Today the Obama Administration will propose its budget for 2011:
WASHINGTON—President Barack Obama will propose on Monday a $3.8 trillion budget for fiscal 2011 that projects the deficit will shoot up to a record $1.6 trillion this year, but would push the red ink down to about $700 billion, or 4% of the gross domestic product, by 2013, according to congressional aides.
The deficit for the current fiscal year, which ends on Sept. 30, would eclipse last year’s $1.4 trillion deficit, in part due to new spending on a proposed jobs package. The president also wants $25 billion for cash-strapped state governments, mainly to offset their funding of the Medicaid health program for the poor.
This brings a number of things to mind. First, I think it’s clear that President Obama has run afoul of the point that I’ve been making for some time: waging war in Afghanistan is expensive, more expensive on a per soldier basis than doing so in Iraq and it’s darned hard to cut military spending while you’re escalating efforts in Afghanistan.
Second, in recent, i.e. over the last couple of decades, Congresses increasing spending has been a lot easier than increasing taxes or decreasing spending. Maybe that’s been true for the entire history of the Republic. Hard choices are a lot easier when they’re between how much more you’ll spend on education and how much more you’ll spend on healthcare than when it’s how you’ll cut both of them or even which one you’ll cut and by how much.
Third, the budget appears to assume a whopping tax increase imposed without raising a hand by allowing the “Bush tax cuts” to expire. It’s a tax increase nonetheless. Perhaps popular “soak the rich!” sentiment will help blunt the criticisms of raising taxes during a recession. Or perhaps they’ve already decided that we’re not in a recession any more. I think they should be a little more cautious. Two months is not a robust trend.
Raising taxes and spending more will put wind in the sails of Republicans painting Democrats as being the party of tax and spend. In an election year in which voters appear to be increasingly concerned about a free-spending federal government will Congressional Democrats take that risk?
And the CBO has already assumed that the “Bush tax cuts” will be allowed to expire in their estimates of deficits for next year, already pushing $1.6T. I look forward, if that’s the right word for it, to their reactions to the proposed budget. If they’re lucky, no one will ask them for their opinion.
Finally, given that it’s an election year we might well get the crowd pleasing no taxes/more spending strategy. That’ll put us even deeper into the hole.
It doesn’t help, either, that the GOP has decided to draw a line in the sand against cuts in both defense spending and in Medicare. Social Security isn’t going to get cuts in an election year (and really, Social Security is not even close to the spending worry that Medicare is), and frankly there’s just not much else in the federal budget to cut when you take all of those things off the table.
Ponies for everyone!
The two political parties and their long-standing policy platforms will soon meet fiscal reality. The CBO testimony last week was pretty sobering and I have to wonder if anyone in Congress is listening.
Several observations:
1. I had the opportunity to catch up on some reading over the weekend. Concerning the Q4 GDP Dave referenced 5-6 essays ago, just as a suspected, a large portion (60% of it) was inventory replenishment at a rate greater than sales. That is: unsustainable. This would tend to corroborate the “anecdotal†pattern I’ve observed in a couple of our portfolio companies. Together with the observation that Q3 GDP was revised downward significantly, Dave’s admonition in the current essay to not count those recovery chickens just yet seems prudent.
2. Anyone who has inspected the OMB’s long term tax and spend statistics in an even cursory manner observes that taxes = spending in the early 60’s before permanently de-coupling after implementation of the Great Society programs. Even the supposed balanced budget during Clinton’s term was an illusion, based on what we now know was a bubble, coupled with pilfering of the SS “Trust Fund†and squandering the “peace dividend.†The truth be told, this is an almost 50 year trend that the spending machine has been in high gear, with a grotesque acceleration recently. Graphs of the data are widely available; but OMB puts one out. Readers should take a look.
3. Everyone will of course want to interpret the data differently. Certain trends are evident, however. On the spending side you see an increase in slope in 1965; you then see the next inflection point and increase in slope in 1974 followed by a 20 year run at that rate. In 1994, you see a downward trend in the slope: remember Newt Gingrich and the end of the era of Big Government and all that?? Then it takes off again in 2000: a republican Congress that lost its way, earmarks and a War. The last two years are so extraordinary they make you want to avert your eyes. Think Greece. Switching gears – Contrary to many people’s beliefs, on the tax revenue side the greatest slope is from 1983 through 2000, a long term period of relatively robust economic growth, and relatively low marginal tax rates I might add. It’s hard to know what to do about smoothing the period around 2000, but I dare say the tax revenue and spending lines might have approached each other had not the financial debacle occurred. Now, all bets are off.
4. Lastly, President Obama’s politics being what they are the expiration of the Bush tax cuts seems a foregone conclusion. But they won’t yield as much revenue as people think, and it’s not even close to covering the spending binge. In fact, tax increases of the magnitude required would be magnitudes above what we have ever experienced. I encourage all readers to go find these statistics/graphs and just take a look. In fact, I encourage the President to do so as well. Combined with the frequently discussed demographic problems with entitlements we have a train wreck coming. He’d be well advised to shut up about the last 8 years. This has been a problem brewing for almost 50 years now. I understand the politics of his statements, but he is showing zero leadership on a crucial fiscal issue right now.
As I see things right now both parties are operating under assumptions, narratives if you will, that aren’t particularly well supported by the facts.
Far too many Republicans believe that lowering marginal tax rates always results in increased revenues. In my view whether lowering marginal tax rates results in increased or decreased revenues depends on how high they were to start with, among other things.
Too many Democrats believe that Clinton’s tax increases in the 90’s balanced the budget. In my view the budget was balanced through a combination of moving things off-budget, “triangulation” resulting in spending that was kept within some bounds, and increased revenues, a pay-off from roughly 15 years of serious capital investment on the part of businesses which hadn’t paid much in the way of results during the entirety of the period, a remarkable development. Then there’s always the dot com bubble, as Drew points out above.
I’ve actually seen some on the Left argue that it was Clinton’s tax increase that ended the recession. No, really.
Yes, this pretty much sums it up. Initially Clinton went grandiose as well, and it didn’t work out as well. However, this time is different. Back then there was no recession and people were generally content. Big changes then are problematic in that most people don’t want them.
Now, with the drums beating about crisis this and crisis that it makes such sweeping changes much more possible. Problem is as the numbers are indicating it isn’t sustainable. Bush & Co. got in trouble because they over-estimated the support of the voters, whatever mandate they thought they had they didn’t. Is Obama making the very same mistake? In 8 years could he be sending the Democrats into the same wilderness the Republicans are currently lost in?
I look at all these proposals and the best guesses people are making in terms of budgets, taxes, deficits, growth, etc. and think…yes, yes he is.
For those of you who voted for him…congratulations. You are going to get exactly what you asked for good and hard. Unfortunately you’ve also dragged the rest of us along with you. Its why democracy really sucks.
Steve,
I did vote for Obama, but would McCain have been substantially different? We are facing systemic problems and systemic unsustainability that both parties like to ignore and which the President has little control over. Changes really must come from Congress but years of gerrymandering and internal Congressional politics continue to hobble that institution’s ability to change the status quo.
Dave is completely correct about the GoP – with the Obama and Bush tax cuts, somewhere close to 40% of tax filers essentially pay no taxes. The GoP says we need to cut government, but where are you going to get $700 billion worth of cuts? No one wants to touch Defense and entitlements which is where the big money is.
On the other hand, the Democrats seem to think we can all have ponies by taxing the rich which simply isn’t possible.
Both parties are living in a dream-world. The only question is when they’ll wake up.
Drew,
What’s terrifying is that the deficit numbers assume the expiration of the Bush tax cuts.
Drew- Cannot get on better computer here, but from memory, spending as percent of GDP, not sure how else to do it meaningfully, has stayed around 20-22% for quite a while (highest under Reagan IIRC). The recent blips are mostly from TARP and the stimulus (A-stan also as Dave notes). Once they are gone, we continue to go up because of entitlements. If one had voted for McCain, and he won, we would have the same entitlement and TARP issue. McCain’s stimulus plan of tax cuts was scored by the CBO as causing a larger deficit.
The key is addressing entitlements. Attempting to do this sends the opposite party scurrying to defend Medicare or SS. We need a way to get past that. Interestingly, the Medicare advisory board in the Senate bill would have been a good start IMHO.
Steve
Alex –
I know. And terrifying is indeed the word.
During the primaries I wrote a long piece for another blog titled “We Have Met the Enemy and He Is Us.” It was a play on words and the essential theme was that the problem is the American voter, who consistently has fallen for politician’s come ons about “ponies for everyone.” And with the incindence of taxation increasingly falling on higher income people over the last 20-30 years its easy to understand the “free lunch” mentality.
But now, who is going to really take it in the shorts over the next decade? (unemployment/lifestyle) Its The Average Joe. Its the old “be careful what you wish for.”
I love this. I love the implicit assumption here. I despise McCain. The power he has been given has corrupted him. Those who voted for him, and if he had won, would be getting what they asked for good and hard too. The rest of us would have been dragged along as well. You might have missed this part of my post,
In the post-war period the high water mark for deficit as a percentage of GDP was, indeed, under Reagan. In 1983 as I remember.
Until now. What bugs me is the specter of borrowing to pay operating costs. That’s a merry-go-round I see no way off of.
Steve V,
Well then I guess we agree.
All –
Data, data data……………..and manipulation thereof…….an engineer and financier’s dream…..
I think the “as a percentage of GDP” spending and taxing metrics have their merits……and faults. I think categorizing by President vs by Congressional control also has it pitfalls.
Mankiw recently published the graph I think you are seeking. Yes, in about 1983 the outlays as a pct of GDP peaked. But if you inspect the graph outlays took off in 1978, so to ascribe this to Reagan, who was elected in 1980, and with a Democratic Congress who called his budgets “dead on arrival” and in the middle of a recession is bizarre. Its just mindless politics.
Similarly, I have no criticism of Obama for saying that he came to office in the middle of a mess. That’s a fact. But he also made assertions – for political gain – that his spending plans would correct the situation. Not even close. He’s way, way off the mark. Further, he has had time to take policy positions that could help or harm….with total control of Congress. I think its harm. He’s a spending maniac. And the data seems to be with me.
Back to the spending graph. A reasonable observation would be that outlays of 21- 22% of GDP reflected a “normative” level back in the 80’s. At trough in the late 90’s they reached 18%. Now. Note that from Reagan days to Clinton days, defense spending declined as a pct of GDP from about 6.5% to 3%. Its basically all of the outlay decline, as a % of GDP. The social spending graph is up, up and away. Free sailing.
So let’s be clear about the last 20-30 years. On a “% of GDP” basis reductions have all been on the back of defense. Now I don’t know what the “right” amount of defense spending is. Probably less. But don’t kid yourselves, the social spending juggernaut has continued unabated for decades…….right through Clinton. And its about to explode. (And Bernard, if you are out their – I mean you.)
And this brings us to today. After 50 years of fiscal irresponsibilty. And after milking the defense monkey for 20 years. We have promised free ponies for everyone” forever. Now what?
And the current Administration and Congress’ reaction?? Spend more…….and lot’s more………AND LOT”S MORE!!!!
What’s the line from the Greatful Dead’s Casey Jones song: “….engine ahead, you know its the end…..the fireman screams but the engine just gleams….”
Trouble ahead, trouble behind……
I would quibble with the complete control of Congress, after all, there are only 58 Democratic Senators. Lieberman was almost McCain’s VP candidate. The Blue Dogs are hardly reliable votes.
That aside, please go back to your data. The spending is largely entitlement spending. TARP and the stimulus spending will son be gone. Look at the data tables which show our debt with and without those. SS, Medicare and Medicaid, especially Medicare, are what kill us. On that account, both parties have shown themselves willing to use Medicare as a tool to garner votes. I suspect you will disagree, but that is why I had some hopes for the Medicare advisory panel. It would have taken 67% of the Senate to override their recommendations. Pretty hard to do I am thinking. Since Republicans have effectively killed that, what remains politically feasible? Means testing makes sense. Getting rid of it altogether and making it part of a private system like Germany or France makes sense. Just not politically feasible.
Steve
http://gregmankiw.blogspot.com/
And when we throw in the BS factor, they never meet projections………..
“The spending is largely entitlement spending. TARP and the stimulus spending will son be gone. Look at the data tables which show our debt with and without those. SS, Medicare and Medicaid, especially Medicare, are what kill us. On that account, both parties have shown themselves willing to use Medicare as a tool to garner votes. I suspect you will disagree,”
Steve –
Methinks you completely misunderstand my worldview. Perhaps shame on me for not voicing it well.
TARP and stimulus spending will soon be gone? Can you send me some of what’s in your bong? These guys are just getting started. Please.
I have no quarrel with the entitlements you cite. I’ve been making the point for years. Its implicit (if not explicit) in everything I’ve written in this thread and elsewhere. These very entitlement programs have been ticking time bombs since 1965.
My basic problem is this: Republicans fall off the wagon from time to time. They feel the need to offer goodies to the electorate or else fail in election. They also have their special interests. But with Democrats its in their DNA. I defy anyone on this forum to dispute that the basic Democratic platform at all levels of government and for 50 years has been: “these are social ills, you’ve been wronged, and so we are going to create a government program to fix it all…………..and oh by the way…….someone else will pay for it.” That, my friends, is social heroin.
Most recently, Obama told us 3% of us would pay for it all.
Its truley sick. Its a scam. Its bad social and fiscal policy.
But this fraud gets pols elected.
So is there blood on the hands of both parties? Sure. I happen to believe more on the Democratic side.
But this forms my worldview: at any juncture, attempt to limit the role of government, for it will only grow from its base level. And it will be largely ineffective in its stated goal. I think the empirical evidence is on my side.
Anyone heard a candidate in this election cycle telling us they will cure unemployment and poverty……………..just like they did in 1965, 45-50 years ago……….and in every election?
Yeah. And me Johnson’s 10 inches long…………….
The Senate minority whip (Durbin) was in town yesterday arguing that the money received back by TARP needs to be spent on jobs, particularly public employment jobs. It’s like free money.
I’m not sure if that’s necessarily what Steve means by TARP being behind us. But TARP and the stimulus package are going to be revenue neutral if the bailed-out industries pay it off with interest, and if the multiplier effect of the stimulus overcomes the interest charges, dead weight loss and (I’m not sure of this) stimulates private investment to produce tax revenue.
(I’d appreciate corrections to that last sentence if I’m wrong)
I think that “as a percentage of GDP” is a good metric for defense. It is IIRC suggested by Hamilton in his view that spending (probably on the Navy though) would likely be proportionate to the new country’s commercial interests. We’ve also argued to our NATO allies that a certain percentage of GDP in defense spending is proper, even though there is a free rider problem that the country with the highest GDP would have a greater interest in the global state of affairs.
As to domestic spending, I’m not sure the figures mean as much.
Dave, on the defense spending, your point on how much more costly equipping Americans to fight in Afghanistan is than in Iraq seems right. But Politico says that “When compared to the peak war spending of the Bush years, Obama is only about 10% below Bush’s annual average of $176 billion in fiscal years 2007 and 2008—the time of the Iraq war surge. ” http://www.politico.com/news/stories/0110/32272.html#ixzz0eKoTd5WP
That strikes me as inconsistent with the notion that Afghanistan is more expensive on a per-soldier basis. Iraq ramped down somewhat and Afghanistan ramped up extensively and the result was less costs. My first guess is that Iraq involved a lot of industrial improvements, such as electricity, industry and water plants (that occasionally got blown up) which are not a factor in Afghanistan.
In looking at the graph Drew mentions
http://www.cbo.gov/ftpdocs/108xx/doc10871/Summary.shtml#1045449
scroll down to figure 2.
Note that if we look at 2000 to 2020 we see a trend and a large step up then down starting in and around 2008/2012 or so (with the step down not being as large as the step up)*. But the trend there indicates that Obama is quite happy to continue Bush’s spendthrift ways.
There was much gnashing of teeth and hair pulling by many on the Left over these events under the evil Bush. Now…now…why its not enough spending dammit!!! And keep in mind this assumes a nice boost in taxes as Bush’s tax cuts go away and the ATM levers a bunch of middle class people into very high tax brackets. Keep these provisions (very popular election year move) then the picture is even worse. That is we WILL pass the previous peak.
Now, will we have a sudden change in the trend? I don’t know. I’m skeptical. Why? Medicare. Medicare is going to start running out of money. When that happens this will add to the deficit. Social Security as well, but probably not till a bit latter and relatively speaking its contribution will be minor. That is we wont be able to turn the trend line even if we really, really wanted too.
And the Medicare advisory panel was a joke. You really think that Congress is going to let something like that have teeth? Something that can cut costs and possibly piss of the elderly? A wealthy demographic, a voting demographic like no other, a demographic that is going to get bigger not smaller? Really?
I have a fuzzy pink unicorn I’d like to sell you. Rub its nose and it poops out gold. I’ll sell it to you for $500. Interested?
*The step up takes us from around 21% of GDP to 25% of GDP. The step down takes us from 24% to roughly 22% or so.
Steve-You dont, I think, believe in countercyclical govt spending. I think it makes sense. It is a well known belief in accepted economic theory. Others believe in trying to accomplish it with tax cuts, again increasing the deficit. I am not really sure what a libertarian would have done. I think that when faced with the reality that we dont know how to break up big international banks, they would have split the difference leaning more towards tax cuts. Just guessing. While you are skeptical about the Advisory board, it does take decisions out of the direct hands of Congress. I think that is an approach with a lot of merit. I dont think we are going to have some magic pony come along and make Medicare spending decrease which is the current alternative.
Drew- Fall off of the wagon? Look at Republican spending and taxing results. Just look at the numbers, not at the rhetoric. What would I look at that would convince me that they actually care about the debt? I see fiscal responsibility as being mostly about the willingness to pay for what you buy. Would I like to pay less tax? Sure, but how do we do that with this kind of debt? Cut spending? Sure, just tell me what. After voting for Republicans until 2006, I am not going to vote for one again until they tell me what they are going to cut. Well, that and get their act together on foreign policy.
PD-Pretty much. I dont see the political will for another stimulus or another TARP and we are getting some TARP money back.
Steve
steve,
This is amusing in that for once I’m going to do to you what Michael Reynolds always accuses me of…you are too enamored with the theory I’m afraid. Yes, theoretically it makes perfect sense if the spending multiplier is greater than 1 during a downturn.
Empirically you don’t have a leg to stand on I’m afraid. Aside from the Clinton years when was the last time the U.S. government ran a surplus during the boom portion of the cycle. Yes, I thought so, pretty much never (since the end of WWII). Counter cyclical spending is not to run massive ginormous deficits in the bad years and simply large deficits in good years.
It is essentially the same thing, in theory, a increasing spending. But we often cut taxes during the boom period not during the recession. Again, usually theory and practice differ. With taxes the record is a bit better (e.g. the Clinton tax increases came at about the right time).
We’ve gone so far down the road to corporatism I don’t know what the answer is. The State and corporations are so tied to each other that seperating is like unscrambling and omellet. I’d be in favor of trying to implement Leamer & Kotlikoff’s limited purpose banking proposals as a starter. Turning banks more into clearing houses and let investors figure out if any given loan is worth funding. Beyond that, parhaps Arnold Kling’s ideas on a negative income tax and ending any and all other subsidy programs. What you get from the negative income tax is it. And no, it wont be nice to live on, but if you want to be a lazy ass bastard living off others what do you expect?
You know the old saying a bird in the hand is worth two in the bush. I’d believe that advisory board’s power when I see it. But given that quasi independent agencies like the Fed and Fannie Mae and Freddie Mac were corrupted by political power/pressure I think you have to go further than pointing to some legislation. Also TARP. It was supposed to be used to buy toxic assets off of banks. I could see the logic in that, but then it was morphed into a hand-out program with strings. Legislation is meaningless, IMO. Sure it says do X, but who is to stop Congress if they do Y? The SCOTUS? Yeah worked real good with FDR and the switch in time to save nine.