Obligatory budget post

I keep on hearing about a "pivot," but where is it?  Via Greg Mankiw and Arnold Kling, here is Keith Hennessey:

We can draw five important conclusions from this graph:

  1. At 8.3% of GDP, the proposed budget deficit for 2011 is still extremely high.
  2. President Obama is proposing larger budget deficits than he did last year.
  3. For 2011, the most relevant year of this proposal, the President is proposing a budget deficit that is 2.3 percentage points higher than he did last year (8.3% vs. 6.0%).
  4. Using his own numbers, the President’s proposed budget deficits will cause debt as a share of the economy to increase.
  5. Under the President’s proposal, budget deficits begin to increase as a share of the economy beginning in 2018.

Adding further detail to (4), the President’s own figures show deficits averaging 5.1% of GDP over the next 5 years, and 4.5% of GDP over the next ten years.  They further show debt held by the public increasing from 63.6% of GDP this year to 77.2% of GDP ten years from now.  I think it’s a safe assumption that CBO’s rescore of the President’s budget will be even worse.

Addendum: Brad DeLong objects.


We can draw five important conclusions from this graph:

1. Given projected unemployment of over 8-9% in 2011, the proposed budget deficit is too low compared to optimal economic policy.
2. The recession Obama inherited is far more severe than anyone thought when they did last year's budgeting, so the deficits will automatically be larger even if no laws change.
3. This legacy is also is true for 2011.
4. This legacy means debt will grow as a share of the economy.
5. Beginning in 2018, the aging of the population and rising health care costs mean that even with cuts in discretionary spending, the deficits will start to increase again unless we find a way to fund those promised entitlements or rein in health care costs.

Given the dire state of the economy, we should be thinking about ways to provide more stimulus now to get the economy growing. The time for being a deficit hawk was in 2003 when major tax cuts, unfunded Medicare part D and two wars were initiated. Focusing on deficits now is a bit like worrying about the water bill when the house is still on fire.

The first four points are explained by the fact that last year's budget assumed a stronger economic recovery, which turned out to be wrong in retrospect.

The fifth point is just silly: of the $218 billion deficit increase from 2018 to 2020, $426 billion comes from mandatory spending programs. That is, there is a projected $424 billion increase in mandatory spending, which the President's budget offsets with other provisions in the budget to the cut that increase to $218 billion. Regardless, those deficits are sustainable, at ~3.5% of GDP.

Source: The Budget, Table S-4. Subtotal mandatory spending row and deficit row.

Have you seen the composition of those projected deficits? Erik provides some good thoughts on the actual driving forces of those deficits, with high levels of unemployment and rising health care costs. In fact, the Bush era tax cuts and Medicare D constitute an overwhelming portion of those projected deficits in 2019. If you really are concerned about the deficits, you should be focusing on those aspects.

Here is a wikipedia finding:

By tenure, the largest increases in gross debt relative to GDP, to date, occurred under George H.W. Bush (+11.2%), George W. Bush (+11.9%), and Ronald Reagan (+18.5%).

The Obama administration is going with accepted economic theory: tax cuts create high economic and employment growth.

That tax cuts have failed to deliver any real employment growth, contrary to theory, is ignored because the free lunch offered by accepted economic theory is too attractive to nearly everyone that history is rejected.

Instead various new theories are being proposed to justify the slow growth in aggregate real incomes that seek to explain how the US is at the pinnacle of development and further growth should not be expected.

I would note that accepted theory argues that tax hikes will reduce tax revenue, so hiking taxes can't reduce the deficit.

But as tax cuts on speculation and pump and dump failed to increase revenues by spurring greater employment and thus taxable incomes where the highest taxes are levied, and when the tax law promoted pump and dump bubble popped, taxable incomes plummeted producing the high deficits.

So, one concludes hat nothing can reduce the deficit, neither tax cuts nor tax hikes, and as conservatives have established that cutting entitlements is a plot by liberals to harm the people, the only option is to rationalize higher deficits, but only after Republicans have gained control of the Congress and Whitehouse.

Then it will be possible to return to the view that Reagan proved deficits don't matter. And to more tax cuts to create wealth by pump and dump bubbles via tax incentives while punishing those who labor with significantly higher tax rates.

Ask yourself this question: why would a true capitalist sell his capital if it is generating a high rate of return. If a capitalist never sells his capital, why does he need reduced tax rates, and now the proposed zero tax rate, in order to create the incentive to create capital which generates high rates of return for long term sustainable growth?

Or to put it another way, how much in capital gains tax has Warren Buffett paid on his approximately $50B in capital accumulation? Why hasn't he sold his capital by now given the lower and lower capital gains rates? Is he waiting until capital gains goes to zero so he can sell his $50B in capital and then go on a big consumption binge?

The focus on cutting taxes on "capital gains" has merely promoted pump and dump, focused people on ways to drive up asset prices because that is where the tax incentives are. Why make something when you can make more after taxes by taking something made before and selling it for a higher price and calling it a capital gain?

If people are reluctant to sell capital and pay high taxes on capital gains, people with cash to invest will be driven to buy durable goods that can produce income, thus increasing the amount of real capital equipment and property, because that will be cheaper than paying the premium those owning capital will demand in order to cover high capital gains taxes. And isn't increasing real capital investment something a capitalist strives for?

And by increasing real productive capital won't growth in aggregate and per capita GDP be higher and with it real tax revenue?

Such analyses should highlight level and trend; and answer the questions "compared to what?" and "where is this going?".

Item 3 should read (my edits in CAPS): "For 2011, the most relevant year of this proposal, the President is proposing aNOTHER UNSUSTAINABLE budget deficit that is THIRTY-EIGHT PERCENT higher than The MONSTROSITY HE COMMITTED US TO last year (8.3% vs. 6.0%).

Let's say the Obama 38% rise is constant over 10 years. Then the deficit will rise 2,500% by 2020. Does anyone know what the GDP constant growth rate through 2020 will be?

Other sources: Despite a trillion dollars in proposed tax increases, over the next 10 years, the nationl debt will soar by $8,500,000,000,000.00. That's an averahge annual deficit of $850,000,000,000. Caution: these are Obama's numbers. The real numbers will be different.

In the real world if we know the penurious policies of the the preceeding jerk are ruinous, we stop them! We do not increase the actions we think destructive.

Oh! From whence is all that money to come?

We're ruined.

I blame Bush!

Erik, Jerome, and Bill: pointing out who got us here is probably best left for a different audience. I suspect that those who frequent this site and are critical of the current budget forecasts are also critical of over-spending by other governments. The relevant question now is "will the situation improve or deteriorate?".

A few points:

†¢@T Shaw: Penurious means stingy.

†¢I don't think the forecasts for 2018 reflect much about Obama's priorities. As someone else pointed out they are driven by mandatory spending on the SS and medicare. Since we've neglected to address those, we're probably going to get stuck with annual or semi-annual adjustments to temporarily restore balance, a new story every year.

†¢ Not sure I get point 3, maybe its wording is off. The way I see it, the government initiated gross overspending with the 2008 budget, ostensibly in response to the financial crisis and subsequent unemployment and decreased consumer spending and lower revenue for, well, almost everyone. This unsustainably large bulge in spending looks like a 3 to 5 year phenomenon, starting in 2008, hopefully peaking in 2009, and going down (but still quite large) in 2010.

†¢ There's little choice but to get the deficit back down to arguably sustainable levels (like say 2 to 4 percent) within the next 2 to 4 years.

†¢The longer term problem of exploding mandatory costs must be borne by everyone. We can't throw Obama under the bus for that. We'll all be under it soon enough if we don't act.

†¢there's no hope that partisans will agree about whose fault this all is, now or in the future. Conservatives will mostly make the easy connection between big deficits and big government spending. They'll generally say that this overspending was mainly unnecessary or unproductive, or both. They'll blame government for its role in creating a bastardized version of the free market without sufficient conditions to foster the kind of competition that could have prevented big risky actions and subsequent failure.

†¢Liberals not only won't buy this, they'll demonize corporations and competition and fail to acknowledge how things like insisting that the american dream equals home ownership contributed to our current state.

†¢And the rest of us will shake our heads and try to pick up the pieces.

NYTimes has an interesting widget showing how CBO deficit projections change over time, and how the estimate has a clear bias:


So, whatever they tell us, it's almost certainly worse.

Left wing partisans are throwing president Bush under the bus only because he happens to have an R next to his name as opposed to the newly appointed czar of hope and change.

This doesn't make any difference to small government libertarians like me, throw Bush, Republicans, Democrats, Lieberman, populists and the entirety of congress under for the budget. It makes no difference. Henessey has made concessions that Republicans screwed up with Medicare part D, he himself was on capital hill when they passed it.

The main point is that Obama is increasing the size of government as a share of GDP year over year, the tax burden is increasing and our debt is becoming unmanageable. If Obama wants to step up to the plate and make massive cuts in spending and solve this dilemma in a way that will benefit the middle class, but lowering spending and keeping the tax burden low, than more power to him. I have a feeling that he really doesn't have that in mind though, and that the unfunded obligations of the United States are going to come at the expense of every American's standard of living.

"Even the Best of the Republicans Are Pretty Awful...

Alan Kling..."

"And, of course, left out of Hennessey's "analysius"..."

For the life of me I can't understand why the wingnuts think this guy is a dick.

Anybody have any estimates of what all these projected deficit and debt
levels and ratios would look like if we had the tax code we had back in
2000 when we were running surpluses? Somehow I remember there being some
tax increases passed in the early part of the decade, with the second round
of those being unanimously opposed by the members of one party in Congress,
with most of their leaders loudly forecasting that they would result in
a major recession. Did not happen, but I never saw any of those folks
discussing how or why they were so very wrong about those so certain forecasts.
Of course, the fact that the party that opposed those tax increases took
over the Congress at the next election has rather solidified the discussion
in a certain direction, and also helped them ignore how wrong they were about
their economic projections, if not their political ones.

No, it doesn't help, Bernie. I read everything in his post, it was strawmen. Apparently you didn't read it. It was DeLong making fun of a Hennessy typo while completely missing Arnold Kling's name.

I read the Hennessy post. It was pretty good and it was a service to provide it. It includes the first time I've seen this written, although I'm sure it is well-known.

"The tax code has features that build in tax increases over time. The most important is known as bracket creep."

Sad to see the country I once admired destroy itself. The way I see it, the root of Americas problems is that power has been centralized in Washington, where it is essentially on sale.

Instead of #4 just preface the whole list with:


In all caps BOLD

Politicians may try to convey the impression that "reducing the deficit" is reducing the debt - it ain't, aint', ain't and everybody here should be drumming that into the heads of all who don't realize that.


Apparently when DeLong says "analysius" he is being sarcastic about the quality of the anlysis and not making fun of a type.

I think it was just a typo on DeLong's part. Elsewhere he uses the word "analysis" though he does put it in quotes to indicate he doesn't think much of it.

Hennessey does point out that Obama faces a dilemma between short-run fiscal stimulus and long-run fiscal imbalance. In that sense, Delong is being a bit harsh.

But on the tax revenue side, Hennessey is misleading. He shows a graph of tax revenue as a percentage of GDP (artificially scaled so that the minimum value is 14% to make the subsequent increase look huge) and says taxes will increase above "historical averages" under Obama. What he fails to note is that taxes were well below historical averages under Bush. Indeed, a properly done graph that does not start in 2009 would make this clear.

That's part of the reason why debt grew so much under Bush and why we have a long-term fiscal imbalance today.

Keith Hennessey had a more illuminating post on taxes just last year. Look at the second graph in this post to see that federal tax revenue as a percentage of GDP has stayed fairly constant in the long-run at about 18.1% of GDP since the end of WWII.

The graph he posted just now that starts in 2009 shows that under Obama, taxes are set to increase from their current historically low level to around maybe 19.5% by 2020.

Put in proper context, this is an anti-climax. Everyone knows taxes will have to increase to deal with an aging population and when you combine this with the fact that tax revenues were noticeably below average the past several years (and certainly below Clinton-era levels when we had a balanced budget) it's simple fiscal responsibility.

I don't see either party proposing the kinds of spending cuts that would be necessary to sustain taxes at the level of less than 18% of GDP.


No dude. What is wrong with Hennessy's 'analysius'? Specifically? Why are you parrotting DeLong? Is what DeLong said?

Tyler linked to DeLong whose only criticisms are strawmen AND annoyingly pissant. The increase in the deficit is not purely arithmetic. It is also not just the "automatic stabilizers". Hennessy even mentions that a cut in the budget would be contractionary giving a nod to the Keynesians (which is what I though DeLong was saying he didn't say until Bernard brought up the issue of arithmetic, so I couldn't even understand DeLong's main complaint, maybe that's on me but I don't think so.)

DeLong then uses a sleight of hand to change the issue to Debt-to-GDP instead of Deficit and Spending-to-GDP and makes a wisecrack about Republican presidents, however there is this:

You can see that all the presidents until Reagan are paying down WWII debt. Then there is the little issue that Reagan/Bush and Bush II were paying for significant conflicts. Even the Democrats called the cold war and the war on terror "wars." Was the largest domestic attack on US soil not an "invasion" to defend? So, I think DeLong's complaints are unsubstantive and even more misleading than anything in Hennessy's 'analysius'.

Oh, and leave Tyler alone. He linked to what is probably the best analysis out there. He apparently linked to the best critique (I have to assume). Best is a relative thing.

He called it the "obligatory" blog post on the budget. And he surely doesn't like instigating ad hominem attacks, though it was quite predictable. And my point is that if DeLong wants to make it less predictable it is entirely within his control, at least for this blog.

Just because DeLong says Tyler isn't doing us a service doesn't make it true.

Delong makes the same arguments that have been made in the comments here:

1. The deficit is increasing due to decreased revenue.
2. Comparisons of the deficit to GDP are misleading.

Disagreement with (what I'll call) Delong's critique comes from:

1. But Hennesey's numbers are right.
2. But the govt should spend less if its revenues are less.

To which I would respond:

1. Hennessey is using accurate numbers to mislead.
2. Every economist (Kling and Mankiw included) think government should run deficits during downturns. Conservative economists think those deficits should come from increased tax cuts, liberal economists think they should come from spending.

Kling and Mankiw link to Hennessey because they find his critique of Obama politically appealing, but his arguments really are misleading and neither academic would publish these opinions themselves because they would be laughed at by their colleagues.

I read each of these comments until I come to the word Republican or Democrat, then I skip the rest. To say or even imply that there is any substantive difference between these two parties is flat out silly. They are ALL self seeking, self serving parasites. And most of them are clueless. Grow up.


You say that Reagan was "paying for significant conflicts." Really? Bigger than the Korean War or the War in Vietnam? Or maybe you mean the broader Cold War that was going on in Reagan's terms? That was not going on from the end of WW II on? Somehow the debt got paid down while those were going on prior to Reagan (although not much so under Carter, blame him).

No, you are just another of the deluded ones who does not notice that cutting taxes leads to budget deficits, especially when one is fighting hot wars, as was the case with our most recent Bush, the first US prez to cut taxes while doing so. Get real.

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