James Pethokoukis

Politics and policy from inside Washington

Budget group: New Obama budget plan would fail, could cause tax trigger to be pulled

Apr 21, 2011 16:55 UTC

The bipartisan Committee for a Responsible Federal Budget has taken a crack at deciphering President Barack Obama’s murky new budget plan, called the “Framework for Shared Prosperity and Shared Fiscal Responsibility.” And its findings are devastating:

Using CBO rather than OMB numbers, we estimate that the plan is unlikely to result in a declining debt-to-GDP ratio, and would thus rely on the proposed “Debt Failsafe” to achieve further savings.

And that could mean higher taxes or additional spending cuts. As it is, the Obama Framework would save 40 percent less than the Ryan “Path to Prosperity.”  More:

The President’s Framework falls short of both he Fiscal Commission recommendations and those from the House Budget Committee, both of which would reduce the deficit by over $4 trillion and reduce the debt to below 69 percent of GDP by the end of the 10-year period. … Measured against CBO assumptions, it does not appear that the $2.5 trillion of deficit reduction in the President’s Framework would be sufficient to reduce the deficit to 2.5 percent of GDP in 2015 or 2 percent in 2020, as claimed. Using reasonable phase-in assumptions, we estimate that unless the debt failsafe is employed (as it would be in this circumstance), deficits would remain at or above 3 percent of GDP throughout the decade. As a result, debt would continue to slowly increase as a share of the economy, reaching 77 percent of GDP by 2021.

cfrfbchart

And here are the various debt trajectory paths:

traject

And here is how the various plans compare on the details:

crfb3

Just like in my analysis here and here, the CRFB found that the Ryan Plan cuts more debt than the Obama Plan. Also note that while  the White House said its plan relied just 25 percent on higher taxes (33 percent if you exclude interest), the CFRB found that it actually relies 30 percent on higher tax revenue (40 percent if you exclude interest.) And since the debt trigger would be pulled, even higher taxes would be possible, as well additional spending cuts.

Committee for a Responsible Federal BudgetCommittee for a Responsible Federal Budget
COMMENT

How about clawing back the trillions given illegally to Wall Street, before killing citizens to pay the “debt” ?

Posted by seanoleary | Report as abusive

Should Congress raise the debt ceiling? And for what price?

Apr 21, 2011 16:06 UTC

Conservatives have many flavors of views on this, as can be seen at an online symposium over at National Review Online. Here are two of the more interesting takes:

1) Pass it quickly, with conditions. This is the Doug Holtz-Eakin plan:

Conservatives should attach to the debt limit annual caps on total spending for the next ten years equal to those in the House-passed budget. There are other viable contenders ranging from alternative spending limits (such as those proposed by Senator Corker) to a balanced-budget amendment that limits taxes and spending (such as that of Senators Hatch, Cornyn, and Toomey). But the House has already agreed to the levels in the budget. If it passes those caps quickly, the onus will be on the Senate to pass a debt-limit increase and on the president to sign it. If either balks, the battle shifts from raising the debt limit to whether there should be spending restraint.

2)  First, make sure default is not an option. From Phil Kerpen:

To win the debt-ceiling showdown, the Republican House leadership must first do what all 47 Senate Republicans did when they voted for the Toomey-Vitter amendment …   also known as the Full Faith and Credit Act and championed in the House by Tom McClintock (R., Calif.) and Scott Garrett (R., N.J.), would take away from the administration the discretion to default on Treasury bonds. It would require bondholders and Social Security recipients to be paid first in the event the debt ceiling is reached. There is more than enough revenue on a cash-flow basis to take any default risk off the table.

Passing this legislation in the House — even though the Democrats already have stopped it in the Senate — would help educate the public that default is not at stake. … By passing the Toomey-Vitter bill, the House can gain real leverage to demand that the administration make deep cuts in spending and fundamental reforms like the Medicaid block grants at the heart of the Ryan budget — or face the daunting prospect not of default, but of operating the government on a cash-flow basis.

COMMENT

This administration would never default, despite the rhetoric. They would lose prestige in the eyes of those they love best. Congressman with enough spine should simply refuse to fund this obese goverment. Just say no.

Posted by allan1776 | Report as abusive

The economic hill Obama has to climb to re-election

Apr 21, 2011 15:28 UTC

This analysis by Sean Trende of RealClearPolitics should give the White House pause:

The six incumbents who have successfully stood for re-election since World War II have enjoyed, on average, growth in per capita real disposable income (RDI) of 11.7 percent over the course of their term. The unsuccessful presidents have fared worse — about 8 percent growth on average.

So far, RDI is up 1.2 percent over the course of the Obama presidency. To hit the 11.7 percent mark over the course of his term, income would have to grow by about 1.4 percent in each of the seven quarters between now and late 2012. Since the 1980s, we’ve had 24 total quarters where RDI growth was above 1.4 percent.

The short-term future prognosis for RDI is not good: It actually shrunk from January to February of 2011. Moreover, government transfer payments and taxes are an important portion of RDI; they actually account for almost all of the RDI growth over the course of the president’s term. But the expiration of the payroll tax cuts and unemployment benefits at the end of the year will apply further downward pressure to this measure.

The most recent Pew poll suggests that a majority of the country currently characterizes the state of the economy as “poor,” while only 8 percent classify it as “excellent” or “good.” Only 20 percent believe the economy is recovering.

And as Sean also notes, the economy seems to have hit a soft patch: GDP growth has slowed, wages are flat or falling, housing remains ugly. In addition, things like the S&P warning and high borrowing levels may also be undermining voter confidence.

Obama 2012, the dollar and the stink of instability

Apr 21, 2011 10:03 UTC

President Obama’s approval/disapproval ratings are now an upside-down 45 percent/50 percent, according to the RealClearPolitics average. If those numbers were to hold until Election Day 2012, Obama would be a decided underdog for a second term, at least that is what statistical  modeling tells:

Mr. Obama’s approval ratings have been varying in recent months: between about 45 and about 50 percent. If Mr. Obama’s approval rating is at the top of that range, 50 percent, on Nov. 6, 2012 — about where it is now — the model figures that his chances of winning re-election will be greater than 80 percent. But if his approval rating is at the bottom of the range instead, at 45 percent, his chances for a second term will be only about one in three, and he’ll have to hope that the Republican nominee is a weak one.

And here are Obama numbers in chart form:

rcpapril

Almost as worrisome for the White House is this chart looking at the direction of the country:

track

I think what’s at play here is more than just gas prices, though that’s a big part of it. You also have the sliding dollar, S&P’s debt warning, high unemployment, flat or falling incomes, a depressed housing sector. Obama may have won in 2008 even without the financial crisis, but it was that meltdown that allowed him to crush John McCain. And since then, he keeps repeating how his policies have pulled America out of the ditch, like in a speech last year in New York:

“After they drove the car into the ditch, made it as difficult as possible for us to pull it back, now they want the keys back. “No! You can’t drive. We don’t want to have to go back into the ditch. We just got the car out.”

But the recovery feels both weak and unsustainable, like nothing has been fixed since 2008. Do Americans feel like the nation is on the verge of another 25-year boom or like it’s on the precipice? Right along with the slide in Obama’s approval ratings and this latest downturn in public confidence has been the decline in the dollar. Just look at the US Dollar Index:

dollar

COMMENT

With President Clinton holding a jobs summit in America and addressing corporate America, and President Obama investigating gas and oil manipulations, things will probably start to turn sometime in the near future.
Of course we’ll have to worry that special interest and the military industrial complex doesn’t make something happen to change the world condition or cause oil to go up?? Anythings possible when it comes down to billions of dollars, big oil and special interest.

Posted by cocostar | Report as abusive

Why S&P would lurv Paul Ryan’s budget plan after all

Apr 20, 2011 19:14 UTC

Earlier today I noted that none of the major debt reduction plans floating around would meet S&P’s key financial metrics, as well as those of its competitors. At least this was the analysis of Goldman Sachs. Here is what I wrote (plus a pretty chart):

A key metric for the firm is the ratio of net interest payments to government revenue. Goldman Sachs found that all the major reform plans would still allow that ratio to increase to levels that rating agencies would probably consider worrisome.  Avoiding that would require defense cuts, immediate cuts to senior benefits and/or tax increases. Good luck with that.

But no fast. Jed Graham over at Investor’s Business Daily’s must-read Capital Hill blog says Goldman got it wrong:

Both Goldman and the policy arm of conservative GOP House members suggest that the U.S. could be in downgrade territory once interest payments exceed 14% of federal revenue.

That would happen in 2015 not only under President Obama’s initial budget plan, but also under the Ryan and commission plans.

So are we doomed? Hardly.

The 14% interest-to-revenue ratio applies not to the federal government, but to general government, which includes states and localities. This is a measure that Moody’s offers for international comparison purposes, since European governments tend to do most of the taxing and borrowing on behalf of localities.

The applicable danger zone for the federal government would be an interest-to-revenue ratio of 18%, which Steven Hess, Moody’s lead analyst for the U.S. rating, recently confirmed for IBD.

Under current projections, the federal government’s interest-to-revenue metric would peak at 17.o% in 2020 under Ryan’s plan. Under fiscal commission plan projections released in December, interest would peak at 15.6% of revenues in 2018, when revenues would be about $550 billion higher than under the Ryan plan.

5 reasons why S&P just guaranteed U.S. debt will lose AAA rating

Apr 20, 2011 14:04 UTC

By prodding Washington to agree on a debt plan, Standard & Poor’s might achieve just the opposite. Its dour take on Treasuries could inflame the debt-ceiling debate, leaving little energy for a grand budget compromise. And the severe austerity S&P desires would have few takers anyway. Consider the following:

1)  Obviously the rating agency hopes its unnerving note will nudge lawmakers into reaching agreement on taxes and expenditures. Inaction until after the 2012 national elections risks an actual downgrade of America’s AAA bond rating.

2) But striking some mega-deal doesn’t have top priority on Capitol Hill. First up is the battle over raising the debt ceiling. Democrats want a clean vote on a bill, while Republicans are trying to tack on various debt reduction measures. The GOP quickly pointed to S&P’s statement as further justification of its bargaining position.

3) That the rating agency made no mention of the debt ceiling is irrelevant. Nor does it matter that Congress just released a report blaming S&P and its peers for triggering the financial crisis. Politicians take their friends where they can find them. And S&P’s warning is spurring Republicans to dig in. That helps ensure the negotiations will be arduous, requiring Capitol Hill’s nearly undivided attention until July and potentially pushing the country to the brink of default. There probably won’t be much chance to work on major changes to taxing and spending.

4) Such efforts didn’t have much momentum anyway. A bipartisan “Gang of Six” in the Senate is working on a proposal that draws on recommendations from the president’s debt panel. And it was gaining support among Republicans until House Budget Chairman Paul Ryan released his plan.

5) Even if Congress moves toward compromise, making S&P happy won’t be easy. A key metric for the firm is the ratio of net interest payments to government revenue. Goldman Sachs found that all the major reform plans would still allow that ratio to increase to levels that rating agencies would probably consider worrisome.  Avoiding that would require defense cuts, immediate cuts to senior benefits and/or tax increases. Good luck with that.

interestchart

Given the acrimony, if S&P really wants Washington to act, it may find it actually takes more than a warning.

COMMENT

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The $4 trillion gap: Obama vs. Ryan, an apples-to-apples budget comparison

Apr 20, 2011 13:26 UTC

OK, let’s try and actually compare the new Obama budget plan — “The Framework for Shared Prosperity and Shared Fiscal Responsibility” — with Rep. Paul Ryan’s “Path to Prosperity.” My calculations — partly based on work done by Goldman Sachs — find that the Ryan Path would save more than double, 130 percent. In dollars, it’s a difference of $3.9 trillion (nearly 2/3 from higher taxes, net interest expense savings).

1) Obama says his plan cuts $4 trillion in debt over 12 years vs. … something or other. Ryan says his plan cuts $4.4 trillion over ten years vs. Obama’s original 2012 budget from February.

2) To do an apples-to-apples comparison, it’s necessary to a) plot them over the same time span; b) compare them against the same baseline and c) adjust them for similar economic assumptions. Goldman Sachs does the first two steps for me. It plots both plans vs. what the CBO calls its “alternate” baseline — the one it thinks most likely. (For instance, it does not assume all the Bush tax cuts get repealed like the main CBO baseline does.) Goldman thinks that’s what the White House did, too.

3) Goldman Sachs also adds back in Obama’s pledge to let the top-end Bush tax cuts expire, something which isn’t clear from Obama’s speech or subsequent White House fact sheet. Here is the chart of Goldman’s findings:

goldmanchart

5) Those savings – 2.4 percent for Obama, 3.5 percent for Ryan — are over ten years vs. cumulative GDP of $196 trillion over 2012-2021 (not counting interest expense). In dollar amounts, that works to savings of $4.7 trillion for Obama and $6.9 trillion for Ryan. So the Ryan Path saves $2.2 trillion more.

6) But that’s not all! The Obama Framework likely uses the same higher growth assumptions as Obama’s February budget. When CBO re-ran that budget using its own gloomier forecast, it found the Obama plan raised $1.7 trillion less than it claimed. Ryan uses the CBO numbers. So a back-of-the-envelope estimate — adjusted for similar economic assumptions — finds the Obama Framework would only save $3 trillion vs. $6.9 trillion for the Ryan Path over ten years. And nearly 2/3 of Obama’s savings comes from higher taxes (net interest).

COMMENT

Two points:
1) Can you explain a little why you took the 2.4 number instead of the 3.4 number, it seems like your assuming the 2.4 because you assume Obama is not going to let the bush-era tax cuts expire (even though it seems like he pretty explicitly said he would).

2) You mention Obama’s rosy economic forecast, but you did not mention Ryan’s pretty unbelievable forecast
(from http://mobile.nationaljournal.com/budget  /ryan-plan-pushes-optimism-to-the-outer -limits-20110405)

“If Rep. Paul Ryan’s newly unveiled 2012 budget is signed into law, this is what Ryan’s economic forecasters say will happen: The unemployment rate will plunge by 2.5 percentage points. The still-sinking housing market will roar back in a brand new boom. The federal government will collect $100 billion more in income tax revenues than it otherwise would have.

And that’s just in the first year. By 2015, the forecasters say, unemployment will fall to 4 percent. By 2021, it will be a nearly unprecedented 2.8 percent.”

I don’t know if unemployment has ever been 2.8 percent. That seems very suspect to me.

Posted by ceptri | Report as abusive

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.

obama

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:

newcbo

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.

COMMENT

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.

Posted by seattlesh | Report as abusive

Why U.S. debt shouldn’t be AAA rated: It’s actually worse than Spain’s

Apr 19, 2011 15:33 UTC

Credit rating agencies such as S&P really place a lot of emphasis on two financial metrics:  the ratio of net debt to GDP and the ratio of net interest payments to government revenues. When you look at those two factors, Goldman Sachs concludes “that the US is already at the outer edge of AAA territory. ” (Thank goodness for the supremacy of the dollar.) Look at the pretty chart from GS:

gschart2

COMMENT

If the USD Index continues to fall over time, how would this affect the position of the US icon on this graph ? It would seem to me that the ‘current political/financial’ pressures are for the icon to move up vertically and tend to move to the right as well. What is not clear to me is how the various currency evaluations might interact regarding this graph.

Posted by lwmaus | Report as abusive

S&P doesn’t like any of the debt plans out there

Apr 19, 2011 13:59 UTC

Here’s the thing: S&P seems to want Washington to cut much faster than any of the plans currently circulating. As Goldman Sachs notes:

Most scenarios would take the U.S. further into risk of a downgrade using the rating agencies’ stated criteria (for instance, Moody’s has in the past indicated that the edge of its “reversibility band” for a downgrade from AAA is an interest to revenue ratio of 14%; the definition and coverage of the measures in the chart may differ somewhat but the implication is similar).  … Most official forecasts show greater deterioration of these measures. Interestingly, the highest profile reform proposals, from the co-chairs of the President’s Fiscal Commission, Sen. Alan Simpson (R-WY) and Erskine Bowles (D) and, separately, from Rep. Paul Ryan (R-WI) would result in a much more benign path for the debt/GDP ratio, but would still allow the interest to revenue ratio to increase to levels that the rating agencies would likely view as problematic.

spchart

COMMENT

You always do a great job at taking this complex topic and turning it into something understandable.
This graphing that you do should be on all three nightly news stations, educating the public that only watch advertisements to make their judgements on econ issues.

I’ve been hearing about these large money holders that are planning on turning “vigilante,” if the US government starts getting political with this serious issue of US survival formatting plan.

One “soft vigilante” that is included in this is China. Since February last year, they have been rolling back– slowly, as to not jolt the US too much. They are most definitely divesting themselves of our debt in search of less risky foreign markets. It is a slow, deliberate “protest” that they do not like the way Obama is operating….spending 1 & 1/2 years on a giant unaffordable, spending bill instead of working on changing Wall Street’s damage-bent behavior and repairing pure misery.
And now, Obama’s off campaigning, promising that the next term will be just like the first two years, totally oblivious to what the crisis at hand is.

I’m glad the S & P is getting tough. Hello, Administration….time to stop show-boating and time to get real!

Will the Administration get serious and on task?
Well, the vigilantes are ready to pounce.

I moved all my stuff into safe savings accounts to wait it out. I’d suggest everyone else does that too.

Posted by limapie | Report as abusive
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