Learnings from Iowa and New Hampshire

Yes the polls in New Hampshire only closed about 30 minutes ago but it appears there's enough insight to write a post now rather than tomorrow morning.  Here's a few things that I think we've learned and a few I think we haven't so far.

What we've learned

1.  Donald Trump has a passionate group of supporters who are with him as long as he's in it but he has a really hard time expanding that group.  Trump has lost the race among late deciders in both states and seems to be supported by a group of folks who are Trump or nothing.

2.  The split in the establishment lane helped Trump (and Cruz) enormously.  In a world where there were fewer of Kasich, Bush, Rubio, and Christie, Trump would still have won likely but it would have been close and Cruz would have gone from being "in the pack" to being far behind.  This is because neither Trump nor Cruz is a strong second choice.

3.  Trump and Cruz therefore would like as many people to stay in the race for as long as possible.

4.  Christie (probably) killed Rubio but he didn't help himself nearly enough.  His kamikaze attack was "successful" in the sense it did damage but he certainly looks like he's going down with his plane.

5.  A brokered convention, which I thought a bit of a long shot for a while, now looks pretty likely to me.  The Trump supporters aren't going anywhere.  Cruz has enough money, success, and pride to run all the way to the end and the winner of the establishment lane will have enough money as well.  In that scenario, I don't see a delegate majority coming for anyone.  Trump will consistently get 20 to 35 percent of the vote.  Cruz and the establishment candidate will split the rest in varying degrees.  There's simply no majority as long as all three are in it.

6.  Bernie isn't going anywhere any time soon.  He'll be in it to Super Tuesday at least and probably beyond.  His win probably does nothing more than preserve the status quo since it was neither big enough to change the narrative nor small enough to cast doubts among the faithful.  Look for the Hillary/Bernie race to get increasingly nasty.  Hillary's people really want him out and Bernie's people really increasingly don't like Hillary.

What we haven't learned

1.  No this win in NH doesn't make Trump the favorite to win the nomination.  Trump simply isn't likely to pull support as the field consolidates.  He is the most unlike the rest of the field, both in terms of policy and in terms of personality.  The chances of moving from establishment to Trump are nearly nil.  Maybe he picks up a few Fiorina supporters when she drops out but there aren't enough to matter and I think he won't get many.

2.  No, the New Hampshire results don't indicate that American wants national health care.  Trump voters are not voting for Trump because he wants national health care.  Bernie voters may well be but they are 50 percent of Democrats in two small and liberal states, hardly an electoral majority in a national election.

I may have more as things clarify themselves but that's my early read of it.

A Rorschach Evening

I was up fairly late last night watching a surprisingly interesting Iowa caucus outcome.  This morning, it appears to be pretty clear.  Hillary won (but barely), Cruz won (perhaps a bit unsurprisingly except to the pundits) and Rubio and Sanders did a lot better than people thought.

Today, each one of those candidates seems to be spinning pretty heavily that they won.  This truly is one where the outcome is heavily in the eye of the beholder.  I'm relatively neutral here in the sense that of all those running, I'd pick Kasich who has absolutely no chance of being the nominee.

So let me take it back to the three lanes I see in the race at the moment.

1.  The angry lane.  This is Trump on the Republican side and, to a degree, Sanders on the Democratic side.  Sanders to a degree because Sanders isn't nearly as angry as some of his supporters are.  He runs as more of a dedicated warrior than an angry one but his supporters are pretty clearly angry.  It wasn't a great night for the angry lane.  Trump dramatically underperformed despite very strong turnout.  Sanders overperformed but I don't think that was angry coming home to roost.

2.  The ideological lane.  This is Cruz on the Republican side and Sanders on the Democratic side.  Here, you'd have to say it was a pretty good night.  Cruz won and Sanders outperformed.  That said, I think Iowa is a bit of a different world than most of the country.  The winning play on the Republican side wasn't conservatism but faith.  Yes the two are linked but it's really the faith based conservatives who rule Iowa (Santorum and Huckabee anyone?).  That's pretty unique to Iowa.  On the Democratic side, the refrain (socialism) was the complete ideology but the electorate is particularly suited to the refrain.  Again, it doesn't seem likely that this resonates as well nationally as it did in Iowa.

3.  The traditional lane.  I'm going to shy away from the "E" word here.  This is Clinton and Rubio.  On the whole, it was a pretty mixed night for the traditional party types.  Yes Clinton won and Rubio beat expectations but the traditionalists Republicans and Democrats do seem weaker than most (including me) would have expected.  Across all the traditional candidates on the Republican side, you had a total vote count in the low to mid 30s.  And Clinton's showing of 50 percent is hardly anything to write home about given how far she has fallen in Iowa and the fact that she's almost sure to lose New Hampshire.

Ultimately, I still would bet on the traditionalists on both sides and suspect it's Rubio vs Clinton in the fall (barring crazy things happening).  The advantage traditionalist have is that they are acceptable to most people.  And in a 2 person race, which already has happened in the Dem race and should be a few weeks out in the Rep race, I think the traditionalist has to be the favorite.

A Few Thoughts on the Executive Power Debate

There's lots of discussion back and forth on various blogs on the executive power debate generating lots of commentary about whether its the dictatorial executive or the do nothing legislative that bears responsibility for the current standoff.  I'd like to argue that its largely the fault of the legislative but it has very little to do with the current Congress and a lot to do with the evolution of Congressional action over time.

In my view, it is in fact the case that the Congress is responsible for the rise of the executive state. Since at least the 1970s, Congress had gradually walked away from actually passing laws and more and more toward passing grants of executive authority. You can see this in the past in acts like the Clean Air Act (although I'd argue those who wrote it never foresaw its current application) and today in acts like the ACA and Dodd/Frank. The latter two acts were more or less massive grants of authority to the executive to "figure it out later."

Congress will claim that this is necessary due to the complexity of implementing these programs. But rather than letting it stop them, they have every incentive to keep doing so. They are allowed to duck responsibility for the legislation they write. Look at the outcry over the various implementing regulations around the ACA. Few/no Congresspeople are in trouble because of these largely because voters will "blame" the administration. And Congresspeople get to do it too. To take a simple example, Congress could have/should have expressed a point of view on what broad categories of benefits should be included in "minimum" coverage but they chose not to, not because they couldn't but because they didn't want to take the heat for doing so.

In broad strokes then, Congress over time has invited the executive to take control of the government. And, over successive Presidencies, the executive has been only too happy to do so, realizing over time, that as long as they control 40 percent of the votes in the Senate (to give a margin for error), there is more or less no brake on executive power. 

Sure, in my view at least, President Obama has gone further than his predecessors but he is simply continuing a tradition that was <i>created by Congress</i>. The administration (this one or any other) didn't take this power, it was handed it by Congress. Yes, the executive is doing even more than Congress intended but it's a question of degree rather than kind.

Until such time as the people begin to force Congress to pass real legislation as opposed to simply passing something that says in effect "the administration will write whatever rules it feels like as long as they relate to topic X," there is simply no hope. Executive power will continue to increase because Congress will continue to hand over power to the executive.

This is a bipartisan problem and really does require a bipartisan solution but, to be honest, I have no hope that such a thing will happen.

In closing, let me point out that I also think this change explains the increasing polarization in DC and in the country. In a world where Congress doesn't decide anything, there is no outlet for the citizens to sort out their differences. Executive fiat is not a good way to do compromise and yet, increasingly that is what we are reduced to.

Again, it is in the hands of Congress, not to compromise with the President or to do his will but to force the executive to do its will, not by silly lawsuits or threats of impeachment but by writing clear bills that do something clear, not long fuzzy bills that are impossible to understand. Will that potentially limit Congress's ability to affect major policy changes? For a time it might. But, in the long run, we would be a far better country for it.

Now This is Interesting

The always wonderful Tax Policy Center has just published a wonderful piece of work on taxes and spending since 2000.  You can find it here.  It will be the subject of several future posts, once I get through all 140 pages or so of it.

But I wanted to flag it for anyone who loves data.

Better and Worse Off Under the ACA

There's a bit of a raging debate going on over whether people are going to be better or worse off under the coverage provisions of the ACA.  In the end, the math is almost impossible to do since it probably ultimately comes down to a household by household discussion and the cross-subsidies in the ACA are too complex to untangle without a lot more data and a lot more time than is available to the average blogger with a job (aka me).

But I thought I'd take a bit of a run at this, attempting to be charitable to the proponents.  Starting from the current CBO estimates of impact on coverage, I made the following assumptions:

1.  People who lose coverage are worse off - this assumption is because the CBO analysis is on gross numbers, meaning the coverage losses are not people who net lose coverage.

2.  People who acquire coverage with subsidies are better off - this is a charitable assumption since some people who acquire coverage with subsidies will still be paying more than they did prior to the ACA.  If their health care usage is low, they will be worse off.

3.  People who acquire coverage without subsidies are worse off - this is a slightly uncharitable assumption since some people who have high health usage will be better off depending on their prior insurance status.  However since group 2 is much larger than group 3, the net of these two assumptions is probably slightly charitable.

4.  People who acquire coverage through Medicaid are excluded.  The reason for this is the Medicaid expansion is entirely separable from the rest of the ACA and the noise in the market is all about the non-Medicaid part of the program.

5.  Nobody else is assumed to be better or worse off.  Of course this isn't true since those with employer insurance may be better or worse off depending on the cost impact on their policies and the actual amount of health care they use.  Those who pay taxes for the ACA are clearly worse off since their coverage, even if unchanged, costs more.  But again, the intent was to be charitable to the proponents of the ACA

If you aggregate it all, you get the following picture

So, the best case for the ACA is 15 to 20 million people better and worse off with slightly more better off than worse off.  And note, this is the best case solution.  It's likely that many who are now required to buy coverage, even with subsidies, will perceive themselves to be worse off because of the cash flow implications of paying for insurance regardless of usage.

And this is a long way short of the administration's positioning that the uninsured population will be eliminated and nobody will be made worse off.

The final point I'd make is that the gap between the positioning and the reality is going to get worse, not better, at least for the next couple of years.

"Only 5 Percent" Could Come Back to Bite the ACA

Over the last little while, the defenders of the ACA have been making the argument that those hit by losing their existing coverage are "only" 5 percent of Americans.  Leaving aside the fact that many believe this is not true (and I plan on a more in depth post on winners and losers this weekend), let's try to put the 5 percent number in context.

If we look at the ACA impacts as projected by the CBO and reduce them to percentages of the US population, we get the following (by 2017):

Newly covered under Medicaid - 3.9%
Covered in exchanges (no subsidies) - 1.2%
Covered in exchanges (with subsidies) - 6.3%

So, even were we to assume that all people covered in the exchanges are better off (they aren't for reasons I'll go into this weekend), the byzantine portion of the ACA (as opposed to the straight up Medicaid expansion) affects "only" 6% of Americans.

I wonder when we'll hear that out of the White House.

It's Time for Conservatives to Embrace Welfare as We Know It

Rather than post an incredibly long response in a thread on a similar topic, I've decided to write a fairly long blog post instead.  The topic du jour I suppose is how do conservatives create an ideas driven approach that is palatable to Americans and sits in opposition to the social democratic practices of the modern Democratic party.

My answer to this question is too long for a single blog post but I'll start today by talking about the entitlement state, the place where I think there is the most opportunity but where there is also a significant change in mindset required.  My central thesis is that conservatives should embrace welfare as we know it to change the nature of the dialogue in Washington.

Today the dialog is about those who want to help versus the anti-governmental anarchists.  Leaving aside the fact that neither of these characterizations is true, it's quite easy for the caricature to emerge.  Modern Republicans, of whatever stripe, seem opposed to any extension of benefits pretty much at any time (with exceptions for farm supports and benefits for the elderly).  This is simply an untenable approach, and it's devoid of principle as well.  As an example, why are the elderly worthy of benefits and the poor not?  And no, "because they paid for their benefits" isn't a rationale.  We don't use that for anything else.  I pay taxes.  Am I therefore eligible for SNAP?  Fortunately for me, I am not.

Rather, the right approach for the modern conservative is to embrace the government's role (yes, even the Federal government's role) as guarantor of last resort.  This means you are for Medicaid, SNAP, TANF, and a whole bunch of things that conservatives are thought to be against.  At the same time, you are opposed to benefits that are paid to people who do not need them.  This shifts the ground from probenefit/antibenefit to what the definition of need actually is.

At the edges, there is really little difference in Americans.  Pretty much everyone agrees that children deserve help to avoid bad outcomes and Warren Buffet should get nothing I would imagine.  The debate is where in the middle to draw the line.  And yet, this is a debate we almost never have as a nation.  Take the recent dustup over SNAP benefits.  The positioning is that Republicans want to cut benefits and Democrats want to sustain (or increase) benefits.  The right conversation should be over who received benefits and how much benefit they should receive.  Republicans should redirect the SNAP debate to a debate over how much and who, not whether the total is $80 billion or $76 billion a year on average over 10 years.  The debate is abstract and useless.

Parenthetically, I don't know what the "right" answer is on SNAP.  It may well be that we spend to little, based on who we give benefits to and how much we give.  Or it may be we spend to much.  I simply do not know.  Some things I do know however.

First, providing government benefits to the wealthy is not something we should be doing.  It does nothing more than encourage wealth formation and subsidize intergenerational wealth transfer.  Benefits should time and again be linked to the need of the recipient - to put the payor and the payee in the same conversation. Where there is no need, there should be no benefit.

Second, the only way to provide benefits to all (or nearly all) regardless of need is to move to a European style tax structure at the federal level where taxes on the middle class are far higher than they are toady.  The tradeoff needs to be shown.  But to do this, Republicans need to abandon the fiction that small changes in "entitlement" programs can address the fiscal imbalance the US faces.

Finally, this approach brings the Republicans closer to a defendable principle and a productive debate.  There's simply no productive debate where you take the position that the people most in need (the perceived status of SNAP beneficiaries) should get less.  There is a productive debate about who should get benefits and how much each beneficiary should get, recognizing that what one gets is what another pays.

I don't know where this debate would leave us in terms of taxing and spending.  My hope is that we would collectively decide that some level of need is necessary to receive benefits and that, given that decision, current or lower levels of taxation can sustain what we wish to supply.  However, even if it doesn't result in that outcome, it is a much more productive discussion than the one in which we are currently engaged.

The Sad Sad Nature of the Debt Ceiling Debate

This is a truly sad time to be an American.  One cannot help but watch the current squabbles over the funding of the government and the debt ceiling without feeling both helpless and deeply disturbed.  A few of the more disturbing points to me are:

1. We are, at this point, mostly fighting over issues that don't matter on the budget side.  As near as I can tell, the budget debate boils down to a fight over the ACA medical device tax which is irrelevant from a budgetary perspective and a debate over whether we will spend less than $10 billion (or 0.3%) more or less in terms of the sequester caps.
2. The "settled law" and various other stand on principal points are falling apart.  The death knell here was when the Senate refused to consider the Collins/Manchin bill because it "extended the BCA caps for too long."  But of course, the BCA is settled law every bit as much as the ACA is.  Neither side is fighting for a principal here, naked political power is all there is.
3. The debt ceiling itself is awful and untouchable.  We are debating the length of a debt ceiling extension when pretty much everyone, at least on the Democratic side, believes the debt ceiling is stupid.  Where's the proposal to eliminate the debt ceiling entirely?  Well, it turns out Americans like the debt ceiling so we avoid doing the right thing in order to do the stupid thing.

I have no doubt that eventually we will sort this out in a way that kicks the can a little bit down the road, poisons the process further, and reveals how devoid of principle the entire process is.

It's simply sad to have to watch it.

The Bush (and Obama) Tax Cuts

One of the things we read all too often on the web is about the gross revenue impact of the "Bush tax cuts."  It's so often said that we pretty much all accept it as a reality.  The point of this post is not to defend the tax cuts of 2001 and 2003 but to try to put them in some type of context.

To start, let's note that the tax cuts of 2001 and 2003 are considered relative to the baseline of not passing them.  Fair enough.  The CBO did an assessment of the impact of these tax cuts and concluded that between 2002 and 2011, the impact was a shade over $1.5 trillion.  Between 2001 and 2009 (fiscal years), the impact was about $1.2 trillion.  It seems very fair to say that the "Bush tax cuts" cost the Treasury between $1.0 and $1.2 trillion.  That's a lot of money for sure.

But, during the course of refuting someone who told me the Bush tax cuts had cost $10 trillion, it occurred to me to look up the cost of the "Obama tax cuts."  In that camp, I'd include the following

• The $700 billion of cost in continuing the Bush tax cuts (which expired on 1/1/2010) until 2012.
• The roughly $180 billion cost of the payroll tax holiday
• The $1.2 trillion cost of continuing almost all of the 2001 and 2003 tax cuts through President Obama's second term.
• The $250 billion in tax cuts that were in the ARRA

In total then, President Obama has cost the Treasury (using the same baseline as for the Bush tax cuts) on the order of $2.3 trillion during his two terms versus about half that amount for the dreaded "Bush tax cuts."

Please do not interpret this as a defense of the Bush tax cuts, just an attempt to put them in context.

A Very Weak Argument About the ACA

This post from Ezra Klein exemplifies the type of argumentation that will be used by the administration to encourage the young to make bad financial decisions around health insurance, a decision on which the entire ACA edifice appears to rest.

Let me just offer a few observations (from the comment I left in response to the post).

Clancy is wrong: The subsidies are funded by taxes on rich people and by cuts to Medicare spending, not by the premiums paid by young people. In fact, young people are likely to be the biggest beneficiaries of the subsidies because they’re more likely than any other age group to be poor and uninsured.

Right and so wonderfully deceptive at exactly the same time.  Yes, in point of fact, the young will disproportionately receive subsidies because, of those not covered by Medicare, they are disproportionately poor.  But that fact misses the larger point.

Even with subsidies, many of the young will wind up paying far more for insurance than the insurance is worth to them on an actuarial basis.  This is because the ACA has set a community rating cap at 3:1, far below the 5:1 that was prevalent before and even further below the real actuarial values.

The trick to making any health-insurance system work is to attract enough healthy and young people into the insurance pool.

 

Same fallacy again.  This is only true with community rating, at least to the degree that is required under the ACA.  Without community rating, this isn't true at all.  In other individual insurance markets, cars and life for example, this is not true.  It is the provision of the ACA that drives this not a necessary condition of insurance.

The number of young people who make too much money to qualify for subsidies but don’t receive health insurance through their jobs is pretty small (and also not easy to pinpoint).

 

Deceptive again. The statement is true but irrelevant.  Qualifying for (any) subsidy does not make insurance a good financial decision.  That's the implicit logic in this point and the logic is false.

And Obamacare is intentionally structured to prevent people who go without insurance from acquiring it only after they need it. You can only sign up for health insurance during an annual open-enrollment period

 

One more deception.  The statement is true but not relative.  Today, if one gets a "pre-existing condition," one may not be eligible for insurance ever (in the individual market).  The ACA dramatically reduces this risk (and therefore the amount a rational person should pay to avoid it).  Guaranteed issue makes insurance less valuable not more.  In other words, this is exactly the opposite of what is claimed.

Young people grow old. Healthy people get sick. Rich people become poor. The people overpaying to keep costs low today are the people underpaying 10 or 20 years from now. It’s a terrible mistake to believe your health-care needs won’t change over time.

 

Continuing exactly the same line of fallacious argument.  The ACA allows those people to buy the coverage 10 or 20 years from now no matter what at a better actuarial value than they will received today.

The only question is whether you’ll have insurance when it comes.

 

The short story here is that the ACA eliminates the things that allow for cost control in insurance and pays for them by imposing a hidden tax on the young.  That's quite disingenuous as an approach and Mr. Klein's defense is quite weak.  And yet, having young people buy this argument is exactly what the ACA depends on.  Isn't it a bit sad that the government is dependent on encouraging people to behave in financially irresponsible ways in order to implement policy.
                                   

A Question for Zandi and Blinder

Back in the days of the ARRA debate, a great deal was made of a study by Mark Zandi and Alan Blinder that described the effects of the stimulus using a complex economic model.   I don't want to renew the whole stimulus debate but a post on a different topic caused me to dust off the Zandi/Blinder paper and look at some of the forecasts for GDP that were in the model.

Here are five interesting numbers for you.  The first four are forecast GDP in 2012 (in $2005 dollars) according to the model.

No policy response (no fiscal or monetary policy) - $12620
Monetary stimulus (no fiscal policy) - $14216
Fiscal stimulus (no monetary policy) - $13774
Both fiscal and monetary stimulus - $14552

Actual GDP in 2012 - $13593

In other words, the GDP in 2012 was nearly 7% smaller than was predicted by the Zandi/Blinder model in 2010 and indeed was nearly 5% smaller than predicted by the model in a world where the stimulus never happened.  These are large differences to be sure and in a very short period of time.

My question for the authors is "why?"

A couple of answers occur to me. 

1. Fiscal and monetary policy were far more restrictive than envisioned by the model for 2011 and 2012.  While possible, this seems highly unlikely because smaller deficits were forecast for 2011 and 2012 in 2010 than actually occurred.  To the degree the authors were using public data, they would have assumed more austerity on the government side than actually existed.
2. The model's long term effects are either flawed or undermined by exogenous factors.  Again, while this is possible, it seems unlikely, particularly given the magnitude of the observed differences.
3. The model isn't very good and its conclusions are suspect.  In the absence of an alternative, this seems the most likely answer.

I'm quite sure I'll not get a reply from the authors but it just goes to show that periodically checking on the predictions of models is a good way to think about validating them, albeit it's often after the smoke of the debate has cleared.

The Timing of Savings

Several commentators have made the point that the President's budgetary savings are back end loaded.  I wanted to test this theory so I calculated the savings in each budget relative to the CBO baseline and the percentage of the savings that come in the first 5 years of the budget versus the second five years.  Frankly, it doesn't make much of a case for optimism about any of the forecasts.

First to set a baseline, let's determine the percentage of spending that comes in the first five years versus the last as a reasonable expectation of how the savings "should" come.  Using the CBO baseline, we get that 43.1% of the spending in the CBO baseline occurs in the first five years so a reasonable expectation is that 40 percent or so of the savings should come in the same time period.

So how do the different budgets do?  The Ryan budget comes closest to our 40 percent benchmark

In the Ryan budget, 32% of the savings come in the first five years.  In the Murray budget, the number is far lower, at 14%.  But the worse by far is in the President's budget where negative 9% of the savings come in the first five years, meaning the President's budget actually adds more to the debt over the next five years than is planned to be the case in the CBO baseline.

A budget that says more than 100% of the pain will come after you've left office isn't much of a budget at all.

Why Our Way of Discussing Budgets Must Be Reformed

The following appeared in an article at The Hill online

Republicans are betting that the public will be receptive to the Ryan plan’s measures to balance the budget in just 10 years, through lowering tax rates, $5.7 trillion in spending cuts and a repeal of the president’s healthcare reform law. 

 Of the three claims, one is partially true but misleading, one is false (in any reasonable world) and one is true.  The last one is true...the Ryan budget does repeal the President's health care law but the other two are misleading at best and false at worst.

First the misleading part...the lowering of tax rates.  Yes, the Ryan plan lowers tax rates and balances that with limitations on or eliminations of deductions in the current tax code.  Leaving aside my point of view on Ryan's tax plan, we should be able to agree that the average person, reading the words "through lowering tax rates" could be forgiven for assuming that Ryan plans to reduce government revenues to some degree.  Of course, as I've pointed out, this simply is not the case.  The Ryan plan proposes to increase government revenues by an average of 6.2% per year for the next decade.  It may well be that we should increase revenues more (as other budgets have proposed) but it is certainly not the case that Congressman Ryan has proposed cutting revenues.

Now the false part - $5.7 trillion in spending cuts.  There are no $5.7 trillion in spending cuts in the Ryan budget.  The budget proposes growing spending by 3.4% per year on average for the next 10 years.  Perhaps, some day we will realize that we can't grow spending by 3.4% per year while cutting it by $5.7 trillion.  Clearly today is not that day.

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.

Sometimes It's Even Worse

Well, I'll admit I was wrong.  A week or so ago, before the CBO score was out, I estimated that the Senate sequester replacement plan would defer most of the deficit reduction until later and do very little of it in 2013.

So in summary, the best case is that the bill reduces the deficit by about $8 billion this year.  The worse case is that it adds about $3 billion to the deficit this year.  Neither is anywhere close to $85 billion in deficit reduction this year.

Well now the CBO score is out and it is in fact worse than I thought.  Let's start with spending.  The Senate bill increases spending relative to the baseline with the sequester included by $63 billion.  In other words, it eliminates $85 billion in spending reductions in 2013 and replaces them with $22 billion in net spending reductions over the next 10 years.  And of this $22 billion, only $5 billion (net) comes in the next 5 years.

On the tax side, it adds $55 billion of tax increases, almost all of which come from the application of a new alternative minimum tax, beginning at incomes of $1 million.

So to review, the bill as scored by the CBO, replaces $85 billion in deficit reduction in 2013 achieved by spending reductions with $400 million of deficit increase in 2013 (a small spending increase almost offset by a small tax increase) and $77 billion of deficit reduction over the next 10 years, 72 percent of which ($55 billion over $77 billion) is tax increases.

So the "balanced proposal" of the Senate achieves no deficit reduction in 2013, less deficit reduction over 10 years than the sequester would achieve in 1 year, and has more than 70 percent of the deficit reduction coming from tax increases.

A replacement it is not.

The Impact of "A Balanced Approach"

All the discussion from the President has been about the need for "a balanced approach" to the sequester which, roughly stated, means replacing half of the spending cuts with tax increases.  Let's leave aside, for the moment, that the other aspect of "a balanced approach" seems to be kicking the can to the future and focus for a moment on the impact on spending growth and tax rates of this approach assuming it were to happen.

For the purposes of this argument, I'm going to assume that this notion of balance applies to both the sequester and the BCA caps.  The reason I'm making this assumption is that, were one to believe the President's argument, it probably should.  After all, why allow caps to be all spending when you can achieve the same deficit reduction through a mix of spending and taxes.

To make the analysis simple, I'm going to focus on the last year of the caps, fiscal 2021.  In the CBO baseline, total government spending is forecast to grow by 5.25% on average per year.  Now what happens if we let the caps go.  Well, in 2021, the caps and the sequester restrain spending by $178 billion (Table 1-5).  But we are going to go halfsies so we'll raise spending by only $89 billion that year.  This then would take the growth rate of spending up to 5.46% and spending as a percentage of GDP up to 22.8% from the current forecast of 22.4%

Now on the tax side, let's make the assumption that all of the tax increases come from "the rich" and that this plan continues through the period.  In total, on a 10 year basis, this would equate to a tax increase at least as large at the increase that just went through on the top rate over 10 years.  That increase raised the effective tax rate of the top 1% of taxpayers by 3 percentage points.  We might rightly assume that this would do similar taking the effective tax rate of that group to 39.4 percent, the highest rate ever by a fair margin.

Such is the effect of "a balanced approach."  Spending back up over 23 percent of GDP by the end of the forecast, the highest effective rates in measured history (which I remind you only goes back to 1979 where there was a 70 percent marginal tax rate), and an accelerating deficit and debt to GDP ratio.