The Weirdness of 10-Year Deficit Reduction

By James Kwak

The Gang of Six plan proposes to reduce the cumulative deficit by $3.6-3.7 trillion over ten years relative to the CBO’s March 2011 baseline. Everyone’s excited about it. Four trillion dollars! Hooray!

The weird thing is that if you are claiming deficit reductions against the CBO’s baseline, I think intellectual honesty requires you to point out that, according to the CBO’s baseline, there is no deficit problem. The projected 2021 deficit is $729 billion, but net interest spending is $807 billion (Table 1-5). That means that the primary budget is running a surplus of $78 billion, the entire deficit is due to interest payments on the debt, and the debt has stabilized around 75 percent of GDP. This is not a great situation, but it’s no emergency, either.

Now, you may point out that the baseline is unrealistic, and I agree. But the three most unrealistic things in the baseline cancel themselves out. We know that Congress will continue to patch the AMT, which will cost $804 billion over ten years. (Numbers are from the CBO’s January Budget and Economic Outlook, Table 1-7; the baseline only changed minimally (and in a good way) between January and March.) We know that Congress will not let Medicare payment rates immediately fall by 28 percent; that costs $302 billion over ten years. But we also know that we are reducing military operations in Iraq and Afghanistan, which will save $1,371 billion over ten years.* Add those three corrections, and the cumulative deficit is smaller than in the baseline by $265 billion.**

The big policy uncertainty that hangs over the ten-year baseline is the Bush and Obama tax cuts of 2001, 2003, and 2009, which were extended in December 2010 and now expire at the end of 2012. If we extend all of those tax cuts, we will add $612 billion to the 2021 deficit (on top of $137 billion for patching the AMT). That’s real money. To which my answer is: let them expire. Let all the tax cuts expire, and there is no ten-year deficit problem.

Instead, the Gang of Six plan proposes to cut taxes by $1.5 trillion (over ten years) relative to the CBO baseline — which means $1.5 trillion in unnecessary spending cuts.

The real problems come after the ten-year horizon, when Medicare spending accelerates due to an aging population and increasing health care costs. Those problems need to be solved sooner or later, and sooner is better than later, since every year of high health care cost inflation that goes by makes the problem worse. But the Gang of Six plan is the wrong way to solve those problems (although it is admittedly far better than the Ryan Plan, which only makes them worse). Does anyone really think that the middle class’s paltry 2001/2003 tax cuts will make up for a lower Social Security cost-of-living adjustment and a cap on federal health care spending?

* By statute, the CBO baseline must project military appropriations as a straight line based on past appropriations, so it assumes constant force levels for the next decade.

** The 2021 impact is even better: there you get a net $28 billion saving, which boosts the primary surplus to $106 billion.

22 responses to “The Weirdness of 10-Year Deficit Reduction

  1. maybe it’s because the ‘Gang’ isn’t very representative.

  2. In other words, we need to slash entitlements NOW to save the country from what the GOP will do to us in the next few years. Nice…

  3. CBS from the West

    ” But we also know that we are reducing military operations in Iraq and Afghanistan…”

    Maybe. I have read that behind the scenes US diplomats are finagling to get “invited” to stay on beyond the established withdrawal dates.

    And even if we do get out of Iraq and Afghanistan, why would anyone believe we won’t get involved in new wars elsewhere? We’ve already gotten entangled in Libya, and there are so many other possibilities. If there is a consistent theme in US foreign policy since World War II, it’s that we just can’t resist throwing our military weight around.

  4. Yeah, ‘reducing military operations’…but the Military budget continues to grow. Hmm.

  5. That’s exactly it, we have a military based economy that is doubley based on greed and who can get to the fidiciary trough fastest. It has resulted in the concentration of money and power, and in its wake left an uncompromising cast o characters that may want to turn things around by holding the debt ceiling hostage. And I don’t blame them, the concentration couldn’t schedule their own mothers funeral on time.

  6. Does the CBO Baseline even factor in Corporate Tax Revenue?

    As of 2009 U.S.Corporation Tax Revenue as a share of GDP, (OECD) contributed approx. 2.1% — much less than all other countries. From 2000-05 the average revenue of Corp’s in the OECD countries was approx. 16% vs 13% for the U.S.! Absolutely, no U.S. Corporation pays 35%. Why? Tax Code Law, loopholes, offset/ deferred payments, credits, subsidies, exemptions, etc., etc., !
    Ref: The Double Irish Arrangement

    http://en.wikipedia.org/wiki/Double_Irish_Arrangement

    Thankyou James and Simon

  7. From Wiki:
    In the Republic of Ireland employees pay pay-as-you-earn (PAYE) taxes based on their income, less certain allowances. It is a progressive tax system with little or no tax on low earners and a high rate applied to top earners.
    A large proportion of central government tax revenue is derived from value added tax (VAT), excise duties and other taxes on consumption. The Irish tax system is primarily in place to pay for current expenditure programs, such as universal free education (including third level), taxpayer funded healthcare, social welfare payments such as old age pensions and unemployment benefit and public capital expenditure

    Now in order for the US tax system to work, we have to face reality first, and then make the necessary changes.

  8. Who says all the low fruit has been picked?
    The Republican’s and their surrogate Tea Party, or the almighty, and righteous Democratic Party — I know it’s a tough question to answer, as James says,… kinda (pathetic) weird, that (JMHO) they can’t cut $4 Trillion over a decade? (why not go the way of Christy/ N.J Gov. and spread the savings over 30 years,…unbelievable)
    We have literally capitulated to Korea, and China’s Trade War’s with the United States (can anyone say Clinton?) over the last two decades. Just think of the trade deficit as a ,”not-so-esoteric-treason-perpetuated-by-all-our-lawmakers”! A gratuitous giveaway to solidify their reelection via Corporate American’s Multi-National Capitalist! These free market wanna be potentate-plenipotentiary-psychotic’s (the “P’s have it ?) are having their way with every hard-working Americans’ future, period!
    Just do the math. The average U.S. tariff is 2%, whereas Korea’s, and China’s respectively are 6% and 10%,… amazing. Simply amazing!!!

    Thankyou James and Simon

  9. Two questions:

    How much of the dollar value internationally has to do with the perceived US military supremacy?

    What about the interest rate on US debt… for how long can you keep on having your banks lend to the government without any capital, while at the same time they have to put up substantial capital when lending to small US businesses and US entrepreneurs?

  10. What the heck is the Gang of Six smoking?

  11. The kleptocracy’s machinations provide a perverse distraction from summer’s heatwave.

    “As a final point, confront the fact that you are even lied to about “deficit reduction.” Even if Obama gets his $4 trillion “deficit reduction” over the next decade, it does not mean that the current national debt will be $4 trillion less than it currently is. The “reduction” merely means that the growth in the national debt will be $4 trillion less than otherwise. Regardless of any “deficit reduction,” the national debt ten years from now will be much higher than it presently is.”

    http://www.counterpunch.com/roberts07222011.html

  12. CBS from the West

    @ Anonymous

    “‘As a final point, confront the fact that you are even lied to about “deficit reduction.’ Even if Obama gets his $4 trillion ‘deficit reduction’ over the next decade, it does not mean that the current national debt will be $4 trillion less than it currently is.The ‘reduction’ merely means that the growth in the national debt will be $4 trillion less than otherwise. ”

    Good grief! I didn’t imagine anything could drive me to try to defend Obama. But really, there is no lie here. If one understands the meaning of the terms deficit and debt, there is no deception. If one doesn’t, then really one should learn that vocabulary before entering this fray. People who don’t grasp the difference between a function and its first-difference or first-derivative really have no place in the discussion. It’s not rocket science–anyone can learn this.

  13. Social security is also going to explode by 202 — $1T/yr. The front half of the baby boom will have turned 62 by then and most of them are going to want their money.

    The CBO’s estimate of GDP in 221 is laughable — $24T, that’s nearly 5% growth pa. We’ll be lucky to keep what we got if oil goes to $200 or more, which it will.

  14. @ anon: You are correct, any statistics used after the 08 crisis are moot. That was a hugh 10 year number rammed into law after a lenghty tax cut session that still needed to be extended or draw out the crisis card again. There really is no one who can address the principle debt in the short or the long term, we are content with paying interest and bonds on the backs of the middle class and even that is mired in arguement.

  15. From Norquist’s piece in NYTimes today.. “Finally, there has been much confusion — some of it {Norquist’s] fault — over whether the ending of the 2001 and 2003 tax cuts or the A.M.T. “patches,” scheduled for Dec. 31, 2012, should count as a tax hike. If they are ended, the government will take in nearly $4 trillion more over the next decade than if they remain.

    My position, and the implications of the pledge regarding such “temporary” tax cuts, is clear. If there were no vote in Congress and taxes rose automatically, then no politicians would have voted for higher taxes and no elected official would have broken his or her pledge.”

    So even Norquist seems to want a disclaimer on the Republican pledge of allegiance with regard to the Bush tax cuts. The Reps digging in on this one is purely 2012 campaigning.

  16. How about we just focus on the 2011 and 2012 deficits? The RINO’s on the Go6 are a joke. The only reduction in spending comes from changing how the CPI is calculated, thus lowering the Cost of Living for Social Security recipients. Can’t talk to a Lib about tax increases because of the intellectual dis-honesty regarding spending cuts. How about that put that into a bill with details and see how many senators are really willing to vote for it?

  17. Brenda Vinall-Mogel

    Maybe it is time to think outside of the Box here.

    Drop all Government Department budgets by 3 – 5% including the traditionally thought of parts of the Executive, Legislative and Judicial branches. We can then pull ALL of the welfare portions out of the various departments like USDA’s Food Stamp Program and place them in a new Welfare Department. By separating social programs from other programs, government leaders and the people can see where the real expenses are for the government and set-up solutions to the programs; thus reducing the deficit over time.

    As said above, this new Welfare Dept is to not only to distribute funds, but to find solutions to end or reduce programs based on a case-by-case base. This new group of Caseworker is to be an advocate for this family; not a person who “hands out” programs based on X. IF further education is needed, then the caseworker shows the person a computer in the building and shows the person how to find a school, financial aid, etc. and works with the person on finding out the schools placement rates for jobs in their proposed field to help guide in making choices. All who receive aid are placed on a timeline with goals for when services should end. Every program except SSI should have this type of an exit strategy for each person. Those who work with the cases should have contracts, which are renewed based on success rates.

    Another example would be housing. If government sponsored housing is needed in an area, the first question should be why are housing rates too high and then work with town planners on developing integrated affordable housing units or finding out if some other factor is affecting wages to keep housing from being affordable, or if it was caused by the situation we just went through. The issue is to find solutions and not building more government housing.

    Anyone under Federal Unemployment Insurance should also go through an exit strategy of X days to find a job in his or her field and then to various other options like a Plan B retraining or assistance in starting a small business IF that is what is needed. Plan C, help to move to an area where the skills are needed. Plan D, no more assistance unless they are signed up with a temp agency that works with employers in the job skill area. If they refuse work of any type within their skill sets, then they do not get any supplemental aid of any type for that week. If there is a developmental issue with the person then they can be referred to other agencies and/or may be hired by the government for seasonal work helping building and grounds departments or park systems.

    I know this is very simple, but many here will at least understand the idea, which is to find solutions to reduce some types of government spending. We can say cut the budget all we want, but it fails to look at the reason why the budget is large to start out with. What we do not want to see chopped are government’s educational/research programs, which help everyone from industry to food production, Foreign Programs, though again aid packages do need to be looked at for success based on the programs intent and not public opinion and factions of the fickle press, nor do we want to see safety programs that provide some consistency in regulations across the states cut, etc., most departments if the Welfare programs are pulled out should be able to come up with areas to cut as long as they know it is coming and they can determine the areas to reduce.

    As for taxes, remove all deductions and lower the actual rate. Possibly making the tax rate more equitable by tying ALL government payments including SSI and Medicare to no more than X% of wages. Those who make more than $106,800 still pay the same percent for government, but as an increase in personal income taxes since SSI is capped. Those who are self employed would pay the additional amount to SSI as they do currently, but if their wages exceed the cap, they would pay the same increase in the amount of personal income tax just like those who would work for an employer once they exceed the $106,800 rate. Currently, that would be a 4.2% increase in revenue for the government for every dollar above $106,800 and those who make more than the capped amount would still pay the same percent of income for government programs as those below the cap.

  18. I am not an economist, but how can one ignore interest costs in looking at a budget? Are they not actually due and payable to somebody? Thanks.

  19. I would be interested to hear your thoughts on the potential benefits of tax cuts to the economy and therefore to the deficit? At what level do lower taxes stop generating more revenue as is consistantly found in Europe (where of course taxes are much higher) and simply mean that not enough money is coming in?

  20. Phooey! My budget balances this year, http://www.mjbarkl.com/usbudget.pdf , and provides Medicare for All. Why can’t the Gang of Whatever do that? (no, no need to answer, it’s a rhetorical question). Best wishes, –Mike Barkley, Candidate for Congress, http://www.mjbarkl.com/run.htm

  21. A lot of people made some great points, but I think as the article shows the current debate is driven more by politics and ideology than economics. What so many politicians and people miss is the fact that the US government is not a family or a corporation or even like most countries of the world for that matter. The US federal budget does not have to balance every year (or any year for that matter). There are some real issues out there that we need to address, namely healthcare costs, but that is more of a question of what type of society we want to have than what marginal tax rates should be. For some strange reason the US has always found a way forward, and even when we took two steps back we would eventually take three steps forward and keep going. Our current situation will sometime soon crystallize in a healthy way in the minds of people and politicians and we will get through this. We always do.

  22. A lot of people made some great points, but I think as the article shows the current debate is driven more by politics and ideology than economics. What so many politicians and people miss is the fact that the US government is not a family or a corporation or even like most countries of the world for that matter. The US federal budget does not have to balance every year (or any year for that matter). There are some real issues out there that we need to address, namely healthcare costs, but that is more of a question of what type of society we want to have than what marginal tax rates should be. For some strange reason the US has always found a way forward, and even when we took two steps back we would eventually take three steps forward and keep going. Our current situation will sometime soon crystallize in a healthy way in the minds of people and politicians and we will get through this. We always do.