James Pethokoukis

Politics and policy from inside Washington

No ‘substantial effect’ on long-term budget woes

Feb 14, 2011 19:50 UTC

Hey, it’s not just me pointing out the many flaws in the Obama budget. This from the Committee for a Responsible Federal Budget:

Unfortunately, the Administration does not achieve either of the fiscal goals it established for
its own Fiscal Commission. For one, the budget does  not reach primary balance in 2015.
Instead, at just over $600 billion, the deficit remains more than $100 billion away from
primary balance. Secondly, the budget does not make meaningful improvements to the longterm fiscal outlook. Few of the policies in the budget would have a substantial effect on the
trajectory of spending or revenues outside of the ten-year window.
As noted above, the level at which the budget stabilizes the debt – 77 percent of GDP – is
way too high. It is well above historical levels (about 40 percent of GDP) and the traditional
target of 60 percent of GDP – and could threaten the government’s ability to borrow in case
of a real emergency down the road. It also begins to creep up again at the end of the ten-year
window, and likely will grow substantially beyond this window.
Unfortunately, the budget doesn’t make any meaningful improvements to the largest
problem areas of the budget. The budget does keep defense costs from increasing, trim
Medicare and Medicaid spending a bit, and limit tax expenditures for high earners. But these
measures only scratch the surface when the Administration should be calling for real
defense cuts, serious changes in federal health spending, and fundamental tax reform – as
well as Social Security reform designed to achieve 75-year sustainable solvency.

Unfortunately, the Administration does not achieve either of the fiscal goals it established for  its own Fiscal Commission. For one, the budget does  not reach primary balance in 2015.  Instead, at just over $600 billion, the deficit remains more than $100 billion away from  primary balance. Secondly, the budget does not make meaningful improvements to the longterm fiscal outlook. Few of the policies in the budget would have a substantial effect on the  trajectory of spending or revenues outside of the ten-year window.

As noted above, the level at which the budget stabilizes the debt – 77 percent of GDP – is  way too high. It is well above historical levels (about 40 percent of GDP) and the traditional  target of 60 percent of GDP – and could threaten the government’s ability to borrow in case  of a real emergency down the road. It also begins to creep up again at the end of the ten-year  window, and likely will grow substantially beyond this window.

Unfortunately, the budget doesn’t make any meaningful improvements to the largest  problem areas of the budget. The budget does keep defense costs from increasing, trim  Medicare and Medicaid spending a bit, and limit tax expenditures for high earners. But these  measures only scratch the surface when the Administration should be calling for real  defense cuts, serious changes in federal health spending, and fundamental tax reform – as  well as Social Security reform designed to achieve 75-year sustainable solvency.

COMMENT

perhaps it would help us all understand if someone would put in plain english the effects of having a high and prolonged defecit. I’m conservative, but so far, I don’t see how the defecit has done much to the average joe in america. Certainly hasn’t hurt the stock market lately.

Posted by zotdoc | Report as abusive

Are Democratic moderates breaking right on spending?

Feb 2, 2011 17:19 UTC

A nice piece of analysis of the Corker-McCaskill budget proposal from Jed Graham over at IBD’s Capital Hill blog:

On Tuesday, Sen. Claire McCaskill, D-Mo., joined with Sen. Bob Corker, R-Tenn., to propose the Commitment to American Prosperity Act, which would gradually lower the ceiling for all federal spending to 20.6% of GDP by 2020, down from a projected 24.7% this year.

The Corker-McCaskill CAP bill goes a big step further than President Obama’s Fiscal Commission, which aimed to reduce spending to 21.8% of GDP by 2020. And it does so without the inducement for Democrats of more than $1 trillion in tax hikes over the coming decade.

Under the Corker-McCaskill vision, entitlements would no longer be entitlements; rather, they’d have to vie for annual budget dollars like any other program and their spending could grow faster than the economy only if spending on other programs were to shrink as a share of the economic pie.

McCaskill is among nine first-term Democrats elected in 2006 who could face challenging re-election battles in 2012. While she is the only Democrat to sign on to the bill introduced with eight GOP backers, McCaskill’s move may be the clearest sign that vulnerable party moderates intend to make significant progress on deficit reduction this year.

“At a time when many families have been forced to tighten their pocketbooks, Congress must also learn to do the same,” McCaskill said in a statement. “This bill isn’t just about cutting back this year or next year; it’s about instilling permanent discipline to keep spending at a responsible level.”

As U.S. debt goes up, Obama’s concern goes down

Jan 26, 2011 17:34 UTC

In the space of less than 24 hours, the Congressional Budget Office managed to stomp all over President Barack Obama’s dovish debt speech. That Obama failed to use the State of the Union address to explicitly endorse any of his own debt panel’s major budget-cutting recommendations was, shall we say, a glaring omission. Now that failure appears absolutely blinding. Give us the bad news CBO bean counters:

For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO’s baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021.

The deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP.

Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

If Medicare’s payment rates for physicians’ services were held constant as well, then deficits from 2012 through 2021 would average about 6 percent of GDP, compared with 3.6 percent in the baseline. By 2021, the budget deficit would be about double the baseline projection, and with cumulative deficits totaling nearly $12 trillion over the 2012–2021 period, debt held by the public would reach 97 percent of GDP, the highest level since 1946.

Well, at least Obama didn’t ignore the debt issue completely. Deficit reduction was included as one of his five economic “pillars,” along with innovation, education, infrastructure and government reform. And he did call for a temporary freeze on some spending categories. But his narrow formulation exempts sixth-sevenths of federal outlays for savings of less than $400 billion over ten years (only a quarter of the $1.6  trillion his commission called for) vs. perhaps $12  trillion in total new debt. Last week, a group of influential Republicans called for $2.5 trillion in cuts over a decade.

There had been hope Obama would at least suggest trimming Social Security, as his bipartisan debt commission suggested last December. But the idea was dropped after much howling from liberal interest groups. Yet, strangely, Obama said it was necessary to “find a bipartisan solution to strengthen Social Security for future generations.” He should check his in-box because it’s been sitting in there for more than a month.

The White House has clearly decided that a “pro-growth” message will serve Obama well in his 2012 reelection bid, with the space race reference meant to evoke the can-do 1960s.To hammer home the point, Obama emphasized the need to keep investing in the “Apollo projects” of today. In other words, let the GOP be the Party of Austerity and root-canal economics.

The speech isn’t necessarily Obama’s final take on the matter, of course. Progress can be made outside the media spotlight. In 1997, secret talks between the Clinton White House and congressional Republicans almost led a bold deal to fix Social Security.

Obama might want to try a similar tactic and quietly meet with the guy who gave the Republican TV response, Rep. Paul Ryan. The rising GOP star and debt panel member has created a plan with a former Clinton economist to sharply cut future health costs, the primary driver of America’s long-term debt woes. Otherwise, U.S. debt may just keep rocketing higher.

COMMENT

What do you people not understand about the fact that the Social Security budget is handled separately and has a savings built up.

Even if you doubled the retirement age you are not allowed to touch the money social security has collected.

Further Social Security is more and more often the only income for the retired and disabled. Without it people die. Do you want to be held responsible for a large number of deaths and blatant theft for what people have themselves paid for? You see whats happening in the middle east?

Posted by toyotabedzrock | Report as abusive

More on states going bankrupt, this time with added Felix Salmon goodness

Dec 8, 2010 21:52 UTC

Felix Salmon — who, like me, works at Reuters but, unlike me, is officially a citizen of no nation and operates from a specially modified Yakovlev “Yak” 77 that only lands to refuel and take on provisions — comments on my post about GOP plans to push states into bankruptcy:

If it were implemented, or if it even looked like it might get implemented, prices of municipal bonds would plunge, and most states would find it pretty much impossible to borrow money. As such, facing a massive and immediate liquidity crisis, they would be in more need of a federal bailout than before the bankruptcy legislation was seriously mooted.

The fact is that there’s only one reason to invent a Chapter 8 bankruptcy provision for states—and that’s to come up with an efficient and legal way to impose losses on bondholders and other creditors. (Chapter 9, which applies to cities and other municipal entities, doesn’t apply to states.) The creditors, fully aware of this, would immediately cease lending, certainly to the rockier states like California, Illinois, and New York. That’s not what we want. As a result, unless or until those states can bring their budgets into a primary surplus, introducing such a provision would certainly do more harm than good. And if those states can bring their budgets into a primary surplus, then we don’t need the bankruptcy provision, since they’ll be easily capable of rolling over their debts.

If the states had a bankruptcy provision all along, then I’m sure some people would be thinking seriously about whether it made sense for one or more states to file. But they don’t, and there’s basically no way of getting there from here. As such, the idea’s a non-starter.

Wow, states not being able to borrow. That sounds more like a feature than a bug to me. This would give governors like Chris Christie another tool in their arsenal. Look for legislation along this line next year.

Secret GOP plan: Push states to declare bankruptcy and smash unions

Dec 7, 2010 18:42 UTC

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program.  BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31.  And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds

Greater transparency on these obligations can’t be bad. In fact, the federal government itself would do well to report deficit numbers not just on the current cash-in, cash-out basis but also incorporating the underfunding of promised pension and healthcare benefits to retirees.

But it’s about more than just openness. Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy. Indeed, legislation  amending federal bankruptcy law is currently being prepared by congressional Republicans. Local municipalities do declare bankruptcy from time to time, most famously California’s Orange County in 1994. But states can’t. Allowing them the same ability to renegotiate obligations could enable them to slash public employees’ lavish benefits, a big factor in their financial woes. In a recent issue of the The Weekly Standard, bankruptcy expert David Skeel of the University of Pennsylvania walks through the implications:

With liquidation off the table, the effectiveness of state bankruptcy would depend a great deal on the state’s willingness to play hardball with its creditors. The principal candidates for restructuring in states like California or Illinois are the state’s bonds and its contracts with public employees. Ideally, bondholders would vote to approve a restructuring. But if they dug in their heels and resisted proposals to restructure their debt, a bankruptcy chapter for states should allow (as municipal bankruptcy already does) for a proposal to be “crammed down” over their objections under certain circumstances. This eliminates the hold-out problem—the refusal of a minority of bondholders to agree to the terms of a restructuring—that can foil efforts to restructure outside of bankruptcy.

The bankruptcy law should give debtor states even more power to rewrite union contracts, if the court approves. Interestingly, it is easier to renegotiate a burdensome union contract in municipal bankruptcy than in a corporate bankruptcy. Vallejo has used this power in its bankruptcy case, which was filed in 2008. It is possible that a state could even renegotiate existing pension benefits in bankruptcy, although this is much less clear and less likely than the power to renegotiate an ongoing contract.

It wouldn’t be easy to change the law. Public employee unions have traditionally carried great influence with Democrats, even if President Barack Obama’s willingness to freeze their pay on the federal level suggests their clout may be waning.  From the Republican perspective, the fiscal crisis on the state level provides a golden opportunity to defund a key Democratic interest group. For the GOP, it’s an economic and political win.

COMMENT

“Here, the ‘take’ for public-employee union entitlements is projected to DOUBLE in 5 years, and it is already HIGH! The old contracts MUST be broken.”

I’d love to know where this garbage came from – do you even have any evidence to back this assertion up? I think not. In fact, don’t bother – by actually showing you the errors used in cherry-picking such an arbitrary figure, I’d just upset you and you clearly aren’t likely to be changing your mind based on the facts.

“Look at the gulf that is widening between public and private sector jobs. This has to stop. It is unsustainable.”

Look to the gulf that is widening between the personal tax burden and concentration of wealth into the polutocratic top 2% in the USA. THAT is what is unsustainable.

“Sounds like a good plan as far as this Red Stater is concerned because we can see the Blue States circling the drain and we know what’s next…federal handout. The liberal test beds have run their economies into the ground. They shouldn’t expect flyover country to bail out their bad policies. Did you see the way CA voted in the last election for heaven’s sake? These people are clueless…drop the guillotine.”

Take a look at how much your ‘red state’ gets in Federal funding vs. the ‘blue states’ – or should I say, engines of the economy, and then edit out your outrageous comments about blue states needing federal handouts. Red states are generally the highest recipients and lowest contributors to Federal funds – and oddly enough its exactly those welfare states that hold the strongest views on these issues. Don’t kill your golden goose.

for more information here is a good place to start:
http://en.wikipedia.org/wiki/Federal_spe nding_and_taxation_across_states


The American Dream used to be that you can build a life from scratch here, that you can come here with nothing and end up with a business, a house, even wealth that you can leave to the next generation.

Guaranteed wages and social security for some mean less opportunity for the rest of us. That is why I left Europe; I saw that I was going to have to pay for the babyboomers retirements and healthcare for the rest of my life. America is now worse than Europe.

Home values should fall! They are inflated. The entire Obama agenda is about keeping the bubbles inflated, bailing out the rich, the babyboomers, the too big to fail companies, union/government workers.
- Posted by peterverkooijen”

So you swallowed the conservative agenda hook, line and sinker, then you found out that it’s exactly the same over here, in a country where all they’ve managed to achieve is a quarter of the population without health care – and yet you are still unable to admit this ideology is fundamentally flawed.

Why are you blaming public and union workers for something as functionally disconnected as prices in the housing market?? Since Unionized and public workers together account for less than 7% of the United States’ work force, and under 33% of them are unionized. It doesn’t seem that the influence they could exert on the market could be the reason for high property prices.

The republican party and their allies are playing a negative-sum game in order to win. The problem is, they will destroy their prize by playing this way.

Posted by Retalliouns | Report as abusive

Should Republicans refuse any tax increases?

Nov 22, 2010 17:40 UTC

Steve Moore and Richard Vedder think raising tax revenue in exchange for spending cuts is a mug’s game (via WSJ):

In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.

We’ve updated the research. Using standard statistical analyses that introduce variables to control for business-cycle fluctuations, wars and inflation, we found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.

We also looked at different time periods (e.g., 1947-2009 vs. 1959-2009), different financial data (fiscal year federal budget data, as well as calendar year National Income and Product Account data from the Bureau of Economic Analysis), different lag structures (e.g., relating taxes one year to spending change the following year to allow for the time it takes bureaucracies to spend money), different control variables, etc. The alternative models produce different estimates of the tax-spend relationship—between $1.05 and $1.81. But no matter how we configured the data and no matter what variables we examined, higher tax collections never resulted in less spending.

Well, certainly the budget can be brought into balance without tax increases. Americans for Tax Reform does it over the short term (5-7 years) by pretty much freezing spending (at 2008 levels) for everything but Medicare and Social Security. So, too, Rep. Paul Ryan with his Roadmap for America’s Future. But what about the politics? Does this assume no compromise with Democrats? If compromise is needed, what do the Rs offer? Defense cuts? But perhaps the solution is to offer a more pro-growth tax system with restructured entitlements. More revenue from more growth + less social insurance spending.

COMMENT

I (and I think many others) have no problems with tax breaks for small business because they really do drive jobs in America. What really rubs a lot of people the wrong way is tax breaks for multi-national mega-corps that have no interest in supporting America or growing in America – to them the grass is greener in emerging markets like BRIC countries and they want to put their profits to work there. Maybe some kind of tax-credit for healthcare on new employees (and partial for existing employees) could be worked out?… that would help stem the big complaint I hear from small businesses.

Posted by CDN_finance | Report as abusive

Presenting your federal budget

Nov 10, 2010 15:16 UTC

The great graphics folks a the WaPo do another fantastic job:

wapo

Will Obama fire his accountants?

Jun 12, 2009 12:45 UTC

Some Democrats want the costs of healthcare reform to be judged by the White House Office of Management and Budget, not the nonpartisan Congressional Budget Office. As The Hill explains: “This unusual option could give Democratic leaders hundreds of billions of additional dollars to work with as they draft their plans. But Republicans would call it an accounting gimmick and a huge spending loophole.” It doesn’t need to be said, but I will say it: If the Bush White House would have tried a stunt like this, the Dems and the MSM media would have screamed.

Do we need a second Obama stimulus pacakge?

May 29, 2009 14:56 UTC

Back in January when Team Obama was pushing its stimulus plan, the White House put out a self-analysis of the potential economic impact of the plan, authored by Jared Bernstein and Christina Romer.  If Congress passed the president’s plan, the report said, the U.S. unemployment rate would rise to just under 8 percent by later this year and fall to 7 percent by Q4 2010. If the plan was not passed, the reported predicted, the U.S. unemployment rate would climb to 9 percent next year.

Time for a reality check. Unemployment is already at 8.9 percent The consenus private sector estimate is that unemployment will average 9.7 percent next year. Douglas Elmendorf, head of the Congressional Budget Office, says unemployment will peak at 10.5 percent next year.  One conclusion is that we need another mega-stimulus package. An alternatve conclusion would be that the first one isn’t working and it’s time for Plan B.

COMMENT

I would agree that the original stimulus plan isn’t working. The plan was poorly planned and I believe that the Obama Administration rushed this plan due to all the hype generated from Obama’s campaign promises. If the country is going to move forward with another stimulus package, I think the money would be put to better use if it was invested into civil construction projects. Civil Construction projects would not only help boost the economy, but it will also help to decrease the growing unemployment, which at this point in time, getting people back to work is one of the most important issues this country faces.

Posted by Derek | Report as abusive
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