Hudson Institute (Link) - Chuck Blahous (March 2, 2009)
The budgetary methods the Obama Administration is using to claim progress against the deficit embody an intriguing reversal of course. The very methods now being used to make deficit-reduction efforts appear larger are in fact the precise opposite of ones previously used -- by many of the same people now advocating for this budget -- to make the Social Security shortfall appear smaller. To understand the inconsistency requires getting under the hood of both sets of estimates.
The Administration has announced a goal of "cutting the deficit in half" by 2013, to $533 billion. Almost none of this avowed deficit-reduction would be accomplished by Obama Administration policies. Their projected "baseline deficit" for 2013 – that is, assuming the enactment of no policies for which they take responsibility – is not in fact twice as large, but rather $734 billion.
But even this $734 billion figure isn't actually current law. Rather, it is a figure that results from moving the baseline current-law deficit ($101 billion) to one reflecting "current policies" – policies now in force but whose extension requires a change in law.
Many of us have long believed that a "current policy" baseline is the more forthright course. Indeed, the two largest such items used to shift the baseline are an assumed extension of the 2001 and 2003 tax relief (along with patching the AMT), and funding for "overseas contingency operations" (the favored euphemism for armed conflict abroad.) Those of us on the Republican side have generally favored continuing these policies, and opposed offsetting them with additional revenues. From our perspective, they are indeed the baseline.
For this Administration, however, to now rely on this current policy baseline to claim progress against the deficit is ironic at best. After all, it came into office criticizing many of these same policies, which require a change in law to extend, and they have the power to curtail them if they choose. These policies will not be reflected in future law unless this Administration agrees to them.
More relevantly, however, the Administration hasn't confined their baseline-shifting to these items alone. The next largest item shifting the baseline upward in 2013 is increased interest on the debt -- to which the Administration's recently-enacted stimulus package is the greatest contributor. After that comes expensive "doc fix" legislation. In the past, Congress has offset such legislation. The Administration is apparently choosing instead to add this $330 billion in spending over ten years to the deficit, and is cloaking that policy choice within the baseline. Next in size come the portions of the stimulus package that won't be doing any stimulating until five years from now.
These items – representing purely discretionary policy choices of the Administration – are used to inflate the 2013 baseline by nearly as much as their proposed deficit-reduction would accomplish in that year.
It is not unusual for a budget baseline to reflect the passage of recent legislation, such as the stimulus package. But to advocate for various deficit-expanding policies, submerge those measures into the baseline, and then claim credit only for deficit reduction, takes some audacity indeed. Relative to the deficit path the Administration actually inherited, their budget proposes to make hardly any progress at all by 2013.
What makes this presentation particularly notable is the inconsistency with past analyses. In particular, it is inconsistent with past critiques of the Bush Administration's tax policies, and with ongoing minimization of the Social Security shortfall.
One of the favorite pastimes of Social Security reform opponents has been to cite CBO's recent Social Security estimates, which consistently showed a smaller deficit than the official estimates of the Trustees. Some columnists have recently mocked the idea of even discussing Social Security reform, referencing allegedly puny CBO estimates of the Social Security shortfall.
What will these advocates do now that the key scorekeepers have moved from CBO to OMB and reversed their previous methodology? CBO had only arrived, in its latest report, at their smaller estimate of the Social Security deficit by assuming that the 2001/03 tax relief would be repealed, and that the AMT would perpetually capture more and more taxpayers. This assumption shrank future Social Security deficits via a dramatic projected increase in the income taxation of Social Security benefits. (The "current policy" estimate, in CBO's last report, was confined to an "alternative baseline" that Social Security status quo advocates generally ignored.) CBO's reliance on an inflated tax baseline alone accounted for roughly 40% of their apparent reduction of the Social Security shortfall. (A good portion of the rest of the difference came from CBO's inexplicable adoption of higher real wage growth estimates just as the economic downturn was getting under way.)
Changing political seasons have a way of changing accounting practices. The high-revenue baseline was fashionable for some to use while in campaign mode, when it was tempting to downplay the Social Security deficit and to magnify the supposed deficit impact of President Bush's tax cuts. But now that many policy advocates have moved from outside the Administration to inside it, the methods are reversing; now the permanent extension of the 2001/03 tax cuts is a part of the baseline, to create the appearance of progress against the deficit.
Such reversals are, perhaps, predictable, if less than admirable. But they have consequences. It will be interesting to see whether "progressive" economists continue to defend the CBO Social Security estimates of last year, or the Obama Administration's Budget of this year. They can't consistently do both.
Listen to this interview from the David Boze show with Chuck...
David Boze March 2, 2009 - Wizard of Oz Budget