Fiscal Responsibility: Obama Takes the Reins 84 comments
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Now I am a believer.
Few readers of my blog will be surprised to hear that I supported Barack Obama in the election. But I was always skeptical that he would be able to achieve fully his promises to bring candor, responsibility, and bipartisanship to Washington. Experience had convinced me it wasn’t possible. OK, I am still dubious whether it is possible to achieve bipartisanship – even for Obama. The evidence was his failure a week ago to get a single Republican vote for his fiscal stimulus in the House (and only three votes in the Senate) despite his substantial election mandate, the severity of the current recession, and the concessions he made to the other side.
When it comes to honesty and responsibility, however, what he did at the Fiscal Responsibility Summit yesterday was breathtaking. Obama didn’t just promise to cut the budget deficit in half over the next four years. Both his predecessors promised to do that. He provided enough details to make one believe that he actually might be able to do it, despite the remarkably adverse circumstances that he has inherited.
Before I elaborate on how he apparently plans to bring fiscal sanity back to Washington, let me explain what to us policy wonks is the most amazing thing of all: With a few bold waves of his hand, Obama has brought down all the cobwebs of misleading and dishonest budget math that have hopelessly obscured and encumbered the making of fiscal policy at the White House. This is a risk: it means admitting that the budget situation is far worse than the Republicans have been claiming. They could try to blame the appearance of worse numbers on him. But he is doing the right thing. And this is the right time.
To get more specific, here are three kinds of tricks that his predecessor used in order to pretend to be on a path back to fiscal solvency. They sound childish, but they fooled most of the country. (I am skipping the wilder claims, that didn’t fool as many people.) Obama and his team are voluntarily giving up these tricks, even though he probably won’t get much credit for it:
- Trick #1: Omitting from future budget estimates the cost of the wars in Iraq and Afghanistan. Every year, for the past 5 years, the expensive wars have continued; and every year the White House and its allies in Congress pretended that this was a surprise. Obama is putting the estimated future costs of the wars into the forecasts right now.
- Trick #2: Pretending in every succeeding budget forecast that you will allow temporary tax cuts such as the “AMT patch” to expire in a few years, thereby bringing in more tax revenue, even though everyone knows you will renew them when the time comes and this is in fact your declared policy. The White House forecasts will now include honest forecasts of future taxes. Gone also will be the similar trick of pretending in the budget forecasts that the government will in the future cut Medicare payments to doctors even though you have no intention of doing so (because it would result in the doctors dropping out of Medicare).
- Trick #3: Using as the base line for a promise to “cut the budget deficit in half” an artificially high budget deficit that you yourself proposed. This is what Bush did in the fine print of his promise in the 2004 campaign. (Not that he cut the budget deficit at all, in the end. But we will get to actual policies below. Right now we are just talking about ways to fooling the press into reporting misleading claims with a straight face.) Obama has explicitly said that he plans to cut the deficit in half relative to the $1.3 trillion deficit he inherited, not relative to the much higher deficit that will occur in the coming fiscal year as a result of the recession….that is, as a result both of inevitably lost tax receipts and of the fiscal stimulus that Obama correctly deemed necessary to moderate the recession’s severity. This choice of benchmark was brave. After all, he would have been within his rights to say that because he inherited the recession from his predecessor, the corresponding rise in the deficit in 2010 should not count as his responsibility.
Turning from word to deed, how will Obama move the country back toward fiscal responsibility? It won’t be easy, so deep is the current hole we are in. But I perceive four categories of initiatives, each of them encompassing further breaths of fresh air: (1) limiting spending growth, (2) increasing tax revenue, (3) making new initiatives more cost-effective, and (4) long-term entitlements reform.
(1) Limiting spending growth
Three examples of measures that Obama mentioned in his speech that I particularly like:
- Cut unneeded federal payments to agribusiness. This one is high on the wish list of virtually every economist.
- Withdraw combat troops from Iraq. Enough said.
- Reinstate PAYGO (Pay as You Go). This means that if some Congressman proposes a new outlay, they have to show how to pay for it by proposing someplace else to cut. The provision was originally adopted by the first President Bush in 1991 (as part of a courageous budget agreement with congressional Democrats that probably cost him re-election); it was extended by President Clinton in 1993 (without a single Republican vote); it helped a lot to deliver fiscal surpluses by the latter part of the decade (1998-2000); and it was allowed to expire by the second President Bush in 2001 (with the result that the rate of spending growth tripled thereafter).
(2) Increasing tax revenue
Two examples (among other possibilties):
- Tax investment income earned by hedge fund partners at the same ordinary income tax rates that the rest of us pay. It’s about time.
- Let Bush’s tax cuts on income for those earning above $250 million expire as scheduled after 2010.
(3) Seeking cost-effectiveness when addressing priorities that the Democrats consider neglected, such as health care and global climate change.
Two examples:
- Increase the efficiency with which health care is delivered.
- By 2012, require that companies buy permits for Greenhouse Gas Emissions, rather than giving them all the permits for free. Free allocation would be a big windfall to utilities and others because they will in any case pass on much of the increased cost of energy to consumers.
(4) Long-term entitlements reform.
The overwhelming problem in the longer term is the coming deficits of Social Security (big) and Medicare (much bigger). The easy thing for Obama to do would have been to put off any attempt to deal with them until after he had put behind him the financial crisis, recession, and first steps toward budget responsibility. But he has now said that he wants to put in place during his first year in office the process to deal with the entitlements problems.
Everybody familiar with the facts has always known how to fix Social Security. The solution is not all that hard, but is politically painful to enact. The answer is some combination of three changes:
(i) progressive indexation of benefits. (Current retirees would not have their benefits cut, not even relative to what they otherwise would have been. Really);
(ii) raising the retirement age. (Just a little. Really. And let’s exempt workers who do heavy manual labor); and
(iii) making upper-income workers pay higher payroll taxes than those earning $107,000.
I have no inside knowledge if this is what Obama is planning. The game in the past has always been that no politician would propose any combination of these three things, because if he or she did, members of the opposite party would promptly attack him. So the thing to do is to form a study group comprising knowledgeable members of both parties in the Congress, have them meet for one year, and then come out holding hands and simultaneously declaring their support for a precise package of this sort.
This was the strategy Bill Clinton chose to address Social Security, after having successfully delivered on his earlier promises to cut the budget deficit in half in his first term and then to eliminate it entirely. Before the year was up, the Republicans decided they would rather impeach him than solve the Social Security problem. In this sense Obama is taking up where Clinton left off eight years ago. Too bad the country sank $5 trillion in the hole in the meantime.
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Does the author plan on raising the age further?
PS: What is "progressive indexation of benefits"?
Seriously, I understand the author's point. But IMO, the analysis is incomplete. The government creates incentives for people to act in certain ways. Tax policy is a big way to do that. I am suspicious about the 250k cut off, especially with higher payroll taxes over 107k. People who make good salaries typically work harder jobs with longer hours and live in cities where costs are higher. Penalizing the responsible just can't be good long term policy.
There has already been a lot written about the tragedy of the stimulus. We're spending 800 Billion and not getting much to show for it. It's not just spending money that was needed, but spending in a way that makes sense. Think about how much could've been done with that money if it were focused on something specific. In short, I don't believe a few rhetorical techniques with revised arguments are the same thing as fiscal responsibilty.
Obama has done the right thing to make this promise to cut the deficit. He's either shaping himself up to be the best president ever or the worst.
I'm scared to admit it, but I'm getting closer and closer to pouring a glass of the Obama Kool-Aid.
Where is the beef?
The only growth that Obama is proposing is that of government. Does he really believe he can balance a budget by increasing the size of government? If so, he is an economic ignoramus.
His programs will decrease government revenues while increasing expenses. Obama and Congress' single entry bookkeeping is laughable. Only his lap dogs, who have a vested emotional or financial interest in Obama, could possibly believe his policies are positive.
On Feb 24 05:58 AM bosun.j wrote:
> Get ready, the tinkle down extremist-capitalist neo-CON nutjobs are
> going to come out of the woodwork on this one!!
Also, when not a single Republican voted for Obama's fiscal stimulus in the House and only three voted in the Senate, it should be apparent that this is not based on economic rhetoric. Instead, it should be quite apparent that as a party, Republicans have no interest in supporting Obama. I am not condemning their behavior, since this problem is a typical example of Nash's Prisoner Dilemma. What if the stimulus package is successful? Well, Republicans would get little credit for it and Obama and its fellow Dems would be held as saviors. Now, if the stimulus fails, then Republicans will sheer in unison: "We knew it and told you so". Most likely, they will use a rhetoric similar to that posted above by Ergo: "Think about how much could've been done with that money if it were focused on something specific" (I personally find this statement amusing).
In the end politics are what they are. It's always normal people with often questionable ethics who are given too much power. The point here is not to blame them and call for anarchy. Their behavior is quite natural and generally falls within the idea that the end justify the means. However, when we finally get a President that seems not to fit the good old Washington mold, it seems like the most patriotic and enlightened path is to provide full support to his efforts since let's all be honest here, it's been a long time we haven't been in such a hole.
You first need to read Obama's books and understand he is the first president we have had since Lincoln who has a handle on humanity and what it takes to live a life.
He is taking all the right steps in the right direction. Many of them may be small steps and he may fall down a few times. Have you ever watched a baby learn to walk? Getting out of this mess will be no easy task and not straight forward. Everyone in the whole world needs to contribute. Develop new businesses and change our old way of doing things. Honesty would be a good place to start.
He's not ducking responsibility, he's not hiding in the White House, he's not reversing huge policy initiatives based on polls. And when the Republicans tried to block the stimulus, he used his popularity to get the needed votes and get it approved, rather than complain about partisan gridlock.
He's got a steady hand on the rudder, seems willing to incorporate varying points of view, and doesn't seem to get bent out of shape by opposition, even vocal opposition. He thinks before he speaks and uses complete sentences.
Excellent article. I have several thoughts:
1. Obama seems to have the ability to tell the truth and not to pull punches. This may or may not stand him in good stead because it does not fit the mold of our political system. (Yes, the word "mold" has two meanings, and I meant both to be considered.) It is one thing to tell the truth and quite another to get politicians to take appropriate action based on the truth.
2. One of the biggest mistakes Roosevelt made in The Great Depression was to raise taxes in 1937. Consequences of raising taxes before there is a well established recovery must be carefully considered.
3. Improving efficiencies in government and other broad service areas, such as medicine, will involve challenging entrenched economic interests. Can Obama be effective here when all too many legislative branch politicians are bought and paid for? Especially when many of these people may not be consciously aware that they are acting in response to "bribery", but feel they are acting on "principle". Too many politicians have frozen their brains in an ideological rigidity that prevents them from engaging in pragmatic reasoning.
Abraham Lincoln was able to overcome such handicaps, but that was in the day when media exposure took place in terms of days, not minutes. Obama may or may not have all the political acumen of Lincoln, whom he apparently wishes to emulate. But could Lincoln have been successful if he lived with our modern media?
Kindly consider that government is not a business. Government exists to provide services for the commons. Trying to run gov't like a business leads bureaucrats to make stellar decisions like betting that a Katrina like storm wouldn't hit New Orleans and therefore failing to adequately defend a major port city form devastation.
bosun
On Feb 24 10:43 AM John Lounsbury wrote:
> 3. Improving efficiencies in government and other broad service
> areas, such as
So mostly I think your article represents your own delusions.
However, we might possibly agree on one thing. I think they need to stop tweaking the Alternate Minimum Tax. Let it go ahead and screw the high income people in high tax states that generally vote democratic anyway. Why are republicans trying to minimize the negative effect of the AMT on wealthy democrats in blue states. That is nuts.
Either fix it for real, or just let the thing do its damage. The little year by year tweaks just keep us in the crazy place.
Another silver lining of the porkulus bill is that it will ultimately result in broad based tax increases because they won't possibly be able to raise enough revenue just by taxing the high income people. And eventually when the middle class figures out that they are hurt more by higher taxes than they are helped by Obama's soaring rhetoric they may actually consider voting differently.
Keep you safe? Borrowed Trillions from China and brought the economy and country to its knees. Safe?
You are truly too propagandized by feau news to waste any more energy on you.
Sad. So sad.
On Feb 24 11:48 AM Evaluator wrote:
>Bush kept
> my family and I safe for 7+ years, and I appreciate that.
As for the "Stimulus", I would have felt better if they had actually pretended to read it. This type of behavior tells me that the circus is almost over.
With the Shadow Banking Derivatives Hole still not being addressed, still causing utter uncertainty, nothing will be effective. Band aids do not reconcile gaping wounds.
Those that give up liberty for safety deserve neither. The Subjugation continues.
When talk of reducing the size and thus the money leeching ability of the Federal Government is discussed I will see at least some hope. Government Does Nothing Well - There is no incentive to do so; no reprisal for failure.
Currently benefits after one's retirement are indexed to wages of continuing workers. One proposal is to index them instead to the CPI, so that real benefits would remain constant. The "progressive indexation" idea, as I understand it, is that lower income workers would continue to see their benefits rise along with nominal wages but that the benefits of higher income workers would rise at a slower rate, progressively closer to the rate of CPI inflation. It was originally proposed by Bob Pozen, but became popular with the Bush Administration and unpopular with liberals.
JF
On Feb 24 08:26 AM Joyful Alternative wrote:
> One point: The full age of Social Security retirement has already
> been raised. For example, the age for someone born in 1945 is 66
> and for someone born in 1957 it's 67 (not 65).
>
> Does the author plan on raising the age further?
>
> PS: What is "progressive indexation of benefits"?
But to clarify: whatever measures are taken to fix Social Security, they are not going to have much effect in the next four years. It is for the more distant future. The steps to cut the deficit over the next four years are different (PAYGO, etc.).
JF
On Feb 24 10:14 AM ED K wrote:
> The President elect saying ,he will cut the deficit in half in four
> years, only exposes his economic inexperience.With each proposal
> he makes and new commitment my giving him the benefit of the doubt
> dwindles further.Iam starting to believe his administration is going
> to be a disaster for the country.
>
> If his cutting the deficit in half has anything to do with altering
> social security,raising taxes or modifying medicare he will quickly
> become a lame duck president.This proposal could turn out to be his
> swan song.
I agree.
On the question of the difficulties of having mature policy discussions via the modern media, I go back and forth on whether we should view this as a new phenomenon. Some people say that the famous Lincoln-Douglas debates were in fact as simple-minded as modern candidate debates.
JF
On Feb 24 10:43 AM John Lounsbury wrote:
> Jeffrey - - -
>
> Excellent article. I have several thoughts:
>
> 1. Obama seems to have the ability to tell the truth and not to pull
> punches. This may or may not stand him in good stead because it does
> not fit the mold of our political system. (Yes, the word "mold" has
> two meanings, and I meant both to be considered.) It is one thing
> to tell the truth and quite another to get politicians to take appropriate
> action based on the truth.
>
> 2. One of the biggest mistakes Roosevelt made in The Great Depression
> was to raise taxes in 1937. Consequences of raising taxes before
> there is a well established recovery must be carefully considered.
>
>
> 3. Improving efficiencies in government and other broad service areas,
> such as medicine, will involve challenging entrenched economic interests.
> Can Obama be effective here when all too many legislative branch
> politicians are bought and paid for? Especially when many of these
> people may not be consciously aware that they are acting in response
> to "bribery", but feel they are acting on "principle". Too many politicians
> have frozen their brains in an ideological rigidity that prevents
> them from engaging in pragmatic reasoning.
>
> Abraham Lincoln was able to overcome such handicaps, but that was
> in the day when media exposure took place in terms of days, not minutes.
> Obama may or may not have all the political acumen of Lincoln, whom
> he apparently wishes to emulate. But could Lincoln have been successful
> if he lived with our modern media?