Obama's deficit reduction plan: Worse than nothing

Doing nothing (other than letting the Bush tax cuts expire on schedule) would be better than the current plan

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    President Obama gestures while speaking in the Rose Garden of the White House in Washington. Will the president's debt plan be worse than just leaving the economy alone?
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About a month ago, the Brookings Institution’s Bill Gale made what I thought–and still think–is a brilliant analogy between budget baselines and weight loss goals at an event about the debt limit deal’s “super committee.” I liked it so much that I quoted from the transcript in my very next Tax Notes column (republished on the Concord Coalition site here), and I’d like to re-quote it here (emphasis added):

In terms of an example, think about this the following way: Suppose you’ve been eating badly the last, let’s say, 10 years, and you’ve been gaining a lot of weight and you want to lose weight and you want to lose 15 pounds. Well, we won’t go with 1.5 trillion pounds. You want to lose 15 pounds. The question is, compared to what?

Now, the way we’d usually think about it is, well, compared to where I am right now I want to lose 15 pounds. There’s another way to think about it, though, which is to say, well, I’ve been eating badly for 10 years. If I continue to eat badly the next 10 years I’m going to gain 45 more pounds, so I’m going to lose 15 pounds relative to that increase of 45 pounds that I’m going to do over the next decade.

Now, nobody that’s serious about losing weight builds in a 45-pound weight increase and then says, “I’m going to lose 15 pounds relative to that.” But using one of the baselines, the policy-extended one, as the standard for a deficit reduction goal would be the equivalent of increasing the deficit by $4.5 trillion and then saying, “I’m going to cut it by $1.5 trillion [in other words, increase it by $3 trillion relative to current law].”

In that same Tax Notes column of mine, called “Three Ways to the Current-Law Revenue Baseline,” I explained why I wanted the super committee to adopt a revenue goal of achieving a level of revenues consistent with the current-law baseline. First, there are lots of ways to get there, and all aren’t too bad or so hard–the easiest option being the “do nothing” approach where Congress simply (goes home(?) and) avoids passing any new tax legislation–including any extension of any part of the Bush tax cuts, which have always been deficit financed. Second, committing to those levels of revenues would insure getting our deficits down to clearly economically sustainable levels (not just borderline sustainable or “not quite” sustainable) over the next 10 to 20 years, while we’ll probably still be waiting for entitlement reform to either get done or materialize. I pointed out that the super committee did not have to decide right now (or figure out how Congress and the Administration would actually agree to) the specific tax policy that would produce those current-law revenue levels. All they would have to do is demand that the Bush tax cuts comply with strict pay-as-you-go rules going forward, such that any extension of any part of them would no longer be deficit financed.

In Bill’s lingo, they’d have to commit to not “eating” any more of those very fattening deficit-financed tax cuts. In Bill’s lingo, that’s the way they’d really commit to changing their bad habits and thus not gain any more weight–not one pound of what would otherwise be a 45-pound weight increase.

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Well, yesterday the President unveiled his deficit-reduction plan, one that has been characterized as qualifying as a “go big” approach–by the Administration, of course, but also by none other than Bill Gale, here, when he says (emphasis added):

The debt-limit deal signed in August had two parts. OMB estimates that the first part will reduce spending by $1.2 trillion (this may seem confusing, because the commonly-used figure for this part was $900 billion originally).

In combination with the debt-limit deal, then, the new proposals would (a) pay for the stimulus package the President proposed and (b) still reduce 10-year deficits by $4.4 trillion. Changes of this size constitute “going big” in current budget parlance and should be applauded.

In contrast, the Joint Select Committee needs to come up with “just” $1.5 trillion in deficit reduction to avoid the automatic second-round cuts. The president is asking Congress to go well beyond that and make a much more significant dent in the fiscal problem now.

Well, by the Administration’s own numbers, the plan’s revenue-gaining proposals raise nearly $1.6 trillion over ten years. But that’s only after the Administration first cuts revenues by $3.9 trillion to adjust to their “policy-extended” baseline that assumes that under “business as usual” the entirety of the Bush(/Obama) tax cuts and Alternative Minimum Tax relief would be extended and deficit financed. On net, this means that relative to current law (the purview of legislators, by the way), the President’s revenue proposals for “deficit reduction“–you know, his more “balanced” approach for deficit reduction because it supposedly includes higher revenue–would actually reduce revenues and increase deficits by $2.3 trillion ($3.9 trillion minus $1.6 trillion, from tables S-1 and S-2 in the Administration’s report) over ten years.

So, relating this to Bill Gale’s original analogy of someone who wants to change his ways and avoid what would otherwise be a 45-pound weight gain from his “eating as usual” diet that’s very heavy on deficit-financed tax cuts, the President’s new “diet plan” would indeed avoid the 45-pound weight gain, but would still lead to a 26.5-pound weight gain–as $2.3 trillion in deficit-financed tax cuts is 59 percent (still the bulk of) of the $3.9 trillion worth of all of the possible deficit-financed tax cuts, and 59 percent of 45 pounds is 26.5 pounds.

Now, I want to give credit where credit is due, and certainly the President’s plan is:

  • far better than the Republican approach of suggesting even more deficit-financed tax cuts coupled with draconian (I would call “heartless”) cuts in spending; and
  • considerably better than the “business as usual” policy-extended baseline–that worst-case scenario where all of the expiring tax cuts are all extended and deficit financed.

But I think we should all take note that for all the work and hard choices the Obama Administration put into this plan, it still is “worse”–still falls short of–deficit reduction under the “Do Nothing” approach where all the expiring tax cuts just actually expire.

If I actually had a personal goal of avoiding a 45-pound weight gain and was told I could achieve that by doing nothing versus going on a “tough” and specific alternative diet that would lead to “only” a 26.5-pound gain, I don’t think I’d be that persuaded to sign up for that diet.

And if I instead was told that I could just commit to the equivalent of “doing nothing” in terms of my weight gain, that instead of starving myself completely off my favorite bad-habits food (letting my access to that particular food disappear as scheduled, analogous to letting the tax cuts expire) I could keep some of that favorite yummy-but-fattening food in my diet, but add enough additional exercise to offset the caloric impact?….Well, then sticking to the “do nothing” weight-gain goal (and avoiding the full 45 additional pounds) wouldn’t seem so awful and austere after all.

(I eat a LOT of sweets by the way, but I also do a lot of yoga.)

So, Bill Gale and I have been having a little bit of a personal disagreement over whether I’m being too much a “Debbie (or Diane) Downer” on this. I mean, can’t I emphasize my usual “glass is half full” perspective? Well, in this case, no. I’ve always thought that the current-law revenue baseline is the right goal for tax policy going forward, and I especially think that’s true now. If the President wanted to “go big” with an approach that’s a big contrast to the Republican approach, he should have “gone bigger” with revenues. Falling short of “doing nothing” is far from good enough. And I say this not because I’m a pessimist, but because I’m an optimist and truly believe we can do much better than this.

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