James Pethokoukis

Politics and policy from inside Washington

Geithner vs. Ryan on S&P’s debt warning

Apr 18, 2011 16:01 UTC

Here is what the Treasury Department has to say about S&P’s bomb:

“This morning, S&P affirmed the AAA rating of the U.S., but emphasized the importance of timely bipartisan cooperation and action on fiscal reform. In addition, Moody’s commented today that ‘we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government.’

“As the president said last week, addressing the current fiscal situation is well within our capacity as a country. He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility. The U.S. economy is strengthening as it emerges from the recent recession. Both political parties now agree that it is time to begin bringing down deficits as a share of GDP.

“S&P assumes that the U.S. will enact ‘a comprehensive budgetary consolidation program — combined with meaningful steps toward implementation by 2013,’ but we believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.”

And here is House Budget Chairman Paul Ryan:

“We face the most predictable economic crisis in our history — a crisis driven by the explosive growth of government spending and debt. House Republicans took action last week to chart a new course by passing a budget that lifts our crushing burden of debt and puts our economy on the path to prosperity. By contrast, the President’s budget locks in Washington’s recent spending spree, adds $13 trillion to the debt over the next decade, and accelerates our nation toward a fiscal crisis. The failure to advance solutions threatens not only the livelihoods of future generations, but also the economic security of American families today. A campaign speech is no substitute for a serious, credible budget. The President and his party’s leaders must put an end to empty promises and work with us to avert this looming economic crisis.”

Obama’s $2 trillion stealth tax hike

Apr 18, 2011 02:57 UTC

Talk about fuzzy math. President Obama claims higher taxes will account for a mere third — $1 trillion — of his proposed $3 trillion debt reduction over 12 years, not counting less interest expense. Wrong. The actual number is probably around 50 percent of $4 trillion in savings — some $2 trillion — and could be closer to 60 percent. (More details below.) Instead of offering a template for a Grand Compromise, Obama seems to have created a Grand Obfuscation.

This is just one example among many that shows how Obama’s much-hyped new budget plan is actually neither new nor a budget nor a plan. To the extent that it’s even a “framework” — to grant the White House its preferred descriptor — it’s one whose ideas and goals are precariously fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity. Then again, the core purpose isn’t budgetary balance but political persuasion.

The Obama White House naturally wants the media to favorably compare his outline to House Budget Chairman Paul Ryan’s 73-page  “Path to Prosperity” which is highly detailed and has been scored accurate by the Congressional Budget Office. It brings the budget into balance and eliminates the national debt by cutting spending — not raising taxes.

And how does Obama’s  “Framework for Shared Prosperity and Shared Fiscal Responsibility compare?

1) Obama’s Framework is a speech, along with a roughly 15-page fact sheet that is unlikely ever to get placed under the CBO microscope. It’s tough to score generalities such as the president’s claim the plan would put “deficits on a declining path toward close to 2.0% of GDP toward the end of the decade.” “Close to”? “Toward the end”?

2) The Obama Framework also fails to give a clear trajectory of where the debt-to-GDP ratio is heading, other than to call for a trigger that would boost taxes or cut spending in 2014 if the ratio doesn’t appear to be bending lower.

3) Other oddities abound. The plan has a 12-year time frame rather than the customary ten. It doesn’t indicate  what baseline it uses to make claims that it cuts debt by $4 trillion, if you include interest expense. Nor does it spell out what economic projections are being plugged in. Obama’s 2012 budget released in February was more bullish than the CBO’s, which Ryan uses.

4) Also unlike the Ryan Path, the Obama Framework doesn’t show how his plan affects debt and deficits over the coming decades. If it did, Obama would have to reveal that he can’t a) keep government spending above historical levels and b) balance the budget and reduce debt long term without c) jacking middle class taxes through the roof.

The Obama Framework is so vague and fuzzy that doing a true apples-to-apples comparison between the Ryan Path and the Obama Framework comparison is almost impossible. (Best guess: Ryan cuts $3 trillion more than Obama over a dozen years.) This could be intentional.

The tax issue mentioned earlier provides a perfect illustration. Toward the end of his speech last week, Obama said the following:

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.

But earlier in the speech, Obama also said this:

In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. We can’t afford it. And I refuse to renew them again.

If you’re keeping score, what Obama is actually proposing is $1 trillion in new taxes on wealthier Americans (and small businesses) and $1 trillion in higher tax revenues by reducing tax breaks and subsidies for a total of $2 trillion in new taxes over 12 years. That means total debt reduction, not counting interest, would be $4 trillion, 50 percent of which would come from higher taxes. The econ team at Goldman Sachs ran a similar analysis and found that 56 percent of Obama savings over ten years could come from higher tax revenue.

In this way, Obama relies far more on taxes than the two-parts spending/one-part taxes formula of the Obama-Bowles-Simpson debt panel that is supposedly his model. As Obama said, “It’s an approach that borrows from the recommendations of the bipartisan Fiscal Commission I appointed last year.” Not really.

Now none of this is easy to discern from Obama’s speech nor from the accompanying fact sheet. Neither indicates which budget baseline Obama is using. If he is, for instance, using the standard CBO baseline which assumes all the Bush tax cuts expire, Obama’s budget plan might actually get close to 60 percent of its debt reduction from taxes, especially if he also used the CBO’s gloomier GDP forecast. And if his mid-decade tax “trigger” should get pulled …

Of course, the framework that really interests the White House is a political one. They want to set the terms of the 2012 presidential election debate. And with this budget plan they have, though surely not in the way they intended. America’s debt problem is one of too much spending, not too little revenue. By offering a tax-heavy fiscal fix that keeps Big Government firmly in place, Obama offers Americans a clear choice of economic futures, his or Paul Ryan’s.

COMMENT

Democrats are so darn lazy. If they would just look up some FACTS instead of repeating lies otherwise known as Democrat talking points, they might realize that the top 10% of tax payers already paid 71% of the income tax though they only made 43% of the income… nah they’re not paying their “fair share” as Obama likes to blather…

The top 10% only make $3.3 trillion in AGI so for every 1% increase in their taxes you only get $33 billion… so raising rates back to the Clinton rates only nets about $100 billion a year. Of course that ignores the fact that many if not all of the top 10% would adjust their affairs to avoid most or all of the rate increase but just for argument, let’s use the $33 Billion figure.

Now a question for you Democrat/Socialists of “tax the rich” school. What is the annual interest on Obama’s $16 trillion deficit? OK I’ll tell you since I am sure you have no clue,it’s $400 Billion. Obama’s annual deficit is $1.2 Trillion.

So let’s do a little math, going back to the Clinton rates covers only 25% of Obama’s interest expense… so for “tax the rich to work, we really need an additional $1.2 trillion a year to cover the Democrat spending and the debt service. So he really has to raise rates by about 36% on those evil rich people in the top 10%.

You see the magic of Obama and the Socialist/Communists “Tax the Rich” plans is that they don’t work. Honesty is not one of Obama’s strong suits. You can now see how ridiculous any argument that relies on “taxing the rich” is. Spending has to be cut by well over a trillion dollars a year.

Posted by labillyboy | Report as abusive

Conflict of visions: Obama vs. Ryan

Apr 15, 2011 20:53 UTC

So the House just passed Paul Ryan’s highly-detailed “Path to Prosperity” Plan. It almost immediately achieves primary balance and reduces debt as a share of the economy. It balances the budget in the 2030s and eliminates outstanding debt in the 2050s by cutting and restructuring government healthcare spending. And it does all this without raising taxes while also lowering tax rates on companies and investors, both big and small. Even more impressive, the plan uses the slow-growth economic assumptions of the Congressional Budget Office, which, by the way, has scored the lengthy fiscal blueprint.

Then we have President Obama’s plan, as outlined in his speech earlier this week. Despite an economy plagued by high unemployment and falling wages, somewhere between 40 percent and 60 percent of his debt reduction would come through higher taxes over the next decade.  And there is no long-term plan to bring the budget into long-term balance. Achieving that while also keeping Obama’s high level of spending — even assuming unproven, Washington-imposed healthcare cost controls work —  would require raising middle-class taxes, a reality the White House wishes to hide.  Even worse, Obama assumes growth will be stronger than the CBO does, making a comparison with the Ryan plan even less flattering. And will the White House ever submit this plan to the CBO? Who knows? The fiscal scorekeeper would have a tough time scoring it in its present shape. (The propeller-heads in the White House budget office apparently had no role in in creating Obama’s new plan. Neither did the defense department despite the defense cuts.) And it was all bundled in a thick wrapping of class-warfare rhetoric.

At least, that’s how I see things.

COMMENT

So both plans fall woefully short of addressing all of the challenges confronting the Nation’s fiscal state. Once again, no doubt, politics has clouded the better judgement of our representatives and forced our “Better Angels” to be driven away. As usual for most complex problems, the real solutions lie somewhere in the middle between the typically delivered two extremes. The question for us to answer is does any of our Congressmen Possess the intestinal fortitude to risk their political futures, step away from the party lines/positions and reach across the political aisle and embrace compromise and consensus building. Everyone, and I really mean everyone, has to sacrifice their current socioeconomic positions in this great Nation and give back to demonstrate to the rest of the world (and financial markets) that we are very serious about addressing our debt situation. Credit worthiness is truly a matter of perception. If the lender believes you are a credit risk, then you are a credit risk regardless of the details or numbers. The same applies for the nation. So our near-term objective should be to change the perceptions of our creditors. The first step toward that end is to generate a fiscal plan that reassures them we are serious about addressing our debt situation. Start there, focus are actions accordingly and work our way back to that AAA ratings the world is accustomed to seeing from the United States!

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Obama’s new plan may actually rely 60 percent on tax increases

Apr 15, 2011 15:38 UTC

In his budget speech earlier this week, President Obama described his budget plan this way:

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 tax expenditures — spending in the tax code. And it achieves these goals while protecting the middle class, protecting our commitment to seniors and protecting our investments in the future.

Now with all these plans floating around — the debt commission, Paul Ryan’s — Goldman Sachs has tried to do an apples-to-apples comparison over 10 years (not 12 as White House tried to pull off). And here is what it found:

gsSo of the 3.4 percentage points of savings, more than half — 1.9 points — comes from taxes. That’s 56 percent, not the one-third or one-quarter that Obama was talking about. And I am assuming that Goldman is using the White House’s rosier economic forecasts when evaluating Obama’s plan. (Ryan uses the gloomier ones from the Congressional Budget Office.) I think the Republicans will be pointing this out.

UPDATE: Here is one more key bit from the Goldman Report:

Measured against the CBO alternative scenario, the President’s proposal relies more heavily on increased revenue than the other proposals. It assumes that the $1 trillion in proposed revenue increase (over 12 years) does not include the additional $700bn (over ten years) from allowing the upper-income tax provisions to expire; the President’s spending cut proposal is on the same general scale as the external commissions, though somewhat smaller, at around 1.5% of ten-year GDP.

To be clear, Obama is abolishing the Bush tax cuts for $250,000 and  an additional $1 trillion tax hike.

COMMENT

@mailo24, anyone who doesn’t think as you do is crazy…. right? And “down with social programs!” (until it is you who are sick, injured, unable to work, laid off, fired, retired etc etc etc)

Posted by hsvkitty | Report as abusive

Obama’s upside-down tax reform

Apr 14, 2011 19:34 UTC

Larry Kudlow notices on part of the Obama budget/speech that doesn’t seem to echo Bowles-Simpson:

We thought tax reform meant lowering rates and broadening the base by eliminating or cutting back on various deductions, credits, and loopholes. That’s what the Bowles-Simpson commission proposed. That’s what Paul Ryan and David Camp are working on. And that’s the pro-growth model.

But President Obama unveiled a much different tax-reform vision in his much-anticipated debt speech on Wednesday. He would raise tax rates on upper-income earners and small businesses. He also would eliminate deductions and credits, or so called “tax expenditures.” The president referred to these tax-expenditure reductions as “spending cuts.” In his context, they most certainly are not. They are more tax hikes.

Basically, the president is giving successful earners and small-business filers a double tax hike. That’s what it really is.

Of course, the president’s formula of estimating higher revenues to lower the deficit is completely wrong. The reality is that higher tax rates will slow the economy, inhibit new start-up companies, penalize investors, and may very well lose revenues and increase the deficit. In the latter part of his speech the president did mention some kind of middle-class and corporate tax reform. But he gave no specifics.

COMMENT

Everybody should pay an equal percentage of taxes. If you only bring in a cute little 15k a year then maybe you should take your pell grants and go to school so you can do something useful with your life. Whoever thought penalizing the successful was a good idea was clearly not very successful.

Posted by JKHazen | Report as abusive

The big hole in Obama’s budget plan

Apr 14, 2011 08:01 UTC

Did the White House A/V dude load the wrong file into Obama’s teleprompter? While the president’s class-warfare attack on Paul Ryan’s “Path to Prosperity” would probably have earned rousing applause at a Jefferson-Jackson dinner, the speech failed to accomplish its advertised purpose: outlining Obama’s long-term blueprint to avoid a debt crisis.

Even if a) his doubling-down on Obamacare’s unproven cost controls works and b) his trillion-dollar tax increases don’t slow the economy, this new plan only stabilizes government debt as a share of the economy for maybe a dozen years. After that, the march to financial crisis continues apace.

Of course, if Obama had actually offered a multi-decade blueprint, like Ryan did, he would have had to concede that there’s no way he can pay for all his spending over the long term without Washington raising taxes on the middle-class and probably instituting a value-added tax. (On that count, one nonpartisan budget expert told me, the Obama plan is “ridiculous.”) As I wrote a few days ago:

The president is also promising a long-term fix. The further out one goes, however, the less feasible it is to spare the middle class as Obama promises. White House economists reckon America’s aging population – and its healthcare needs — means government will need to be bigger than its post-World War Two average of around 21 percent of GDP. (And this actually assumes Obamacare’s cost controls work.)

Yet the U.S. tax system has rarely generated anywhere near so much revenue as a share of output, much less two to four points higher or more. And it sure can’t by just taxing the “rich.” In that scenario, a value-added tax hitting everyone could well be needed. A 10-point VAT, layered onto the current system, would generate $3 trillion in revenue over ten years. (Again, assuming no negative economic impact.)

Now that’s no way to launch a reelection campaign. It’s also no way to win the economic future. Yesterday, the International Monetary Fund kvetched that the White House had no credible plan in place to cut U.S. debt. Some 24 hours later, it still doesn’t.

The Obama debt plan, lightly dissected

Apr 14, 2011 00:50 UTC

Here is a pretty good rundown of President Obama’s plan  from Goldman Sachs (with my comments in bold):

1.The president proposes to reduce the deficit by a cumulative $4 trillion over twelve years (through 2023), though it is not entirely clear what baseline this savings number is relative to.

Yes, this confused me, too. It is easier to look at the year deficit- and debt- to-GDP numbers. But it also tough to do this since the White House hasn’t put out a breakdown. Instead it produced this: “The Administration projects that this framework will reduce deficits as a share of our economy to about 2.5% of GDP in 2015, and put deficits on a declining path toward close to 2.0% of GDP toward the end of the decade.” What does “close to” mean? I dunno. And what about the strange use of a 12-year budget window to make his cuts look bigger. Very weird. Will this ever by submitted to the CBO?

2. The president also proposes to establish a debt trigger that would enforce across the board cuts in spending and “tax expenditures” if by 2014 “the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.” For example, the current CBO baseline assumes an increase in the debt to GDP ratio from 2018 to 2020 of 75.3 to 76.2, so if this policy were to apply today (rather than 2014 as proposed), it would imply additional fiscal tightening as we understand the proposal.

The WH numbers appear to be close to Paul Ryan’s numbers which would mean a debt ratio stabilized around 70 percent, much  better than the 87 percent of his previous budget.

3. More discretionary cuts reflect recent congressional debate. President Obama’s new proposal would reduce non-defense discretionary spending by an additional $200 billion over ten years compared with the freeze proposed in his FY2012 budget, released in February. To some extent this probably reflects the fact that any freeze over future years would start at a lower level, and thus presumably generates additional cumulative savings.

The budget deal would supposedly cut $315 billion over ten years, so Obama is expecting to cut less than that.

4. The president indicates that additional savings would also be found in defense discretionary spending; the White House fact sheet identifies $400bn in savings over twelve years (through 2023) beyond the savings from ramping down overseas military operations. Some of this reduction appears to be new, but it isn’t clear how much it overlaps with existing proposals to reduce defense spending.

Me, neither.

Taxes: Few specifics. The president endorses the concepts behind the fiscal commission’s proposal, namely to reform the tax code and reduce tax expenditures. Note that the fiscal commission recommendations included multiple reform scenarios. He also indicates that increased revenue should make up only one quarter of total budgetary savings (including interest savings), in line with the fiscal commission’s approach. Note that the president’s budget in February already assumed expiration of upper-income tax cuts after 2012 as well as a limitation on itemized deduction by higher-income taxpayers; we assume the discussion of those issues in his speech relates to those proposals.

What expenditures would be reduced or eliminated? How much would  rates be lowered? As low as Bowles-Simpson recommends? Again, I dunno.   How this is structured also determine ether the middle-class would have a higher tax burden. But maybe Obama, as he is hinting, is promoting the theory that only higher tax rates are tax hikes, not fewer tax breaks.

Mandatory spending: Less deficit reduction than the House proposal. President Obama proposes $340bn in savings from additional health reforms over the next ten years. This does not appear to involve the fiscal commission’s recommendations. Instead, it assumes savings from setting an even lower spending growth goal of GDP + 0.5% for the Independent Payment Advisory Board (IPAB) set up under last year’s health reform law, as well as $100bn in Medicaid savings and $200bn in Medicare savings. This is a much lower aggregate deficit reduction amount from this segment of the budget than included in the House Republican budget resolution, which proposes $1.1 trillion in savings compared with the President’s FY2012 budget. The President proposes $360bn in savings through 2023 (i.e. over twelve years) in “other mandatory” spending, compared with the House proposal to reduce spending by $1.8 trillion through 2021 (i.e. over ten years).

This is a combination of placing greater faith in Obamacare cost controls and across-the-board spending cuts. But the cuts are not enough long-term to prevent Obama or a Democratic successor from having to raise middle class taxes.

Social Security: No near term changes. Like congressional proposals, the president does not propose any near term savings from the Social Security program, though he endorses long-term reform.

The anti-Paul Ryan plan

Apr 12, 2011 18:37 UTC

The Congressional Progressive Caucus has finally released its response to Rep. Paul Ryan’s Path to Prosperity.  ”The People’s Budget”  is almost like a parody of a liberal Democratic plan. It proposes raising taxes by $4 trillion over ten years and cutting spending (mostly defense) by $900 billion. (Ryan would cut spending by $6 trillion.) It would take tax revenue as a share of GDP to 22.3 percent vs. a previous all-time high of 20.9 percent in World War Two. Even worse, the plan only goes out a decade since its tax hikes still wouldn’t balance the budget long-term because it ignores healthcare reform.

CPC

COMMENT

If ”The People’s Budget” is a parody of a liberal Democratic plan, then the “Path to Prosperity” is a parody of “Atlas Shrugged”, a poorly written work of fiction that Paul Ryan has read too many times.

Posted by Yellow105 | Report as abusive

Is the Ryan Plan a 73-page suicide note?

Apr 8, 2011 19:38 UTC

Charles Krauthammer asks the question:

In 1983, the British Labour Party under the hard-left Michael Foot issued a 700-page manifesto so radical that one colleague called it “the longest suicide note in history.” House Budget Committee chairman Paul Ryan has just released a recklessly bold, 73-page, ten-year budget plan. At 37 footnotes, it might be the most annotated suicide note in history.

That depends on whether (a) President Obama counters with a deficit-reduction plan of equal seriousness, rather than just demagoguing the Ryan plan till next Election Day, (b) there are any Republicans beyond the measured, super-wonky Ryan who can explain and defend a plan of such daunting scope and complexity, and (c) Americans are serious people.

My guesses: No. Not really. And I hope so (we will find out definitively in November 2012).

Again, is the Ryan Plan a blueprint only Ryan can sell?

COMMENT

Are you joking? The only thing recklessly bold about Ryan’s plan is that it doesn’t do anything meaningful. According to the CBO’s analysis, Ryan’s plan will not balance the budget until sometime between 2060 and 2080, and that’s while assuming a lot of rosy things that nobody can possibly predict. Moreover, while on this path Ryan’s plan will add an additional $63 trillion to the national debt. How will that affect the economy? What if the dollar crashes and countries like China won’t buy our securities anymore… then what? This plan is a sham.

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Why a government shutdown is even possible

Apr 8, 2011 18:50 UTC

What a very different political world it would be right now if President Obama had a) supported his own debt commission, b) devised a 2012 budget that made deep spending cuts over near and medium term, and c)  listened to his own economic team and suggested a Social Security fix. But with no leadership from the White House on the horizon, it made all that much more important for the Tea Party wing of the GOP to dig in and push real spending cuts now.

But certainly the Obama political team thinks the president would benefit from a shutdown, removing the political impetus to act. Plus, this administration simply does not believe the debt is a big problem right now, an important problem but not an urgent problem. Clearly …

debt0411

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