Skip to content

Category: budget policy

Published on Leave a comment on Catching up

World Cup celebrations, done wrong. I guess one game doesn't change quite everything.

Huge infrastructure projects, done very wrong. Get Ted Williams's name off that tunnel--it makes no sense to honor the greatest hitter who ever lived with this big strikeout of a money pit.

Budget spin, done wrong. If there is no recession in the forecast, then why isn't the on-budget account in surplus? If not with robust economic growth, then when will the debt be repaid?

Fish, done right. I got a behind-the-scenes tour of this remarkable place.

Published on Leave a comment on Mankiw’s Resolutions

Greg Mankiw provides a list of new year's resolutions for economic policy makers in yesterday's Wall Street Journal in "Repeat After Me." The one-liners are:

  1. This year I will be straight about the budget mess.
  2. This year I will be unequivocal in my support of free trade.
  3. This year I will ask farmers to accept the free market.
  4. This year I will admit that there are some good taxes.
  5. This year I will not be tempted to bash the Fed.
  6. This year I will vote to eliminate the penny.
  7. This year I will be modest about what government can do.

Read the whole thing--witty, straightforward, informative--just the reasons why Greg's textbooks were a hit and working for him was a pleasure. Resolution #1 bears more scrutiny. Greg specifies the full resolution as:

I know that the federal budget is on an unsustainable path. I know that when the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose. I know that the choices aren't pretty -- either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history. I am going to admit these facts to the American people, and I am going to say which choice I favor.

There needs to be a pause between the first two sentences here. The federal budget is on an unsustainable path, but not only because of the looming demographic shift. That problem needs to be addressed, regardless of what is done about entitlements. The on-budget and off-budget imbalances are two problems that have a common cause--no one seems interested in "Repeating After Greg."

To see what the prospects are for anyone adopting Greg's resolution #1, we turn to Stan Collender's most recent "Budget Battles" column. It's not a pretty picture:

It's hard to see how anything positive will happen this year on the federal budget. Here are the reasons why.

It's An Election Year. The president's budget has not been a real fiscal blueprint for some time, but there are two reasons why President Bush's fiscal 2007 budget is very likely to be more of a pure political statement tha[n] any submitted by this president.

First, the White House is going to want to release the equivalent of a campaign platform for Republicans running for election in November rather than a serious budget that attempts to get anything done. This will eliminate most, if not all, of the incentives for bipartisan compromise and will doom most of what the president proposes to the budget graveyard as soon as his plan is received on Capitol Hill. This will be what congressional Republicans will run on regardless of whether anything is actually enacted.

Second, at this point in his presidency, Bush will have very little opportunity to propose legislative changes that will have a substantial positive impact on the deficit before Inauguration Day in 2009. The better strategy for the White House will be to again underestimate revenues and economic growth and then take credit later in the year for what appears to be an improved budget outlook. When it comes to federal finances, this is an administration that has repeatedly demonstrated that it will not make hard choices if the impact will be felt after it is no longer in power. There is no reason to believe the administration will do anything differently now.

Read the whole thing. I don't think Greg will have many takers. Maybe they'll eliminate the penny.

Blogsearch Technorati

Published on Leave a comment on A Forecast and a Budget

Last Thursday, the Administration released its economic forecast that will be used as the basis for its FY 2007 Budget, to be released early in 2006. See the actual forecast summary here, and a transcript of a conference call with CEA Member Matt Slaughter here. It is in general little changed from the mid-session review forecast released 6 months ago.

Even with the hurricanes, the real GDP forecast is up a tenth of a percentage point over the 4 quarters of 2005. That will allow for more revenues relative to expenditures. The "wedge" between inflation in the GDP price deflator (which corresponds most closely to the tax base) and the CPI price deflator (which corresponds to the way government expenditures, like Social Security benefits, are indexed) widened for 2005, with some narrowing forecast for 2006 and 2007. I suspect that energy prices are the culprit--given how much we consume rather than produce (i.e., import). When the wedge gets wider, that suggests faster growth in expenditures than tax revenues, and this will offset to some degree the impact of a higher GDP growth assumption. If the deficit is to come down in the FY 2007 budget relative to past forecasts, most of the work will have to be done by changing taxes and expenditures, not by relying on a more favorable economic picture.

Yesterday, the President was on the road to promote continued extension of some of the soon-to-sunset tax cuts. The ones in question pertain to the tax rates on dividends and capital gains. I find this whole discussion to be disheartening. The first order issue with tax policy is that we are not raising enough revenue to match our expenditures. Making the lower tax rates permanent just makes sure that we will permanently not have enough revenue to match our expenditures, unless we decide to lower expenditures by even more.

That brings us back to the FY 2007 budget. I would be much happier if the President spoke about which expenditures he will cut in that budget with the same specificity that he talks about which tax cuts he'd like to make permanent. Yesterday's road show was not a high point. Consider this:

Bush fell back on campaign-style rhetoric yesterday: "When you hear people say that we don't need to make the tax relief permanent, what they're really saying is, they're going to raise your taxes."

I'm prepared to be very unhappy come budget time.

UPDATE: This post was picked up by a Post with a much larger circulation.

Blogsearch Technorati

Published on Leave a comment on More Links on Katrina and Fiscal Policy

My last post raised a number of interesting questions elsewhere in the blogosphere. Here is a sampling:

Todd Zywicki picks up the theme at Volokh Conspiracy:

One can raise legitimate questions in principle about whether this is the type of activity for which it is appropriate to engage in deficit spending. I think a case can be made that this may be, because of the "lumpiness" and unexpected nature of the liability, that may be appropriate to smooth over a period of time (like fighting a war or investing in capital projects).

But a larger point implied here seems like a sound one to me--one problem with running chronic deficits during ordinary times or on ordinary pork-barrel spending is that it makes it more difficult to justify additional deficits in times where deficit spending is appropriate (arguably such as fighting a war or rebuilding one of the nation's most important cities and ports). To paraphrase Spinal Tap, if you are already on "10" for deficit spending what do you do when you need that extra "push over the cliff"?

He provides a precautionary reason for keeping deficits low when possible--so that they have room to go higher without excessive disruption when disasters strike. Commenter Robert Schwartz also notes that much of the rebuilding goes for capital projects, suggesting some reason for longer term financing. I'll disagree to some degree below--the owners of those capital projects are still the current generation of taxpayers, whether privately or publicly. He goes further to suggest taxes on gasoline to provide current financing.

Jacob, posting at an interesting new blog called "Everyone's Illusion" takes issue with what is becoming my tagline, "If taxes are bad, deficits are surely worse." He makes an argument based on Ricardian Equivalence that is answered quite well by PGL at Angry Bear. There are circumstances under which a higher public deficit would be completely offset through higher saving in the private sector. I've never been convinced that these circumstances apply in practice, even though they closely approximate the behavior of the Samwick household (consumption is set at a level far below permanent income and is unaffected, so far, by changes in tax policy). There are simply too many people not saving enough in the present generation to meaningfully offset the debts we are passing along.

But Jacob certainly has a point--I should not be so ambiguous in my use of that line that I appear to always prefer taxes to deficits. Here is where the line is valid: in situations like the current one, where an administration is considering whether to finance a discretionary expense for the benefit of current generation of taxpayers by raising taxes or enlarging the government's debt, it will seek to make arguments against raising taxes.

These arguments can pertain to efficiency or equity. The arguments against taxes on the basis of efficiency are the generic arguments about the virtues of financing a smaller government. These arguments are not relevant when considering a shift from current to future generations. Taxes are distortionary and reduce economic activity today, and they will have the analogous impact in the future when resources must be found to service or repay the addtional debt issued in their place.

And if we are in a situation, as we currently are, where the expenditures to be financed go directly to benefit members of the current generation, the equity considerations are paramount. When a dollar is spent to rebuild New Orleans, property owners (i.e., those who have ownership of the assets that are rebuilt) will benefit. Future generations will pay them for the future use of these assets through the market for goods and services--commodities that pass through the port, hotel rooms in New Orleans, housing in New Orleans, food in the French Quarter. They should not also have to pay for them through higher taxes.

Brad DeLong sums it up pretty well--calling me an unhappy fiscal camper--focusing on the seeming absence of logic for why we now have to offset some proposed new spending but we did not, so it seems, for other Administration priorities.

But the best is yet to come. From Stan Collender's "Budget Battles" column, dated 9/20/2005. The teaser:

President Bush either is wrong, mistaken, or misleading: The significant additional federal spending because of Hurricane Katrina absolutely will not be offset with cuts to other programs.

There are two reasons.

First, there isn't enough "unnecessary" spending or waste, fraud and abuse in the budget to pay for the federal costs of Katrina, which are now expected to total at least $200 billion in fiscal 2006 alone.

[...]

The second reason other spending won't be cut to offset the costs of Katrina is that attempting to do so would significantly slow the process of providing federal aid.

Read the whole thing.

Bloogle this post

Published on Leave a comment on A Katrina Tax Surcharge

Discouraging news from the President's remarks today:

WASHINGTON (AP) - President Bush on Friday ruled out raising taxes to pay for Gulf Coast reconstruction, saying other government spending must be cut. "You bet it will cost money, but I'm confident we can handle it," he said.

Bush spoke after his advisers warned that Hurricane Katrina relief and reconstruction costs will swell the national debt by $200 billion or beyond. "It's going to cost whatever it costs," he said. "We're going to be wise about the money we spend."

Bush did not put a price tag on the costs or say what government programs will be cut.

Where to begin?

I'll start by noting for the benefit of the folks working on the President's speeches that the sentence, "It's going to cost whatever it costs," gives the audience no confidence in the next statement, "We're going to be wise about the money we spend."

I was a fan of cutting other government spending before Katrina, and I am a fan of it now. I hope that the President is right that "we can handle it." The President will have to sort that out with the Republican leadership on the Hill, who seem to believe (quite counterfactually) that there is no more fat to trim. Leave that aside for the moment, and let's ask the following question:

If we can handle it now, why weren't we handling it before?

Why does rebuilding New Orleans compete favorably with this unspecified set of least useful programs, but not funding Social Security personal retirement accounts? Or the new Medicare prescription drug benefit? Or simply lowering the debt burden on future generations?

But I digress. If we have decided that rebuilding New Orleans to the tune of $200 billion is a national objective (and I haven't seen nearly enough debate on that subject in the Capitol), then we ought to fund it by reducing our consumption of everything else. The simplest way to do that would be to impose an income tax surcharge that funds the rebuilding over a given period. Over the next three years, for example, individual income tax receipts are projected to average about $1 trillion per year. So everyone has to pay a 6.7% surcharge over those years, maybe a bit more, since Katrina's economic impact should lower the projections for taxable income and the surcharge itself will discourage economic activity. Over a four year horizon, the surcharge would be 5%, before those adjustments. These are percentages of the taxpayers' tax bill, not of their taxable incomes.

Taxes may be bad, but deficits are surely worse. What's the explanation for why future generations should have to pay for this one, too?

Bloogle this post

Published on Leave a comment on Previews of a Mid-Session Review

There were two significant pieces of information this week regarding the likely Mid-Session Review of the Budget, to be formally released this summer.

First, as is now the custom, the Administration released an overview of its economic forecast as soon as it was finished. (The next step is for that forecast to be used by OMB and Treasury as they estimate expenditures and revenues.) This is a good move, because the Administration might otherwise be in the position of presenting this information six weeks or more from now as if it were current. The key changes since the last economic forecast six months ago are a reduction of the real GDP growth rate from 3.5 to 3.4 percent in the four quarters of 2005 and an increase in the CPI inflation rate from 2 to 2.9 percent over the same time period.

Both of these changes suggest a slight worsening of the future budget outlook for economic reasons. Lower real GDP growth suggests a lower future level of the tax base. Higher CPI inflation--when it is due to increases in the prices of energy, which is largely imported--raises the amount of government expenditures on things like Social Security benefits without an offsetting increase in revenues from the tax base, which is tied to the GDP price deflator. For 2005, the "wedge" between CPI and GDP inflation has opened up from a 0.1 percentage point forecast last December to a 0.6 percentage point forecast this week. I don't have a good feel for how large the impact of these two changes will be, and a lower interest rate forecast may offset some of the impact. We'll find that out when the MSR is released this summer.

Second, and much more importantly for the daily headlines and the near-term budget outlook, the Congressional Budget Office released its Monthly Budget Review for May. The deficit through the first eight months of fiscal year 2005 was $73 billion less than the comparable period of fiscal year 2004. This is attributed to revenues that are 15 percent higher than the same period last year and outlays that are 7 percent higher. As reported in the Wall Street Journal, forecasts of the deficit by CBO and others are now running about $350 billion, which is less than last year's $412 billion and earlier forecasts of this year's deficit.

So I'll take the good news, but I remain very concerned about the budget outlook, for three reasons:

1) We are in the fat part of the business cycle. A sensible fiscal policy is to run a balanced budget over the business cycle and to save Social Security surpluses for future Social Security benefits. So we should be running surpluses, not deficits, and that should be excluding the Social Security surplus.

2) The 7 percent increase in outlays compared to last year looks to be no smaller than the difference in nominal GDP across the two periods, so I guess I disagree with OMB Director Joshua Bolten's characterization (in the WSJ) of this as "spending discipline."

3) Baby boomers, lots of them, start retiring and collecting their entitlements soon. Full Social Security and Medicare starting in 2011. Early Social Security benefits starting in 2008. No preparations being made to lessen that financial burden on future taxpayers. Douglas Holtz-Eakin, Director of the CBO, summarized this well in the WSJ:

These are the good ol' days. These are the best of times. After this, it gets worse.

Other blogs commenting on this post

Published on Leave a comment on CBO’s Budget Outlook

The most interesting piece of economic news this week was the release of the Congressional Budget Office's "The Budget and Economic Outlook Years 2006 to 2015." This is a confusing document, largely because of the rules governing the way CBO specifies its baseline. Quoting from the report:

At first glance, the current baseline budget outlook may appear to have improved relative to CBO's previous projections, which were issued last September. The cumulative deficit projected for the 2005-2014 period (the 10 years covered by the previous baseline) has declined from $2.3 trillion to $1.4 trillion. However, because of the statutory rules that govern baseline projections, the current baseline omits a significant amount of spending that will occur this year--and possibly for some time to come--for U.S. military operations in Iraq and Afghanistan and for other activities related to the global war on terrorism. Likewise, those rules may have led the September 2004 baseline to overstate such costs.

The apples-to-apples comparison is presented in Summary Table 2, which shows that--apart from the treatment of last year's Iraq and Afghanistan Supplemental--the 10-year deficit has increased by $501 billion, with $371 billion of that change due to legislative changes. The explanation of the changes is:

Since September, when CBO issued its previous baseline, changes unrelated to the treatment of spending for activities in Iraq and Afghanistan have increased the cumulative deficit projected for 2005 to 2014 by more than $500 billion. Among the legislation that contributed to that increase was the Working Families Tax Relief Act of 2004. That law extended several tax provisions, including the 10 percent tax bracket, relief from the marriage penalty, and the increase in the child tax credit--thereby adding $146 billion to the 10-year deficit (excluding debt-service costs). In addition, supplemental appropriations for 2005 provide $11.5 billion in disaster relief for hurricane victims; extrapolating that budget authority through 2014 (following rules for the baseline) adds $94 billion to discretionary spending. Revisions to the baseline caused by changes in CBO's economic forecast were fairly small, reducing the projected 10-year deficit by $41 billion. Other, so-called technical revisions to the baseline--mostly involving revenues--increased that cumulative deficit by $173 billion.

So even knocking out most of the disaster relief (in addition to the military operations in the Middle East), the 10-year picture worsened by about $300 billion due to last fall's legislation. I'd call this a disappointing outcome for fiscal conservatism. I understand that we tend to regard taxes as "bad." But if taxes are bad, then deficits are surely worse, precisely because they are our children's taxes. Let's hope for better as the Budget makes its way through Congress later this year.

Other blogs commenting on this post