What's Plausible for the Fiscal Outlook?

The first definition of “plausible” on dictionary.com is:

plausible

[plaw-zuh-buhl]

having an appearance of truth or reason; seemingly worthy of approval or acceptance; credible; believable: a plausible excuse; a plausible plot.

Note that it doesn’t say “likely” or “probable”–it connotes the notion of possibility not probability. I bring this up because many folks, especially the media, want to interpret the “Concord Coalition Plausible Baseline” as our best forecast of what the fiscal outlook will turn out to be. No, we’re not saying that’s the most likely outcome; we’re saying that’s a plausible, possible outcome. And it’s a worst-case scenario, because that’s what we do at Concord: we warn about the possible really bad outcomes if we don’t start making more responsible choices–because we don’t want them to happen.

On Saturday’s front page of the Washington Post, Lori Montgomery does an excellent job of laying out the different projections of budget deficits over the next ten years (see the graphic above)–explaining how the CBO baseline shows deficits of $7.1 trillion, while OMB shows $9.[1] trillion (rounding up $9.051 trillion) based on their own economic forecast, while the cost of Obama Administration budget policy applied to CBO’s baseline suggests the larger figure of $10.3 trillion, while if all the (2001 and 2003) Bush tax cuts were made permanent the deficits would grow to $11.3 trillion. (The latter two estimates come from Bill Gale of Brookings.) Then there’s Concord’s “plausible” figure of $14.4 trillion, so one might wonder: what really is “plausible” out of all those estimates?

The answer is that they all are “plausible” estimates of the fiscal outlook going forward over the next ten years–the full $7.3 trillion range of possibilities is indeed all possible and all within the control of policymakers. We’re not talking about re-writing history or even re-writing (repealing) current tax law. The main point of Lori’s story was to highlight the thorny issue of what the Obama Administration will do about their campaign promises about tax policy now that the deficit outlook is so much worse and the Bush tax cuts seem even more unaffordable than they used to. And in showing the different deficit projections and explaining what they have to do with the Bush tax cuts, Lori is pointing out the following facts, which really represent choices or different “plausible outcomes”:

1. Current law commits to the Bush tax cuts only until the end of 2010 ($7.1 trillion in deficits);
   
2. but President Obama has proposed to extend most of the Bush tax cuts in his budget proposal ($9.1 - $10.3 trillion); and
   
3. therefore Obama Administration tax policy is not that different from where we’d end up if we extended all of the Bush tax cuts (as Senator McCain had wanted to do had he become president) ($11.3 trillion).

…and throw Concord’s “plausible baseline” into the mix, which relative to Bill Gale’s $11.3 trillion estimate adds in the permanent extension of all the other expiring tax cuts (over $2 trillion with interest costs) as well as a higher estimate for spending which assumes it grows with the economy (boosting spending by about $1 trillion on net after adjusting the baseline defense spending assumption downward), both as estimated by CBO in Table 1-7 of their outlook (pages 24-25), and you get $14.4 trillion in deficits as another possibility (”plausible outcome #4″), too.

So the full ($7.3 trillion) range of estimates–from $7.1 trillion in deficits all the way up to $14.4 trillion in deficits, is all “plausible” in my opinion. Outcome #1 could happen if Congress and the Administration left town, didn’t enact any new policies, and let the nation continue on autopilot with the laws currently on the books. OR outcome #1 could happen if any new spending or tax cuts that Congress and the Administration put into law (that’s ANY and ALL new stuff, not just the stuff covered under Congress’ “pay-as-you-go” rules which now exempt the Bush tax cuts and never included “discretionary” spending) were fully paid for/offset instead of being deficit financed. At the opposite extreme is the Concord Plausible Baseline, which would occur if current policies were all to be permanently extended without paying for any of them–i.e., through continued deficit financing. To be clear and to be fair, this is not Concord’s estimate of deficits under the Obama Administration’s budget, because, as prime example, the Administration proposed: (i) to extend most, but not all, of the Bush tax cuts (still via deficit financing); and (ii) to permanently extend the Making Work Pay tax credit but in a fully offset manner using climate policy revenues.

My point is that these deficit projections are all uncomfortably large, but the Administration certainly has a wide “opportunity set” in front of them. They could do anything from the one extreme of NOT extending any of the Bush tax cuts (or fully paying for whatever they choose to extend or whatever new tax cuts they’d rather have) all the way to the opposite extreme of making permanent all of the tax cuts currently in place and not paying for any of it. There are many fiscal paths the Obama Administration can choose among, and choices over tax policy are a huge factor, as emphasized in the Washington Post story by both Bill Gale and Dave Walker (and my emphasis added):

“If you rule out inflating our way out of the problem and defaulting on the debt, there are two ways [to reduce the deficit]: Cut spending or raise taxes,” said William G. Gale, an expert on fiscal policy at the Brookings Institution. With more than 80 percent of federal spending devoted to politically untouchable programs such as Social Security, Medicare and Medicaid, he said, “it’s going to be really hard to make significant headway on the spending side. So that means you’ve got to think about taxes.”…

“There’s no question in my view that Bush was the most fiscally irresponsible president in the history of the republic,” said David M. Walker, the comptroller general under Bush who now advocates for deficit reduction. Obama “was handed a bad deck,” he said. “But the question is, are you making it better or not? And so far the answer is no.”…

Obama could raise taxes without taking any legislative action. If he let all the Bush tax cuts expire next year and refused to enact legislation to restrain the alternative minimum tax, deficits would be about $200 billion a year lower and the debt would stop growing as a percentage of the economy, according to Gale’s analysis of new data from the nonpartisan Congressional Budget Office. But that would mean big tax increases for most American families, violating Obama’s pledge…

Although the deteriorating economy has certainly been a huge challenge to the fiscal outlook over the past year, what constrains which of these “plausible outcomes” can come true is not the economics as much as the politics–how much political courage the Administration and Congress can muster, hopefully bolstered by Americans who recognize it’s time to face up to tough choices.

Comments

[bearfund:]

Why should we rule out defaulting on the debt? Debt service accounts for almost 20% of the budget. If we got spending under control we wouldn't need to borrow any more, and if we can't then our notional credit rating won't matter anyway. With spending under control, that 20% would allow breathing room to reduce taxes or at least avert the need to raise them.

The time for ordinary prudence was indeed 10 years ago (or 50). Now we need something more, a little outside the box thinking. Defaulting should absolutely be part of the public discourse around this issue.

Aug 30 10:18 PM

[valuemodel:]

With all due respect to the Concord folks and their nobly-motivated call for fiscal prudence, to talk about raising taxes as the principal means of solving the budget deficit is to frame this problem in a truly limiting way, as well as to accept the status quo. Eliminating our budget deficit is going to take a great deal of resourcefulness and common sense, and more participation on the part of voters when they think elected officials are behaving like idiots. I would also submit that it means challenging the media to be more rigorous in searching for and presenting the facts so that we raise the level of the debate and the chances of a more sensible, enduring solution.

Why don't leaders/economists/cit... look at the U.S. budget deficit from the perspective of personal financial planning? When individuals spend beyond their means and experience cash flow and credit problems, a line item review is conducted to reveal which expenditures are absolutely essential. Here, then, is how our country spent its resources in 2008. Of almost $3 trillion in expenditures, 23% was spent on Medicare and Medicaid, 21% each was spent on Defense and Social Security , 17% on "Other Discretionary," 10% on other mandatory, and 8% on interest. (en.wikipedia.org/wiki/...)

Drilling down into one of the categories, the U.S. spent almost ONE-THIRD of its tax receipts, or $800 billion, on defense and Homeland security. This is certainly not fiscally prudent, and it also may be overkill from another perspective. According to Defense Secretary Robert Gates, "The United States cannot take its current dominance for granted and needs to invest in the programs, platforms, and personnel that will ensure that dominance's persistence. But it is also important to keep some perspective. As much as the U.S. Navy has shrunk since the end of the Cold War, for example, in terms of tonnage, its battle fleet is still larger than the next 13 navies combined -- and 11 of those 13 navies are U.S. allies or partners."

I've picked on defense spending which some here might find ideologically unpalatable, but I ask those to recall that Mr. Gates also served under Bush. My point is more fundamental: we should examine closely the details of all large spending programs and decide where we will sensibly allocate scarce resources. We can't afford not to.

I very much appreciate the comments made about George Bush's imprudence in giving tax cuts we could not really afford. Now we are in a situation where I think we can't afford raising taxes, either. I would be curious to know whether the Concord Coalition has addressed or is considering other more creative or constructive means of deficit reduction.

Aug 31 12:23 AM

[Gary A:]

It is difficult to have political courage when you are tied to the hip of the International Bank of Settlements, you know, the guys who wanted off balance sheet banking at Basel 2, then turned around and imposed mark to market, and may do so at first opportunity again.

Aug 31 03:50 AM

[Warren B. M...:]

Too bad no one seems to understand that the govt deficit = (to the penny) 'non govt' accumulation of net of financial assets (aka 'nominal savings')

This is an accounting identity, not a theory.

And the federal govt. neither 'has' or 'doesn't have' 'money.' It spends by changing numbers in bank accounts upward (as Bernanke stated in May), and it taxes by changing numbers downward.

The Federal govt doesn't 'get anything' when it taxes or 'lose anything' when it spends.

And if you pay your taxes in cash to the govt it gives you a receipt for payment and then tosses the cash in a shredder.

Spending and taxing is a tool to adjust the outcomes of the real economy.

A tsy security is nothing more than a 'savings account' at the fed.

when china sells us t shirts, the fed transfers funds from someone else's account at the fed to china's account at the fed for payment.

then china decides to spend those funds or save them, usually buying a tsy sec, which means the fed transfers their balances from china's transaction account at the fed (called a reserve account) to its savings account at the fed (called tsy secs).

And when the tsy secs mature china's securities account is debited and china's transaction account is credited.

That's all. For the federal govt there is no dependence on funding
in dollars from anyone. they just move balances on their own spread sheet. any constraints are necessarily self imposed.

and interest rates are set by the fed which has full control over the entire term structure of rates whether it knows it or not.

so keep you eye on the real economy, excess capacity, unemployment, the output gap, inflation, etc. etc. and let the deficit fall where it may. it's a residual that doesn't even need to be published for purposes of fiscal and monetary policy.

Aug 31 08:31 AM

[Mike from NYC:]

As I see it, in my simpleton way, the USA is surrounded by deficits in budget and trade matters. I don't know how you can eliminate or reduce the budget when the outflow is greater than the inflow of money without taxes being increased since we can't seem to grow our exports to help balance our budget. Unfair trade practices by China and other developing nations hamper our ability to export and puts American companies at a disadvantage, although many American companies did this to themselves when they exported factories and jobs overseas in the name of profits and cheered on by Wall Street and our government. I don't know the fate of the future of the USA but I'm becoming more and more pessimistic by what I see, especially since Congress is so dysfunctional and partisan.

Aug 31 08:51 AM

[Kevin_T:]

Do these projections factor in the change in behavior of people and businesses if taxes are raised massively? You don't just collect all that extra money, people start taking action to save taxes instead of making money. They demand more vacation and perks instead of raises. More of the economy moves underground. More business moves offshore. Small business that would have been started are not started at all. More 2nd income households revert to single income. More people decide to not work at all. As the reward for work and economic risk decreases there is less work and less taking of risk.

Big tax increases only bring in a percentage of the revenue that might be expected and that percentage tends to decrease over time as people adjust their behavior to it. That needs to be factored into any calculations.

Aug 31 09:56 AM

[crazyv:]

"therefore Obama Administration tax policy is not that different from where we’d end up if we extended all of the Bush tax cuts (as Senator McCain had wanted to do had he become president) ($11.3 trillion)."

The difference is equal to the cost of providing universal health insurance! When a trillion dollars is "not that different" in eyes of the author - I stopped reading.

Aug 31 10:11 AM

[PANAMA JACK:]

The article as merit, the comments have merit, and no way we are getting out of this mess to soon without raising taxes. But it's unfortunate because the american taxpayer is allready buckling and we are the engine that's keeping the this fragile economy going.
I am realy surprise that no one is talking about the pork barrels that the tops have been removed, they are like wishing wells for washinghton insiders.
I just watched a video on you-tube that realy got me going, but I wasn't surprise that the B.S. is still going on!
The federal government is sinding millions to an airport in PA.
that twenty people use everyday.Dah!
I can understand needed spending, but this is B.S.

Aug 31 10:15 AM

[Gem Hudson:]

What could be fully paid for but never borrow. What can not be spending more of a deficit but paid-as-they-are-going... and what is to be accounted off set to balancing the budget. Policy revenues is not to tax and to borrow more or never to print up to monetize all that red ink because the treasury secretary can not buy back all that treasury notes. They can default or running an high power motor need a high power generator.

They are trap like rats because pillaging the pillage until then there is nothing left to pillage pillage nothing more.

Aug 31 10:21 AM

[milkchaser:]

The deficit in the first year of Obama is greater than all 8 years of Bush administration (during which the Democrats had a Senate majority half the time and a House majority 25% of the time).

But we are to believe that Bush was the sole font of fiscal irresponsibility? Was Bush fiscally irresponsible? Sure. He seemed to have lost his veto pen. But the Obama's $800 billion stimulus package did not deem a mention? Was not that irresponsible, too?

I believe it was Cheney who said "deficits don't matter". Friedman made a related argument along the lines that it is better to have a large deficit with lower spending than higher spending with no budget deficit. The problem is that Congress uses the capacity to borrow as an excuse to overspend.

As Coolidge said, taxing people for spending we do not absolutely need "is nothing more than legalized larceny". Better not to spend, but for necessary spending, why tax and inhibit productivity when you can borrow at a reasonable rate? It is irresponsible not to borrow a reasonable amount.

Unfortunately, there is nothing reasonable about fiscal policy in our lifetimes.

Aug 31 10:53 AM

[jdl51:]

We spend almost two thirds of that every year on defense spending. The trillion for health care is over a 10 year period and some of that could be made up in efficiencies. We're talking about, at most, tens of billions a year for health care coverage for all. Cut out half of the farm subsidies and other corporate welfare and you've got something that really benefits the country.


On Aug 31 10:11 AM crazyv wrote:

> "therefore Obama Administration tax policy is not that different
> from where we’d end up if we extended all of the Bush tax cuts (as
> Senator McCain had wanted to do had he become president) ($11.3 trillion)."
>
>
> The difference is equal to the cost of providing universal health
> insurance! When a trillion dollars is "not that different" in eyes
> of the author - I stopped reading.

Aug 31 11:09 AM

[MichaelJ007:]

I like how raise taxes or cut spending are the ONLY ways out of this. cut taxes, cut spending and watch the economy heat up. Clearly seperate Banks from Investment Companies. No more off balance sheet transactions. More or less, cut the bullshit and let the producers of society keep more of their pay. They'll spend more and produce more, allowing the GOV to collect more taxes in comparison to the new slimmed down spending. Unfortunately, this makes sense, it is was America was founded on and it is no longer status quo. So it looks like inflate, tax and spend MORE will be the most probable outcome.

Aug 31 11:21 AM

[Mark Wallace:]

Your comments are very perceptive and very true.


On Aug 31 09:56 AM Kevin_T wrote:

> Do these projections factor in the change in behavior of people and
> businesses if taxes are raised massively? You don't just collect
> all that extra money, people start taking action to save taxes instead
> of making money. They demand more vacation and perks instead of raises.
> More of the economy moves underground. More business moves offshore.
> Small business that would have been started are not started at all.
> More 2nd income households revert to single income. More people decide
> to not work at all. As the reward for work and economic risk decreases
> there is less work and less taking of risk.
>
> Big tax increases only bring in a percentage of the revenue that
> might be expected and that percentage tends to decrease over time
> as people adjust their behavior to it. That needs to be factored
> into any calculations.

Aug 31 12:45 PM

[Mark Wallace:]

Christina Romer, one of Obama's top economic advisors, has published a paper indicating that each dollar of increased taxes decreases gross domestic product by three dollars. As a nation, we are not going to be able to tax our way out of the fiscal dilemma in which we find ourselves. Raising taxes in any major way will absolutely crush this economy. Franklin Delano Roosevelt tried that in the mid 1930s, and the result was the 1937 recession.

Aug 31 12:50 PM

[CLH:]

This problem can only be solved by spending less.

1 Shut down social security (except for people on welfare)

2 Shut down medicare (except for people on welfare)

There is now plenty of money and ALL citizens will save so they can pay their own pension and medical care.

How will they save? Most will buy govt. bonds as people did in the 1940s. Thus we dont need to borrow from others.

Also the govt. employees will be cut by 80-90%.

Aug 31 12:50 PM

[metaforge:]

Ron Paul 2012

Aug 31 01:05 PM

[Suncatcher:]

It might be a good start if we allowed the federal government to do ONLY those things expressly required by the constitution. A radical idea I know.
Or I guess we can hope that presidents and dictators have a special tv channel where the commercials offer "get your debt negotiated in half" . "Our firm negotiated on behalf of Iceland and we got their debt reduced by half! Don't suffer those harassing calls from the IMF. Call us for serious debt reduction!"
Or possibly those other commercials: " Turn your unwanted gold in for cash! Send us that gold collecting dust in Fort Knox and we'll mail you top dollar within 24 hours!! Use that old bling to pay for that health care program you've always wanted."

I just hope the president watches tv, or we could be sunk.

Aug 31 08:48 PM

[Geezer Bela...:]

This is not a particulaely clear article. When all is said we do not know if the Author advocates raising taxes or not. But one thing the Author does not suggest: lowering government spending.
Allow me to make the following points:
1. Obama promised to reduce the deficit, not to raise taxes, promote bipartizanship and bring troops home from Iraq and move to the center.
2. He did not mean to keep any of his promises, except spreading the wealth.
3. The institution of the 'mark to market' accounting in Spetember 2008 froze the money in the banks and sent the economy into a dive.
4. This has been done when Roosevelt was President with equally disasterous results.
5. "Mark to market" allows the govt to continue bankrupting enterprises and then "bail them out" by monopoly money. This way the govt can expropriate enterprises as they have done with GM, Chrysler, AIG and some more.
6." Mark to market" allows the govt to prolong deflation and thus slow apparent inflation. That's how the FED gets away with printing money.
7.The economy will not recover this way. Obama and his backers have no intention of reviving the economy. What they are after is government control.
8.The Obama regime intends to nationalize health care and even pensions.
9.Increasing taxes reduces economic growth. ALWAYS! How come? Raising taxes takes money from those best at producing income and transfer it to those less able to use the money to grow the economy.
10.Depicting tax cuts as "tax cuts for the rich" is demagoguery and in fact hurts our economy. So is the idea that the govt needs to "pay" for tax cuts. The income does not belong to the government. It belongs to those who earn it.
11. The Obama regime wants to increase spending so we will have two choices: a) default on our debt or b) raise taxes. Their goal is the same as that of the Euro-Socialists: increase taxes to 50% of national income. In fact, the govt is close to achieving that goal now. Of the 4 trillion proposed spending, almost half is deficit.

Finally, some of you complain justly about the profligate spending approved and advocated by George W Bush. He thought that he would earn kudos by proposing new programs. But he didn't earn the gratitude of the Media. Worse, instead of declaring a National Emergency when bank money was frozen and repealing "mark to market" he gave in and started the bailout mess. It played right into the hands of Obama. Whether we can reverse this or are to repeat the mistake of Germany in the thirties is not clear at this point. But the very existance of this Republic as a democratic capitalism is being threatened.

Sep 01 12:00 AM

[bearfund:]

For many years the United States government ran a surplus. Therefore if your statement were true, no savings could have been possible. In fact people had plenty of savings, far moreso than they do today. Your statement would also suggest that people in other countries such as Norway and Saudi Arabia that have run surpluses for a long period of time must not have savings; this is also patently false.

Your entire argument seems to be based on the idea that the only thing central banks can hold is debt of the government under which the bank operates. This is a relatively recent development in central banking (still not true or even substantially true of any central bank, by the way), which itself is a relatively recent development in finance. This is complete nonsense so I didn't bother reading the rest.


On Aug 31 08:31 AM Warren B. Mosler wrote:

> Too bad no one seems to understand that the govt deficit = (to the
> penny) 'non govt' accumulation of net of financial assets (aka 'nominal
> savings')
>
> This is an accounting identity, not a theory.
>
> And the federal govt. neither 'has' or 'doesn't have' 'money.' It
> spends by changing numbers in bank accounts upward (as Bernanke stated
> in May), and it taxes by changing numbers downward.
>
> The Federal govt doesn't 'get anything' when it taxes or 'lose anything'
> when it spends.
>
> And if you pay your taxes in cash to the govt it gives you a receipt
> for payment and then tosses the cash in a shredder.
>
> Spending and taxing is a tool to adjust the outcomes of the real
> economy.
>
> A tsy security is nothing more than a 'savings account' at the fed.
>
>
> when china sells us t shirts, the fed transfers funds from someone
> else's account at the fed to china's account at the fed for payment.
>
>
> then china decides to spend those funds or save them, usually buying
> a tsy sec, which means the fed transfers their balances from china's
> transaction account at the fed (called a reserve account) to its
> savings account at the fed (called tsy secs).
>
> And when the tsy secs mature china's securities account is debited
> and china's transaction account is credited.
>
> That's all. For the federal govt there is no dependence on funding
>
> in dollars from anyone. they just move balances on their own spread
> sheet. any constraints are necessarily self imposed.
>
> and interest rates are set by the fed which has full control over
> the entire term structure of rates whether it knows it or not.<br/>
>
> so keep you eye on the real economy, excess capacity, unemployment,
> the output gap, inflation, etc. etc. and let the deficit fall where
> it may. it's a residual that doesn't even need to be published for
> purposes of fiscal and monetary policy.

Sep 01 04:05 AM

[Geezer Bela...:]

The world according to Mosler is a strange one (moslereconomics.com). Mosler's blog begins with Mosler's law: There is no financial crisis so deep that a sufficiently large net increase in public spending cannot deal with it. Then it continues with statements that boggle the mind:
1. federal deficits=nongovernment savings;
2. trade deficits=just a number in a spreadsheet;
3. taxes and govt spending=just a way the govt adjusts the economy. And so on. The Obama regime must get economic advice from economists like Mr Mosler.

Now, there are facts that you have overlooked, Mr Mosler.
1. Debt is real and the federal govt pays interest on it;
2. The value of the dollar has gone down by 95 cents since the time of Roosevelt and is about to sink lower;
3. No, we do not owe the debt to ourselves, but to foreign governments and banks. And they are bound to notice that the dollars that they are paid as interest are buying less and less;
4. No, Roosevelt's policies never did deal satisfactory with the economic crisis of the 20's. Only when 'mark to market' accounting was repealed (so the US could win WWII) could the country recover;
5. No, we can not generate paper money and expect people to give us real goods in return;
6. The Obama regime's spending is not causing economic recovery, but delaying it. Inflation is held in check by continuing to bankrupt one business after another. People losing jobs, businesses and livelyhoods is more than just a cipher in a spread sheet;
7. The value of gold represents the effort it takes to produce it. So, gold price goes up, because gold is not printed but mined, whereas paper money is printed.

Sep 01 09:32 AM