Reading Between The Lines Of President Obama's Budget

Obama Oct2010

Photo: White House flickr

In a recent column, I argued that the president’s budget, which was released on Feb. 14, doesn’t deserve the attention it gets since Congress always starts from scratch anyway and mostly ignores every president’s proposal. But this does not mean that the budget document is worthless.On the contrary, it is an extremely valuable compendium of data and analysis on a wide range of fiscal, economic and social issues.

The physical budget is a large document that is quite expensive if one wants to buy a printed copy. Fortunately, it is available online for free. Many of the tables are even available in spreadsheet form for those who want to do their own analyses.

The budget itself is relatively short and lays out the president’s proposals in broad form. The nitty-gritty details are in the appendix, a huge document with information on every department, agency and line item that Congress must appropriate funds for.

The two budget documents I use most often are the historical tables, because many aspects of the budget cannot be comprehended without looking at trends, and the analytical perspectives volume, which contains a great deal of interesting analysis on a variety of budget-related topics.

One chapter I always read in the analytical perspectives volume is the one on long-term budget trends. It makes clear that Medicare, Medicaid and Social Security are the principal drivers of spending. Spending on these three programs is expected to rise by 3 percentage points of the gross domestic product (GDP) by the year 2030 and consume 60 per cent of non-interest spending. The main driver is the ageing of the population, as the giant baby boom generation retires. The fact that health spending has long been rising faster than the rate of growth of the economy is also important.

The long-term trends chapter also makes the point that insofar as we are concerned about the debt and deficits, the government’s revenue-raising capacity is also a critical factor. Although Republicans simply deny that tax cuts have any effect on the deficit, anyone with a modicum of common sense knows that this is ridiculous.

According to the historical tables, federal revenues will only consume 14.4 per cent of GDP this year – the lowest percentage since 1950. The postwar average is about 18.5 per cent and there were many very prosperous years when revenues were considerably higher. In the late 1990s, they averaged more than 20 per cent of GDP, which was a key reason why we ran budget surpluses.

The budget somewhat implausibly assumes that the ineffective Bush tax cuts will finally be allowed to expire at the end of 2012, as they are scheduled to do under current law. This causes revenues to raise to 17.9 per cent of GDP in 2013, 18.7 per cent in 2014, 19.1 per cent in 2016, and 19.3 per cent in 2016. In the long run, the budget assumes that revenues will remain at about 20 per cent of GDP, even though total government spending will continue to rise to more than a third of GDP by 2080.

For revenues to be allowed to rise this substantially in such a short period of time will require President Obama to renounce his pledge never to raise taxes on those with incomes below $250,000; essentially campaign on allowing the tax cuts to expire on schedule, and still get re-elected in 2012. Those are three really big “ifs.” We can assume that the Republican nominee will insist not just on permanent extension of the tax cuts, but on still more big tax cuts on top of those, while continuing to insist that tax cuts have nothing to do with the deficit, which is terrible and must be reduced.

The budget makes the important point that tax reform is necessary to ensure that the government’s revenue-raising capacity is adequate to fund the health and retirement benefits that people expect. Economists know how to design a tax code that can raise more revenue without increasing the economic burden of taxation. That is because some taxes impose a greater economic burden, which economists call the deadweight cost of taxation, than others. Thus tax reform has the potential to increase revenues while stimulating growth at the same time.

This brings me to a chapter entitled, “Interactions Between the Economy and the Budget.” It’s useful because it allows anyone to forecast budget trends based on their knowledge of things like inflation, interest rates, and real growth in the economy. Thus we see that if inflation is one percentage point higher than forecast every year for the next 10 years, it will cause federals spending to rise by a total of $1.4 trillion over that period. But revenues will rise by $2.8 trillion, thus reducing projected deficits.

Many conservative economists, like Larry Kudlow, continually claim that faster growth is all we need to get out from under our debt problem. The budget tells us that if real GDP grows 1 percentage point faster over the next 10 years then federal receipts will cumulatively be $2.9 trillion higher and spending will be $349 billion lower, for a total budget improvement of $3.2 trillion. That would obviously help a lot. But with the debt expected to rise by more than $8 trillion over the next 10 years even with a fairly sharp rise in revenues, the economy would essentially have to grow twice as fast as its historical trend to keep the debt from rising.

Furthermore, for faster growth to reduce the deficit it would have to arise immaculately, so to speak, and not through enactment of further tax cuts, because that would take away the higher revenues that are the principal reason why faster growth improves federal finances. Moreover, getting a significant, sustained rise in real GDP growth is very, very hard to do. In short, the idea that all we have to do is enact still more tax cuts and that this will automatically raise growth, which will make the deficit evaporate, is rank nonsense.

Moving on, I always like to look at the chapter on federal borrowing and debt. One of the points it makes is that the debt limit applies to what’s called the gross federal debt, which includes Treasury securities held by the Social Security trust fund and other government trust funds. These balances will continue to rise even if the federal budget were balanced, meaning that the debt limit would still have to rise from time to time. This is among the reasons why refusing to raise the debt limit, as many Republicans insist they will never do, is really dumb.

This chapter also makes the important point that the federal government does a lot of borrowing that is unrelated to the budget. Government-sponsored enterprises, such as Fannie Mae and Freddie Mac, the big housing agencies, do a lot of borrowing to maintain liquidity in the mortgage market. There are also loan guarantees for student loans and a variety of other purposes.

Finally, this chapter presents data on domestic and foreign holding of Treasury securities. It shows that 40 years ago, almost all of the national debt was owed to Americans; we literally owed it to ourselves. But now, close to half the debt held by the public is owed to foreigners, primarily the Chinese, Japanese, and British. In many cases, however, these debts are not held by private individuals, but by foreign central banks, which use dollars as backing for their own currencies.

The budget also contains a chapter on federal regulation because the Office of Management and Budget, which compiles the budget, oversees federal regulatory policy. One of the things OMB strives to do is ensure that regulations meet a cost-benefit test. If at all possible, the benefits should exceed the costs.

Of course, conservatives routinely deny that there are any benefits whatsoever to federal regulation; they simply impose unnecessary costs. However, it is obvious that many health and safety regulations confer enormous benefits, and we also know from experience that corporate America often cuts corners in pursuit of profits. Consequently, there are many cases where the benefits of a regulation exceed the costs.

Lastly, the budget contains a chapter on social indicators, a laundry list of various statistics that tell us how well we are going as a society in improving living conditions. Many of these indicators, such as the unemployment rate and real median family income, are fairly well known. Others are more obscure.

For example, we see that the share of total income going to the lower 60 per cent of households has fallen from 32.3 per cent in 1970 to 26.6 per cent in 2009. At the same time, the share going to just the top one per cent of taxpayers has risen from 7.8 per cent in 1970 to 17.7 per cent in 2008. Obviously, if the benefits of growth are not widely shared and are going disproportionately to the well-to-do, it’s something people ought to care about.

We also see that air pollution has fallen sharply over the last 30 years according to a variety of indicators in the budget, energy consumption and greenhouse gas emissions per capita are trending downward, infant mortality has fallen from 26 per 1000 live births in 1960 to 6.6 in 2008, life expectancy at birth has risen from 69.7 years in 1960 to 77.8 in 2008, the percentage of the population that smokes has fallen from 37.4 per cent in 1970 to 20.6 per cent in 2009, the violent crime rate has fallen from almost 5 per cent to just 1.7 per cent in 2009, and so on.

There are, of course, many other things in the budget document worth calling attention to. The point I would like to leave is that the budget is much more than just some proposals relating to taxes and spending; it’s a resource that tells us a great deal about how the government operates and its impact on society. Sometimes that impact is for ill, but often for the good. Those looking for good ammunition to counter the relentless disparagement of government that comes from Republican politicians and right-wing think tanks can find it here.

This article originally appeared at The Fiscal Times.

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