At the New York Times’ Room for Debate site, former VP Biden Chief Economist Jared Bernstein and I debate the next steps in the fiscal struggle.
Dr. Bernstein now works as a senior fellow at the Center on Budget and Policy Priorities.
Here’s CNBC’s Rick Santelli interviewing Ed Lazear on our new paper.
I’d like to thank the Heritage Foundation for taking the time and effort to respond to my post, “Eight problems with the Heritage immigration cost estimate.” Heritage’s response, written by Derrick Morgan, is professional and takes a constructive tone. I still disagree with their conclusion, but I appreciate their efforts to make this a discussion rather than the usual screaming matches one finds online.
I’m not sure it adds a lot of value for me to go point-by-point rebutting each of Mr. Morgan’s responses to my original technical points. He is right that we agree in some areas, even though he doesn’t highlight all areas of our agreement. I am sorry to say that where we still disagree his responses have not convinced me to change my original critiques.
While I therefore stand by each point of my original critique, I think it’s most helpful if I highlight a few points on which we agree, and then explain again only the most important reasons why I continue to recommend policymakers ignore this study and its headline number.
Last night Senator Rand Paul from Kentucky led a 13-hour filibuster of the nomination of John Brennan to head the CIA. Based on a couple questions from friends I’d like to explain how a filibuster works and why they are so rare.
At almost any point in time the Senate is technically either debating or voting on a yes or no question. Typical questions the Senate considers look like this:
- Should amendment A by Senator B to bill C be adopted?
- Should the Senate pass bill C?
- Should the Senate consent to the nomination of person D to job E?
- [Now that it has finished F,] Should the Senate next proceed to working on G?
Most questions the Senate considers are debatable. This means that any of 100 Senators, or all of them, can speak about the question for as long as he or she wants.
A few types of questions are non-debatable. As soon as the question is asked, the Senate immediately proceeds to vote on the question. Nominations are debatable questions.
There’s a middle ground as well, used mostly for two types of fiscal policy legislation. The Senate has a fixed amount of total time to debate a budget resolution or a budget reconciliation bill.
In his briefing yesterday White House Press Secretary Jay Carney said:
MR. CARNEY: [E]very proposal the President has put forward … has included significant investments in our economy — in infrastructure, in education, in putting teachers and police officers back on the street.
… they represent the President’s view that deficit reduction is not a goal unto itself; it should be in service of the broader goal, which is positive economic growth and job creation, and that we need to continue to invest wisely to ensure that our economy grows.
Investing in infrastructure, for example, doesn’t just create jobs in the near term; it helps build a foundation for sustained economic growth in the decades to come.
Mr. Carney and his boss use this argument often to justify many of the President’s proposed spending increases. The broader goal, they argue, “is positive economic growth and job creation … [to] build a foundation for sustained economic growth in decades to come.”
I expect Team Obama will be using this argument more frequently as the sequester and budget resolution debates heat up. They’ll probably use it again as a straw man to suggest that because Congressional Republicans oppose the Obama Administration’s proposed spending levels and particular spending plans, those same Republicans oppose all economic growth benefits that come from public infrastructure investment.
So let’s look at government capital investment in this context of long-term economic growth.
The Administration starts from a strong theoretical foundation. Capital investment, whether in the private or public sector, should lead to more productive workers, who will enjoy higher wages and improved living standards over time. When aimed at increasing productivity, capital investment (or capital formation) leads to “sustained economic growth in decades to come.” So far, so good.
- Capital investment by government often pursues multiple policy goals, some of which conflict with maximizing productivity growth. If you’re investing for long-run growth you’ll invest differently than if you also have goals to maximize short-term job creation and to change the future balance of energy sources to reduce greenhouse gas emissions (for instance). The pursuit of multiple policy goals lowers the expected economic growth benefit of public capital spending.
- Geographic politics distorts and often dominates government investment in physical infrastructure. Highway funds and airport funds especially are allocated in part based on which Members of Congress have maximum procedural leverage over the spending bill. Even if you could somehow get Congress to stop earmarking infrastructure spending (good luck), and even if you could rely on the Executive Branch not to allow their own political goals to influence how they allocate funds, local geographic politics would come into play at the state level, since much federal infrastructure spending flows through State governments. This is where reality most falls short of a valid theoretical starting point for increasing productivity and long-term growth.
- Non-geographic politics can distort government capital spending. This is principally an Executive Branch concern, as we saw with the Obama Administration’s decision to throw good money after bad to postpone Solyndra’s failure. And rent-seekers come out of the woodwork, looking to leverage their connections to government officials to win infrastructure investment contracts.
- Once “investment” is favored, everything gets relabeled as investment. The Obama Administration has been particularly guilty of this; almost every spending increase they propose is an “investment” of some sort. We should allow them some rhetorical leeway, and we should recognize that government has other reasons to spend money than just to maximize future economic growth. At the same time, it’s misleading when they claim that increased government spending that serves other policy goals (some quite legitimate) also increases future economic growth.
- There’s a difference between government investments in the commons and government spending that primarily benefits individuals. A new airport benefits all who use it. A scientific research grant benefits the researcher and society as a whole if his research advances our understanding. A subsidized student loan is an investment in human capital, but the return on that investment accrues mostly to the student and his or her family. That’s not wrong, it’s just having a more limited effect on increasing long-term growth for society as a whole.
- Government investment in physical infrastructure is slow. The Administration learned this as they tried to force money out the door in 2009 for “shovel-ready jobs” that turned out not to be there. This doesn’t mean you don’t build roads and improve ports and airports, it just means the short-term fiscal stimulus argument for this type of spending is weak.
- Government investment in physical infrastructure is intentionally expensive because of “prevailing wage” requirements, championed by construction labor unions, that mandate the government must pay more for workers than an aggressive private firm might be able to find in the labor market.
- We should evaluate the marginal productivity benefits of additional investment. The President sometimes argues that building the national highway system was good for growth, therefore his specific proposal to increase highway spending is good for growth, too. But those are different investments, and we need to examine the marginal benefits (and rate of return) on the specific incremental investments he is now proposing. The transcontinental railroad definitely increased national economic growth, but that doesn’t mean the feds should subsidize a costly California bullet train with questionable growth benefits.
- International comparisons of government infrastructure are silly. U.S. government capital spending should be determined based on what will most increase U.S. productivity without comparison to what other countries are doing. If American ports are clogged and that is harming our trade and slowing American economic growth, then we should upgrade our ports. We shouldn’t instead improve our airports because other countries have shinier ones. We have a different geography, a different economy, and different infrastructure needs than does China, or Japan, or Dubai or France. It is crazy to suggest that the U.S. should build bullet trains because China is doing so.
- Government investment faces no market discipline. Capital investment in a private firm can face some of the above challenges—a CEO, for instance, might want a new facility built in his hometown rather than where it will produce the highest rate of return. Or a firm might reject an investment that would maximize its’ workers’ productivity because that investment is inconsistent with the firm’s broader strategic goals. But these firms ultimately face the discipline of the market to curb their excesses. Government does not, and in some cases policymakers are rewarded by their election markets to distort infrastructure investment even farther from its growth-maximizing ideal.
- Government capital investment financed by raising taxes on private capital investment will slow long-term economic growth. While in theory there probably are government infrastructure investments with very high rates of return, all of the above reasons suggest that in practice the actual rate of return on government-directed investment is going to be lower than in the private sector. If you advocate raising capital taxes (on capital gains and dividends, for instance, as Senate Democrats appear poised to do) at the same time you argue for increased government capital spending, you’re shifting capital investment from the private sector to the public sector. That will slow long-run economic growth rather than increase it.
After all of these cautions you might conclude that I’m opposed to more highway spending or to all additional government capital investment. I’m not. America needs a robust, efficient, and plentiful supply of national physical and human capital. And there are definitely areas where smart government capital investment can increase productivity and contribute to faster long-run economic growth.
I am instead suggesting that the President’s infrastructure investment strategy is missing some key cautions, and that we shouldn’t use simplistic arguments and flawed logic, cloaked in attractive investment rhetoric, to justify enormous and often unrelated increases in government spending. We should recognize that in practice government infrastructure investment falls far short of its theoretic ideal, and we should therefore spend taxpayer money on it cautiously and wisely rather than with reckless abandon.
(photo credit: Robin Ellis)
Yesterday I argued that the President is bluffing on his veto threat. Today I want to respond to some great feedback from friends and readers. Warning: discussions of negotiating strategy and tactics can get a little dense.
1. I agree that Senate Democrats would likely block any bill that the President would veto. This means the veto threat is important principally to reinforce Leader Reid’s efforts to hold his Democrats together as a unified bloc.
But if I’m right that the President thinks he cannot afford to risk a recession, then the President needs a new law. Whether a bill dies in the Senate or as a result of his veto, in either case no law –> fiscal cliff –> recession –> severe damage to the rest of the President’s agenda. My hypothesis is that the President is unwilling to take that risk, so he needs the House and Senate to pass a bill he can sign. I think my argument holds whether the veto would be actual or merely a tool to reinforce his allies stopping a bill in the Senate.
2. I agree that, were it not for the recession risk, many Democrats, possibly including the President, would think that no new law was a good fiscal policy outcome. Yes, the President and almost all Congressional Democrats say they want to extend current tax rates for the non-rich. But if all tax rates go up, future deficits will be $5.4 trillion lower. If the sequester is allowed to bind, deficits would be reduced by another $1.2 trillion over the next decade. This outcome, of no new law, would give the President a lot more fiscal flexibility. The deficit and debt problem would be far from solved, but he would have more room to propose new spending that I’m guessing he wants.
There’s an interesting intra-Democratic party tension here. Which is more important to elected Democrats: preventing middle class tax increases or having more room to increase government spending? The President insists he wants to prevent tax increases on the middle class, but it’s easy to believe that he, and especially some Congressional Democrats, would be happy to have such broad-based tax increases to finance their desires to expand government.
If you think the President thinks the potentially quite significant fiscal policy benefits (from his point of view) of no deal are greater than the costs of a 2013 recession and the damage it would do to his entire policy agenda, then you disagree with me and should conclude the President is not bluffing.
4. There are clearly some important Congressional Democrats (e.g., Senator Patty Murray) who appear willing to risk a recession so they can have more money to spend. I disagree with those who suggest those Congressional Democrats would block a bill that the President wanted to sign. If he wants a deal, he’ll be able to deliver the Democratic votes to pass it, and if he wants a bill blocked, they’ll block it for him.
Indeed, the President’s greatest tactical weakness is the varying views within the Democratic party, and especially differences between confident liberals like Senator Murray and nervous in-cycle moderates. Congressional Republicans need to figure out how to expose and exploit these differences and split Congressional Democrats. I will address that in a future post.
5. One wise friend thinks the President is so confident that he would win an early 2013 blame game that he is willing to risk a recession.
In this view you agree that the President still wants and needs a new law to avoid a recession. You also think that not only does the President think he has negotiating leverage now, he thinks his leverage would increase after the new year if there is no new law. You would argue that he is willing to gamble that, faced with the prospect of being blamed both for tax increases and triggering a recession, Republicans would quickly fold in January 2013 if there is no deal. Therefore, you think he thinks risking a recession still won’t result in a recession, because it will end quickly when Republicans cave.
Thanks to all who provided great feedback and counterarguments. For now I’m going to stick with my original view. I think the President thinks he needs to get a deal because I think his highest priority is (and should be) avoiding even the risk of triggering a new recession in the first year of his second term.
What scares me more is that I fear the President wants a deal but doesn’t know how to get one with Republicans. My working hypothesis is that the President is an ineffective negotiator when dealing with those who disagree with him. This view is heavily reinforced by Bob Woodward’s book The Price of Politics. Other than two years ago when he swallowed the Republican view whole and extended all tax rates, the President is oh-for-Administration in major bipartisan legislation. At the moment I worry less about the President’s goals and priorities, and more about his negotiating skill and his capacity to reach agreement with those with whom he strongly disagrees.
(photo credit: Jim Moran)
Today’s Washington Post contains an election-season hatchet job on Paul Ryan by reporter Lori Montgomery, “Amid debt crisis, Paul Ryan sat on the sidelines.” I would expect a story like this on the Newsweek or Huffington Post sites, but the Post purports to be nonpartisan and balanced.
Ms. Montgomery’s story offers two premises:
- Mr. Ryan “sat on the sidelines” rather than act, and in doing so he failed to behave as a responsible legislator;
- He would rather espouse conservative principles than engage in the messy business of bipartisan compromise.
Here is Ms. Montgomery’s core assertion:
But knowledge is not action. Over the past two years, as others labored to bring Democrats and Republicans together to tackle the nation’s $16 trillion debt, Ryan sat on the sidelines, glumly predicting their efforts were doomed to fail because they strayed too far from his own low-tax, small-government vision.
Here is her evidence:
- Ryan voted against the Bowles-Simpson recommendations;
- Through much of 2011, he insisted publicly that a “grand bargain” on the budget was impossible; and
- He “asked Boehner not to name him to the congressional ‘supercommittee’ that took a final stab at bipartisan compromise last fall.”
- He voted against a measure to dial back unemployment benefits and extend a temporary payroll tax holiday.
She writes that Mr. Ryan “did draft a blueprint for wiping out deficits by 2040,” but she fails to mention that he passed that plan through the House. She does not report that Mr. Ryan’s staff were providing behind-the-scenes technical assistance to Speaker Boehner during the Grand Bargain negotiation. She doesn’t report that Mr. Ryan loaned his budget committee staff director to Mr. Hensarling on the super committee. She doesn’t mention that Mr. Ryan’s prediction that the super committee would fail came true, or that the Obama White House was AWOL during the super committee negotiations. She doesn’t mention that he voted for the Budget Control At of 2011, for the tax rate extensions at the end of 2010, and for the FY 2012 Omnibus Appropriations Act, three major bipartisan fiscal laws that deeply split House Republicans.
Did Chairman Ryan sit on the sidelines over the past two years? On April 15, 2011, the House passed the FY 2012 budget resolution. On March 29, 2012, the House passed the FY 2013 budget resolution. Both were written by Mr. Ryan, passed by him out of his Budget Committee, and he managed the floor debate for each.
It is true that Mr. Ryan never reached a bipartisan conference agreement on either of his two budget resolutions, but that’s because the Senate never did its work. Mr. Ryan’s Senate counterpart, Senate Budget Committee Chairman Kent Conrad (D), did not pass a Senate budget resolution for any of the last three years. It is unfair to criticize Mr. Ryan for failing to reach a bipartisan compromise when his Democratic counterpart didn’t even show up or do his job.
More importantly, Mr. Ryan acted. His job as Budget Committee Chairman is to pass a budget resolution, and he did his job both years. Ms. Montgomery criticizes Mr. Ryan for failing to cut bipartisan deals in ad hoc negotiating forums. Yet he was not a member of two of the three, and she fails to give him credit for doing his job by passing legislation. As Budget Committee Chairman Mr. Ryan produced more concrete legislative progress than the Bowles-Simpson Commission and the super committee combined.
Ms. Montgomery suggests that being conservative and being bipartisan are mutually exclusive. That is a false premise.
And he has earned wide praise for tackling Medicare, the nation’s biggest budget problem, despite the political risk.
But as Washington braces for another push after the election to solve the nation’s budget problems, independent budget analysts, Democrats and some Republicans say Ryan has done more to burnish his conservative credentials than to help bridge the yawning political divide that stands as the most profound barrier to action.
Ms. Montgomery fails to mention Mr. Ryan’s two bipartisan Medicare plans. He developed the first with former Clinton Budget Director Alice Rivlin during the Bowles-Simpson Commission and negotiated the second with Democratic Senator Ron Wyden. Rivlin-Ryan (which can point to the bipartisan Breaux-Frist-Thomas as its intellectual forefather) and Ryan-Wyden are major bipartisan structural Medicare reforms. Ryan-Wyden is the Medicare policy assumed in the budget resolution passed by the House this year, even though it moved a big step left from the all-Republican plan assumed last year. Medicare is one of the biggest fiscal challenges America faces. Mr. Ryan is the only one who has made concrete legislative progress on a bipartisan Medicare plan since 2003.
Maybe Ms. Montgomery didn’t know about Rivlin-Ryan and Ryan-Wyden? Here is what she wrote on December 14, 2011 in a story titled “Paul Ryan to announce new approach to preserving Medicare”:
Working with Democratic Sen. Ron Wyden (Ore.), the Wisconsin Republican is developing a framework that would offer traditional, government-run Medicare as an option for future retirees along with a variety of private plans.
… The center formed its own debt-reduction committee, chaired by former senator Pete Domenici (R-N.M.) and former Clinton budget director Alice Rivlin, who has also worked with Ryan on his premium support approach to Medicare.
It is easy to write that someone is not bipartisan when you ignore his bipartisan work. In this case the premise is incorrect and Ms. Montgomery knows it’s incorrect.
The Biden comparison and the Commission
Ms. Montgomery contrasts Mr. Ryan with VP Biden:
Democrats say he would make a very different sort of vice president than Joseph Biden, a natural glad-hander who has taken the lead for Obama in negotiations with Republicans over taxes and deficit reduction.
We don’t know who are the Democrats who make this comparison, but we do know that VP Biden’s Communications Director, Shailagh Murray, co-authored at least six stories with Ms. Montgomery when she worked at the Post.
Like many others, Ms. Montgomery’s thesis relies heavily on Mr. Ryan’s no vote in the Bowles-Simpson Commission. Never mind that Senate Finance Committee Chairman Max Baucus (D) also voted no, or that President Obama quietly shelved the recommendations of this commission that he created to report to himself. Never mind that, unlike President Obama, Mr. Ryan proposed his own long-term solution after voting no, then passed it in the House.
The Ryan vote is a perfectly obvious tactical move once you understand the structure of the commission and how it interacts with fiscal negotiations. Mr. Ryan (and Mr. Camp and Mr. Hensarling) were members of a commission that reported to President Obama. Yet they, as the representatives of House Republicans, represent the opposite pole from President Obama in fiscal negotiations.
Had the House Republicans on the commission voted aye, President Obama could then have received the negotiated solution and proposed policies one big step to the left, while trying to claim that he was supporting the recommendations (as he now claims). Ryan/Camp/Hensarling (or their leaders) would then be forced to negotiate a compromise between Bowles-Simpson that they had already endorsed and a more liberal position later chosen unilaterally by President Obama. Agreeing to Bowles-Simpson would have been only the first of two rounds of concessions made by House Republicans, given that the President structured the commission so that he alone would get a second bite at the apple.
The Senate Republican appointees (Coburn, Crapo, and Gregg) voted aye in the commission, but they were able to do so in part because they knew the House Republicans were voting no. The Senate Republicans could vote to move the process along, while House Republicans saved their aye vote for a round two in which the President was at the table.
Since President Obama ignored the Bowles-Simpson recommendations, that second round instead started from scratch in the Grand Bargain negotiations between the President and Speaker Boehner, who represent and lead the two poles of the negotiation. Ms. Montgomery contrasts Mr. Ryan’s position in the commission with Speaker Boehner’s in the Grand Bargain negotiation, but Speaker Boehner was dealing directly with the President rather than as the first step in a potential two-step process. Mr. Boehner could go farther than could Ryan/Camp/Hensarling because he knew that he wouldn’t get double-dipped. Even so, President Obama tried to double-dip the Speaker when he used the Gang of Six proposal to demand $400 B more in tax increases and that the agreed-upon ceiling for revenues instead be a floor.
Senator Conrad and the Gang of Six
Ms. Montgomery includes this quote from Senator Conrad:
“His approach — my way or the highway — is precisely what’s wrong with this town. It’s the triumph of ideology,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.), who served with Ryan on the independent fiscal commission chaired by Democrat Erskine B. Bowles and former Republican senator Alan K. Simpson of Wyoming. “The hard reality is, given the fact that we have divided government, both sides have to compromise in order to achieve a result. And Paul has refused to do that.”
Let’s compare and contrast:
- During the Commission, Mr. Ryan worked with Dr. Rivlin to develop a bipartisan compromise Medicare plan. He voted no on the non-binding Bowles-Simpson recommendations, then introduced his own plan (a step to the right of B-S) in the House and passed it. The following year he renegotiated Rivlin-Ryan, compromised with Senator Wyden and produced Ryan-Wyden, included it in the House budget plan, and passed it.
- Senator Conrad voted aye on the non-binding Bowles-Simpson recommendations. He then introduced a different plan (a step to the left of B-S) as leader of the Senate’s Gang of Six. He could have used his Gang of Six plan as the basis for a bipartisan budget resolution but, at Leader Reid’s direction, chose instead to do nothing. He marked up no budget resolution. Instead, he and the Gang rolled out their plan at exactly the wrong moment. President Obama said nice things about it and upped his tax increase demand of Speaker Boehner, leading to the collapse of the Grand Bargain negotiations.
- President Obama created the commission, waited for its report, and then ignored it. He waited until Mr. Ryan proposed a budget, then attacked both the budget and Mr. Ryan in a speech at George Washington University.
Senator Conrad says the problem with Washington is the triumph of ideology. I think the problem is that certainly elected officials, including Chairman Conrad and President Obama, did not do their job.
The GW Speech
Ms. Montgomery takes a speech in which President Obama attacked Mr. Ryan and portrays the event as reflecting poorly on Mr. Ryan (emphasis is mine):
Ryan, too, blames the president. “Obama didn’t want success,” he said in November. He said that became apparent seven months earlier when Obama responded to the recommendations of the Bowles-Simpson fiscal commission by rolling out his own deficit-reduction plan. Unaware that White House aides had invited Ryan to hear Obama’s speech at George Washington University — and that Ryan was sitting in the front row — the president blasted Ryan’s budget and renewed his call for higher taxes on the wealthy.
“It became clear to me when Obama invited us to GW . . . that he wasn’t going to triangulate and embrace Bowles-Simpson. He decided to double down on demagoguery and ideology, and he has stuck to that ever since,” Ryan said.
According to Ms. Montgomery, the President was simply the victim of poor staff work. Mr. Ryan is portrayed as the aggressor. Yet in Bob Woodward’s book we read:
“We’re not waiting,” the president said in exasperation. He wanted to rip into Ryan’s plan.
… “I want to say this idea that we can’t get our deficit down without brutalizing Medicaid, it’s a dark view of America,” he said. He wanted that idea in the speech.
… Obama was getting fired up as he worked through what to say and how to say it.
I believe there was a staff foul-up in inviting Mr. Ryan to the speech, but the President’s partisan attack was neither unintentional nor staff-driven. It was a planned attack devised by President Obama that ripped into Mr. Ryan’s plan and poisoned the well. Yet somehow Ms. Montgomery portrays the President as the victim of Mr. Ryan’s “blame.”
For decades the Washington Post was the paper of record for DC. Over the past few years POLITICO has supplanted the Post in that role. When the Post’s staff publishes an obviously partisan hit piece with such weak intellectual support less than six weeks before Election Day, they destroy any credibility they have for objectivity or nonpartisan reporting. That’s a shame.
(photo credit: Chealion)
Since the next five months of policy discussion will be dominated by the election I think it makes sense to disclose my campaign contributions.
In this election cycle I have donated to the following campaigns:
- Mitt Romney for President;
- Paul Ryan for the House;
- Rob Portman for Senate; and
- Ted Cruz for Senate.
I am not “an advisor to” or “affiliated with” these campaigns or any others. And my financial support for these candidates does not mean that I agree with everything they say. I will sometimes write things that are consistent with the policies they advocate. I will also criticize or disagree with them when I think it’s important to do so.
If I contribute to other campaigns I will disclose that here as well.
This is the first in a three part post.
- (this post)
- The Ryan budget proposes lower deficits and less debt than the Obama budget
- How will President Obama respond this year to Chairman Ryan’s lower deficits and debt?
The business of Washington, DC is changing policy. Almost everyone in Washington is trying either to change some element of policy or to prevent someone else’s changes.
As a result the public debate centers almost entirely on the fight over how and how much policy would change rather than on what the absolute results would be. Both are important, but public debate usually ignores the results and only argues about the proposed change. That’s bad.
In fiscal policy this often leads to endless debates in which both sides agree on what the result of a proposed policy would be, but disagree on whether that result is an increase or a decrease because of disagreements about the baseline, the starting point for measuring a change. It also leads to poorly informed decisions in which policymakers ignore whether the results are acceptable relative to an objective standard.
I care a lot about whether a proposal increases or reduces the deficit. I care a lot more about these changes, and about deficits in general, when the resulting deficits are 7-10 percent of GDP than when they are 1 or 2 percent.
I am therefore going to do something a bit unusual with today’s chart. I’m going to show you the deficits proposed by President Obama in his budget without telling you whether they are increases or reductions relative to some (easily disputed) future baseline. By doing this I hope to focus your attention on a different way of thinking about the deficit that may be more important than the way Washington traditionally looks at a budget. Instead we’re going to compare the President’s proposed deficits to two results standards that are difficult to gimmick.
Here are deficits and surpluses since 2000 and President Obama’s proposed deficits for the next ten years. I’d like you to focus on (1) the shape of the the dark blue proposed line and (2) how it compares to the green and orange dotted lines. As always, click on the graph to see a larger version.
- This graph is measured in percent of GDP.
- Actual historic surpluses (in 2000 and 2001) and deficits are in medium blue. The President’s proposed deficits are in dark blue, to the right of the black vertical line.
- The red dot shows the most important proposed deficit, that for Fiscal Year 2013, the year Congress is now working on (in theory). This fiscal year begins October 1, 2012. The President proposes a 6.1% deficit for FY13. This year’s (FY12) deficit is projected to be 8.1% of GDP.
- The dotted orange line represents the average (pre-2008 crisis) budget deficit of 2.1% of GDP. That’s the average from 1960-2008.
- The dotted green line is at 3% of GDP, a rule-of-thumb line for the deficit/GDP that would result in debt/GDP staying constant. Deficits above the green line mean the debt is increasing relative to our economy, while deficits below the green line mean the economy is growing faster than government debt [held by the public].
I suggest you memorize three numbers when you’re discussing deficits: 0, 2, and 3.
- Zero is a balanced budget, of course.
- The historic (pre-crisis) average budget deficit is about 2% of GDP.
- A deficit of roughly 3% of GDP will hold debt/GDP stable.
(Technically the 2 is between 1.8 and 2.1, depending on exactly when you start the window. For a rule of thumb, two works great.)
Key #1 to understanding the President’s budget is that he would bring the deficit down below the green line and then make sure he doesn’t break above it again. I’d bet heavily that’s the principle his budget director used in building this budget – get me to a point where we are (just barely) not increasing debt/GDP, at least at the end of the 10-year budget window.
Key #2 is that at no point in the next ten years would his deficits be at or below their historic average. The proposed blue line is at all times above the orange line.
This is consistent with where the President has been on the deficit since his “second” budget proposal last spring. If Congress does what the President proposes, the debt/GDP situation will briefly stop getting worse for a few years at the end of the next decade before entitlement spending pressures once again start driving deficits up.
It also means that the President would not, for a single year, get deficits below their historic average. Rather than fluctuating around 2% of GDP as it has since 1960, the President proposes a new medium-term deficit ceiling of 3% of GDP.
Conclusion: The President’s budget would result in deficits that are always higher than the historic average but would, beginning six years from now, temporarily stop government debt from increasing relative to the U.S. economy.