The inherited deficits fallacy

The inherited deficits fallacy

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 70s, 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 90s 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:

  1. The number is made up. CBO says it’s half as big.
  2. You support continuations of most of the policy changes you attack.
  3. You will be in office for (at least) the next four years and can do something about it.
  4. 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 1960s and Social Security’s indexing formula was changed in the 1970s, 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: Center for American Progress)

51 responses

  1. Whoa. On a stylistic note, it's like you just morphed into the incredible hulk (that's a compliment, by the way). I think I speak for at least some of your readers–at any rate, I speak for myself–when I say that it's about durned time you got a little aggressive. The Obami been saying this stuff from day one, and they never–never–stop, and we clingy rubes of the hoi polloi simply do not have the reserves of knowledge to make a good response. (That a response is required we know from BS detectors–the lady doth protest too much and all that).

    Some of what you've written here still sounds to me like it's about a galaxy far, far away–I remember a story I heard about Steve Largent, who went into Congress focused like a laser on the budget and, after several years, wound up confessing that he still didn't understand it.

    I wrote in a post here a few months ago that it seems almost as if anyone can claim (nearly) anything about the budget, deficits and debts, so long as the books are appropriately cooked. I bet Obama could get away with claiming he will erase the deficit and cut the debt by 70% in ten years, if he wanted to (he practically is claiming that already). He'd be challenged by all the right people, but this stuff just sort of hovers in the air around citizens and our busy lives, and all we hear is "slash…deficit…eviscerate…debt…" How can we possibly tell the difference? The budget is a mystery-in-riddle-in-enigma type deal.

    Totally unrelated to your argument–or your facts, rather–which I not competent to challenge anyway, it looks to me like it's a matter of who sounds more credible to voters. To say "Bush and his hunchbacks did it!" still sounds credible to most people, although that fairy dust is wearing off. If unemployment stays high and, oh, I don't know, the commercial real estate bubble bursts next year, then I think the CBO's numbers and the people delivering them will begin to be heard in a way that matters. (I suppose I'm saying, now that I look at it, that the credibility of Republicans will be determined mostly by circumstances).

    The Virginia bloodbath and the New Jersey "Finally!" suggest that GOP voices are beginning to seep into the ether. I'm just saying it's depressing to think that the Obama/Orszag narrative will become the conventional wisdom if GDP happens to go positive and unemployment drops a few points (much like the "Hoover was a Rothbardian" narrative did in the FDR years).

    For what it's worth.

  2. While I think you demolished Orszag's argument, your proposed solution misses several important aspects to our current and future financial problems by misplacing the blame. The issue isn't the President; its the Senate.

    The Senate's supermajority requirement to pass any kind of legislation coupled with an extreme, unified minority who seeks to block the majority party legislation results in terrible special interest laden bills or grid lock.

    These two structural factors are the primary determinants for the terrible future fiscal situation that we face. Any solution that attempts to actually address our public debt in a fiscally responsible manner would require raising taxes and cutting spending. Both of these things are 1) horribly unpopular with the electorate 2)have no constituency aside from policy wonks and 3) enrage special interests who benefit from the spending and/or would have to pay the taxes.

    Considering those factors, it means that the government can neither raise taxes nor cut spending. It means that neither conservatives nor liberals can implement their agenda in a fiscally responsible manner*. And I think this is terrible for our citizenry and democracy because democracy should roughly conform to the will of the people. When the electorate votes a political party into power, that party should have the chance to implement their agenda. Then, if the electorate doesn't like what they get, they can kick the bums out and vote in the other guys. I am a liberal; I stronly opposed just about every policy George W. Bush and his Republican congress proposed, but I think they should have been able to enact those policies with a democratic majority. Becauase elections should have clear consequences and part of a responsible democracy is living with the choices we make.

    Instead we get status quo grid lock, where no particular person is responsible. Whoever is in power rages against the obstinate, unreasonable minority who refuse to compromise, while the minority rails against the majority's ham fisted power grabs and its refusal to deal fairly with the minority's objections and point of view.

    And all the electorate can see is that no matter what they do nothing changes–everything just keeps going in the same trajectory no matter who they vote for. In the end, while your analysis is sound, your judgment is questionable. Essentially, what you are suggesting is that Obama commit political suicide for no substantive or symbolic gain. What's the point of asking a politician to do that?

    *I know, I know conservatives think raising taxes is by definition fiscally irresponsible, I mean fiscally responsible in the non-ideological sense of paying ones bills and not going into debt.

  3. Dear Mr. Hennessey:
    Thank you for your thorough, insightful and learned rebuttal of Peter Orszag's comments. I heard many of Mr. Orszag's arguments on the Charlie Rose Program earlier this week. I felt that there had to be another side to the story. Again I appreciate your comments.

  4. "When the electorate votes a political party into power, that party should have the chance to implement their agenda. "

    Obama and the Democrats DO have the chance to implement their agenda but they are supposed to follow the rules to get there. Surely you aren't saying that the Republicans should roll over and vote in the Democrat agenda simply because the Dems are "in power"?

  5. Joseph,

    I agree completely. Unless we address the institutional obstacles to real reform we'll never solve our fiscal problems. One solution that I wish received more attention is campaign finance reform. I don't know how market fundamentalists justify the "money is free speech" argument, but I'd sure like that argument to occur. We have to rid our elections of special interest influence (as much as possible) if we ever hope to have a functioning democracy. This is partly the responsibility of the electorate, but mostly the institutional impediments must be addressed.

    How much of our debt outside of SS and Medicare obligations is the result of patent protections in pharmaceuticals and ridiculous military contracts? It surprises me that most conservatives don't remember the words of President Eisenhower, and how he was fearful of future presidents not having the military background he had. I'm guessing that the conservatives of today would call President Eisenhower a Marxist or socialist for making this statement,

    "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. It is spending the sweat of its
    laborers, the genius of its scientists, the hopes of its
    children. . . . We pay for a single fighter aircraft with
    500,000 bushels of wheat. We pay for a single
    destroyer with new homes that could have housed
    more than 8,000 people. . . . This is not a way of life
    at all in any true sense. Under the cloud of
    threatening war it is humanity hanging from a cross
    of iron."

    This kind of thoughtful, truly compassionate argumentation for the common good would send most mainstream conservatives into conniptions.

    • If you are building houses while your enemy is building tanks, you will no longer have houses.

      Procurement represents about 20% of the military budget which in turn is about 3-4% of GDP

  6. Pingback: Instapundit » Blog Archive » KEITH HENNESSEY: The Inherited Deficits Fallacy….

  7. Thanks… kinda like using an A-bomb to kill a rodent, but the rodent deserves it.

    But, enough about Orszag's looks… ba-da-boom.

    I particularly like your pointing out that (if I may paraphrase) all past decisions are embedded in the present. I would add, that they could all be reversed any time Congress and the Administration (ANY Congress and Administration, not just this one) chooses to. Social Security, Medicare, the military, any of it could be zeroed out of new budget authority and as current contracts are wound down, eliminated.

    We generally choose not to do this, for obvious reasons. But blaming, for example, Bush for Medicare Part D while continuing to fund it and even trying to enlarge it, or more generally reaping the political benefits of Social Security while not addressing its structural actuarial deficit, insults my intelligence.

    But, Orszag and his ilk has done a lot of that this year. Stimulus "jobs created or saved," anyone?

  8. Orszag and Obama want all the authority and none of the responsibility, all the applause and none of the tough decisions. They cannot complain about tax cuts and the Medicare Drug benefit, and then embrace them. They cannot complain about the budget deficit and then embrace the madness by adding to it. What is most telling is how their attempts to have it both ways appear increasingly desperate and nonsensical as your hulkified repost demonstrates. Orszag is better than this. It is sad to see him reduced to streaming non sequitors.

  9. The problem I have is that tax cuts are not deficit spending. They reduce income which in turn means you must reduce your spending but in themselves they don't cause spending and to use them as an excuse for debt is nonsense. Budget income must be forecast then spending adjusted to fit. This has not taken place in so many years but isn't this basic stuff? Yes I've simplified this severely.

    • Quite right. Tax cuts do not create deficits. Only spending can do that. And tax cuts do not necessarily reduce income. Tax revenues after the Bush era cuts remained above historical averages and capital gains tax revenues and economic growth rates doubled. Bush's "tax cuts for the wealthy" actually increased revenue on the high end while the increased child tax credit and lowered minimum tax rate reduced revenue at the low end, a classic redistribution of wealth that should have had the libs dancing in the streets. The deficits were created by the above baseline spending the dems (as well as far too many repubs) are so inordinately fond of. Tax cuts will not be our ruination. Profligate entitlement spending will (and it was Teddy Kennedy specifically and his like-minded peers who insisted that means testing the drug benefit "made no sense") . Hennessey is quite right as well. Obama has the means and opportunity to "correct" the policies of his predecessor. Why doesn't he just do it? (That's rather a rhetorical question–I think we all know why.)

  10. Given those debt numbers, I can see now that the Fed will get lots of pressure to keep T-bills low to keep the interest payments small .. forever.

  11. 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.

  12. "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

  13. Pingback: Hot Air » Blog Archive » The “inherited deficits” fallacy

  14. Did not the tax cuts stimulate the economy and therefore increase the tax collections? After the tax cuts the unemployment rate fell to as low as 4.6%.

  15. Pingback: Serving up hot links… » The Anchoress | A First Things Blog

  16. 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.

  17. Didn't the tax cuts of 2001 and 03 actually lead to higher revenues? Weren't tax collections up throughout the Bush administration?

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