James Pethokoukis

Politics and policy from inside Washington

Is Elmendorf’s CBO too pessimistic or is Orszag’s OMB too optimistic?

Apr 12, 2010 17:01 UTC

White House budget chief Peter Orszag thinks his old colleagues at the Congressional Budget Office are being too pessimistic over the potential budget savings of healthcare reform (via The Hill):

“I think if anything, the deficit impact may well turn out to be larger than what was projected by the Congressional Budget Office for two reasons,” Orszag said at an event sponsored by the Economic Club of Washington. ”One, if you look at the history of projections on major pieces of legislation, they’ve tended to be too conservative rather than too optimistic,” he said. “And second, the scoring largely does not take into account this evolution toward paying for quality, which I think in this decade will begin to pay off.”

Me: Interesting, the International Monetary Fund thinks Orszag’s Office of Management and Budget might be too optimistic about its overall fiscal forecasts. This from the folks at e21:

The IMF working paper makes a compelling case that the Office of Management and Budget (OMB) uses unrealistically low interest rates in its forecasts of future debt and deficit levels, assumes too rapid a recovery, and overstates the speed at which countercyclical entitlement expenditures will fall in response to economic growth. As the IMF explains (page 14), “aging and health related spending are not the key drivers of this debt build-up.” Indeed, policy choices are.

Optimism is nothing new. As the IMF explains, “the past record of budget projections shows a strong tendency for ‘optimistic’ budget forecasts.” With the exception of 1993 to 1997, OMB projections have underestimated the growth of deficits and debt. What’s different about the Obama team’s projections is the magnitude of their optimism. The IMF estimates that to stabilize debt below 70% of GDP would require a fiscal adjustment of about 3.5% of GDP. In nominal terms, that would require some combination of spending cuts and tax increases equal to roughly $600 billion in 2014 alone.

Bernanke’s strange comments on U.S. deficits

Apr 8, 2010 17:10 UTC

Cato’s Mike Cannon thinks Ben Bernanke’s comments on budget deficits should have come weeks ago. And he thinks he knows why they did not (excerpts):

If Bernanke really wanted to warn the American public about the dangers of rising budget deficits, then a congressional debate over creating two new entitlement programs would be the most important time to deliver that message.  … Had Bernanke delivered his populist warning before January 28, it could have jeopardized his confirmation by the Senate to a second term as Fed chairman. Had he done so between January 28 and March 21, he would have suffered a storm of criticism from Democrats (and possible retribution when his term came up for renewal in 2013) because his sensible, responsible warning would have made moderate House Democrats more skeptical about ObamaCare’s new entitlements.

Bernanke’s behavior thus reveals why ObamaCare’s cost would exceed projections and would increase the deficit. Knowledgeable leftists, notably Tom Daschle and Uwe Reinhardt, recognize that Congress is no good at eliminating wasteful health care spending because politics gets in the way. (Every dollar of wasteful health care spending is a dollar of income to somebody, and that somebody has a lobbyist.) The Left’s central planners believe they can contain health care costs by creating an independent government bureaucracy that sets prices and otherwise rations care without interference from (read: without being accountable to) Congress. ObamaCare’s new Independent Payment Advisory Board is a precursor to what Daschle calls a “Health Fed,” so named to convey that this new bureaucracy would have the same vaunted reputation for independence as the Federal Reserve.

Politics affects Bernanke’s behavior and the Fed’s behavior. Politics will defang the Independent Payment Advisory Board, and many of ObamaCare’s other purported cost-cutting measures.

Me: This is worrisome. Too much of policy, whether it is  future a Health Fed or the deficit commission, is based on the ability of outside panels to end run Congress —  and of Congress to ultimately cede power.

How America might get a VAT of its own

Apr 6, 2010 00:14 UTC

When will the other chaussure drop? Now that America has gone French (and German and British) with universal healthcare, expect Washington to eventually propose a European-style, value-added consumption tax to pay for it — as well as the rest of the historic rise in federal spending. But U.S. voters are in a severe anti-tax mood. It might take another financial crisis to give politicians the will and hubris to ignore them.

Here’s how it might all play out:

1) For Washington insiders, it’s a matter of “when” not “if.” Politicians and economists I chat with from the White House to Capitol Hill to the Federal Reserve think a VAT inevitable. Healthcare reform has only hardened that consensus. Spending cuts to pay for expanded coverage may not happen. Either way, the budget numbers scream for action. Annual federal spending as a share of GDP will likely outpace revenue by at least six percentage points for years to come. Trillion-dollar deficits the norm.

2) Just slashing spending is one option. But that would require a radical reshaping of social-insurance schemes as outlined by Rep. Paul Ryan in his recent white paper, “A Roadmap for America’s Future.” The war over healthcare would seem a minor skirmish by comparison.  A battle worth fighting, but a coalition of the willing might be small.

3) Maybe a broad income tax increase? So far Washington has shown an appetite for nicking only the rich. And one study suggests the tax burden on wealthy households is approaching — or has perhaps even exceeded — the revenue-maximizing level. That’s right, America is on the wrong side of the Laffer Curve again. Even assuming the rich wouldn’t flee to tax shelters, top income tax rates would need rise to economy-crushing levels to balance the budget.

4) Anyway, it’s smarter to tax consumption broadly rather than work and investment narrowly. Especially in an economy that needs less of the former and more of the latter. And that is what a VAT does. Few doubt its ability to raise massive amount of revenue with fewer disincentives than the current system. But if the economics are clear, the politics are a puzzle in Tea Party America. VAT proponents assume political intransigence without a financial crisis to spur action, just as market chaos helped get the $700 billion bank rescue passed in 2008.

5) Yet there is a reasonable scenario where America would accept a VAT. In fact, it is the only scenario under which we should accept a VAT.

First, Washington would have to demonstrate it could manage the public purse by reforming entitlements in a Ryan-esque manner. A tall order, but a necessary prerequisite or else voters would fear that entire six-point budget gap would be closed by tax hikes via a VAT. So, in the end, government spending needs to be dramatically cut. (Preferably, we would never need to get past this step.;)

Second, a VAT would have to completely overwrite the current complex and inefficient tax code. If not, voters would fear getting hit by both VAT and income tax hikes. A VAT can’t be an add on.

Third, every sales receipt in America would have to indicate the VAT penalty. But politicians love the hidden aspect of a VAT as way of duping voters. To them opaqueness is a feature, not a bug.

Fourth, the intended tax burden should be kept level at first. A pro-growth VAT — one that does away with corporate and investment taxes — might produce more revenue merely by expanding the economic pie.

Still a tough sell. Better skip the part about the French.

COMMENT

Democrats: taxing and spending us into bankruptcy.

$14 trillion debt. $2 trillion deficits. High unemployment. A president living like Louis XVI.

Of course, it’s all George Bush’s fault!

Posted by Koblog | Report as abusive

Waste, fraud and abuse at Social Security

Mar 30, 2010 16:57 UTC

The super-insightful Andrew Biggs looks how the Crist-Rubio debate dealt with Social Security — and finds laughable the former’s comments about restoring the system’s long-term solvency by rooting out waste, fraud and abuse:

As a general rule, when a politician mentions “waste, fraud, and abuse” it should be interpreted the same as if the candidate wore a sign saying “I’m not serious.” That’s not to say that we don’t have problems with fraud, but that the real problem is simply that the government spends too much.

This is particularly so in the case of Social Security, which is one of the most efficient federal government programs. Social Security takes money from young workers, calculates a benefit for retirees based on their earnings and their years in the workforce, and cuts them a check. There’s not a lot of discretion involved, which reduces chances for things to go wrong. Sure, there are problems in the disability program and I’m confident there are folks getting disability benefits who actually could work. But that’s the fault of the eligibility criteria passed by Congress in the 1980s more than any problem of vetting applicants by the Social Security Administration. On this issue, at least, Crist was very unimpressive.

What did impress me, though, was the fact that Rubio—who, after all, is running for the Senate from Florida—was willing to be upfront about the hard choices awaiting us on Social Security. In part this may be due to the character of the candidate, who struck me as a principled conservative.

COMMENT

First Older citizens paid along with their employers out of their own monthly earnings into the social security retirement insurance. So those checkks being cutare what we paid into. It is not taken from younger workers. The government stole what older workers paid into for their retirement and illegally took it for war. This was money that did not belong to the government it is not nor has it ever been entitlements not any more than if someone opens a bank account to save for their future and the banker steals it for his own use. Theft is theft and the government had no right to steal social security insurance paid into by workers of years past.

A lot of the waste is done by social security administration workers who do not follow their own rules and demand recipeints follow them and who waste time and paper who work but do not want to work. Pigs at government trough. Go sit in a SS office someday or employment office or DSHS office and watch how many “Breaks
” they take and if you watch close some play computer games and eventually when they feel like it call someone to their desk but they are lazy and NOT earning their wage. Most are like this. They get paid too much money and do NOT want to help. Most also are rude and act we are taking money right out of their pocket. When it is money WE paid into it is NOT their money and they would not have a job but for SS or unemployment paid insurance paid by employees and employers. People get mad at the wrong people and think we are not entitled to it. YES we are we PAID into it out of our hard earned wages and long hours of work.

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The risks of a deficit commission

Mar 25, 2010 12:29 UTC

We now know the makeup of President Obama’s bipartisan deficit commission. There are 10 Ds and 8 Rs with 14 votes needed to approve a recommendation As I go down the membership list, I see a lot of folks who are likely believers in the new Washington Consensus — significant spending cuts won’t help so big tax hikes are necessary. Of course, study after study shows big tax hikes are a terrible way to bring deficits under control. They kill growth which makes balancing the budget even harder since revenues are deflated.

Iraq debt almost as safe as California’s

Mar 24, 2010 17:20 UTC

Wow (from the Boston Globe):

Iraq is now considered a safer bet than Argentina, Venezuela, Pakistan, and Dubai — and is nearly on par with the State of California, according to Bloomberg statistics on credit default swaps, which are considered a raw indicator of default risk.

“Compared to California, I’d rather bet on Iraq,’’ Daher said. “Iraq is a country where there are still bombs going off and people getting murdered, but they are less indebted than the United States. California is likely to have more demands on its resources, and there is no miracle where California is going to have more revenue coming out of the sky. Iraq has prospects for tremendously higher revenues, if they can manage to get their act halfway together, which they seem to be doing.’’

Health reform is faith-based deficit reduction

Mar 23, 2010 12:38 UTC

Healthcare reformers in Washington are asking America’s creditors to take a leap of faith. The plan is supposed to cut future budget shortfalls. But it depends on politicians following through on cuts and taxes, a deficit commission imposing additional discipline, and untested reforms working as expected. Owners of U.S. government debt shouldn’t bank on it.

The numbers add up on paper, at least according to the nonpartisan Congressional Budget Office. Its estimate for the 10-year cost of reform is $940 billion, with cost cuts elsewhere and new taxes turning that into a $138 billion net reduction in the projected federal deficit over a decade. Go out another 10 years, and the plan racks up another trillion or so in projected savings.

One problem is that despite being nonpartisan, the CBO’s methods are still dictated by Congress. That means Capitol Hill can get away with financial chicanery such as front-loading some tax increases and delaying spending plans — something that can help the numbers work because, in a fixed 10-year period, the tax income is counted for more years than the spending.

And then there are the promised but politically unpalatable fiscal fixes that fall to a future president and Congress. Proposed cuts in federal payments to hospitals, for instance, are delayed a decade. If today’s lawmakers are punting such measures, it’s hard to have any confidence their successors will show any more mettle.

The reformers hope more can be saved if the healthcare plan’s cost-control pilot projects bear fruit and are then widely implemented. But the CBO doesn’t give these projects much credit. And even the White House admits that rising healthcare costs could still threaten America’s finances. That’s one reason why President Barack Obama is keen on a bipartisan, deficit-cutting panel. But its potential efficacy is widely derided by veteran budgeteers.

At least with healthcare an effort is being made to do no fiscal harm. That was not the case with major spending initiatives of the past decade for which balancing cost cuts or tax increases weren’t attempted. But with the U.S. ratio of debt to GDP still on track to double in a decade, it will take a leap of faith for America’s creditors to retain their enthusiasm for Treasury bonds.

COMMENT

This bill is designed as an irrevocable “ratchet” up of Government spending and control.

The Left has calculated that even if it gets kicked out of office, this travesty of a bill will remain in effect, and when they inevitably return, they will ratchet it up further (Public Option, complete takeover, etc.).

Fir the sake of the future of the country, one only hopes they’ve miscalculated and the bill gets thrown out for its myriad areas of unconstitutionality. Or if the Supremes are cowed by the same cabal that so rudely (and incorrectly) treated them at the Shame of the Union address, then this Frankenstein piece of Machiavellian Central Planning may indeed remain in effect and the Decline and Fall of the American Empire will have truly commenced.

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Paul Ryan’s budget roadmap is flummoxing Washington

Mar 10, 2010 20:38 UTC

Washington doesn’t know how to handle Rep. Paul Ryan’s outline for how to balance the budget without raising taxes. House Majority Leader Steny Hoyer says the Wisconsin Republican’s plan is “unsustainable.” (Well, it makes Big Government unsustainable.) And an analysis from the Tax Vox blog takes issue with his revenue estimates.

Of course, the issue here is spending, spending, spending. The Washington Consensus is that taxes must go up, that it is not politically possible to cut spending. Ryan is trying to prove that consensus wrong with a little bit math and little bit of moxie.<

COMMENT

Paul Ryan appears to be the only guy in Washington with some common sense and the ability to clearly articulate his views in a non-partisan manner.

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California Screaming

Mar 10, 2010 19:42 UTC

Here are some fun facts about California’s fiscal situation, in light of state college students protesting a 32 percent tuition hike (via WSJ):

1) In 1999, the Democratic legislature ran a reckless gamble that makes Wall Street’s bankers look cautious. At the top of a bull market, they assumed their investment returns would grow at a 8.25% rate in perpetuity—equivalent to assuming that the Dow would reach 25,000 by 2009—and enacted a huge pension boon for public-safety and industrial unions.

2) It let firefighters retire at age 50 and receive 3% of their final year’s compensation times the number of years they worked. If a firefighter started working at the age of 20, he could retire at 50 and earn 90% of his final salary, in perpetuity

3) In 2002, the state legislature further extended benefits to many nonsafety classifications, such as milk and billboard inspectors. More than 15,000 public employees have retired with annual pensions greater than $100,000.

4) In the last decade, government worker pension costs (not including health care) have risen to $3 billion from $150 million, a 2,000% jump, while state revenues have increased by 24%.

5) This year alone $3 billion was diverted from other programs to fund pensions, including more than $800 million from the UC system.

6) The governor’s office projects that over the next decade the annual taxpayer contributions to retiree pensions and health care will grow to $15 billion from $5.5 billion, and that’s assuming the stock market doubles every 10 years. With unfunded pension and health-care liabilities totaling more than $122 billion, California will continue chopping at higher-ed.

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