The inherited deficits fallacy
4 November
Budget Director Peter Orszag spoke at NYU yesterday, a speech titled “Rescue, Recovery, and Reining in the Deficit.”
I wrote a super-long post yesterday, but it was too much. So today I respond to the headline-inducing element of the speech. Tomorrow I will post a longer point-by-point response to the rest of his speech.
Warning: my tone in this post is a smidge more aggressive than usual. Director Orszag’s speech fired me up.
Here is the part of the Director’s speech that got the most attention:
ORSZAG: So how did we get here?
Of the $9 trillion in deficits projected over the coming decade, nearly $5 trillion comes as a result of failing to pay in the past for just two policies — the 2001 and 2003 tax cuts and the creation of a Medicare prescription drug benefit.
The cost of the tax cuts will total about $4 trillion over the next decade, including the additional interest on the debt the federal government will have to pay since the tax cuts were deficit financed. The Medicare prescription drug bill will add about another $700 billion to the deficit – bringing us to about $5 trillion total for the cost of just these two policies.
In addition, roughly $3.5 trillion can be attributed to automatic economic stabilizers.
As the economy enters recession, certain spending programs, such as unemployment insurance and food stamps, automatically increase and revenues tend to decline. Although this helps to ameliorate the economic downturn by stimulating demand, it also leads to higher deficits.
Finally, there is the Recovery Act which accounts for just 10 percent of the entire deficit over the next decade.
All told, the entire $9 trillion deficit reflects the failure to pay for policies in the past and the cost of the worst economic downturn since the Great Depression and the steps we had to take to combat it.
Now, assigning blame never solves a problem, but it is important to understand that we didn’t get where we are merely as a result of bad luck.
It was the result of decisions – conscious, but unfortunate – and it will take deliberate action for us to work our way out of this situation.
And it’s critically important that we do just that.
Let’s break it into pieces.
ORSZAG: Of the $9 trillion in deficits projected over the coming decade, …
This is Director Orszag’s made-up number. CBO says the baseline deficits over the next decade are half as large, $4.5 trillion.
ORSZAG: … nearly $5 trillion comes as a result of failing to pay in the past for just two policies — the 2001 and 2003 tax cuts and the creation of a Medicare prescription drug benefit.
The cost of the tax cuts will total about $4 trillion over the next decade, including the additional interest on the debt the federal government will have to pay since the tax cuts were deficit financed. The Medicare prescription drug bill will add about another $700 billion to the deficit – bringing us to about $5 trillion total for the cost of just these two policies.
Director Orszag is correct that neither the Medicare drug benefit nor the tax cuts were offset with other spending cuts or tax increases. He fails to tell you that in 2003 Congressional Democrats wanted to spend more on Medicare drugs than the bill President Bush signed into law. (President Obama was a State Senator at the time.) He fails to tell you that President Obama did not propose means-testing the drug benefit to save money, as President Bush tried to do. He also fails to tell you that President Obama’s budget proposes to continue $3.2 trillion of the 2001 and 2003 tax cuts and the AMT patches that followed them. (See the first few lines of Table S-5.) He also fails to tell you that his $9 T figure includes $835 B for the stimulus and associated interest costs that President Obama clearly did not inherit.
While he wants to argue that these “$5 trillion” are “not his fault,” the same could be said about all federal spending and taxes in place when President Obama took office. Had Medicare not been enacted in 1965 or had Social Security benefits not been indexed to wages rather than inflation in the 70’s, our budget would be in surplus today (if nothing else had changed). It is misleading to attribute future deficits to any particular past policy change, as future deficits are the result of a calculation assuming unchanged extensions of all past policy changes into a path for total future spending and total future tax receipts. Director Orszag is picking and choosing particular policies to try to assign blame. How much of future deficits are because future Medicare spending was not offset when Medicare was enacted in 1965?
This is closely related to the PAYGO myth the Administration is trying to popularize. The core of the Administration’s budget message is: “Our predecessors were irresponsible by not paying for their policy changes. They left us a mess. We are being responsible by paying for everything we do.”
The reality is more complex. The two parties have different visions of PAYGO, and both parties violate their visions on occasion.
- Republicans, including President Bush, generally try to offset proposed mandatory spending increases with spending cuts. I support almost every spending cut and almost every tax cut in front of me, and support packaging them together when I can but don’t sacrifice one for the absence of the other.
- This was violated for the Medicare drug benefit. You can blame this on President Bush, or on the Republican-majority House of the late 90’s that first passed an unpaid-for universally subsidized Medicare drug benefit, or on the Congressional Democrats who proposed to spend even more without offsets. I would note that President Bush developed a proposal to package the Medicare drug benefit with dramatic changes to restructure fee-for-service Medicare and make it compete with private health plans on a level playing field. This proposal would have more than offset the increased spending from the drug benefit. House Republican Leaders (in 2003) rejected these reforms and insisted on just doing the drug benefit because AARP and Congressional Democrats opposed the reforms.
- Moderate Democrats (to the extent they exist in Washington) argue mandatory spending increases and tax cuts should be offset. They (and Republicans) ignore discretionary spending increases.
- The Obama Administration and Congressional Democrats invoke PAYGO when it’s convenient and ignores it when it’s inconvenient:
- The Administration did not insist that the stimulus be offset (they could have insisted on deficit reduction far in the future to preserve the short-term stimulus effect). Even now Director Orszag hides those deficit increases in the baseline and excludes them from his calculations of the deficit impact of President Obama’s policies.
- The Administration buried $200+ B of proposed Medicare spending increases on doctors in the baseline and worked with Leader Reid to try to pass these as a standalone bill without offsets.
- Congressional Democrats are now drafting a $100B – $200B we’re-not-calling-it-a-second-stimulus bill to extend certain provisions of the first. My sources tell me this bill will not be offset.
- The reality is that each party has a view of what should and should not be “paid for,” and each violates it when it’s the only way to get high priority legislation through Congress.
ORSZAG: In addition, roughly $3.5 trillion can be attributed to automatic economic stabilizers.
As the economy enters recession, certain spending programs, such as unemployment insurance and food stamps, automatically increase and revenues tend to decline. Although this helps to ameliorate the economic downturn by stimulating demand, it also leads to higher deficits.
I can’t find this number. I think he’s summing up recent past and near-future revenue losses and spending because our economy is operating below ‘potential.’ My view is, so what? All Presidents have to deal with economic fluctuations, sometimes severe ones. You shouldn’t time your deficit reduction to hit when you’re trying to promote short-term economic growth, but a deficit is a deficit and accumulated debt doesn’t know what its source was. Try to make them smaller whatever their cause. This really has the feel of “IT’S NOT MY FAULT!”
ORSZAG: Finally, there is the Recovery Act which accounts for just 10 percent of the entire deficit over the next decade.
… only if you start from Director Orszag’s made-up $9 trillion baseline deficit number. If you start from CBO’s $4.5 T baseline, and if you include interest costs as he does for the tax cuts he didn’t like, you’re above 20%.
ORSZAG: All told, the entire $9 trillion deficit reflects the failure to pay for policies in the past and the cost of the worst economic downturn since the Great Depression and the steps we had to take to combat it.
This is brazen. Translation: $9 trillion of deficits over the next ten years are not our fault.
I have three problems with this:
- The number is made up. CBO says it’s half as big.
- You support continuations of most of the policy changes you attack.
- You will be in office for (at least) the next four years and can do something about it.
- Your policies would make the problem you describe worse. CBO says much worse.
Here is the math behind the Administration’s claim of fiscal responsibility, and CBO’s countervailing analysis. All figures are for the next ten years (2010-2019):
|
Administration |
CBO |
|
| Additional debt under the baseline |
$9.0 trillion |
$4.5 trillion |
| Additional debt under the President’s budget |
$7.0 trillion |
$9.3 trillion |
| Effect of the President’s budget on additional debt |
-$2.0 trillion of debt |
+$4.8 trillion of debt |
I wrote about this extensively in March: Baseline games.
ORSZAG: Now, assigning blame never solves a problem, but it is important to understand that we didn’t get where we are merely as a result of bad luck.
It was the result of decisions – conscious, but unfortunate – and it will take deliberate action for us to work our way out of this situation.
In early January CBO estimated a deficit for FY 2009 of 8.3% of GDP. Most of that was because of the TARP. That 8.3% is a genuinely “inherited” problem that is not President Obama’s “fault.” Since January, economic deterioration and policy changes enacted into law by the Obama Administration and the Congress put the FY 2009 deficit at 10% of GDP. I don’t know whose fault that additional 1.7% is, but it is the responsibility of the current leadership.
Similarly, CBO projected that at the end of FY 2009 debt as a share of GDP would slightly exceed 50%. CBO projected that, under baseline policies, debt/GDP would climb to 56% by 2019. The 50% was inherited and not Team Obama’s “fault.” The 56% is unfortunate, but you’re elected to change policy, so fix it if it bugs you. How, then, does the Administration explain the proposed increase of debt/GDP to 82% of GDP?
Director Orszag tries to redefine the baseline so that his inherited future deficit and debt problem look worse, and his boss’ culpability for future deficits and debt looks smaller. I disagree with his budget mechanics, but so what? Ever since Medicare and Medicaid were created in the 1960’s and Social Security’s indexing formula was changed in the 1970’s, every President has inherited a future deficit problem. Each year that problem goes unsolved, the problem gets harder to fix. President Obama is no different. Complaining about future problems but not proposing solutions just looks whiny.
Suck it up. Each President has the ability to propose changes and fix the problem. Director Orszag focuses on the deficit-increasing policies of the Bush Administration, but ignores the President’s attempt to slow the growth of Social Security spending, his proposed Medicare reforms, or the Medicaid savings the Obama Administration undid in the stimulus bill earlier this year. He ignores President Bush’s veto of an out-of-control farm bill (passed in a Republican-majority Congress), his attempt to restrain obscene Congressional highway spending desires, and his unpopular but principled vetoes of two S-CHIP bills because they spent $12 B too much. Think about that: in late 2007 and early 2008 we were fighting about $12 B of spending.
If you think the Medicare drug benefit was a mistake, then propose changes to it. Means-test it rather than turning off the Medicare funding warning trigger as the House did earlier this year. If you don’t like the future deficit impacts of the 2001 and 2003 tax cuts, then don’t propose to continue most of them, or propose other tax increases to pay for them. That’s why you’re in office: to change policies with which you disagree. It’s absurd to complain about future deficits that you have the ability to [try to] change. And it’s astonishing that you would try to blame your predecessor for future changes you choose not to make.
It’s even more absurd when the policies you propose make the problem worse. Director Orszag’s argument is belied once again by the Congressional Budget Office, which wrote in March:
CBO: As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period. … The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions).
The most disappointing aspect of Director Orszag’s speech is not the details of his substantive argument. It’s that he would use a valuable and limited resource, his ability to command attention and shape the policy agenda, to assign blame rather than propose solutions. We need the current Administration to spend less time worrying about whether future problems are their fault, and more time trying to solve those problems.
You inherited debt/GDP of 50.5%. Under your policies that will increase to 82%. Please stop worrying about whose fault that is and do something about it. Propose a solution.
(photo credit: OMB)
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Obama's entire successful campaign was based on blaming Bush. For Everything. For Leftards, that's not only the truth, it is the gospel. You really expect his people to stop now?
Now he's acting like we forced him into the presidency against his will. Long after the "Bam's four years are up, his supplicants in the MSM will be blaming George Bush for every bad thing that comes out of this current administration. Neither he, his appointees, or the the press will think to place any blame on this administration.
Believe me, there will be many articles in Nov/Dec 2012 on how it was Bush's fault that Obama lost the election.
"Every gun that is made, every warship launched,
every rocket fired, signifies, in the final sense, a theft
from those who hunger and are not fed, those who are
cold and are not clothed. This world in arms is not
spending money alone."
Not really. We have plenty of capacity for growing food and fabricating clothes. Hell, we pay farmers not to grow food, and have been for decades, because if we didn't, they would produce too much and drive a lot of themselves out of business, leaving us without any slack capacity for bad years.
And, what's with the passive voice? Is this a real Eisenhower quote, or one of those wiki-quotes that zip around the web from time to time? "Are not fed, are not clothed"… people can feed and clothe themselves. This nation has done a better job of allowing them to do so than any other ever in the history of the Earth. We must have been doing something right all these years. We don't need your revolution. You need to free your mind.
This was a speech given by President Eisenhower in 1953, during the height of the Cold War. President Eisenhower was a warrior who hated weapons and used them wisely as a general and president (for instance, he despised the atomic bomb). He wasn't perfect, but he had an insight into war and violence that gives him a credible and unique perspective. He wasn't a cigar-chomping armchair chickenhawk like David Brooks, he's a true soldier who understood that defense was a necessity, but that it should not dominate our way of life and should be regarded with the reverence and wisdom it deserves.
The speech was entitled "Cross of Iron", the full text of which can be read here: Cross of Iron Speech
Liberal analysts always assume that if the Bush tax cuts had not occurred, the government would have more money, but this wrongly assumes the cuts had no impact on the economy and thus tax revenues, which is silly. Also if the government did have more money, they would have found more ways to spend it and we would have an even bigger problem.
Didn't the tax cuts of 2001 and 03 actually lead to higher revenues? Weren't tax collections up throughout the Bush administration?
I blame both parties for the generational THEFT taking place in the form of TARP, Stimulus, Budget, Cash for Clunkers and the hog bills go on and on and on. Spending bills come from Congress and neither side seems to understand that you can NOT run a country on borrowed money (Ponzi scheme). It is their insane and often corrupt spending that is the problem. I see our government as something out of a sci-fy horror show as this massive blob destroys and gobbles up everything in their path and everything they get their dirty little hands into and it is destroying our country and enslaving our children to debt they will never be able to pay back…debt to Communist China and worse!
We have a COMMUNIST president heading the African Jihad on America. Anyone that doesn't believe that should do the research for themselves. The "useful idiots" (as Stalin would have called our media) have failed to investigate and report the truth about Obama and those who advise him. I believe it was Bill Ayer's that said killing 25 million Americans would be necessary in the upcoming revolution…those that will not submit to the take over and destruction of America. This isn't just a lefty progressive, this is an enemy of the country and it is time people understand the mission.
Martin Gross, in his book "National Suicide" says that Washington DC is a madhouse where no one is really in control. He says to get rid of the parties (notice how many times the terms "Democrat" and "Republican" appear in the article) and to force a balanced budget.
This is the reason we need:
THE AMERICAN REGENT
http://naturalfake.wordpress.com/2009/11/04/the-a...
"Inherited" is something that is given to you without any effort on your part. Obambi actively campaigned for the job, it was not dropped into his lap so to complain about inheriting problems is just plain whining. Also where was he during his time in the Senate? Didn't he have a chance to vote on some of these programs?
Excellent points!!
If Mr. Orszag is opposed to the Bush tax cuts, where is the Administration's proposal to repeal them? Those tax cuts are now Obama's.
Excellent post!
>Most of that was because of the TARP. That 8.3% is a genuinely “inherited” problem that is not President Obama’s “fault.”
It is the fault of the Democrat-controlled Congress – and Obama voted for it.
My points stand. And, I find your effort to silence David Brooks fascistic. This is America. Everyone has a right to their opinion. Address the merits of his arguments. Your ad hominems have no value.
I bet he uses 9 Trillion so that Obama can say he “cut the deficit in half” to 4.5 Trillion.
I blame both parties for the generational THEFT taking place in the form of TARP, Stimulus, Budget, Cash for Clunkers and the hog bills go on and on and on. Spending bills come from Congress and neither side seems to understand that you can NOT run a country on borrowed money (Ponzi scheme). It is their insane and often corrupt spending that is the problem. I see our government as something out of a sci-fy horror show as this massive blob destroys and gobbles up everything in their path and everything they get their dirty little hands into and it is destroying our country and enslaving our children to debt they will never be able to pay back…debt to Communist China and worse!
RUListening is right on the money here. The bottom line is deficit spending should only occur in unforseen circumstances (monumental natural disasters [Great CA Earthquake] and war). Every other circumstance of government spending is predictable (e.g., a lot of what you do on this blog regarding demographics), or discretionary (e.g., shall we build a bridge or not, and how will it be paid for). To be blunt, everyone should be quiet until there is no Federal Debt (yes, the entire DEBT). Simply raise the Social Security and Medicare eligibility ages on a sliding scale — no change for current retirees, something like 75 for 18-year-olds. I'll trust the CBO to figure it out. Give the 18-year-olds back 2% of their wage-based taxes with a notice they sign, understanding the money should be set aside for their retirement, and they should save something like 13% on top of that. Tell every federal agency there will be no new funding until the DEBT is zero, and they will have to absorb inflation. We're paying enough SES and GS-15's, they should be able to figure that out. Congress should then spend time streamlining the USC. If they want to do something else, then figure out a way to pay back the debt faster.
While I generally agree with the principle expressed by many posters here, the ideas your putting out Vinyl simple will not work. Raising the retirement or eligibility age will work; however, you can't give new workers their money back or the numbers won't balance. This was the issue when Bush tried privatization. In steady state it works, but in the interim, you have to borrow a whole lot of money to make the math work for current retirees. Furthermore, you can let people keep their money but you cannot force them to save it or any amount of money on top of it.
The simple problem is we need to decide whether we are willing as a society to let people be stupid and have bad outcomes for themselves. You either say you value freedom (and people will make bad decisions) or you say you value outcomes and you have the government try to force "better" normative outcomes. You can't have it both ways. I'll give people freedom and they will do what I want (e.g., save for retirement).
To finish off. The last sentence of the previous post doesn't work. You can't have freedome and societally driven optimal outcomes because free people will choose to do different things. Personally, I value freedom over normative outcomes and do not believe it is government's task to drive better outcomes for me in my life. What I don't think any of us can do is ask to have it both ways. We can have freedom and some bad outcomes or control and similar (some better and some worse) outcomes.
"He ignores President Bush’s veto of an out-of-control farm bill (passed in a Republican-majority Congress)"
First, Democrats won majorities in both houses in 2006.
Second, the veto was overridden by Congress, so it had no effect on spending. Orszag was right to ignore it.
Third, if you are trying to suggest that Bush was trying to be fiscally responsible, it's important to remember that the Bush veto was primarily about taxes. It's like Bush's threat to veto S. 1634. Bush supported money for our troops; the only reason he opposed S. 1634 is that it was funded by taxes and Bush wanted to increase the deficit instead.