Making Heads And Tails Of The CBO Budget Numbers
Numbers are flying all around Washington today, giant numbers with more zeroes than you have toes. A new Congressional Budget Office report projects that President Obama's budget will produce $9,300,000,000,000 (of $9.3 trillion) worth of red ink for the U.S. Treasury between 2010 and 2019. That is $2,300,000,000,000 ($2.3 trillion) worse than White House bean counters had predicted when they wrote the budget, mainly because the economy has gotten much worse since they did their work.
Members of Congress, meanwhile, are shouting out other numbers. The budget deficit will hit $1.8 trillion in 2009, they say, and $1.4 trillion in 2010. In other words, lots more fingers, lots more toes in the short term. Others point out that under the CBO estimates the nation's debt is going to balloon, from 41 percent of GDP (a measure of the economy's size) in 2008 to 82 percent of GDP in 2019. The White House maintains that you should focus on another number. In the briefing today, Robert Gibbs repeatedly emphasized Obama's intention to cut the deficit in half during his first term compared with the money-losing operation that President Bush was running at the end of his last term, a goal that the administration is still determined to meet.
Almost all of these numbers sound bad, but none of them makes that much sense in isolation. The wonder of numbers is that they are so fungible in policy debates. Gibbs can claim Obama is aiming to cut the problem in half, while the CBO points out that at the same time Obama will be roughly doubling the size of the problem. Neither are lying. And neither are explaining everything you need to know. The job of putting the deficit in proper context is actually quite difficult, mainly because no one really knows what will happen over the coming years. If the economy rebounds with spirit this year, then most doomsday scenarios are less likely to come to pass. If the economy continues to deteriorate over the next five years, then we are all in deep trouble no matter what the deficit is this year. If something in between happens, which is the most likely scenario, the real world impact of the budget debt will be, uh, something in between.
But let me endeavor, nonetheless, on this cool Friday night to attempt to bring some clarity to this confusion. One important fact that is often lost in these discussions is that not all budget debt is equally bad. A trillion dollars deficit this year is not as troubling to economic wizards, for instance, as a trillion dollar deficit in 2015. For this reason, economists often speak of the deficit problem in roughly three categories: Short-term, medium-term and long-term. (Politicians, by contrast, almost never make these distinctions.) Each era of fiscal peril is governed by its own dangers and its own physics. And the Obama Administration's ability to get Congress to navigate these three eras will play a big role in determining the happiness of your children and grandchildren. So with that introduction, I will now attempt an admittedly rudimentary explanation of what worries and does not worry lawmakers and experts about the sea of red ink in which we all now swim. (After the jump.)
The Short-Term Deficit
In the short term, economists broadly agree that the U.S. Government has to spend far more money than it takes in. That's because the economy is broken. Private sector spending has collapsed, and a gap has been created between what the economy can produce and what it is producing. That gap, according to Keynsian theories that are widely accepted, should be filled by government borrowing to prevent the economy from slumping further into the abyss. That will get people working and spending again, preventing a much steeper downturn, which could be much more damaging on the nation's fiscal health.
As a result, most economists are not so concerned about the short-term costs of the stimulus spending, and the bank bailouts, which are making our current deficit so big. "We've known since Keynes that short-term deficits should be thought of differently than long-term deficits," explained Alan Auerbach, an economist at the U.C. Berkeley, expressing a consensus view. "Focusing so much on short term deficits is sort of nutty."
This is why so many economists get exasperated by the debates on Capitol Hill. Republicans, especially, have recently made a business out of conflating the long-term spending problem, the mid-term spending problems and the short-term spending explosion. These politicians speak of the bailouts to AIG, the costs of new school buildings and the relatively distant entitlement crisis as if each category of spending was interchangeable. They are not. The real problems arises when the government deepens its debt in times of relative economic health, or set up spending programs that do not end, which this country has been doing for much of the last decade. So we come to the issue of. . .
The Medium-Term Deficit
The medium term is that period of time that Auerbach calls "post-recession and pre-catastrophe," when the current financial crisis will have passed but the full impact of the entitlement crisis has not yet arrived. It is this period that is most debated when members of Congress discuss the Obama budget, a period roughly between five and ten years out, when the world is likely to take a critical eye to America's fiscal health.
Once upon a time, politicians talked about fiscal responsibility in terms of balancing the budget. The government would strive to only spend what money it raised in receipts, they said. Nowadays, the standard has slipped. Policy makers now talk about not growing the debt-to-GDP ratio, or making sure that the deficit is not any bigger than the growth in the economy, so that the national debt does not take up a greater share of the economy. On the one hand, this concern about spending is about building confidence for the nation's creditors, who want to know that we will not spend ourselves into oblivion. On the other hand, this concern about spending has to do with keeping as much capital as possible in the private sector, where, economists tell us, it will make our lives better.
"The more the government borrows, the less available for private investment," explains William Gale, an economist at the Brookings Institution. Less capital for private investment will likely mean lower wages and lower living standards. Earlier this month, Federal Reserve Chairman Ben Bernanke spoke directly to this concern over medium-term spending before Congress. "We have to make sure that in the medium term we have a fiscal position that will allow, and I use this as a rule of thumb," he said, "the debt-GDP ratio not to be growing so that we can assure ourselves we'll be able to finance those debts at a reasonable rate and not impose excessive burdens on our children and grandchildren."
This is where the CBO analysis of Obama's budget causes so much concern. With a projected slowdown in growth over the coming years, thanks to the current economic situation, the CBO estimates that the deficit spending will never dip below 4 percent of the GDP and sometimes rise as high as 6 percent between 2012 and 2019. The economy meanwhile is expected to grow at about 4 percent once the recovery occurs, which means the debt-to-GDP ration, as laid out by the Obama plan is something less than sustainable. Not only will we be taking on more debt, but we will be taking on debt faster than we expand. And if we can't control our spending even when the going is good, when will we ever?
This is the problem that Sen. Kent Conrad, the Democratic chair of the Budget Committee, was discussing Friday, when he released a statement in response to the CBO report. “The reality is we are going to have to make adjustments to the President's budget if we want to keep the deficit on a downward trajectory," he said. The medium-term problem is therefore the issue that most directly affects Obama's policy priorities, which include increases in spending on education and energy, and decreased taxes for the middle class. But concern over the medium-term deficit are just peanuts compared to the concerns over the. . .
The Long-Term Deficit
The long-term deficit is the real killer. The only good news is that it is still a few decades out. As it stands, health care spending is growing far faster than the rest of the economy, with no end in sight. As Peter Orszag, the White House Budget director, often says, "If health care costs go up at the same rate over the next four decades as they did over the previous four decades, those two programs [Medicare and Medicaid] go from 5 percent of GDP to 20 percent of GDP by 2050." In other words: calamity. In this dark future, either the government would be bankrupt or you would be working most of the year just to raise enough money to pay your own health insurance premiums and the taxes needed to fund Medicare and Medicaid. The Social Security program would also be under funded at this point, but it presents a far smaller fiscal risk.
Neither Obama's budget nor the new CBO estimates deal much with these out years. But the daunting dangers of the coming entitlement crisis hang heavily over all discussions of budget deficits and national debts, because they dwarf by many fingers and toes all the problems we now have. This is also one of the principal reasons that Obama has announced his determination to tackle health care this year. It is a daunting task, because most economists agree that the only way to reign in these costs is to transform the entire health care system, not just Medicare and Medicaid, to slow the growth in treatment cost and make the system more efficient.
The key to solving this problem is to cut costs, but Obama has proposed getting a solution through Congress by promising, at the same time, to expand coverage, which will increase costs. If he just expands coverage, but does not find a way to cut costs, then our fiscal house will be in far weaker shape. But if he can find a way this year to begin a fundamental change in how healthcare works in America, the fiscal benefits will be worth far more than several dozen more bailouts of AIG.
There is much more to say, but the hour is late. Now close down your computer, and go back to watching basketball. There is a lull here to enjoy. The CBO number wars are set to continue Sunday on the network news morning shows, and the fight won't end there. But from now until then, we can all focus on our NCAA brackets, reveling in the miraculous joy that sports provide: The ability to care a great deal about something that really doesn't matter much at all.
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giant numbers with more zeroes than you have toes
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I actually have eleven toes. -
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Michael Scherer:
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Does this mean that we don't have enough money to occupy two countries indefinitely? -
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Michael Scherer:
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If the economy rebounds with spirit this year, then most doomsday scenarios are less likely to come to pass. If the economy continues to deteriorate over the next five years, then we are all in deep trouble no matter what the deficit is this year. If something in between happens, which is the most likely scenario, the real world impact of the budget debt will be, uh, something in between.
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How do you know that "something in between" "is the most likely scenario"?
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Are you regressing to a phony mean? -
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I have to admit at the outset that I did not read all of that. I think I got the jest of it. My thought is more about what all of the money manipulation and injection is about. It is about jolting commerce. Causing economic activity. Repairing badly mangled trust. Jobs, productivity, credit, all that. There is no doubt that things will get back on track. They have to. The economy is about living. Million dollar houses may not sell for a million dollars, but they probably will sell eventually. The thieves that have caused this mess will be viewed with a jaundiced eye in the future if there is a lesson to be learned. Everybody will have a few bucks short than they want, but things will balance.
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Michael Scherer:
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...Obama has proposed getting a solution through Congress by promising, at the same time, to expand coverage, which will increase costs
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Would the costs be decreased if Obama's "solution" were less "uniquely American" in terms of its failure to address the inefficiencies (insurers) in our health care system that produce inflationary pressures causing the highest costs per person in the world?
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Doesn't your (correct) analysis of the true nature of entitlements' fiscal issues (being almost solely a matter of health care spending) make the necessity of single-pay fairly obvious if we are to reduce the costs that burden our economy long term, Michael Scherer? -
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My apoligies for commenting before reading through the whole blog post. I have now done that, and my comment does not change in the least, other than to add that the issue of "entitlements" is a phoney issue. You speak of massive expenditure to spark some life into the economy, and "entitlements" are a problem? I fail to follow this logic. I understand the health care cost problem, but that will balance eventually as well. We will have people dying on the street because of excessive health care costs? I don't think so. Trust me, it is all about trust, and removing and suing the creeps who have done this. The economy will recover because it has to. People have to live and they will. Very simple economic theory, but it is what economics is about, however the genuises in DC view it.
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I should also say, Michael Scherer, my thanks for the Ezra Klein-esque detailed post.
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Posts like this are where serious peoples' discussions of the way forward start. -
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I beg to differ. The 2008 NCAA men's basketball tournament had a significant impact on sales tax revenues in Lawrence, Kansas.
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s_z: The irony here is that my silly, bald-faced lie about the number of toes I have gets me exactly as far with MS as your cogent, relevant comments.
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I thought this was a very good piece, Michael.
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Thanks for the thoughtful post. Michael. Perspective is valued at precisely this point in the (somewhat dysfunctional) national discussion. One quibble: the NCAA tourney DOESN'T REALLY MATTER?
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Thank you for an exceeding helpful post.
One point:
If health care costs go up at the same rate over the next four decades as they did over the previous four decades...
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I have discussed elsewhere the fact that many economic arguments are skewed by the fact that while there no limit to how much wealth you can accumulate, there is a lowere limit on just how poor you can become without starving to death.
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Likewise while health-care costs have risen at the alarming rate you suggest, there's a point past which no-one will be able to afford them and demand will dry up. To simply assume that the current curve continues indefinitely is not only not realistic but it's unecessarily alarmist as well.
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It also suggests that Obama's insistence on addressing the issue during his first year is rather important. -
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Also,
When bouncing around huge nembers it's always helpful to divide them into per/houshold amounts.
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It helps the imagination get around the amounts involved. -
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Michael Scherer:
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Here's the key passage from Chapter 2.
.CBO's current forecast, particularly for the near term, is subject to a greater than normal degree of uncertainty.
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Figure 2-3, based on CBO's past forecasting errors, illustrates
the usual uncertainty regarding forecasts of real
GDP. However, the figure probably understates uncertainty today. Both the magnitude of the contractionary forces operating in the economy and the magnitude of the government's actions to stabilize the financial system and stimulate economic growth are outside the range of recent experience. The forecast assumes that financial
markets will begin to function more normally and that
the housing market will stabilize by early next year.
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The possibility that financial markets might not stabilize represents a major source of downside risk to the forecast. Households' and businesses' confidence is also difficult to predict. For example, if consumers begin to anticipate a period of deflation, they may choose to further postpone major discretionary purchases, thereby delaying the recovery; but evidence that economic conditions are stabilizing could encourage households and businesses to resume spending more rapidly than is envisioned in the forecast.
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Finally, although CBO's forecast incorporates the middle of the range of the agency's estimates of ARRA's impact on GDP and employment, that range is quite large. For instance, CBO's analysis suggests that by the fourth quarter of 2010, the stimulus legislation will raise real GDP by between 1.1 percent and 3.4 percent and increase employment by between 1.2 million and 3.6 million jobs.1.
So:
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1) The CBO budget report is unusually poor in terms of its ability to forecast deficits accurately
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2) Much of the unusual degree of uncertainty has to do with continuing uncertainty with respect to credit markets
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3) Another significant factor limiting accurate predictions of future GDP growth and recovery is the role of Keynes' Animal Spirit expressed in public confidence in determining macro-economic trends
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It seems that you and your colleagues will alternately be called upon to act as conduits for (effectively) propagandists on behalf of your corporate sponsors invested in growth, and the government, and conduits for the agents of fear, uncertainty and doubt, on behalf of corporate sponsors invested in profiteering, and the opposition.
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It also seems, Michael Scherer, that we, as a people will be tested --not in the way that the Battle of Britain tested the British people, but in a manner that is at least distantly related. "What kind of people are we?" is the question the CBO report asks us, albeit in the clinical language of forecasters.
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"What kind of people are we?" ask the report's authors. The CBO report tells us that the kind of people we are results from the decisions that we make every day. Will we decide to withhold our business, in the rational expectation of sellers' desperation tomorrow being even more acute than today --will we hesitate? Will we decide to simply pick up where we left off before the world's greatest financiers turned out to be incompetents and frauds, in the rational expectation that economies ever return from periods of great imbalance to relative equilibrium --will we act normally?
"What will we do?" posit the authors neatly alongside "What kind of people are we?".
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But the authors of the CBO Report aren't as comfortable explaining to us that the ratio between public feeling and thinking may be in just as great of a state of imbalance as the deficit to GDP ratio is projected to be. They aren't prepared to speak authoritatively about this imbalance between rational, considered confidence (or lack thereof) and sentiments otherwise produced or derived. This is because the ratio of economics to astrology, research to advertisement, deliberation to demagoguery, information to propaganda, education to ignorance, reliable national honor to feral opportunism --the factors that go into how people arrive at a given level of confidence-- are cultural. The cultural framework that determines public confidence is the product of a specific nation in a specific era, and not any given people at any given time (these givens economists quite naturally prefer to posit).
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The companion question to "What kind of people are we?" is not "What will we do?", but "How will we arrive at our decisions?". Are we in Bedford Falls or Pottersville? Will people listen to Potter or to George Bailey? Are there any George Baileys in America? Would a person like that have a platform to be heard in today's culture --today's media landscape? Are the forces that control people's exposure to knowledge and ideas on balance benevolent? Are these mechanisms good for people?
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These questions bring us back to you again, Michael Scherer, because you are an acknowledged actor, however small, in the system by which public confidence is produced and acquired. I asked you originally to consider your role: would you be a vessel for good propaganda (confidence) or bad propaganda (fear, uncertainty and doubt)? I ask you now to consider your role in terms of that cultural framework --the ratio of information and propaganda, economics to astrology, etc.-- and to begin to determine how you will approach your work with respect to how your readers are to produce or derive confidence. Where will your work fall on the scale?
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Nobody wants to live in a Dashiell Hammett novel, Michael Scherer, except the very sheltered and inexperienced. "What kind of people are we?" is a question that should not be dismissed via comfortable cynicism, florid irony or professional savviness, although the temptations will be great. The CBO Report speaks clinically of an uncertainty that allows for goodness to exist, for benevolence to spread and become routine. There is not that opportunity in a noir novel for its characters, and if they could look outward from the page to us and our world, and shout at us to be different from them and theirs, they would.
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"What kind of people are we...What will we do?" ask the authors of this report, noting the uncertainty that undermines their predictions and our fortunes. My question to you, Michael Scherer, is "How will we arrive at our confidence?" -
15
Michael:
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Good post - best in quite a while. However...
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"Once upon a time, politicians talked about fiscal responsibility in terms of balancing the budget. The government would strive to only spend what money it raised in taxes, they said. Nowadays, the standard has slipped."
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Um...Michael, "Once upon a time" was a little as EIGHT F$%&ING YEARS AGO!!1!!!" This isn't just some abstract notion that our grandparents told us about! This was right HERE, right NOW, the year was 2000 (Y2K), when the gub'mint, having been led by the Democrat party after 12 years of Reagan-voodoo-economics, managed to *balance the budget*.
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It was after 2000, with the House, Senate and White House firmly in control of "fiscal conservatives" that our economy jumped into the handbasket.
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Go Vikings! -
16
This is a post that makes it possible for a focused discussion. Have we passed on from the years of off the book accounting to a time when we will lay out our sources of income and expenditure as a nation for all to see. Sure, the outlook is grim. Sure solutions are going to be tough to come by given the vested interests for whom the national interest is of no import.
If we can get health care right we can do much to make headway. The way things are going medical costs are going to drown us. And I refuse to drown. So I plan to support every effort to establish a single payer system. If that is socialism so be it.
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What I don't understand is this: Where is this money (ie., the goods and services that it buys) that the US is borrowing coming from. Who put the "sweat" equity into the riches that they are borrowing to keep this profligate national lifestyle? As someone who didn't study Economics, the only thing I can surmise is that the US must be sucking a whole lot of sweat equity from those that probably need this equity more.
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Deficits aren't "deficits". Right wingers have an especially hard time with this one. I used to have big arguments about tax cuts. They aren't the same. If you give one trillion to the rich, some of that money might go overseas for vacations, villas, etc, where as if you give it to the working poor, it will circulate in this economy.
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Spending 2 trillion long term on Iraq is not the same as spending that on infrastructure, tax credits for green tech, education, universal health care.
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Art Laffer's curve never addresses that. -
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Where is this money (ie., the goods and services that it buys) that the US is borrowing coming from.
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Some answers are too easy.
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That would be inexpensive Chinese labor. US business takes advantage of the disparity in standards of living between the American middle class and Chinese in otder to manufacture goods there for sale here. The dollars that consequently flow into China would stagnate and since the Chinese don't buy significant exports from us, they instead buy up T-bills. -
20
Largely as a result of the enactment of recent legislation
and the continuing turmoil in financial markets,
CBO's baseline projections of the deficit have risen by
more than $400 billion in both 2009 and 2010 and by
smaller amounts thereafter. Those projections assume
that current laws and policies remain in place. Under
that assumption, CBO now estimates that the deficit
would total almost $1.7 trillion (11.9 percent of gross
domestic product, or GDP) this year and $1.1 trillion
(7.9 percent of GDP) next year—the largest deficits as
a share of GDP since 1945. Deficits would shrink to
about 2 percent of GDP by 2012 and remain in that
vicinity through 2019.
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In other words; If spending is held at the current level, and no new spending proposals are enacted we will still see a deficit of 1.7 TRILLION in 2009 and 1.1 TRILLION in 2010. This does not take into any consideration of “Socialist” healthcare or the so-called energy stimulus to combat the farce called Al Gore's Global Warming.
Then we have this; With the proposals that Obama and his inept band of merry men and women propose further spending…
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As estimated by CBO and the Joint Committee on
Taxation, the President's proposals would add
$4.8 trillion to the baseline deficits over the 2010–
2019 period. CBO projects that if those proposals
were enacted, the deficit would total $1.8 trillion
(13.1 percent of GDP) in 2009 and $1.4 trillion
(9.6 percent of GDP) in 2010. It would decline to
about 4 percent of GDP by 2012 and remain between
4 percent and 6 percent of GDP through 2019.Yes, as it says “the President's proposals would ADD, may I repeat ADD, another 4.8 TRILLION to the baseline deficits from 2010 – 2019. In total our deficit, not Barack “the Insane” Obama's debt to the world, but OURS would be 7.7 TRILLION by 2019. But, other articles I have read show it to be over 9 TRILLION.
http://news.yahoo.com/s/ap/20090320/ap_on_go_pr_wh/obama_budget.
This is completely unsustainable. No one in their right mind could believe Obama's proposals. “Fuzzy math” has a new name, “Hooked on Phonics meets Obama Math”. “Yo' baby yo'. If-in yo' give me some good blo' baby, yo' won't need to worry about the economy”.
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IMPEACH THIS IDIOT BEFORE IT IS TOO LATE!!! -
21
Racist Rusty can't resist......
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Wow, that last comment by Rusty was insanely racist and quite offensive actually. Can we get that comment deleted?
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The First Amendment, you gotta love it!! Don't you think, nathan7777?
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I suppose we could all just stick our heads the sand like the last administration and just assume that spending on military operations overseas doesn't add to the budget, or that the federal government will never have to spend money on Katrina-like disasters, or that Medicare reimbursements to physicians don't exist, or that the AMT is never indexed each year to inflation (which it always is and which always reduces revenues for that year).
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If anything, Obama has reduced the amount of fuzzy math in his budget. So over half of that $4.8 trillion that Rusty rails against is simply due to honest accounting, $2.7 trillion of it to be exact. -
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I briefly considered hanging a hankie over my monitor, but decided adding something on-topic and respectful would scroll rusty out of view.
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Far be it for me to bemoan the financial literacy of the average American. I alternately trembled, sweated and snoozed through three semesters of economics and rarely read the business press. So, like many, I look to the press to not only report economic news but also explain the underlying issues in language I can understand. Instead, they defer to partisan spokespersons, who are constitutionally unable to separate their explanations from their agenda.
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It is not as if there are no sources of relatively unbiased information. But instead we are subjected to hour after hour and page after page of slanted commentary or staged dichotomy. David Schuster tweeted after last night's 1600 Pennsylvania "The best guests fight hard on the air and get along well with their adversary during the break. That's brad B and Chris K. Both are great." It may be great teevee, but for fake combat, I'll take WWE over "news" shows any day.
- michaelscherer Gibbs says Desiree Rogers will not testify tomorrow before House on WH gatecrashers. - 3 hours ago
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