Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances.
President Barack Obama
The State of the Union Address
February 12, 2013
Many years ago, a seasoned Capitol Hill professional cautioned me about giving any questionable number to a politician. Many have fly-trap minds, and once you put something in, you never can get it out. Any nuanced but only partially understood fact, like a discount-store blowtorch, could be misused with considerable ill effect at some later moment.
This bit of wisdom comes quickly to mind when one hears the current buzz about a mere $1.5 trillion of deficit reduction over ten years ending our budget woes. Some reach that number by the roughest of arithmetic; others use more sophisticated analysis, and even provide important and subtle caveats. But the number, even though it has some limited use, already has left the corral of qualification and analysis far behind.
The simple way to reach that number is the way the President did. Three years ago, Erskine Bowles and Alan Simpson characterized our fiscal plight with a calculation that $4 trillion of deficit reduction would “stabilize the debt.” As the President noted in his remarks, some have estimated subsequent budget action to have achieved $2.5 trillion of that. $4 trillion minus $2.5 trillion equals $1.5 trillion, under either OMB (Office of Management and Budget) or CBO (Congressional Budget Office) scoring.
That little inside-Washington joke is not really a joke, however. Bowles and Simpson’s $4 trillion was derivative of many complex and controversial assumptions, and was calculated at a particular time. Let’s review the numerical spreadsheet, and its even-more-subtle and important conceptual underpinnings.
Can we fix the budget deficit by cutting “other” spending?
This rather long post points out that recent budget-deficit-reduction plans tend to assume large amounts of savings from “other” spending – spending that does not include the most prominent and problematic programs of government. It presents numbers to provide a sense of the scale of this phenomenon, and then explains why simply assuming large savings from this nondescript “other” segment of the budget could prove quite dangerous.
The federal budget has clear trouble spots. In the long term, the projected growth of healthcare spending, primarily for Medicare and Medicaid, will far outstrip the growth of the GDP, and is therefore unsustainable. Revenues have been well south of their historical norm for several years. In fact, for the last three years, revenues have been more than 4 percent of GDP below the lowest level of any year in the last half century in which the budget has been balanced. (There were, admittedly, only five such years.) A deficit equal to that revenue shortfall, 4 percent of the GDP, is by itself enough to grow the public debt faster than the economy – which again is not sustainable. The Social Security system has not paid for itself since 2010, and it is not projected to do so ever again without significant changes of policy. The cost of the Middle East wars is a matter of controversy, but it has added at least $1 trillion, and possibly much more, to the public debt.
With all of these well defined and widely known problems, it might come as a surprise that the leading budget proposals from policymakers in Washington – President Obama’s budget, and House Budget Committee Chairman Paul Ryan’s budget resolution – achieve very large shares of their budget savings not in these problem areas, but rather from “other” – that is, not revenues, not Medicare, not Medicaid, not Social Security, and not defense (and of course not interest on the debt, which cannot be cut directly but rather only through savings elsewhere in the budget.) There is the old joke about the drunk who looks for his lost keys under the lamp post, not because he lost them there but because that is where there is light. But why should our nation seek a solution so far away from the problem?
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