Tuesday, February 12, 2013

A Balanced Plan?

The White House is fond of arguing that our changes in fiscal policy should be "balanced" between tax increases and spending cuts.  As a recent example, see this from Dan Pfeiffer.  In it, Mr. Pfeiffer refers as an example of the President's notion of balance to his proposal to the supercommittee.  So I decided to take a look at it in a little bit more detail.

The conclusion was surprising even to me.  The way I would suggest the math is "fair" would score the President's proposal at $70 in tax increases for every $1 in real spending cuts.  I wasn't expecting balance but I was expecting more balance than this.  Let me tell you how I got there.

The President and his team present this as a "balanced" proposal over and above the savings from the Budget Control Act.  The administration provides a convenient summary of its proposal in Table S-6.

American Jobs Act - $447 billion
Mandatory Savings - $(257) billion
Health Savings - $(320) billion
Cap OCOs - $(1084) billion
Tax reform - $(1573) billion
Interest savings - $(715) billion

When I first looked at the table, I didn't think much of it but then I started reflecting on the word choice.

The first thing that occurred to me was the use of the word "savings" in relationship to what others might call spending cuts.  I started by assuming it was just a word choice thing but then I decided to go look at table S-4 where the specific programmatic recommendations are made.

Here are some of the components of "Mandatory Savings" and their sizes:

Increase government fees charged by Fannie Mae and Freddie Mac - $27.5 billion
Increase the passenger aviation fee - $15.0 billion
Raising Unemployment Insurance taxes - $33.0 billion
Recoup financial sector assistance (a tax one presumes) - $30 billion

So of the $257 billion in mandatory savings, at least $100 billion are tax or fee increases.  This ignores increased copays for Tricare and other things that are individual costs.  So roughly 40% of the "savings" are actually tax increases.

In the administration's defense, most of the health savings are actual spending reductions, the largest of which is negotiating drug prices for Medicare.

But now on to the big items, the capping of OCOs and interest.  Capping OCOs is nothing more than not spending money we never intended to spend.  For example, we save $135 billion in 2021 according to this logic but not continuing the wars in Iraq and AfPak until that time.  Is there anyone who seriously expects those wars to be going at the current pace in 2021?  This is an accounting gimmick and nothing more.

Which brings us to interest.  First, it's worth noting that the interest number includes reduced interest from the BCA as well as these new items rather than breaking out the interest as would be more honest.  But more substantively, including the interest savings as a spending cut in the notion of balanced is ridiculous since it would allow a package that was all tax increases to have 15 percent or so of the savings come from "spending cuts."  As I've argued before, interest should be reported separately as it is not a policy change but the outcome of various policy changes.

All of which brings us back to the President's past balanced proposal.  Here's a quick restatement.

Phantom spending cuts (aka cuts that are reductions in money we never intended to spend) work out to $1.1 trillion.  Real spending cuts work out to about $25 billion over 10 years (remembering the President proposed $450 billion in incremental spending).  Tax increases are about $1.7 trillion.  So if we leave the phantom stuff and interest savings out, it's about 70 dollars in tax increases for every dollar of programmatic spending cuts.  An interesting definition of "balance" for sure.

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