海角大神

No fair, 鈥淏rooks鈥� has known me here too long and gave away the 鈥渂aselines matter鈥� punch line to yesterday鈥檚 鈥渏oke鈥�:

鈥淐ould you loan me ten dollars but just give me five? That way you鈥檒l owe me five, I鈥檒l owe you five, and we鈥檒l be even.鈥�

Conveniently, today the Congressional Budget Office released their , so I have some updated numbers for my Bush/Obama tax cuts version of that joke:

President Obama: 鈥淐ould you loan me ten dollars $2.65 trillion for 10 years鈥� worth of all of the Bush tax cuts but just give me five about $2 trillion for the 鈥渕iddle-class鈥� ones? That way you鈥檒l owe me five, I鈥檒l owe you five, and we鈥檒l be even about $700 billion, and I鈥檒l say 鈥渘o problem, keep it,鈥� and I鈥檒l claim to have reduced the deficit by that $700 billion.鈥�

Some footnotes to that joke:

Note Table 1-7 on page 24 of the 鈥搕he table showing policy alternatives not included in the CBO current-law baseline (which assumes the full complement of the Bush tax cuts鈥揳nd AMT relief鈥揺xpire at the end of this year). Extension of the Bush tax cuts (EGTRRA and JGTRRA) in full costs $2.65 trillion over ten years, without counting the cost of AMT relief or any interaction with AMT relief. In their previous , CBO said President Obama鈥檚 proposed extensions of the Bush tax cuts would cost $2.15 trillion, but that included the interaction with AMT (not the cost of extended AMT relief itself though), so I figure it鈥檚 maybe still around $2 trillion for the apples-to-apples comparison鈥搃mplying the difference of around $650-$700 billion that President Obama claims to 鈥渟ave鈥� by not extending the upper bracket tax cuts.

My main point in relaying this little 鈥渏oke鈥� is to say that President Obama is proposing to deficit finance (increase the deficit by) $2 trillion in extended Bush tax cuts rather than $2.7 trillion; he is not proposing to reduce the deficit relative to current law in forgoing extension of the upper-bracket tax cuts. And those figures don鈥檛 even count associated net interest costs, by the way.

鈥�.

And here are a few other things I found interesting in today鈥檚 CBO report:

1. Summary Figure 1 on pg. xii: always my favorite chart, but it strikes me how it shows how far off the average revenues and average outlays are from current reality now鈥揳nd how even over most of the time series going back (1970-now) neither revenues nor outlays stay that close to those averages, even though those are the historical averages! There are pretty wild swings, and maybe the political and policy tendency is to not let the deficit get in the unsustainable range (>3%) for too long, rather than not let revenues get too far from 18% or outlays too far from 21%.
2. Summary Figure 2 on pg. xiii: maybe my second-favorite chart from this report, on net interest and its determinants in the baseline 鈥� it actually contains three charts (variables). The top chart shows interest rates rising over first five years but pretty level over next five; the second shows debt/GDP rising over next couple years but then stabilizing (under baseline policies); and yet the third shows interest spending/GDP continuing to rise throughout the ten-year window. The latter trend puzzled me at first (given the first two), but then I realized that I think it reflects what happens as the debt is rolled over, as we start rolling in higher-interest debt and rolling out (retiring) the lower-interest debt.
3. Table 1-3 on pg. 5: revenue growth rates are very dramatic and reflect both expiring tax provisions (鈥漧argest tax increase in American history鈥�, baby!) and recovering economy. I think it鈥檚 worth pointing out that only with this dramatic 鈥渃atch up鈥� in revenues do we get the more sustainable situation where revenues are projected to grow faster than outlays over the rest of the ten-year window (even if not lasting for long in terms of the longer-term outlook), allowing the gap to close to more sustainable levels of the deficit (<3% of GDP).
4. Page 36 in the economic outlook chapter: This provides a very clear illustration of how CBO鈥檚 alternative fiscal scenario, where most of the Bush tax cuts (the ones Obama proposes) are extended, would increase GDP level and growth over the baseline forecast but only in the first 2-3 years of the window. It underscores how the economic effects of deficits differ in the short-term vs. longer-term鈥搘hy deficits (and deficit-financed 鈥渟timulus鈥�) may be helpful now but harmful if they persist beyond the next couple years鈥揳nd hence why the current weakness in the economy does not justify permanent deficit financing of even Obama鈥檚 鈥渕iddle-class鈥� portions of the Bush tax cuts (which are the only portions CBO now includes in their 鈥渁lternative fiscal scenario鈥�).

鈥�which brings me to an important fiscal policy lesson (鈥漷eachable moment?鈥�) to the Obama Administration and Congress that comes out of the CBO report: the current-law baseline shows us a path (not the only path, but at least a path) to sustainable budget deficits within the ten-year window. We don鈥檛 literally have to stick to current law to get there, but we need to stick to PAYGO (without exemptions) relative to current-law revenue and spending levels to get there. We need to literally pay for things as we go along, including paying for continued policies, if those policies aren鈥檛 already continued under current law. And if we can鈥檛 or aren鈥檛 willing to pay for extending these policies, then perhaps we 蝉丑辞耻濒诲苍鈥檛 extend them鈥揺specially when it doesn鈥檛 make economic sense to extend them.

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