The one budget proposal worth seizing

By Reihan Salam
March 5, 2014

President Obama’s new budget for fiscal year 2015 is almost entirely free of surprises. The Obama administration supports a number of large tax increases, most but not all of which target high-income households, and so the budget assumes that revenues will grow faster than expenditures over the coming decades and that debt levels will decline. One key reason the White House is able to paint so rosy a picture is that its economic assumptions are different from those of the more buttoned-up Congressional Budget Office. Specifically, the Office of Management and Budget, which is responsible for crafting the president’s budget proposal, maintains that the U.S. economy will be 2 percentage points bigger in 2024 than it will be in the CBO’s projection.

This might not sound like a huge difference. But it matters more than you might think. The CBO has devoted considerable time and effort to understand why its 2010 prediction of a robust economic recovery failed to materialize, and it found that the post-crisis recovery really has been as dismal as it feels. Sluggish capital investment has contributed to sluggish productivity growth, and the labor market recovery hasn’t been strong enough to draw the long-term unemployed back into steady jobs.

With this sobering picture in mind, the CBO has lowered its estimate for America’s economic growth potential over the next decade to a mere 2.5 percent, far lower than the 3.3 percent that’s been the average growth rate for the U.S. economy since 1950. CBO projects that real GDP growth will actually fall to 2.2 percent in the second half of the next decade, which is to say they assume things will get worse rather than better. It turns out that even quite small changes, on the order of a 0.1 percentage point difference in the average annual growth rate, can have enormous fiscal consequences. So it’s very noteworthy that between 2010 and 2014, the CBO’s forecast for average real GDP growth over the next decade has gone from 3 percent to 2.5 percent.

How does the White House justify its more optimistic assessment? It seems that the Obama administration is counting on comprehensive immigration reform to deliver large economic benefits. The CBO has estimated that immigration reform could increase the size of the U.S. economy over the next decade by as much as 3 percentage points. It remains to be seen if the benefits of the immigration reform favored by the president will outweigh the benefits. I’m skeptical. It is easy to imagine that a more selective, skills-based immigration policy could be an enormous boon to the U.S. economy, as the economists Xavier Chojnicki, Frédéric Docquier, and Lionel Ragot have suggested. Yet the president favors a substantial increase in less-skilled immigration that could prove quite expensive in an era of rapid technological change.

Regardless, there is no question that factoring in the potential benefits of immigration reform is a new development in presidential budgeting. It could speak to the fact that realistic estimates of America’s growth potential have fallen so much over the course of the Obama presidency that the president’s staffers felt an obligation to get creative.

There is, however, one very promising new initiative in the president’s budget proposal. He calls for a large expansion of the earned income tax credit (EITC), a program that greatly increases the incomes of poor households headed by a working adult. As it currently stands, the EITC is far more generous to parents than it is to childless workers. The unfortunate result is that the wages on offer to many childless adults, and in particular to childless men, are not high enough to draw them into entry-level jobs that can serve as a stepping stone toward economic independence. A number of activists, on the left and on the right, have suggested that an EITC that is more generous to childless workers might make work attractive to men with modest skills, and this might, in turn, make them better marriage partners and, eventually, better parents.

Unfortunately, the Obama administration has also vocally championed a substantial increase in the minimum wage that, unlike its proposed expansion of the EITC, is actually very poorly targeted. The CBO has found that while 19 percent of the income gains associated with increasing the federal minimum wage to $10.10 would go to households earning less than the poverty level, 29 percent would go to households earning more than three times the poverty level. The benefits of President Obama’s EITC expansion, in contrast, would flow almost entirely to the very poor, who need it most.

If anything, the president’s budget proposal is a reminder of the weakness of the U.S. economy. If America’s growth potential were even slightly higher — if it even came close to what the CBO assumed it would be at the start of the Obama years — it would be far easier to carry the growing burden of caring for older Americans and far easier to shrink our public debt.

PHOTOS: U.S. President Barack Obama’s fiscal year 2015 budget proposal is seen on Capitol Hill after being delivered to the Senate Budge Committee in Washington March 4, 2014. REUTERS/Gary Cameron 

U.S. President Barack Obama makes remarks on the budget during a visit to Powell Elementary School in Washington March 4, 2014. REUTERS/Jonathan Ernst

6 comments

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Going, going, gone! Reihan knocks this one out of the park. EITC expansion seems relatively justified, but why can’t this government use tax policy for its intended purpose to generate public revenue and avoid continuous attempts to alter the social landscape.

The only policy pending which can have any material impact on GDP growth is immigration, but basic logic would conclude the best returns are generated from the most skilled labor. It’s almost unimaginable an immigration policy constructed with an initial phase of keeping every foreign student post graduation won’t be well accepted by Congress. It’s simply the biggest bang for the buck and the funding has already been invested at the academic level, sunk costs.

It seems irresponsible that the administration continues to use overstated economic growth when producing their spending agenda. Thanks for pointing it out and attributing it to something, even if it’s an immigration policy with immeasurable risk-neutral economics and low probability of passage.

Posted by ShaqpaQMatt | Report as abusive

“in particular to childless men, are not high enough to draw them into entry-level jobs…”
Really? Draw them in? That means they know abut it and understand it. I assure you they don’t and will not. Think of the people you are talking about for a minute. You really expect hem to understand tax law changes? Instead, who ever is doing their taxes for them will just try and sell them something foolish like H&R block did with an IRA who’s fees were larger than the guaranteed rate. Draw them in….LMFAO!

Posted by tmc | Report as abusive

“assumes, assumptions” we all know what that makes us!

Posted by Mutantone | Report as abusive

“an EITC that is more generous to childless workers might make work attractive to men with modest skills, and this might, in turn, make them better marriage partners and, eventually, better parents.”

I’m stunned. Why didn’t I think of that when I was evaluating a guy for husband/father material? “Heeeyy, there, big boy! You sure look good with that big EITC you got there.” Yeah. That’s the first thing I asked my husband – how big his EITC was.

I’m with tmc – LMFAO.

Posted by JL4 | Report as abusive

Who cares if 29% of minimum wages go to households earning triple the poverty level? It puts more capital into the hands of consumers and stimulates demand….the main thing we need right now! I didn’t hear even a single reason not to increase minimum wages …?

ALso the argument about losing jobs is over. No more propagandists’ time need be wasted on the lie that minimum wages will hurt job growth.

Posted by Benny27 | Report as abusive

@Benny27, I couldn’t agree with you more. Let’s face it, triple poverty level doesn’t mean you make very much anyway, but it does put more money back into the economy overall. I also think we should increase minimum wage to $10+ dollars an hour.

“Trickle Down Economics” which, if it worked at all, would have already worked, but it didn’t work (corporations aren’t trickling down their profits in the form of jobs and now they can’t be trusted), so let’s try increasing minimum wage to get people pumping more money into the economy.

If Walmart were to voluntarily increase minimum wage, they would immediately earn the good will of the general public, and thus, make more money by attracting approving customers. Their employees would get off public assistance which means you and I would save tax dollars, which we would put into the economy. Plus, their employees would have more money to spend in their own stores.

Other companies would follow suit, I believe. Sad that we live in a world where one retailer controls so much.

Posted by JL4 | Report as abusive