, according to reports, by Treasury Secretary Geithner into giving a debt speech, which turned out to be smoke and mirrors and can’t even be scored by the Congressional Budget Office.

The evidence strongly points to Obama not really caring much about debt reduction right now. It also points to him believing – as do many left-of-center economists – that the debt issue is a long-term problem and that any near-term austerity is big risk with such a weak economy. Macroeconomic Advisers, a economic consulting firm respected by the White House, just put out this analysis of the the debt reduction plan put forward by Obama’s commission (bold is mine):

Assuming current fiscal policies remain in force, our economic model suggests that interest rates will rise considerably over the next decade, with the yield on the 10-year Treasury note reaching nearly 9% by 2021. We estimated the effects of a fiscal contraction that is patterned after the so-called Bowles-Simpson plan and that averts this dire scenario. The plan would pare more than $4 trillion from the federal debt by 2021 relative to current policy. Roughly two thirds of this contraction is from spending cuts, the rest from tax increases. For a given path of long-dated yields, the macroeconomic effects of the fiscal contraction are sizable. “Fiscal drag” would reduce real GDP growth by 0.4 to 0.5 percentage point per year through 2015, leaving the unemployment rate a percentage point higher by then.

This is key: Keynesian models like this assume all spending cuts and taxes increases slow growth by reducing overall demand. (Former Obama economist Christina Romer, however, thinks tax increases are less harmful.) The White House has the same kind of models. Slower growth hurts incomes and jobs, which, in turn, hurts the standing of the guy in the Oval Office.

There is a high likelihood that Obama believes spending cuts and tax increases in 2011 and 2012 would hurt his re-election.  This is why he would prefer a clean debt ceiling bill – or, since that is not possible, a debt reduction bill that’s as small as possible. (Or, even better, one with a bit more stimulus in it, like a payroll tax cut extension.) Every dollar in spending cuts or tax hikes makes him just a bit more likely to lose in 2012. From his perspective, better to push off austerity to 2013 — 0r beyond.




ahtohg2: Why not write a better comment by providing sufficient context? 90% of economists generally agree with each other? Where did you pull that number from? Trickle down economics failed? How? Context, sir.

James: excellent op/ed. Cynicism of this administration (and, unfortunately, most politicians) is in order. You offer a reasonable explanation for what I thought was just inexplicable stupidity: it’s all political posturing.

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