Does the President’s budget cut the deficit in half?

Budget Director Peter Orszag wrote on his blog yesterday that he thinks “Debt held by the public net of financial assets is the most meaningful measure of current federal debt.”

I wrote earlier today why I think Director Orszag’s new metric is misleading and dangerous. Now, however, I’m going to take his argument and apply it to the President’s budget, for which Director Orszag is responsible.

It seems to me that his own logic invalidates his claim (and therefore President Obama’s statement) that the President’s budget would cut the deficit in half by the end of the President’s first term.

Therefore, while our Budget will run deficits, we must begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on sound fiscal footing. (President’s Message on the Budget, page 4)

You will remember from my earlier post that debt held by the public is simply the accumulation of the federal budget deficits and surpluses of prior years. It is the sum of all current and past borrowing by the federal government from those outside the government. The deficit is an annual measurement, and the debt is a total of deficits and surpluses over time.

Director Orszag writes that “the most meaningful measure of current federal debt” should net out financial assets held by the U.S. government. If he believes this when measuring debt, then logically you should do the same with the annual deficit. His logic argues that this year’s projected $1.752 trillion federal budget deficit (OMB numbers) is not as good a measure as if we net out the amount of financial assets the U.S. government will purchase this year, which according to OMB is $915 billion (my calculation from Table S-1 of the President’s Budget). The Director’s logic suggests that he would think that the most meaningful measure of this year’s federal budget deficit is to net out this year’s purchase of financial assets. Instead of $1.752 trillion, the “most meaningful” deficit figure for 2009 would be $837 billion.

If the Director disagrees with me extending his logic from the debt to the deficit, I would be intrigued to hear his rationale.

The President has said that his budget will “cut the deficit in half by the end of my first term in office.” Director Orszag has defined that to mean that the 2013 deficit is less than half of the 2009 deficit, as measured on January 20th before they implemented any policy changes:

We project that the deficit for the current fiscal year, including the recovery and stability plans, will be $1.75 trillion, or 12.3 percent of GDP. Of that, $1.3 trillion, or 9.2 percent of GDP, was already in place when we assumed office.

The President is determined to cut this $1.3 trillion deficit by at least half in four years. This would bring the deficit down to $533 billion by fiscal year 2013. More importantly, it would reduce the deficit to about 3 percent of GDP. (Director Orszag’s testimony before the House Budget Committee, March 3, 2009, p. 2.)

If you take the figures in the President’s budget as face value, the Director hits the goal:

  • He projects that the 2009 deficit will be $1.752 trillion.
  • He projected that the 2009 deficit before enacting their new policies would be $1.3 trillion.
  • He projects a 2013 deficit under the President’s budget of $533 billion. That’s 41% of the $1.3 trillion figure, well below half.

Most economists and budgeteers prefer to measure deficits as a percent of the economy. They easily hit their goal using this measure:

  • He projects that the 2009 deficit will be 12.3% of GDP.
  • He projected that the 2009 deficit before enacting their new policies would be 9.2% of GDP.
  • He projects a 2013 deficit under the President’s budget of 3.0% of GDP, well under half the 2009 deficit. They hit this goal with ease.

But his starting (and ending) point for these measurements includes the purchase in 2009 of more than $900 billion of financial assets by the U.S. government (using OMB numbers). According to his blog post yesterday,

If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me. On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state. There’s a similar effect when the federal government borrows money in order to invest in financial assets.

It seems to me that this logic (which I don’t buy) should apply equally to the debt and the deficit. His logic suggests that his starting point in 2009 for measuring “cutting the deficit in half” is inflated by hundreds of billions of dollars used to purchase financial assets.

Look at what happens, though, if instead you look at the deficit net of financial assets purchased:

  • The 2009 deficit, net of financial assets purchased in 2009, is $837 billion.
  • The 2013 deficit, net of financial assets purchased (and sold) in 2013, is $565 billion. That’s 67% of the 2009 deficit, well more than half.

And if we do the same thing as a share of the economy, they still fail to hit the President’s goal:

  • The 2009 deficit, net of financial assets purchased, is 5.1% of GDP.
  • The 2013 deficit, net of financial assets purchased, is 3.2% of GDP. That’s 63% of the 2009 deficit, again well more than half.

Now the Director’s test as stated in his testimony uses the 2009 deficit, measured as of January 20th before President Obama’s policies were enacted, as a starting point. OMB’s public numbers do not allow me to net out the financial assets to develop a precise figure for comparison. But we know that logically it’s not bigger than the $837 billion figure given above, so this ambiguity shouldn’t matter, either for aggregate dollars, or for percent of GDP. If anything, it should mean that they miss their “cut in half” target by an even greater amount.

If Director Orszag thinks that debt held by the public net of financial assets is the most meaningful measure of current federal debt, then it would seem logical that the same should apply to the annual federal budget deficit.

But then, using the Administration’s own numbers, the President’s budget does not come close to meeting the President’s goal of cutting the deficit in half by the end of his first term.

(Note to budget reporters: If you hear a response from OMB and would like to share it with me, I’ll give you my reaction.)

Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits. It’s not. The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.” I stand corrected on these points. But I don’t think this should change my logic above about whether to net out the purchase or sale of financial assets. I don’t see why the differences between deficit and debt accounting should mean that the purchase or sale of financial assets should be treated differently. If the Director or his staff have an answer, I’m all ears.

By | 2017-07-17T17:23:45+00:00 Wednesday, 8 April 2009|