James Pethokoukis

Politics and policy from inside Washington

More Washington budget gimmickry

Nov 27, 2009 18:18 UTC

Karl Rove makes a good point:

The administration says it is now instructing agencies to either freeze spending or propose 5% cuts in their budgets for next year. This won’t add up to much unless agencies use the budgets they had before the stimulus inflated their spending as their baseline in calculating their cuts.

For example, if the Education Department uses its current stimulus-inflated budget of $141 billion instead of the $60 billion budget it had before Mr. Obama moved into the White House, freezing its budget will do nothing to fix the fiscal mess the president has created.

Me: Indeed, one thing to watch out for is how these elevated, stimulus-related spending levels become incorporated into budget baselines.


There are some that have credibility on the deficit (Bartlett, Rubin etc.) there are others that do not. Those who cite folks like Rove and claim to be anything other than polemic deserve derision. Do you perceive Karl Rove as a legitimate expert? Can you rebut the substance of my comment which directly rebuts Rove’s alleged insight?

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The Afghanistan war surtax gambit

Nov 24, 2009 19:32 UTC

Why is passing healthcare reform so difficult? One big reason is that Democrats are trying to pay for a broad-based new entitlement without enacting a broad-based new tax.

As the joke goes, the only real difference between Republicans and Democrats is that the Rs don’t want to raise taxes on anybody and the Ds want to clip only the top 2 percent.

But some Democrats have finally found a cause worth taxing the middle class for: the war in Afghanistan. A group of powerful House committee chairmen are pushing a graduated income surtax. (A Senate effort would tax only the wealthy.)

The twin goals, backers say, are fiscal probity and transparency, especially now that it looks like President Barack Obama will be sending up to $34 billion worth of new troops to Afghanistan.

As Barney Frank, House Financial Services chairman, puts it: ‘It’s important for people to understand how these wars are adding to our deficits.’

Nonsense. The same lawmakers supporting the war surtax also support a healthcare reform plan that is structured to hide long-term costs. No accounting trick is spared. Taxes are front loaded. Some spending is back loaded, while other spending is shunted to a separate bill.

No, the goal of the surtax is to drain public support for a war many Democrats think should be downgraded. And no doubt if this legislative effort proves successful, it would be tempting to eventually make the temporary surtax permanent.

Indeed, the whole effort could be laying the groundwork for a broad value-added tax that many centrist and liberal economists think necessary to shrink America’s long-term budget gap.

But why not take this opportunity to help pay for the war through spending cuts?

It’s inside-the-Beltway wisdom that Congress won’t cut spending. But eventually spending will need trimming to deal with the long-term budget deficit without resorting to currency devaluation or inflation or huge tax increases.

So let’s start now. The war in Afghanistan currently costs some $43 billion a year. As the Heritage Foundation rightly notes, “that sum is dwarfed by the $72 billion in improper payments (i.e. over-payments, payments made for services and goods never received, benefits and tax credits paid to people who didn’t qualify) that the Government Accounting Office said the federal government made last year.” Then there’s $92 billion in corporate welfare and $123 billion in programs that simply aren’t really showing any positive impact, according to government auditors.

Time for Congress to prove the common wisdom wrong and do the unexpected: Cut spending.


Maybe they’ll suggest a modest, temporary VAT to pay for the war. Also, let’s not forget about the billions of waste and fraud that Obama found in Medicare which he could cut painlessly.

PAYGO and pretend fiscal responsibility

Nov 23, 2009 20:09 UTC

Ed Yardeni calls it on PAYGO:

Too bad that there are so many devils in the details. Obama’s proposal for fiscal discipline totally exempts “discretionary spending” for defense, education, environmental protection and many other programs. Normal increases in entitlement spending (more beneficiaries, higher health costs, etc.) also aren’t covered. In other words, the increase in Social Security and Medicare spending resulting from the impending retirement of baby boomers doesn’t count. Congress did operate under self-imposed PAYGO rules during FY1991-FY2002, and frequently skirted them. The statute was then allowed to expire. So here we are with Mr. Obama paying lip service to fiscal disciple with yet another campaign speech.

Is it any wonder that the price of gold is at a record $1165 this morning?

Afternoon speed round

Nov 17, 2009 21:34 UTC

Some of the best things I read today:

1) Tyler Cowen gives his version of healthcare reform. Ideas 3-10 are particularly strong.

2) Noam Scheiber agrees with Summers that budget deficits are not a big deal since less private borrowing mean no crowding out. I wouldn’t get too satisfied with this explantion.

3) IBD’s Jed Graham has  great post that speculates “come 2013, we might begin to see help wanted ads that emphasize the lack of employer-provided insurance as a perk.”

4) Matthew Yglesias looking how Republicans will try to roll back HC reform if it ever passes. The delayed-start will make this easier.

5) Joel Kotkin again show how California is doing everything wrong to boost growth. Just look at Northern California:

Indeed by some accounts, most embarrassingly in a recent Time magazine cover, the shift to green technologies has already created a “thriving” economy.

Time extols Google, Apple, Facebook, Twitter and the other Silicon Valley companies as exemplars leading to a glorious prosperity; somehow the article missed the empty factories, vacant offices and abandoned farms across the state.

For Apple’s Steve Jobs, Google’s Eric Schmidt and venture capitalists connected to Al Gore, these could well be the best of times. Fed policy prints money for investment bankers to speculate; stock prices rise as people have nowhere else to invest. And for the much celebrated venture community, there’s also an Energy Department that pours hundreds of millions into “green” start-ups that build things like expensive electric cars.

California’s high-tech greens may talk a liberal streak in terms of diversity and social justice, but their prescriptions offer little for those who would like to build a career and raise a family in 21st century California. Their policies in terms of land use regulation and greenhouse gas emissions will make it even harder for existing factories, warehouses, homebuilders and other traditional employers of the middle- or working class.

Yet the “greenest” parts of the country–places like the northern end of the Bay Area–are among the toughest places to build or manufacture anything, without huge public-sector subsidies. Indeed, California’s new green requirements, compared with places like Texas or China where manufacturing has other advantages, would further undermine an already struggling sector. Few businesspeople see much growth in the near future in office or residential construction.

Is Obama planning a $3 trillion income tax increase?

Nov 17, 2009 19:51 UTC

Did I just see a trial balloon launched? Over at a Wall Street Journal conference, Christina Romer, chairman of President Obama’s Council of Economic Advisers had this to say about deficit reduction:

But the chairman of the president’s Council of Economic Advisers admitted that health reform and a growing economy isn’t enough to bring down the deficit. She did mention one other place that revenue could come from: letting the Bush tax cuts expire.

Me: Since Obama already wants to get rid of the income and capital gains tax cuts for wealthier Americans that expire at the end of 2010, clearly what Romer is referring to is the rest of the 2001 and 2003 Bush tax cuts. Letting all the 2001 cuts — rate reductions, child tax credit marriage penalty relief — expire would raise tax revenues by $2.5 trillion through 2019. (These CBO numbers assume no negative economic feedback impact from higher taxes.) And letting the 2003 tax cuts on capital gains and dividends expire would be tantamount to a $350 billion tax increase through 2019. And none of this includes possible plans for a VAT that could raise $400 billion a year more to close the huge projected gap — maybe 7 percentage points — between spending as a percentage of GDP and revenues as a percentage of GDP.


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China questions costs of U.S. healthcare reform

Nov 16, 2009 19:13 UTC

Guess what? It turns out the Chinese are kind of curious about how President Barack Obama’s healthcare reform plans would impact America’s huge fiscal deficit. Government officials are using his Asian trip as an opportunity to ask the White House questions. Detailed questions.

Boilerplate assurances that America won’t default on its debt or inflate the shortfall away are apparently not cutting it. Nor should they, when one owns nearly $2 trillion in assets denominated in the currency of a country about to double its national debt over the next decade.

Nothing happening in Washington today should give Beijing any comfort or confidence about what may happen tomorrow. Healthcare reform was originally promoted as a way to “bend the curve” on escalating entitlement costs, the major part of which is financing Medicare and Medicaid. That is looking more and more like an overpromised deliverable.

For instance, a new study from the U.S. government’s Centers for Medicare and Medicaid Services finds that the healthcare reform bill recently passed in the House of Representatives would increase healthcare spending to 21.3 percent of GDP by 2019 compared with 20.8 percent under current law. That’s bending the curve the wrong way. The study also questions the “long-term viability” of the $500 billion in Medicare cuts meant to help pay for expanded insurance coverage.

In addition, the CMS study gives a clearer cost estimate than the one provided by the Congressional Budget Office. According to the CBO, the 10-year cost of PelosiCare is $894 billion. But that analysis includes early years with little government spending, According to the CMS, the House approach would cost $1 trillion from 2013-2019, or some $140 billion a year when fully put into effect.

Few realists in Washington think any of the current reform plans make a significant dent in the long-term healthcare cost to government. Indeed, the Senate Budget Committee recently held hearing about creating a bipartisan commission to find solutions to America’s entitlements problems.

If healthcare reform really bent the curve, there would be a no need for such a commission to do Healthcare Reform 2.0.

The Chinese might want to keep up the questioning.


You got a point there. I never thought about it that way.

Stan Collender takes issue with me over TARP. Aieee!

Nov 13, 2009 13:26 UTC

Budget guru, raconteur and helluva nice guy Stan Collender takes issue with my recent TARP post over at his must-read Capitol Gains and Games blog. I wrote that

First, as the WSJ story says, the White House is talking about the current fiscal year — 2010 — and it has already made an estimate of the spending that will occur and the revenues that will be collected.  What the administration is saying now is that some of the spending it projected might not be needed and, if so, that it is planning not to find some other use for the funds.  As a result, the projected deficit and the amount the government was expected to borrow could be lower, in this case at least $100 billion or so lower, than was originally assumed. … You definitely can reduce the projected deficit and the debt by not spending funds that were projected to be spent.  That, in fact, is how you do it.  Spending that has occurred has already increased the deficit and the only way to reduce it in the future is not tto continue to spend the dollars again.

On these issues, my default mode is to defer to Stan. (I am waiting a reply from my source.) But then he adds this interesting nugget:

A question should be asked about whether the Obama administration deliberately overestimated how much TARP would cost in 2010 so that it would be able to claim savings later in the year.  This has been a favorite tactic of Office and Management and Budget directors in the past.  Indeed, everyone from David Stockman to Dick Darman to Leon Panetta liked, and it was clearly something that the G.W. Bush administration used with impugnity. But regardless of whether it was intentional or fortuitous, not spending TARP money that had been projected to be spent will in fact lower the deficit and the amount of government borrowing compared to what otherwise would have been spent.

Using TARP to pay down deficit? The math doesn’t add up

Nov 12, 2009 14:03 UTC

First, the nub of the WH idea:

The White House is looking to cut its budget deficit by using some unspent funds from the U.S. government’s Troubled Asset Relief Program (TARP), the Wall Street Journal said, citing people familiar with the matter.

Members of the Obama administration are still debating the idea, the paper said, adding that the administration would still like to keep some of the unspent money in case of emergencies.

A U.S. Treasury source told Reuters that it was shifting the focus of the TARP program toward helping small business and the housing sector rather than large banks.

“As that focus shifts, we expect to use significantly less TARP funding than authorized,” the source said. “We will maintain the flexibility to deal with a future crisis, and uninvested TARP money is dedicated to reducing the debt.”

But as my pal Dan Clifton of the  Strategas Group points out, this idea neglects certain budget realities:

Is this really news? The US government has already issued the debt for the funds and any unused money would logically be used to retire that debt. There is about $300bn in unspent TARP funds now. But none of that can be used as deficit reduction. Why? Because the money has not been spent yet. And is it really $300bn? Absolutely not, the administration decided to change the accounting to a net present value basis. So any savings would be negligible. The punchline: This story makes a great headline against the concerns over deficits, but will have zero impact on debt issuance and the deficit.


There are two actions which could substantially reduce (and eventually end) the US debt.

Within the last year companies which received TARP shared the wealth via bonuses when it was not theirs to share. In fact, their response to TARP has been to hog far more in bonuses (at taxpayer expense) than their companies even earned. A substantial tax penalty (a claw back of 70% or better?) on these bonuses would net $Billions which could be used to pay down outstanding debt and discourage future feeding frenzies.

In the late 80′s a pie chart in the 1040 instruction book caught my attention. Still there, it describes the sources and expenditures of US Treasury funds including taxes. Not surprising was that Defense was the greatest spending portion. What I found alarming at that time was that almost as large a piece of the pie went to service the public debt. My reasoning held that this burden would eventually be lifted if the US Treasury would simply STOP selling bonds.

The meltdown on Wall Street last fall has by now been embraced by both Bush and Obama as an excuse to raid the treasury on behalf of the companies which caused the problem. Expect the DEBT piece of the US Expenditures pie to eclipse defense in your next 1040 book.

Can a special commission stanch America’s red ink?

Nov 10, 2009 20:19 UTC

I spent all morning at a Senate Budget Committee hearing looking at how to create a special commission that would devise a plan to fix America’s long-term budget shortfall. This would be like the base-closing commission where a panel — made up mostly of senators and congressman — would submit a plan to Congress that would have to be voted on — up or down, no amendments.

Among the economists and budget experts who testfied — Douglas Holtz-Eakin, Maya MacGuineas, David Walker and Willam Galston — there was widespread agreement that a) commission is a good idea, b) ObamaCare does little to change the long-run fiscal outlook for the better, c) we may be approaching the point where global financial markets rebel as American profligacy, d) Obama will have to break his campaign promise and sharply raise middle-class taxes (in addition to healthcare taxes, of course).

But it would be my guess that Team Obama is more worried today about rising unemployment than rising deficits.


Many Democrats probably would be fine with Carter-era tax rates on top earners and a VAT. Of course, even if those were enacted, it would just lead to more spending and debt. I doubt a commission would be enough cover to get them to vote on really tough things, like the retirement age or really reforming Medicare. At some point, voters just will have to demand that they stop being treated like children, and deal with reality of how to solve these problems. Don’t hold your breath.

Dem healthcare reform fails to bend the curve

Nov 10, 2009 15:08 UTC

If you care about bending the curve of long-term healthcare costs – downward, I should emphasize – then it is tough not to conclude that Democratic efforts at healthcare reform are a failure. The essential money-sucking structure of US healthcare would remain intact. As the NYTimes finally figures out:

Experts — including some who have consulted closely with the White House, like Dr. Denis A. Cortese, chief executive of the Mayo Clinic — say the measures take only baby steps toward revamping the current fee-for-service system, which drives up costs by paying health providers for each visit or procedure performed. …

Among other innovations being considered is a cost-cutting method known as bundling, in which health providers receive a lump sum to care for a patient with a particular medical condition, say, diabetes or heart disease. The House bill calls for the administration to develop a plan for bundling, while the Senate Finance Committee version of the bill gives it until 2013 to create a pilot program.

Some experts would like to see such changes adopted more quickly, and senators of both parties say they will press for more aggressive cost-cutting measures when the bill comes up for debate. But drastic changes in the health care reimbursement system could cost the White House the support of doctors and hospital groups, who have signed onto the legislation and are lobbying hard to keep the current fee-for-service system from being phased out too quickly.

Experts agree that the Senate Finance bill does more to put systemic changes in place. That is because the bill includes two measures that health economists favor: a tax on high-value “Cadillac” health plans, and an independent commission that would make binding recommendations on how to cut Medicare costs.

Dr. Cortese, of the Mayo Clinic, said the bills could do more to reward quality care over quantity. He said he had met with Mr. Orszag and others at the White House and had proposed legislative language that would give Medicare three years to begin rewarding hospitals that are delivering better care at lower cost.


maybe, but if it turns out anything like this public model then we are in very very good shape. http://cli.gs/23yYaM/

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