A Budget Comparison

Now that the House and Senate have passed their respective budgets, I thought it might be useful to do a comparison, at a high level, between the budgets.  The chart below provides a very simple way of looking at the budgets in aggregate, a level that is appropriate, given how unspecific budget resolutions tend to be.

Let's start with the spending side of the equation.  The CBO baseline has spending growth at 5.3% per year from 2013 to 2023.  The Ryan budget is at 3.4% per year and the Murray budget is at 4.8% per year.  All of these are higher than the projected rate of growth of inflation plus population.  Thus, real government spending per capita will increase under each of these budgets.  For example, under the Murray budget, real spending per capita grows from $11,229 in 2013 to $13, 697 in 2023.  In other words, even after accounting for the growth of inflation and population, the Murray budget spends about 20 percent more per person by the end of the 10 year period.

On the revenue side, the budgets are all pretty close.  The Murray budget increases taxes more than the Ryan budget (which basically duplicates the CBO baseline).  But again, all budgets grow spending far faster than GDP, meaning government revenues will expand faster than the growth of the economy.

What is interesting from my perspective is the 2.1 percentage point gap between GDP growth and forecast inflation plus population growth.  As I have discussed before, that gap is our budget opportunity.  A budget that grows spending at the rate of inflation plus population, while growing revenue at the rate of growth of GDP will always balance.  For example, starting from our forecast position in 2013, a budget designed along these lines would balance within 15 years, not quite as fast as the Ryan budget but a lot faster than anything else that has been proposed.

Another Silly NYT Editorial

One can always count on the New York Times editorial board for misleading commentary on matters budgetary.  Here is their latest installment. 

First, we have the customary dipsy doodle on tax expenditures, as if they were actual expenditures

Tax breaks work like spending. Giving a deduction for certain activities, like homeownership or retirement savings, is the same as writing a government check to subsidize those activities. Functionally, they mimic entitlements. Like Medicare, Medicaid and Social Security, they are available, year in and year out, in full, to all who qualify. Yet in budget talks, Republicans ignore tax entitlements, which flow mostly to high-income taxpayers, while pushing to cut Medicare, Medicaid and Social Security.

Giving a deduction is not the same as writing a government check unless one posits that the taxes necessary to write the check would come only from the person who received the deduction.  The fact that you can structure two things to accomplish the same task does not mean they are the same thing.  To take a very trivial example, I can use sunlight or burn natural gas to heat a substance but that does not mean that they are the same thing.

In accounting terms it's the difference between a counter (or contra) credit and a debit.  Although they have the same effect on net worth, they are not the same thing.  But this is the norm for those who favor higher taxes.  If we can equate higher taxes with lower spending, maybe we can confuse the masses enough to get what we want.

But that part is normal for the Times editorial board and is really an irreconcilable difference of opinion.  What's more annoying is the juxtaposition of two things.  First, we have a general description of the size and scope of tax expenditures.

Each year, the government doles out tax breaks worth $1.1 trillion. That is more than the cost of Medicare and Medicaid combined. It is more than Social Security. It tops the defense budget, and it tops the budget for nondefense discretionary programs, which include most everything else.

To get to the $1.1 trillion, one needs to include personal and corporate tax breaks, envision a tax code where capital income is taxes like wage income (which has never happened but maybe should).  The comparisons are tailored...as an example Medicare and Social Security taken together are larger than $1.1 trillion per yer and yet the Times ignores that comparison. 

But the editors follow this up with three examples of tax expenditures: Carried Interest, Nine Figure IRAs, and Like Kind Exchanges.  Of these three, the Times says carried interest costs the Treasury $13.4 over a decade or $1.3 billion per year.  Otherwise know as 0.1% of total tax expenditures.  Like Kind Exchanges cost the government $3 billion a year (or 0.3%) though the editors claim "...the amount could be much higher."  As for nine figure IRAs, the Times only says "[n]o one knows how much tax is avoided this way."

So to review, equate tax increases with spending reductions, quote a really big number to establish how important this is and then cite specific examples that account for less than 0.5% of the number.  I do wonder sometimes how things like this make their way into one of the nation's leading newspapers.

Misplaced Priorities and Wasted Time

Let's turn to the Republican budget from Congressman Ryan and the House Budget Committee.  At one level, based on my prior posts, one could think I'd be supportive of the Republican budget.  But, I'm not, at least not at any level beyond principle.  At the level of principles, tax reform is a good idea and the budget should be balanced by cutting spending, I find myself in line with the budget.  But beyond that level, I'm almost entirely misaligned.

In particular, there are four problems I see with the Ryan budget.

1.  Obfuscation - nowhere in the Ryan budget are there numbers comparable to the CBO numbers to allow for easy comparison between the Ryan budget and the CBO baseline.  This is a substantial issue for those who would like to have comparability between numbers.

2.  Military spending - the Ryan budget clearly increases "base" military spending, that is military spending less OCO spending.  In the Ryan budget, total defense spending looks to be roughly in line with the CBO baseline but this conceals a switch between "base" spending and OCO spending.  In other words, looking at only base spending, the Ryan budget proposes spending more than the CBO on defense.

3.  Entitlements - within the budget window, the Ryan budget does relatively little to address entitlements other than ending the spending associated with the ACA.  Medicare spending (net) is about $100 billion less over the 10 year period and social security spending is exactly the same as in the CBO baseline.  Thus, more than half of manageable (ex-interest) government spending is spared from any spending restraint.  As a consequence of this, Ryan is forced to make very difficult reductions in spending on the poor, a very bad tradeoff in my view.

4.  Taxes - Ryan continues to advance ill thought out and ill defined tax plans in his budgets.  The 10/25% rate and I'll figure out the $5 trillion plus of tax increases later argument is old, tired, and unnecessary.  Ryan could simply content himself with the notion of revenue neutral tax reform and leave it at that.  The tax plans have no impact on the budget whatsoever and thus are nothing more than wasted time in the discussion.  Tax reform will or will not happen in the future.  Offering some specifics without all of them causes much more trouble than it is worth.

So all and all, the Ryan budget is deeply disappointing, particularly since a budget that asked a little more of defense and spending on the elderly and ignored the tax discussion would have been a better answer and might have been more defensible, at least for those willing to engage in the debate.

Adjusting the Baseline and Changing the Message

This week saw the drop of three major budget proposals, from House Republicans, Senate Democrats, and the Congressional Progressive Caucus.  They are all bad for various different reasons.  And in particular, they are bad at the way they represent the numbers in their descriptions.  Each plays fast and loose with "the baseline" and various other definitional elements to make comparisons that are deceptive at best.

I'll be making several posts about the various budgets over the next couple of days.  I want to start with the "centrist" budget, the one from the Senate Democrats.  One major issue is the adjustment of the baseline to create false impressions.

From the Senate Budget,

Achieves $975 billion in deficit reduction through responsible spending cuts made across the federal

budget: 

• $493 billion saved on the domestic spending side, including $275 billion in health care savings
  made in a way that does not harm seniors or families. 

•   $240 billion saved by carefully and responsibly cutting defense spending to align with the
  drawdown of troops in our overseas operations. 

• $242 billion saved in reduced interest payments

Well, that's about 0 for 3 in terms of accuracy.  If we look at the CBO baseline, the Senate budget spends $197 billion less on interest ($5213 billion versus $5410 billion), $41 billion less on domestic discretionary spending ( $6356 billion versus $6397 billion), $626 billion less on defense ($5829 billion versus $6455 billion), and $26 billion more on mandatory spending ($28964 billion versus $28938 billion).  So if we restate into the categories used by Senator Murray and use the CBO baseline versus the one the Senator invents, we get:

• $15 billion less on the domestic spending side
• $626 billion less on defense spending
• $197 billion less on interest payments
• Total spending reductions of $838 billion

In other words, relative to the CBO baseline, it's a typical Democratic plan on spending...cut defense spending and leave everything else alone since any savings in interest payments are the result of tax increases or defense spending reductions.

At a macro level, the Senate budget is more accurate on taxes, claiming $975 billion in tax increases when, in fact, there are only $923 billion in tax increases.  But beyond describing ways the savings might be attained, the Senate budget proposal is silent on how these tax increases will be created.  In fairness, this is the same critique that is leveled against the House Republican proposal at a multiple of the size of tax increases required.

It is not the case however that the Senate budget increases taxes by $1.5 trillion as reported at the Heritage Foundation or National Review.  Yes, the budget contains discussion of replacing the sequester and other things but it does not include those things in the budget and thus it is, in my view, incorrect to claim that the budget increases taxes by more than it actually does.

So to restate, versus the CBO baseline, the Senate budget

1. Increases taxes by $923 billion with no specification as to where those increases will fall
2. Decreases spending on the military by $626 billion.
3. Gets the rest of its spending reductions from reduction in interest related to the two above factors

Hardly a "balanced approach" but entirely consistent with normal democratic priorities.

The lesson here is whenever you see a budgeter building a "bridge" from the CBO baseline to one they say represents "current policy," get ready for some quick spinning.

Another Way of Looking at the CBO Forecast

You wind up reading a lot of these days about budget cuts.  Indeed, in yesterday's New York Times, you had Steven Rattner making the claim that the President and Congress had already introduced trillions of dollars in spending cuts.  Using a chart from the CFRB, Mr. Rattner argues that, including the sequester, we have already had $2.8 trillion of spending cuts.  And yet, as I have noted in the past, the rate of growth forecast in the budget is 5.3% over the next 10 years.

As the same time, the President likes to talk about the need for "a balanced approach" by which he means more spending and more taxes than are already projected.  So let's look at the projection.  What's below is the CBO forecast expressed in real per capita terms using the census forecast of population and the CBO forecast for inflation.

In real, per capita terms, spending growth over the forecast average 2.5% and that's after the spending reductions in the BCA and the sequester.  Over the same period, revenues grow by 3.4% per year.  So Mr. Rattner's claim of spending cuts to the tune of multiple trillions of dollars flies in the face of spending growing faster already than inflation plus population.

And the President's request for "a balanced approach" is actually a request for spending to grow faster than 2.5% per year in real, per capita terms and a request for taxes to grow faster in real per capita terms than 3.4% per year.

Such are the perils of baseline budgeting and the language around budgeting that is used in Washington.