James Pethokoukis

Politics and policy from inside Washington

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:

gschart

adsfdasf

COMMENT

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.

Posted by JamesGreenfield | Report as abusive

The politics of S&P’s U.S. debt warning

Apr 18, 2011 17:16 UTC

OK, so Standard & Poor’s has downgraded the outlook for the U.S. to negative, saying it believes there’s a risk policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

“Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,” S&P said in a release.

Some thoughts here:

1) Did the rather incoherent, hodgepodge nature of Obama’s budget speech last week play a role in this? As I wrote:

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.

And then there was the president’s rhetoric. Recall how Paul Ryan blasted Obama:  ”Rather than building bridges, he is poisoning the well.”  Here is how S&P puts it:

We view President Obama’s and Congressman Ryan’s proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.

2) The agency’s shocking note doesn’t mention the debt ceiling debate. But both Rs and Ds may try to use it to their advantage. Rs can argue it means the vote to raise the limit must include real budget reforms and cuts. Ds can say the U.S. fiscal position is precarious enough that this is no time to mess with the debt ceiling. Of course, that line would run counter to the Dem meme that the debt situation is important but not urgent.

3) Financial pros say that even should S&P take the next step and actually downgrade America’s AAA status — the note said there was at least a 1-in-3 chance of that happening within two years — it would likely have little economic impact. As the WSJ notes:

Meanwhile, Dan Greenhaus of Miller Tabak + Co. notes that even if the U.S. lost its premier status, that doesn’t mean the end of the world. “The experience of Canada and Japan show that the loss of a AAA rating is not a death blow,” he writes in a note to clients. “If governmental finances can be adjusted (in the case of Canada) or domestic participants continue to find the debt attractive (in the case of Japan), higher yields on a sustained basis are not assured.”

But that seems a bit too pat to me. Market and consumer psychology is a precarious thing. It might really depend on what else was happening in the world at that time.

4) I hope Republicans don’t let S&P use this warning to bully them into accepting tax increases to get a quick Grand Compromise budget deal. As I wrote a bit earlier today:

Here’s the problem: Any attempt to cut deficits and debt faster than Paul Ryan’s “Path to Prosperity“  would almost certainly have to involve immediate benefit cuts to Medicare and Social Security recipients or higher taxes. And to the extent that S&P’s call will be interpreted as an exhortation to cut now, those Democrats and Republicans (such as those in the U.S. Senate’s Gang of Six) who insist higher taxes must be part of the fiscal fix will have their hand strengthened. But what S&P is really saying is Washington must decide on a plan. Ryan has a plan, the Obama White House does not.

5) Washington types keep telling me that Americans really don’t care about the debt issue. But I think this warning — not to mention an actual loss of the AAA rating — is yet another data point that will sink into our collective head — right along with a trillion-dollar deficit, the EU debt crisis and our financial meltdown which shows too much debt can cause wealth to disappear in a flash.

COMMENT

Don’t think even for a moment this doesn’t help anyone but Palin. This is like manna from heaven for her. It’s as if God himself decided that she should have a banner week.

Everything seems to be falling into place for her now.

Posted by section9 | Report as abusive

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.”

10 things you need to know about S&P’s U.S. debt warning

Apr 18, 2011 15:28 UTC

Barclays bank offers its take on S&P. Here are some highlights (bold is mine):

1) A couple of hours ago, S&P put its long-term rating on U.S. sovereign debt on negative outlook. This means that it believes there is at least a 33% chance that it will lower the AAA long-term rating of the U.S. within two years.

2) Its base case remains that U.S. policymakers will agree on a deficit reduction plan with savings of $4-5trn over the next 10-12 years. But importantly, S&P emphasizes that meaningful steps to implement this must start by 2013.

3) We believe this is an aggressive timetable, since it means that policymakers will have to agree on a long-term deficit reduction plan before the 2012 elections. This will be tough, given the political landscape and the structural nature of the budgetary problems.

4) According to S&P, the ratio of net general government debt/GDP would rise to 84% in the base case by 2013 (and 90% in a pessimistic scenario). Beyond the medium term, it views growth in entitlement programs to be the main source of fiscal pressure.

5) The catalyst for the negative outlook was the “increased risk” that there would be no resolution to “the medium and long-term fiscal challenges” facing the U.S. until after the 2012 elections.

6) In other words, once the two political parties put their deficit reduction plans on the table, it became obvious how far apart they were, and how difficult the road to political convergence would be. S&P noted that despite more than two years having passed since the financial crisis, there has been no agreement on steps to reverse the fiscal deterioration. It highlighted the examples of other countries such as UK, France and Germany, which have begun implementing plans to address their fiscal problems.

7) The announcement was seemingly a surprise to the bond market: 30y yields reversed their early morning rally, and the yield curve steepened immediately after the announcement. It was a surprise to us, as well. While we have always emphasized the unsustainable nature of the U.S. deficit and have outlined the likely factors that would drive a lowering of the U.S. AAA rating (see How risk-free are U.S. Treasuries? January 8, 2010), we had believed that the rating agencies would wait till after the 2012 elections before taking any action.

8) This announcement was not about the debt ceiling; in fact, the debt ceiling is not even mentioned in the S&P release. In sharp contrast, the reason why U.S. government ratings came under pressure in 1995-96 (Moody’s put parts of U.S. government debt on negative watch) was the debt ceiling impasse at that point. This means that even if the debt ceiling debate were to be resolved in the near term, it would not be enough to restore the outlook to stable.

9) On the other hand, the longer that debt ceiling negotiations drag on, the bigger the seeming rift between the two political parties and the greater the likelihood of a downgrade down the road. In turn, this would mean a steeper Treasury yield curve, higher yields on the long bond, narrower longer-term swap spreads, and a flatter swap spread curve.

10) The key to a stable outlook is that there be a concrete plan for deficit reduction that needs not only to be agreed upon, but also put in place by 2013. As noted earlier, this will be very challenging.

COMMENT

S&P is in no position to dictate policy to the U.S. Government. We all know how much a AAA rating from them is worth after the financial meltdown of 2 years ago. I don’t know why their execs aren’t behind bars.

Posted by Fishrl | Report as abusive

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!

Posted by Norm_Al | Report as abusive

Obama approval now down to 41 percent: Gallup

Apr 15, 2011 17:58 UTC

Gallup has Obama’s approval ratings down to 41 percent (with 50 percent disapproving) and just 35 percent among independents. Ratings like this put an incumbent president deep in the red as far as reelection.  They just don’t get reelected with ratings under 48 percent —  and only a 1/3 chance with a rating of 45 percent.

gallup

COMMENT

He’s still ten points ahead of Congressional Republicans, who are still one point BEHIND Congressional Democrats. Obama is polling ahead of everyone, James.

Shouldn’t your article be titled, “Congressional Republicans Approval Now Down To 31 Percent: Gallup”?

Posted by Yellow105 | Report as abusive

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.

  •