Budget

We now have a pattern on our hands. When the math behind Barack Obama's health care plans doesn't work, Obama attacks math. Now, he doesn't do it directly. He gets Peter Orzsag to debase his intellect for Obama's political ends. First, he did it with the IMF score. Then this week he pressured the CBO scorers early this week after their math provided defeat after defeat to his healthcare dreams. And then this weekend, Orzsag has attacked Doug Elmendorf, the CBO director.

Case 1: The IMF. At a G-20 meeting earlier this year, Barack Obama came away empty-handed. The only success was to send money to the IMF. $100b. This wasn't going to pass on its own, so they attached it to the Supplemental that paid for our troops. And claimed that $100b leaving the treasury costs nothing. According to the Politico, Orzsag had a totally unprecedented meeting with the OMB scorers putting political pressure on them to cook the books. Only a little comment at the time. Oh ... and no one bought Orzsag's nonsense, and the amount became a focus of attention as a bailout of European banks.

Case 2: CBO Whitehouse meeting. Earlier this week, the President meant with the Director of the CBO. According to Jake Tapper, there was a lot of pushback against the unprecedented nature of the meeting:

Said Senate Minority Leader Mitch McConnell, R-Kentucky: "I noticed that the CBO director was sort of called down to the White House yesterday. It strikes me as somewhat akin as the owner of the team asking the umpires to come up to the owner's box."

McConnell said that "if the CBO is to have credibility, they're the umpire. They're not players in this game."

CBO is tasked with providing “objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget.”

Case 3: Keith Hennessey puts it nicely, "CBO Kills the President's Medicare Comission Proposal". You see, the CBO found that Obama's great plan to limit costs was to create a commission only saved $2b. One half of one percent of the total cost. So what happens? Orzsag goes after Elmendorff in all but name:

A final note is worth underscoring. As a former CBO director, I can attest that CBO is sometimes accused of a bias toward exaggerating costs and underestimating savings. Unfortunately, parts of today’s analysis from CBO could feed that perception. For example, and without specifying precisely how the various modifications would work, CBO somehow concluded that the council could "eventually achieve annual savings equal to several percent of Medicare spending...[which] would amount to tens of billions of dollars per year after 2019." Such savings are welcome (and rare!), but it is also the case that (for good reason) CBO has restricted itself to qualitative, not quantitative, analyses of long-term effects from legislative proposals.  In providing a quantitative estimate of long-term effects without any analytical basis for doing so, CBO seems to have overstepped.

What is going on is crystal clear. The CBO is not caving to extended political pressure. After weeks of Pelosi "scolding" and Baucus aides "expressing frustration" it has come to open attacks on the CBO, its director, and the institution's integrity.

Well. I have to say, finally Barack Obama is bringing change I can believe in. Chicago-style change.

Early coverage of the Cap and Trade bill has focused on the successes of Barack Obama and Nancy Pelosi, although I noted that it was also a success for conservative movement groups.

However, focus is beginning to shift. Maybe they didn't get what they wanted? The New York Times' John Broder notes that various groups lobbied the hell out of it. He focuses on the utilities:

The biggest concessions went to utilities, which wanted assurances that they could continue to operate and build coal-burning power plants without shouldering new costs. The utilities received not only tens of billions of dollars worth of free pollution permits, but also billions for work on technology to capture carbon-dioxide emissions from coal combustion to help meet future pollution targets.

By not auctioning these permits, Obama lost a huge amount of money for his earlier proposals. Donald Marron notes that this totals about $600b in revenue that this bill didn't create.

Now think about what Joe Lieberman said yesterday about the health care bill...

Lieberman cited the cost of a public plan as his primary beef with the plan.

"Part of my concern is that, and this goes to the…growing national debt, that inevitably if we create a public option, the public is going to end up pay for it and that's a cost we can't take on," he said.

If Obama had come out of this cap and trade debate with an extra $600b, the healthcare debate would look a lot -- A LOT -- different.

As the scope of the deficit becomes clearer and the political salience of it rises, the cap and trade bill may look like an increasingly poor deal for America, but also the rest of the Obama agenda.

You have to assume that when Team Obama announced that the President would convene his cabinet and challenge them to cut $100MM from their budgets, they were thinking people would be impressed. Government doing its bit, setting an example, showing that they can be good managers and not just spenders of OPM.

So they are probably surprised at the derision with which their announcement was met. People like me who've worked all their lives in what Boston Herald columnist Howie Carr has called "the dreaded private sector" have always suspected that government managers live in a different world, one where prices can be increased in bad times, where budget baselines ALWAYS grow, year over year, by at least 3-5%, where the consumer of your services -- the taxpayer -- can be treated with indifference, since they cannot bring their business to a competitor.

President Obama's laughable idea of managerial frugality only confirms our worst fears. We're laughing because we work in smaller organizations than the federal government that have been cutting, cutting, cutting -- way beyond 1/36,000 of our company's budget.

Corporate managers across America are used to getting challenged to cut costs every year. Just one example: One of the Silicon Valley's largest and most important concerns, Cisco, committed last year to cut its expenses by over $1 billion over the following year. By all accounts, they are getting there.

From what I hear, people are Webexing instead of flying, eating in rather than out, reducing everything down to cafe hours and office supplies. Cisco is a company of about 60,000 employees, with total revenues in excess of $50 billion. By any measure, the federal government is several orders of magnitude larger -- and yet Cisco's frugality measures are several orders of magnitude larger than the federal government's.

There are similar examples here in the Silicon Valley, but only one makes the point: The President's challenge to his top managers belies either an ignorance of what frugality is all about, or is a disingenuous PR announcement that shows contempt for people's intelligence.

A while ago on this blog, I suggested that the President challenge his cabinet to reduce their administrative budgets by a percentage -- say, 10% -- and that they implement a hiring freeze to stop the growth of the federal workforce, to ensure that stimulus dollars go to local communities, not growing DC bureaucracies. Do more with less -- that's what good organizational managers should always try to do.

Instead, we're told that one cabinet secretary figured out how to save a million or so buying office supplies in bulk from Staples. (Guess the Bushies never captured that low-hanging fruit!).

C'mon Mr. President, set the bar higher than that.

Paul Krugman's commentary from 2003, when the deficit was $374 billion.

It has been obvious all along, if you were willing to see it, that the administration's claims to fiscal responsibility have rested on thoroughly cooked books. [...] There's no mystery about why the administration's budget projections have borne so little resemblance to reality: realistic budget numbers would have undermined the case for tax cuts [2009: spending increases & new programs]. So budget analysts were pressured to high-ball estimates of future revenues and low-ball estimates of future expenditures ...

Furthermore, this time huge deficits have emerged [2009: increased] just a few years before the baby boomers start retiring and placing huge demands on Social Security and Medicare. ...

But haven't administration officials said they'll cut the deficit in half by 2008 [2009: 2013]? Yeah, right. I could explain in detail why that claim is nonsense, but in any case, why bother with what these people say? ...

The last defense of the budget deficit is that it helps a depressed economy — to which the answer is "yes, but." ...  And yes, deficits are appropriate as a temporary measure when the economy is depressed — but these deficits aren't temporary ...

Still, do deficits matter? Some economists worry, with good reason, about their long-run effect on economic growth. But I worry most about America's fiscal credibility.

You see, a government that has a reputation for sound finance and honest budgets can get away with running temporary deficits; if it lacks such a reputation, it can't. Right now the U.S. government is running deficits bigger [2009: much, much bigger], as a share of G.D.P., than those that plunged Argentina into crisis. The reason we don't face a comparable crisis is that markets, extrapolating from our responsible past, trust us to get our house in order.

But Mr. Bush [2009: Mr. Obama] shows no inclination to deal with the budget deficit. On the contrary, his administration continues to fudge the numbers and push for ever more tax cuts [2009: spending increases & new programs]. Eventually, markets will notice. And tarnished credibility, along with a much-increased debt, is a problem that Mr. Bush [2009: Mr. Obama] will pass along to other Congresses, other presidents and other generations.

The 2009 deficit is estimated to be $1.7 trillion.  So take Krugman's 2003 criticisms and multiply them by 4.5.  And the long-run deficits are much, much worse, too.

Now, there are legitimate - if unproven - economic arguments that, in the absence of many monetary options, rapid and very temporary fiscal stimulus/deficit spending can be beneficial in reducing the deadweight loss of a potential output shortfall.  But these are not temporary deficits. 

• They are structural - even under the administration's absurdly optimistic economic assumptions, the deficits remain very large. Under the CBO's economic assumptions (pdf), they never go below $658 billion.
• They are permanent - CBO estimates the 2019 deficit at over $1 Trillion (pdf).
• They are driven by entitlements - Entitlements currently amount to about 45% of the federal budget, and that percentage increases dramatically in coming decades.  Yet Obama wants to dramatically expand entitlement spending (e.g., health care).

Republicans irresponsibly ran up enormous deficits during the Bush administration.  Democrats are now doubling down on the disaster.   Republicans and Democrats have played a game of chicken with tax cuts and spending in recent decades.  That's been a major strategic mistake.  Democrats have the advantage, because the majority of long term spending is structural.  When the bill comes due, taxes or inflation will rise dramatically.  For everybody.  At all income levels. There's simply no way around it.

"There are some things we have to do at home to get our house in order. No. 1 is we shouldn't be running up budget deficits." - Barack Obama - May 2006

BOTTOM LINE UP FRONT: We need to win the battles over definitions, principles and policy when it comes to fiscal matters.

President Barack Obama has signed the $410 billion omnibus spending bill, and has broken yet another promise that he made during the campaign. Apparently, there was some debate in the Oval Office over what to do with the bill:

"White House aides said they debated whether the president should sign an omnibus spending bill that includes more than 8,500 pet projects worth $7.7 billion.

"White House counselor David Axelrod suggested a veto would send a strong signal that Mr. Obama's Washington really would represent change. But the president decided it wasn't worth adding a fight with his own party onto a plate that is already overly filled."

We can also surmise that Obama was too embarrassed to sign the bill in public. Check out these tweets from ABC News' Jake Tapper:

jaketapper: "Why are you not signing this bill in public?" the president was asked after he talked about earmark reforms he'd like to see. no answer.

jaketapper: president obama signed the omnibus spending bill...no photographs allowed.

I didn't think too much more about it until Patrick Ruffini, @thingsbreak and I had this short Twitter conversation:

PatrickRuffini: GOP should call for a total ban on earmarks in light of the economy and the deficit. Every day we don't do so we seal our irrelevance #tcot

alaskan: @PatrickRuffini Problem is that there's wasteful spending that aren't earmarks. Need to find a way to describe appropriate public goods.

thingsbreak: @PatrickRuffini But renouncing rather than reforming is political suicide. Earmarks are not intrinsically evil but abused. Agree/disagree?

PatrickRuffini: @alaskan @thingsbreak Earmarks are the most visible and easiest to fix symbol of how Republicans have lost their way

I agree with Patrick that earmarks are the most visible symbol. But that's exactly the problem. I don't agree that it's enough for Republicans to fix "symbols" of how we've lost our way. I don't agree that we need to focus on symbols. Yes, we need to fix the abuse of the earmark process by reforming it. But the fact is that not all earmarks can be construed as wasteful spending and not all wasteful spending are in earmarks.

At the Heritage Foundation's Conservative Bloggers Briefing, I mentioned this to Congressman Tom Price (R-GA), chairman of the House Republican Study Committee, and asked him how we can move away from discussing earmarks and move towards discussing wasteful spending. Price went on to talk about the growing deficit and debt, and said that we have to communicate these large numbers to the American people. I don't think this is quite enough.

It's easy to come up with rhetoric denouncing "the evils of earmarks," but what we should be focusing on substantively is wasteful spending. Republicans should take three concrete steps to revive conservatism in sound fiscal policy: (1) defining public goods and wasteful spending, (2) reformulate principles that voters can connect with, and (3) promoting new fiscal processes and policies that can achieve less spending, more transparency and better prioritization.

(For details on these steps, read below the fold.)

I'm tired of hearing the Robert Gibbs, the Obama team, and my liberal friends claiming we're criticizing Obama's budget but that we don't have any cogent policy solutions of our own. Newt has always been a font of ideas, almost too much so. So I'm starting this thread to ask, if you were President, what policy and budget priorities would YOU be sending to Congress.

Brave fellow and glutton for punishment that I am, I'll go first. It's by no means complete (no housing policy for example), but it's a start.

My message to Congress is in four parts. First, stabilize the economic ecosystem and stop the fear that's spreading now to all sectors of the economy as they assess the impact of the recession combined with radical reforms like health care reform and energy policy.

1. Table the cap-and-trade debate until economic growth returns for at least two straight quarters.
2. Table major health care reform til 2010, but help the uninsured and our emergency rooms through Medicaid and S-Chip, and continue discussion of Community Health Centers as a small-scale solution targeting medical services to the uninsured.

Second, we need to have tax policy that attracts investors back to the markets and allows for capital formation that will drive business creation, expansion, and jobs in the private sector -- and keeps some money in the pockets of individuals so they can spend, save, or pay down debt.

1. Permanent indexing or elimination of alternative minimum tax
2. Leave Bush tax cuts in place til 2012
3. Cut or eliminate the death tax
4. 5-year tax holiday for long-term cap gains
5. 5% reduction for short-term cap gains

Third, the federal bureaucracy needs to manage the budget responsibily. In business, millions of managers are challenged every year to reduce expenses while maintaining output. In bad times, those reductions are steeper, and pay is frozen or cut. Time for government to do the same. Items 6-7 are already in the Obama budget.

1. The President should defer his salary for two years, be an example to those greedy CEOs.
2. Implement a 2-year freeze on Congressional compensation (including staff)
3. 5% across the board reduction in administrative and operating expenses for all federal departments and incent managers to acheive these reduction through bonuses
4. Freeze all discretionary spending, except for unemployment compensation
5. 50% cut to travel and entertainment budgets in the legislative and federal branches
6. Account for supplemental spending estimates (wars in Iraq, Afghanistan) in the budget
7. Means-testing for agriculture subsidies

Fourth, we need an energy policy that protects the environment and improves our security by expanding the role of non-fossil fuels in our energy mix, while keeping costs low.

1. Increase the tax write-off for installation of solar panels from 30 to 65% for residences and businesses
2. Fund and accelerate licensing to build 10 new nuclear power plants in 3-5 years to power the electric grid and hybrid cars
3. Provide new incentives for domestic natural gas production and use it as a transitional energy source 

Back in the Contract with America days, a Balanced Budget Amendment was a major tenet of Republican policy, and a couple of times, it came close enough to passing Congress to inspire furious lobbying and vitriolic sky-is-falling claims from the Democrats. 

A balanced budget requirement isn't some radical pie-in-the-sky idea. 49 out of 50 states have it. The good news is that it works -- those states are actually forced to balance their budget. The bad news is that it's often ugly, with drastic spending cuts and tax increases in many states in the current budget year. 

Albeit more responsible than rampant deficit spending at the federal level, the states aren't any less short term in their thinking than the feds. In good years, state governments rush to spend the surplus only to abruptly cancel programs in a recession -- because there's no real incentive to bank surpluses against a downturn or use state rainy day funds. A budget $5 billion in surplus is just as balanced as one with $0 in surplus, so the politicians might as well spend the money currying favor with voters.  

The only way I can think of to stop this problem is to extend the horizon of the balanced budget from one year to five years. Essentially, the budget would have to be in balance over the course of 5 years, covering most recessions with 2 or 3 years of recovery. 

In bad times, states could deficit spend -- by no more than the surpluses of the previous four years. In good times, states would be forced to bank surpluses -- particularly if the past few years were economically tough. 

One downside is that politicians use it to recreate the present, with budgets just barely in balance across the board, but more likely than not, the politically convenient thing to do would be to slip into a deficit for one or two years, thus kicking off a virtuous circle where subsequent years' budgets would not only have to be in balance, but the extra debt accumulated during a recession would have to be paid off. This could head off irresponsible spending binges in good times and keep state budgets on more of an even keel. 

It's true that budgets wouldn't have to be balanced every year -- though the overall fiscal impact is the same -- but it sure beats the farce of Washington needing to bail out the states when they run off the rails. 

Since none of our so-called leaders are going to present an alternative economic recovery package, I'll do it myself.  Items are in no particular order except the order in which they came to me.

1) Slash the Corporate Income Tax Rate to 15% - The United States currently has the Second Highest Corporate Tax Rate in the World.  This puts our companies at a gigantic competitive disadvantage internationally and retards both job growth and the stock market here at home.  Cutting corporate taxes will spur a business led investment boom in the United States.

2) Make Bush Reductions in Capital Gains and Dividends Permanent - While I would love to slash these grossly counterproductive rates further, that's not feasible politically at the moment.  The next best thing would be to send a permanent signal to financial markets.

3) Abolish the Employer Half of the Payroll Tax - As liberals frequently point out, 80% of taxpayers pay more in payroll taxes than income taxes.  They deserve a big tax cut.  This will also act as a major job creation mechanism.

4) Pass Colombia, South Korea, and Panama Free Trade Agreements - This move is more symbolic than substative, however, it is crucially important.  Passing these agreements would signal to our trading partners that the United States will not turn protectionist like we did in the 1930's.

Passing the Colombia agreement would also weaken an increasingly despotic Hugo Chavez.

5) Establish a 15% flat rate on All Income - This will leave Americans with more money to spend, invest, or do whatever the heck they want to do with it.  It will also do away with the deadweight loss from tax code complexity.  Many other Countries have done this successfully.

Should this prove politically unfeasable, we should still strive to do this for everyone except the top income tax bracket.

6) Create A National Market for Medical Insurance - Rising Medical Costs have been a major economic drag for the past decade.  While the reasons for this are worthy of their own blog post, creating a national market for Medical Insurance instead of 50 separate state markets is the easiest way to lower costs.

7) Drill, Baby, Drill - In addition to harming those nice guys in Tehran, Moscow, and Caracas, increased energy production at home will create oodles of jobs.  It might even make the auto bailout a moot point.

8) Immeadiate Expensing for Business Investment - This will also create a boom in business investment.

9) Boost Defense Spending - This is a policy I support for other reasons.  That said, defense spending has a higher Keynesian Multiplier than anything President Elect Obama is proposing.

10) Abolish the Alternative Maximum Tax - This wildly unfair tax should just be abolished.  I don't care about the rationale.

11) Abolish Sarbanes/Oxley - This onerous regulation, passed during the Enron panic, drives capital and businesses overseas without preventing fraud at home.  Repeal of SarBox would ignite a stock market boom!

12) Abolish Mark to Market - This obscure accounting rule forces companies unnecessarily to lower the value of their assets relative to what they could be sold for.  This was a major factor in the credit freeze.

13) Abolish the Death Tax - Any change in tax policy that both antagonizes liberals and hurts Warren Buffet must be a good idea.

Liberal  Simsbury First Selectwoman (i.e.Mayor) Mary M. Glassman had a startling revelation today over Connecticut's economic crisis. Doing a state capitol presser today, she revealed

 “We can’t come up here and ask the state for more money and we can’t go back to our communities and ask our taxpayers for more money.”

Funny how she was more adamant about tax and spend policies when she ran for Lt. Governor in 2006, .supporting the "millionaire's tax"

Government should live within its means. What a novel concept. Of course, in Connecticut Democrats sound positively disgusted that the economy and those cranky voters have put an end to the usual ping-pong of raising state taxes one year, local taxes the next.  

The Democrats "own" government now. Let's see how they pay for and/or break their promises.

H/T to Matt Stoller for noting that Barack Obama abandoned another centrist position that he has been running on. No more PAYGO:

Tucked into tonight's debate was a little noticed statement from Obama about fiscal responsibility and what he'll have to cut.  He talked about how the country needs to live within its means and so he supports PAYGO, but importantly, also said we'll have to get back to that after we get through these rough economic times.  I don't have the exact quote but it's very good news that he supports a Keynesian stimulus, and hopefully he'll be able to bring the Blue Dogs along.  They want to renounce the stupid PAYGO rules, because making all policy revenue neutral prevents obviously good investment choices like bonding out government revenues to build mass transit, new energy systems, etc.

What other respnsible, centrist positions will Obama abandon? And are Republicans willing to fight to peel off Democratic Blue Dog votes to win a rules fight on PAYGO in a time of a trillion dollar deficit?

While it would seem disinegenuous, given previous objections to PAYGO that it prevented tax cuts. But tax cuts aren't exactly on the horizon. Matt gives us the schedule::

The first discussion of any import within the new Democratic caucus will take place on November 17, when the caucus decides the rules they will vote on in January.  Those rules may include PAYGO or they may not; hopefully if they do include PAGYO there will be exceptions for investment activities that will eventually produce revenue.

Republicans and responsible people (only partial overlap) have between November 17th and some time in early January.