• The Administration uses a figure of $1,128 B (the red bar) for the President’s budget proposal.
• They are comparing that level to the $1,026 B bill passed by House Republicans (H.R. 1, in purple) on a nearly party-line vote.
• The Administration says they have a new proposal (the yellow bar) of $1,077 B.  They get to this number by taking the newly enacted short-term Continuing Resolution (the blue bar), which would lead to $1,083 B of spending if it were extended through the end of this fiscal year on September 30th.  They then (say they will) propose another $6.5 B of cuts relative to this enacted law, bringing them down to $1,077 B.
• They define the negotiating space as the $102 B (purple arrow) between the President’s proposal (red) and the House-passed “Republican” bill (purple).
• They define the distance they have “moved” as the $51 B (yellow arrow) between the President’s proposal (red) and the President’s new proposal (yellow).
• $51 B is half of $102 B, therefore they have “come halfway.”

The principal problem with this presentation is that the President chose the height of the red bar.  Everyone understands this is therefore an arbitrary basis for comparison.  Had the President instead initially proposed $1,230 B (a number I made up by adding another $102 B to the $1,128 B shown here), he could then have described his new yellow bar as “coming three-fourths of the way.”

Democrats are struggling to convince the press that the red bar is a meaningful starting point.  They correctly point out that, last fall, when selling their “cut spending by $100 B” campaign platform, Congressional Republicans used the red bar for comparison.  That was a mistake when Republicans did it last fall.  In recent days Republicans have admitted this mistake and are now attacking the red bar and the Administration’s “halfway” claim.

Team Obama is savvy enough to understand that they won’t convince any Republicans with this argument.  They are instead trying to frame the public debate.  I expect this tactic to fail within the negotiating room and mostly fail outside it.

There are other issues with that $1,128 B figure that the Administration says represents the basis for comparison.  You don’t have to worry about these details, but I include them for completeness, and to further demonstrate how shaky it is to compare other levels to the red bar.

• It’s out of date.  That’s what the President proposed 13 months ago.  One month ago he proposed $1115 B, or $13 B less.
• Pushing the other way, it is artificially low by $23 B.  The President wanted to change the way Pell grants (student loans) are measured.  Congress ignored him and the effect of this is $23 B higher discretionary spending for the President’s policies.
• CBO and OMB score things differently.  The $1,128 B figure is OMB, the others are CBO.  In this case the difference matters.

Now let’s look at a different way to frame it.

I have faded the (misleading, in my view) President’s red bar so that we can ignore it here.  I added a new green bar, showing what would be spent if Congress just did a straight extension of last year.

You can see from this graph that the House-passed bill, the President’s new proposal, and the recently enacted two-week CR all cut spending below CBO’s baseline.  In my view, comparing to this green baseline is a fairer comparison than to the President’s proposal.  On this basis, the President’s new $18 B in cuts from CBO’s baseline are only one-quarter (26%) of the way between baseline and the House-passed bill.  This is, I imagine, how a fiscally conservative Republican in Congress would frame it.

The selection of endpoints for calculating the “gap” and how far one side has “moved” is ultimately a judgment call and at least somewhat arbitrary. I don’t blame the Administration for choosing a high bar to make themselves appear reasonable.  I do blame any reporters who unquestionably report the statement “we’ve come halfway” as fact.

I am for the lowest possible spending – I’d be happy to support the purple bar or even lower.  But rather than argue what the spending should be or how the debate should be framed, I’ll offer my prediction of what the final result will be.

I predict a final enacted (non-emergency) discretionary spending level of $1,052 B, halfway between the House-passed H.R. 1 and the President’s new proposal.  I base this prediction on where I am guessing the votes are, rather than on either side’s intellectual justifications or public framing of the negotiation.

My logic is simple.  The House has already passed the purple bar but cannot get that level through a Democratic-majority Senate.  I think Senate Democrats will show next week that they have a majority to pass the President’s new yellow bar proposal, but will be unable to get 60 votes to overcome a Republican filibuster and, even if they could, would be blocked by the House.  In both cases I see the President as backing up the Senate Democratic legislative strength, but his veto is really a fallback rather than the primary line of defense for the side that wants to spend more.

I am making a judgment that this is rough parity in terms of legislative strength.  I assume both sides are equally obstinate/principled and equally skilled at negotiations, even though Democrats have repeatedly fumbled the ball over the past few weeks.  I then predict the midpoint of those two equal-strength positions as the final outcome.  That’s the midpoint of $1,026 B and $1,077 B, or $1051.5 B.  Round up because appropriators control the paper.

It may be asking too much to imagine either side getting to this level in the next two weeks, so I won’t necessarily predict that this outcome will be achieved before the current CR expires.

Conclusions

• The Administration’s argument that “we have come halfway” is nothing more than a negotiating tactic.
• The intellectual basis for this argument is quite weak and borders on silly.
• Any framing of this debate by measuring “cuts” is dicey because the choice of a starting point is arbitrary.
• The final legislative outcome will be determined by legislative strength much more than by either side’s public framing of the numbers.
• I predict a final enacted non-emergency discretionary spending level of $1,052 B.

I am comparing the past 50 years with the next 50 years under President Obama’s proposed policies.

The dotted red line shows us that, over the past 50 years, federal government spending averaged just over one-fifth of the economy (20.2% of GDP).  The dotted blue shows us that, over the past 50 years, federal revenues averaged just over 18% of GDP.  The small yellow double arrow between the dotted red and blue lines shows the average deficit over the same period: 2.1% of GDP.

The vertical white line at 2011 separates the past from the projected future of the President’s policies.

You can see the assumption of the economy recovering as the blue revenue line recovers from an extraordinary low share of GDP.  As more people get jobs, the government will get more income and wage revenues.  You can also see spending declining from the 2009-2011 phase which spiked principally because of TARP and stimulus.

Three things should jump out at you from the future portion of this graph:

• The red and blue lines diverge enormously, and the gap grows over time.
• The blue line is flat while the red line slopes upward.
• Both the red and blue lines shift upward significantly.

Let’s take each in turn.

The red and blue lines diverge enormously, and the gap grows over time.

The gap between the red and blue lines is the budget deficit.  A deficit of 3% of GDP will hold debt constant relative to the economy.  Under the President’s policies the deficit would dip in 2018 to 2.9%, and would otherwise forever be at or above 3%.  Our government debt burden will increase forever.

In a crisis our economy can handle an enormous temporary budget deficit.  Our deficit problem is that future deficits are large, sustained, and projected to grow forever.  Our little yellow double-headed deficit arrow will grow into a monster and keep growing.

The blue line is flat while the red line slopes upward.

Taxes grow as a share of the economy very slowly.  The blue line is basically flat for two decades.

I’d like the solid blue line to be below the dotted blue line.  Most Congressional Republicans argue to match the historic average of about 18%.  The President proposes just below 20%.  Reverting the tax code to pre-Bush policies (“repealing all the Bush-Obama tax cuts”) would bring us to the high 20s.  In each case the line is basically flat.

The red spending line grows steadily as a share of GDP.  That’s because three enormous spending programs are growing at unsustainable rates:  Social Security, Medicare, and Medicaid.  A better way to think about it is that there are three underlying forces driving spending growth:  demographics, unsustainable benefit promises by elected officials, and per capita health spending growth.

At any point in time, the gap between the red and blue lines can be narrowed by lowering the red line, raising the blue line, or both.  Over time, however, the red line must be flattened, no matter what level you pick for the blue line. If it’s not, any downward red shift or upward blue shift only temporarily narrows the gap.  If you don’t flatten the red line, your solution is only temporary.  It’s the slope of the red line that’s killing us.

Both the red and blue lines shift upward significantly.

We care not just about the gap between the red and blue lines, but also about their absolute levels.  A higher red line means we are devoting more of society’s resources to federal government control.  That leaves less for the private sector (and for state & local governments).

I’m a small government guy, so I want the red line to be as low as possible.  Whatever your policy preference about the size of government relative to the private sector, two things are undisputable:  bigger government comes at the expense of a smaller private sector, and at some point that growth in government has to stop.  This second point is just another way of saying that eventually we have to flatten that red line.

This size-of-government metric is often ignored.  Washington fights about whether a policy (like the new health care laws) widens or narrows the gap (the deficit) without asking whether the policy shifts the lines up or down.  Both things matter.

You can see that President Obama proposes long-term revenues of about 20% of GDP over the next decade.  Other than a brief tick above 20% during the tech stock bubble in the late 90s, that would put federal taxes at an all-time high share of GDP.  That difference, between 18.1% of GDP and almost 20%, is enormous.

Those higher taxes are an explicit policy proposal from the President.  While the new health laws shifted the red spending line up, most of that long-term path long predates him.  The path of entitlement spending has changed over the years, but the shape of this graph has not changed in decades.  Pre-crisis and pre-Obama, the spending line would have bumped around 20% for another several years and then would have begun its steady upward growth.

What has changed is that we used to say this was a long-term problem.  The financial crisis, economic recession, and the President’s policies have eliminated this small amount of breathing room.  This graph makes clear that the long-term problem begins now.

I’ll end with a clean version of this same chart which removes all the explanatory chartjunk.

Sources:  This graph combines three tables from the President’s budget – historical data are from, surprise, Historical Table 1-2; the next ten years are from the principal short-term table (summary table S-1); the rougher long term numbers  are from (table 5-1 on page 51 of Analytical Perspectives), which provides shares of GDP every 10 years.  I combined the streams (the data match in 2020) and interpolated the long run data for intervening years.