James Pethokoukis

Politics and policy from inside Washington

The U.S. debt situation vs. AAA governments

Aug 10, 2011 19:43 UTC

This chart from the Committee for a Responsible Federal Budget shows the U.S. situation could be considered the most dire:



This data set from the Economist provides a different picture:

http://www.economist.com/blogs/buttonwoo d/2010/06/indebtedness_after_financial_c risis

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The stark difference between Reid’s defense cuts and Ryan’s

Jul 26, 2011 12:41 UTC

Here’s the big problem House Republicans have with Sen. Harry Reid’s budget plan: Some $1 trillion of its $2.7 trillion in savings over the next decade — or 37 percent — come from factoring in an expected troop drawdown over the next few years from Iraq and Afghanistan. This is something everyone expects — other than the Congressional Budget Office baseline fiscal forecast. It assumes no drawdown, and it is against CBO’s unlikely scenario that Reid compares his plan.

So, Republicans say, the real savings are just $1.3 trillion, excluding $400 billion in interest payment reductions. That is far less than the $2.4 trillion hike in the debt limit Reid is asking for. And recall that Republicans want spending cuts to at least equal the increase in the debt limit. So Reid is still short, from the House GOP perspective, anywhere from $700 billion (if you accept the interest savings) to $1.1 trillion.

But Democrats charge hypocrisy, noting the recent House Republican budget from Rep. Paul Ryan also assumes a troop drawdown. So GOPers should quit playing politics and embrace the Reid plan.  But what Democrats aren’t saying is that even with that assumption, the House-Ryan budget plan cuts spending by $6.2 trillion vs. President Obama’s 2012 budget since the Obama plan also assumes savings from a drawdown.

So zero percent of Ryan’s $6.2 trillion in spending savings vs. the Obama budget comes from the drawdown. And even against the CBO baseline (which assumes perpetual war with no drawdown), just 17 percent of the House-Ryan budget comes from the drawdown. It still has $4.8 trillion in actual cuts.  This chart from the House budget committee helps explain things. The key spending line is “Global War on Terror”:



I appreciate your response and PLEASE, don’t misinterpret me. I am NO fan of Mr. Obama, not at all. My objection is numbers going out ten years in the future and treated as though they are real and unassailable. I also disbelieve this whole global warming thing because it relies too much on predictions of the distant future. Nobody, and I mean NOBODY, can predict the future with even remote accuracy. Certainly not politicians, so these numbers showing surpluses or deficits well into the future, and with three-digit accuracy no less are, in my huimble opinion, worthless.

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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:


GOP should ignore Moody’s debt ceiling warning

Jun 2, 2011 18:31 UTC

Team Reuters reports:

Moody’s Investors Service said on Thursday there is a very small but rising risk of a short-lived default by the United States if there is no increase in its statutory debt limit in coming weeks.

In a statement, Moody’s said if there is no progress in increasing the debt limit, it would expect to place the Aaa sovereign credit rating on review for a possible downgrade.

“If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction,” Moody’s said.

I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense. Let me again replay what Stanley Druckemiller opined on the topic (via the WSJ):

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.

Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.”

Mr. Druckenmiller says that markets know the difference between a default in which a country will not repay its debts and a technical default, in which investors may have to wait a short period for a particular interest payment. Under the second scenario, he doubts that investors such as the Chinese government would sell their Treasury debt and take losses on the way out—”because I’ll guarantee you people like me will buy it immediately.”



Paper Number 3: The debt ceiling is raised, the gov’t, which won’t repair the budget, must print money (quantitative easing) to make its debt-service payments. Inflation rises to 7% while you lent money at 3%. Your “risk-free” T-bond portfolio loses much of its value.

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Cutting entitlement benefits to wealthier Americans

May 12, 2011 14:49 UTC

Good stuff on means testing from Charles Blahous over at e21:

As it happens, the two largest and fastest-growing areas of federal spending, Social Security and Medicare, are both ones for which the wealthiest Americans are fully eligible for rising benefits. Both programs are, to be sure, of extreme political sensitivity. But the financial imbalances in these two programs require correction by elected officials in any event. To the extent that spending on the wealthy is constrained within these programs, it will reduce the financial pressure for even more politically-sensitive changes to them.

1) The essence of what is required is for the two parties to agree on how many high-income individuals to affect, and on how much. Social Security provides a ready case study in how this could be done. Many Democrats, for example, have expressed sympathy with the concept of raising the current $106,800 limit on the amount of wages subject to the Social Security tax. Such a measure would affect roughly 20% of workers (the number who have wages above the current limit at some point in their careers). Legislators could therefore choose instead to slow the growth of benefits – perhaps for that same number of workers, or the top 20% of the wage spectrum.

How much should the growth of such benefits be slowed? It is not financially necessary to reduce Social Security benefits from current levels. Current Social Security proposals, for example, that employ “progressive indexing” would only impose price-indexation on less than 1% of workers, with everyone else receiving faster benefit growth. Limiting the highest-income 20% to inflation-adjusted benefits and allowing gradually faster growth for workers below that level could by itself eliminate well more than half of the entire Social Security shortfall.

2) As for Medicare, Democrats and Republicans fiercely disagree on whether cost containment is best achieved via a premium support model, or by the federal government’s imposing price controls within the program’s current design. But they do agree on the need for cost containment itself. Already certain features of federal health care law, such as the exemption from the “Cadillac plan tax” and the vouchers provided under the new health entitlement, will grow only with the Consumer Price Index (CPI), despite the fact that historically health cost inflation has exceeded economy-wide CPI. If it is politically acceptable to restrict these forms of federal health care support to CPI growth, surely Medicare direct spending on the highest-income beneficiaries could similarly be limited. (This cost containment could be achieved most neatly by changing the rate of growth for income-related Part B premiums so as to hold the growth rate for total Medicare per-capita expenditures to CPI for the highest-income beneficiaries).

3) Though these are the largest federal spending programs, and though most other direct spending is not targeted on the rich by any definition, savings from direct payments to higher-income individuals need not end there. Agriculture support payments, for example, are currently made to farmers with adjusted gross farm incomes as high as $750,000 (and allowing for an additional $500,000 in non-farm income). At a time when so many continue to struggle amid a weak economy, when federal finances are in desperate condition, and when many talk of the necessity of raising taxes on millionaires, it is difficult for taxpayers to understand why direct payments to millionaires continue. It is encouraging that reports on nascent bipartisan deficit talks indicate that such excessive farm subsidies are potentially on the chopping block.

A bipartisan effort to restrain entitlement spending on the rich will not draw unanimous praise. Some on the far left will see such reforms as part of an insidious plot to weaken popular support for cherished programs. But even objection from these quarters is potentially useful and informative. As a nation we must decide whether our loyalties attach to the programs in the abstract or to the individuals affected by them both as beneficiaries and as taxpayers. We need an informed debate over whether the costs of government should rise to unprecedented levels simply because of the political importance some might attach to buying the support of those who least need assistance.


Senate GOP’s budget proposal shows Dem attacks working

May 10, 2011 20:00 UTC

The “Restoring Balance” fiscal proposal created by Sen. Pat Toomey does lots of good things. Such as the following:

– balances the budget by fiscal year 2020 and achieves a modest surplus in fiscal year 2021.

– reduces publicly-held debt $4.7 trillion below the levels projected in the president’s plan.

– reduces publicly held debt to approximately 52 percent of GDP by 2021 vs. 68 percent for Paul Ryan’s budget plan.

– reduces publicly held debt to approximately 52 percent of GDP by2021 and lowers total spending to 18.5 percent of GDP. This budget spends approximately 3 percent less than the House-passed budget and 16 percent less than the president’ s budget with no changes to Social Security.


It achieves these things mostly by big, fast cuts to discretionary spending (including defense) and to Medicaid. Nothing wrong with that. But even Toomey concedes that it is not a comprehensive plan:

Restoring balance entails two distinct, but related, paths: near-term (discretionary and non-Medicare and Social Security entitlement spending) and long-term (Medicare and SocialSecurity). The first step must be to reduce discretionary spending and non-Medicare and SocialSecurity spending. This category of expenditures has been the primary driver of deficits over the last decade, and continuing to spend at such high rates precludes an effort to tackle the long-term challenges they present.

While Social Security, Medicare and Medicaid require structural reforms soon, it is neither necessary nor politically feasible to take them on all at once. Focusing on just the current 10-year budget window, this budget makes no changes to Social Security. Changes to Medicare are limited to restoring the fictitious and unspecified cuts projected in the president’s budget.

But it’s hard to look at this budget and not conclude that it reflects the success Democrats have had attacking the entitlement reforms in Rep. Paul Ryan’s Path to Prosperity.  The Toomey Plan leaves Social Security and Medicare alone. As a result, it ignores that debt problem beyond a decade out. (Nor does it have lots of comparison charts that make it easy for gin up political attacks.)  I have leveled the same criticism at Obama’s various budget “plans.”  Implementing the Toomey plan would be a huge step forward. But since the American social insurance system will eventually need to go the Ryan path or become a strict, command-and-control rationing system, better to make the case with confidence sooner rather than later. I am quite sure Toomey knows this, and perhaps if the Senate were filled with his clones, this new budget would reflect that.  But for now Republicans, at least those in the Senate, are not looking any further than the 2012 elections.


The Democrats aren’t lifting a finger. Republicans who went home and hald town halls got beaten up by their own constituents, not by Democrats. The GOP has gone off the rails, and nothing can haul that train back up the cliff. They will be spending another ten years in the wilderness, thanks to Grover Norquist, the Kochs, and the Heritage Foundation.

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Boehner really isn’t asking for that much to raise debt ceiling

May 10, 2011 18:19 UTC

On  its face, House Speaker John Boehner’s demand for perhaps more than $2 trillion in spending cuts may look like a dangerous escalation in the political battle over raising the federal debt ceiling by a similar amount. But the reductions would be over 10 years, they’d be in line with several budget proposals, and they would represent only a modest down payment on austerity.

A group of Wall Street executives and other business leaders  listening to Boehner on Monday evening in Manhattan seemed unenthusiastic. They would almost certainly prefer to disentangle the issue of expanding the federal borrowing authority — and thus avoid even the whiff of possible default — from how best to deal with America’s long-term deficit and debt problems. After all, both parties have agreed on a budget that requires more borrowing next year. That is the White House position, too. “To hold one hostage to the other remains extremely unwise,” spokesman Jay Carney told reporters today on Air Force One as Obama flew to Texas.

But, thankfully, politics keeps pushing the two issues together. The powerful Tea Party wing of the GOP wants party leaders to get something substantial in return for enabling more Treasury borrowing. That might include some or all of congressional approval of a balanced budget requirement, a legislative cap on future federal spending, and deep budget cuts. Boehner’s speech certainly gave the impression he’s on the same page. “The cuts should be greater than the accompanying increase in debt authority the president is given,” he said.

Treasury Secretary Timothy Geithner may want as much as $2 trillion in new borrowing capacity through 2012. It’s not a small number, but matching that with cuts over 10 years is manageable. President Barack Obama’s debt commission called for $2.2 trillion over a decade, while his own recent budget proposal contemplates reductions almost as large. And if defense cuts are in the mix, as Boehner implied, it all could be done without touching Medicare and Social Security outlays.

Of course Democrats want to see increases in tax revenue as well as spending cuts. The elements of the Republicans’ three-part package, meanwhile, would force greater fiscal discipline on this and future administrations. Failure to do a deal could lead to a series of repetitive fights over temporary, even monthly, debt limit increases up until the 2012 elections. That won’t suit Wall Streeters, so they should hope Boehner’s equation can accommodate a compromise.



Just remember that this is the same Republican Party that wants to gut medicare and honestly believes that private companies will rein in healthcare costs. These are the people that brought us the Iraq war. Do we really want them back in the driver’s seat? Maybe we do. Maybe we haven’t had enough economic distress, social stagnation and loss of American lives in stupid wars to feel the great sense of satisfaction that they obviously feel for themselves. Oh yes, give it to us, GOP, give us your brilliant ideas and your wonderful future of bread lines and sixth-grade education for all!

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The fantastic assumptions of the “The People’s Budget” by House Democrats

May 9, 2011 15:25 UTC

What’s the true opposite of Rep. Paul Ryan’s “Path to Prosperity” budget plan?  Well, there’s the Obama “Framework,” but that is little more than a speech and a bunch of bullet points.  For a more serious and comprehensive liberal response, take a look at the “People’s Budget” produced by the Congressional Progressive Caucus.

Here’s the short version of the plan: It claims to achieve primary balance (not counting interest costs) by 2014 and overall balance by 2021. It does this via huge tax hikes (on income, corporate profits and investments) and by cutting defense spending by $2.3 trillion over a decade – and then shifting $1.7 trillion of those savings into nondefense outlays.  Those nearly $2 trillion in new “investments” would boost the growth potential of the economy by 0.3 percentage point per year over the next decade. Or so the CPC and the Economic Policy Institute claims.

The economic consulting firm Macroeconomic Advisers is dubious, to say the least, that the Peoples’ Budget would boost growth rather than kill it. Among its criticisms (as excerpted by me):

1) The analysis ignores near-term fiscal drag sure to arise if the plan is implemented when the Federal Open Market Committee has little room to accommodate a strong fiscal contraction.

2) Nor does it even mention the potential deleterious supply-side effects of raising marginal tax rates

3) The $1.7 trillion is nominal, not real, spending. Furthermore, in the CBO baseline inflation averages 2% per year. Adjusting for inflation reduces the $1.7 trillion in current dollars to $1.5 trillion in 2005 dollars.

4) This is gross investment, some of which depreciates away over time. The average or effective depreciation rate on private nonresidential fixed capital is about 7.5% per year. Assuming this rate of depreciation, and then accumulating the real gross investment flows by perpetual inventory into a net stock leads to an increase of roughly $0.7 trillion in the level of the real capital stock over the coming decade.

5) In our own long-run forecast, the real private nonresidential capital stock is roughly $21 trillion at the end of 2021, of which $0.7 trillion would represent an increase of about 3%.

6) This is for the private nonfarm business sector, which accounts for only three-fourths of total GDP. Hence the impact on the level of GDP at the end of ten years would be 0.75 times 1%, or 0.75%.

7)  When this increase is spread over ten years, the average impact on growth is less than 0.1 percentage point per year, or only about a third of the impact the EPI analysis suggests would result from the federal government spending the same amount of money on nondefense activities.

But wait, there’s more:

There are additional reasons to be suspicious. Much of the literature estimating the return to public investments focuses on the productivity of tangible investment like infrastructure, in part because there are data on the tangible public capital stock that facilitate such research. However, of the $1.7 trillion of new nondefense spending proposed in the People’s Budget, only $0.2 billion is specifically earmarked for physical infrastructure that would be included in official estimates of the public capital stock. The remaining $1.5 trillion is for “job creation, education, clean energy and broadband infrastructure, housing, and R&D.” Our National Accounts would count almost all of this either as current consumption or current transfers, not gross investment, and certainly there must be some consumption element in such spending. Do we really think that an increase in “foreign assistance” delivers the same productivity gain as expanding or repairing the inter-state highway system?

In addition, the analysis doesn’t argue that the $2.3 trillion of cuts in defense spending are a reduction in public investment that reduces economic growth. In essence, the EPI analysis implies that, at the margin, nondefense spending is all investment but that defense spending is all consumption. Both sides of this proposition might be closer to the truth than not, but if some nondefense spending is consumption and some defense spending is investment, the EPI calculus on the growth effects of the People’s Budget can be quickly undermined.[7] Suppose, for example, that 75% of the extra nondefense outlays really are new investments, but that 25% of the proposed savings in the defense budget actually reflects cuts in public investment. Then, the net change in public investment is reduced from the $1.7 trillion advanced in the People’s Budget to just $0.7 trillion (=.75*$1.7 trillion – .25*$2.3 trillion).



Fine fine. I don’t doubt all these numbers. That’s why it’s called a *Peoples’ Budget*, not a real budget and don’t forget, it was put together by the *Progressive Caucus*. Lefties never give up. A simple laugh and a wave of the hand at this budget proposal would have been adequate.

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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.


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:


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.


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.

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How bad was Obama 2012 budget 1.0?

Apr 18, 2011 20:36 UTC

It was this bad. (Note that this Goldman Sachs chart also shows that Obama’s budget would have resulted in the pulling of the automatic tax hike/debt cut trigger suggested in his new budget speech/plan). The WH plan is OMB FY 2012 Budget:




That graph is incorrect. Under the CBO baseline, debt held by the public will reach 67% of GDP by 2021. Under Ryan’s plan it reaches 70% of GDP by 2021. Check the CBO’s assessment of Ryan’s plan.

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