President Obama is just out with his newest budget request — which forecasts a dramatic reduction in deficits over the coming decade. The request paints a much rosier debt scenario than a report released by the nonpartisan Congressional Budget Office a month ago. In his budget request, Obama projects public debt as a percentage of gross domestic project falling to 69 percent by 2024, while the CBO has it rising to 79 percent — a difference of 10 percentage points, or roughly $2.7 trillion.
President Obama unveiled an ambitious $3.9 trillion budget blueprint Tuesday that seeks billions of dollars in fresh spending to boost economic growth but also pledges to tame the national debt by raising taxes on the wealthy, slashing payments to health providers and overhauling the nation's immigration laws.
1. So this is all about the deficit, right?
It's true that House Republicans are holding up a spending bill, but they're not holding it up over demands for spending cuts or tax increases or some other package of deficit reduction. In fact, they're happy with the level of spending in the bill. It's a number they proposed, after all.
The federal government is still shut down. But there's more mayhem to come: Congress has to deal with the debt ceiling. If lawmakers don'tvote to increase the nation's borrowing limit by mid-October, the U.S. government won't have enough money to pay all its bills.
The debt-ceiling crisis could be the most serious one yet. The U.S. Treasury Department says that a failure to raise the borrowing limit could potentially trigger a debt default, which would lead to "a financial crisis and recession that could echo the events of 2008 or worse."
There was a logic to Republicans' 2011 debt-ceiling demands. It was the logic underpinning the party's entire platform. It was the argument that had won them the 2010 election. And it was an argument that made sense as part of negotiations over the debt ceiling.
Deficits exploded during the financial crisis. Really, exploded. Here's the graph:
Okay, so don't laugh at me, but what is a deficit?
It's actually not a dumb question, not least because there are plenty of deficits that federal economic policymakers have to keep track of. There's the current account deficit, for one, and the closely related trade deficit. But ignore those. The one we're talking about here is the budget deficit. That's the gap between the amount of money that the federal government is taking in (mainly through taxes but also stuff like civil forfeiture by law enforcement and profits from federal holdings like Fannie and Freddie) and the amount it's spending.
Now that the 10-year budget problem is (poorly, counterproductively) solved, Republicans are faced with a bit of a problem: How do they keep justifying an agenda based entirely around debt fears now that the debt doesn't look so scary?
The answer they've come up with is to change the timeline so the debt looks scarier again. Rather than judging the budget over the next 10 years, they want to judge it over the next 30. The problem, as Jonathan Chait points out, is that no one knows what will happen to the budget over the next 30 years. Imagine projecting the economy of 2013 in 1983. Even the best model would've missed the Internet revolution and the rise of China and India and the 2008 financial crisis, not to mention the two Iraq wars.
People really don't like deficits. Polls measuring national priorities tend to find that the deficit/debt is the second most important issue to voters, after "the economy" generally and ahead of health care, guns, foreign policy and immigration.
Politicians don't like deficits either. Both President Obama and the Republican leadership in the House pay lip service to wanting to reduce the national debt burden, and almost all their fights to date have centered on how best to do that.
Vote-a-rama has officially begun.
The annual ritual (or supposed-to-be-annual, anyway), in which amendments are offered to the Senate budget resolution and the world's greatest deliberative body takes forever to vote on all of them, is underway, with amendments on everything from the Affordable Care Act to drones. Many of them promise to establish "deficit-neutral reserve funds."
You've heard — perhaps on this very blog! — that our long-term deficits are almost entirely driven by health-care costs. That's true over the next 50, 60, 70 years, which is, absurdly, the time frame people often talk in. But over the next 20 years, it's not quite right.
A more accurate way to put it would be that in the coming decades, new spending is almost entirely driven by health-care programs. But what's really driving the spending in those programs is the aging of the population, not the rise in health-care costs. Over at the Concord Coalition's blog, Joshua Gordon makes this point in an unusually clear way — by which I mean, of course, with graphs.
Rarely is the question asked: Why should we want to balance the budget? Deficit hawks tend to talk in general terms about not wanting to pass down a huge debt on to our children, or needing to avoid a debt crisis, but what this actually means is often left underspecified.
The actual concern is much more banal: The hawks are worried about interest rates. High levels of debt, the theory goes, suggest that the country holding that debt might not be able to pay it back. That risk leads bond purchasers to demand higher interest rates. And since government debt is generally the safest asset you can buy, that in turn means interest rates for everything from mortgages to credit cards to business loans shoot up. That means businesses are less likely to borrow money to invest in big projects and purchases, and consumers are less likely to borrow money to buy houses, cars and so on. This phenomenon is known as "crowding out," and it's quite bad for the economy.
"I always say to people," Alan Simpson told NBC's Chuck Todd, "before you, you know begin to drool at the mouth, and go crazy and scratch our eyeballs out, read the damn report. It was 67 pages, we put it in December 1, 2010 and people said, "What are you doing to the vulnerable?" And I said, read it. We don't do anything to people on SSI, we don't do anything with food stamp, we don't do anything with people on -- on unemployment. Get -- get your -- use your bean, instead of listening to crap all day long from the right, and the left."
Jed Graham calls this "the deficit chart that should embarrass deficit hawks":
"Here's a pretty important fact that virtually everyone in Washington seems oblivious to: The federal deficit has never fallen as fast as it's falling now without a coincident recession," he writes for Investor's Business Daily.
Given that bond purchasers are literally paying the federal government for the privilege of giving us their money for the next 10 years, it's hard to justify the amount of attention that the budget deficit has received from policymakers in the short-term. But most analysts think we're probably going to need to start paring back our debt load in the next decade or so. With U.S. debt now near 70 percent of GDP (and topping 100 percent of GDP when Social Security and other trust fund obligations are taken into account*), the challenge looks, at first glance, pretty daunting.
At his news conference today, President Obama went on at great length about what a stupid idea it is to not raise the debt ceiling. "It would slow down our growth, might tip us into recession," he said. "And ironically it would probably increase our deficit."
The president is right — if we hit the debt ceiling, the deficit will almost certainly increase, and perhaps by a great deal. Here are the three main mechanisms through which that will happen:
While the legislation that President Obama signed into law on Tuesday night averts the worst effects of the fiscal cliff and is a step toward raising revenue needed to cut the deficit, most economists would say it is an incomplete solution at best. Here are three ways and six charts showing what the fiscal cliff deal does and doesn't accomplish.
How much can we lower taxes simply by getting rid of tax loopholes and deductions to keep it all revenue-neutral? The Committee for a Responsible Federal Budget argues in a new paper that we can go a lot farther than recent news may suggest.
Last week, the Joint Committee on Taxation found that simply closing loopholes would lower taxes by only 4 percent, which some Democrats hailed as proof that the “base-broadening, rate-lowering” approach wouldn’t be enough. But the CFRB points out that the JCT analysis made some big assumptions that left a lot of revenue on the table.
Washington’s ongoing obsession with Simpson-Bowles isn’t dissipating any time soon: A bipartisan group of senators are reportedly thinking of having their deficit-reduction plan automatically triggered if Congress can’t come up with its own grand bargain. But do all the fans of Simpson-Bowles really understand what they’re endorsing?
We spend a lot of time debating the distributional impact of policies to cut the deficit. Gallons of ink (and millions of pixels) have been spent debating who gets hit most by tax increases, or changes to Medicare, or cuts to Social Security. But what if we don’t cut the deficit? The would presumably hurt some folks more than others. Who gets hit hardest?
POLITICO’s Byron Tau reports that the White House has ruled out eliminating the mortgage-interest deduction for those making under $250,000 a year. That’s a popular position, not least because, according to the Tax Policy Center, the average taxpayer gets $559 from the deduction.
But it makes tax reform a lot trickier. The deduction is one of the biggest in the federal government; the Tax Policy Center projects it will cost $1 trillion over the next decade. The administration has proposed limiting it for high earners, but that proposal only raises only about $40 billion over a decade – a mere 4 percent of the deduction’s total cost. By the end of the decade, cutting the deduction would reduce the budget deficit by about 10 percent. The administration’s proposal would barely dent it:
In theory, it sounds like a great solution: Get Congress to “fast-track” a big fiscal package that would allow individual members and committees to work out the details of a budget deal, but prohibit the filibuster by mandating what’s known as “regular order” to avoid gridlock.
“In the Senate, you stand up and yell ‘regular order’ when you want senators to behave,” former Sen. Pete Domenici (R-N.M.) said Monday afternoon at a summit of like-minded deficit hawks. “Everybody understands.”
— Krugman on the TPC study: “Obama is inadequate; Romney is intensely, screamingly irresponsible.”
— How could the Post Office deal with its debt problems?
— Where did the deficit come from?
— Silicon Valley’s “brogrammer” culture.
— What if The Legend of Zelda were a spaghetti Western?
The headline figures from today’s GDP report for the second quarter of 2012 aren’t great: Annualized first quarter growth was revised up to 2.0 percent from 1.9, and second quarter growth was 1.5 percent, neither of which is anything near recovery speed. But there was a lot more to the report than just those numbers. So what else did it tell us?
Citizens for Tax Justice’s Bob McIntyre points out that the White House’s $150 billion price tag on Obama’s one-year tax cut extension only appears to include part of the total cost — the income tax cuts. Obama’s own 2013 budget includes two other provisions as well: a permanent fix to the Alternative Minimum Tax and relief from scheduled estate tax hikes, which are both separate from the standard income tax. “The only way that the White House can claim a cost of ‘only’ $150 billion or so would be to leave out part of the president’s proposal,” says Bob McIntyre, CTJ’s director.
A grim surprise was tucked inside the Congressional Budget Office’s latest budget outlook. Economic growth, it said, would be only 2 percent in 2012, falling to 1.1 percent in 2013. That’s horrible.
It’s far beneath the growth rate required for the economy and job market to recover. But it’s also probably wrong— provided that Congress wants it to be wrong. Because the CBO isn’t saying the economy can’t grow faster than that. It’s saying the economy won’t grow faster unless Congress makes some hard decisions, and soon.
Speaking of things that the European crisis is not about, while I was in Germany, my colleague Robert Samuelson wrote that “Europe’s turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created. It’s ultimately a crisis of the welfare state, which has grown too large to be easily supported economically.”
I don’t think that quite works. Take Germany. They have a pretty big welfare state: pensions, health care, paid vacations, unemployment benefits equal to two-thirds of one’s income. Indeed, the Organization for Economic Cooperation and Development keeps track of social spending — unemployment, old-age pensions, health care, etc — as a percentage of GDP. In 2007, Germany spent 25.2 percent of their GDP on such things. Greece spent 21.3 percent on social policies. Yet Greece is in crisis, and Germany is fine.
To bring this across the Atlantic, you could argue that the United States’s debt burden is the product of an insufficiently large welfare state — at least with regard to health care. To see a stark illustration of that thesis, head to the Web site of the Organization of Economic Cooperation and Development and download their health-care statistics for Canada and the United States.
I get at this a bit in today’s column, but one of the curious things about the GOP’s interest in Simpson-Bowles is that Simpson-Bowles has more in tax revenue and more in defense cuts than anything President Obama has proposed. It also, to be fair, has more in Social Security reforms and more in Medicare cuts than anything the president has proposed. Nevertheless, a traditional accounting suggests that the White House’s deficit-reduction offers have been well to the right of the Simpson-Bowles plan.
You can see this on the above graph, which uses numbers (pdf) from the Committee for a Responsible Federal Budget*. And yet the Simpson-Bowles plan has fans in the Republican Party. Why?
I think the correct answer to this is: Who cares? If a bunch of elected Republicans have decided they like what’s in Simpson-Bowles, and what’s in Simpson-Bowles is substantially better than what’s been in most of their budget proposals, then what possible downside could there be for the White House and the Democrats in pursuing the plan? If Republicans eventually balk at it, as Democrats suspect will happen, then at least it’s clear who was willing to compromise and who wasn’t.
Over the past few weeks, the White House has been employing what might be called the “good sibling” strategy. Parents will be familiar with this one: When one child is acting out, the other will press her advantage by becoming ostentatiously polite, studious and well behaved. (Yes, I grew up with siblings. Why do you ask?)
Congress in general — and Republicans in particular — have been acting out for most of the year. There was the near-shutdown in February. The near-default in August. In both cases, the White House inserted itself into the middle of the negotiations, only to look weak and ineffectual when it barely squeaked out 11th-hour deals that left no one happy. So it has smartly stepped back and let the supercommittee fail on its own.
The contrast was perhaps clearest Monday morning. While much of Washington was pointing fingers over the deficit, President Obama was on television signing a bill to give tax credits to businesses that hire veterans. Voters who tuned in to watch Congress fail at doing its job saw the president very publicly doing his. And like good siblings everywhere, the president was happy to rub it in.
So the supercommittee? Not so super, it seems. It’s ready to admit defeat. And some think that’s for the best.
Here’s their argument: A bad deal can be worse than no deal at all. And over the last few weeks, the deals offered by both sides were bad deals. They cut too deeply into some areas of government -- like the education, transportation and competitiveness programs in the “non-defense discretionary spending” category -- and did too little on taxes, entitlements, and defense.
Perhaps worse, a bad deal now would make it harder to reach a good deal later. Most economists think we need about $4 trillion of deficit reduction over the next decade or so. There’s a good chance, if the economy doesn’t begin to improve more rapidly, that we need a lot more. There’s little chance that we need a lot less. By the end, the supercommittee was discussing a $1.2 trillion deal. If you add in the spending cuts already agreed to in the debt-ceiling deal, that’s a $2.1 trillion deal. That would have left trillions in deficit reduction undone.
And the trillions it would have left would be in the hardest categories to reach agreement on. Taxes. Entitlements. Defense. Reaching a deal on those items is going to be difficult under the best of circumstances. It will be even harder if all the low-hanging fruit is already picked. If the supercommittee can’t reach a big deal now, better they should give up and go home rather than making it harder for Congress to reach a big deal later.
But before you celebrate the supercommittee’s failure, it’s worth hearing the other side, too.
In the past, I’ve talked about the “do-nothing plan” for deficit reduction: Congress heads home to spend more time with their campaign contributors, and the Bush tax cuts automatically expire, the 1997 Balanced Budget Act’s scheduled Medicare cuts kick in, the Affordable Care Act is implemented, and the budget moves roughly into balance. It’s not an ideal way to balance the budget, but it helps clarify that the deficit is the result of votes Congress expects to cast over the next few years. If, instead of casting those votes, they do nothing, or pay for the things they choose to do, the deficit mostly disappears.
The last few years have added new elements to the do-nothing plan: the trigger, for instance, and various temporary tax cuts Congress has been extending. James Horney of the Center on Budget and Policy Priorities ran the numbers for my colleague E. J. Dionne, and he says the do-nothing plan would now lead to $7.1 trillion in deficit reduction — more than even the Fiscal Commission envisioned. Here’s how it breaks down:
After the failure of the 1973 Geneva Peace Conference, Israeli diplomat Abba Eban sighed that “the Arabs never miss an opportunity to miss an opportunity.” In recent years, the same could be said of Americans.
Two months ago, the U.S. marked the 10th anniversary of the Sept. 11 attacks. Sadly, we commemorated a tragedy without celebrating much triumph. The post-9/11 moment was an unheralded instance of national — even global — unity. The Bush administration could have used it for almost anything. And, to be fair, it did. The nation burned trillions of dollars in two wars and a budget-busting round of tax cuts. The president told us to go shopping, and the Federal Reserve held interest rates at extraordinarily low levels. The result? Deficits and a credit bubble. That was missed opportunity No. 1.
Want to learn about the plight of unemployed workers during the Great Depression? Head to Amazon.com and order John Steinbeck’s Depression-era epic, “The Grapes of Wrath.” Want to learn about the plight of workers during our own Lesser Depression? Head over to Amazon’s warehouse in Lehigh, Pa., and watch them prepare your book for shipping.
We’re all supposed to breathe a sigh of relief this morning. Last night, Senate leaders struck a deal that is likely to avert a government shutdown. But some in the chamber aren’t so impressed. As one fed-up senator told me last week, the United States has a lot of problems to solve, and yet success in today’s Congress constitutes simply keeping the lights on.
This week’s shutdown threat was perhaps the most absurd yet. In most budget battles, the two parties are separated by many billions of dollars. Earlier this year, for instance, the compromise budget that averted a shutdown cut $78.5 billion from the president’s budget request. In this debate, however, the parties were separated by a mere $1.6 billion. The fact is that the preparations for — and certainly the reality of — a shutdown probably would have dwarfed the difference between the two bills.
When he talks about the American Jobs Act, President Obama employs a simple refrain: “Pass this bill!” He used some variant of that a dozen times in his speech announcing the legislation.
But when it came time this week for the president to talk about his deficit-reduction proposal, three words were notably absent from the pitch. He never said “Pass this bill.” In part, that’s because he’s not offering a bill; he’s submitting a proposal to Congress’ Joint Select Committee on Deficit Reduction. But it’s also because there is no chance that a bill resembling Obama’s proposal will pass.