The Surprisingly Easy Medium-Term Budget Fix
Another thing to say about Doug Elmendorf’s dislike of the disconnect “between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services” is that the extent of the country’s medium-term fiscal problems is really not obvious to non-specialists. You can tell this (via Ezra Klein) from this hot new chart from none other than Doug Elmendorf:
This chart is telling us that under current law (the solid lines) the country’s medium-term fiscal trajectory looks not so bad. Those are deficits, but they’re not unsustainably large, and it looks like relatively small tweaks could turn the situation around. The dashed lines, however, represent a “current policy” scenario in which we assume that some of the Bush tax cuts will be extended and also that the AMT threshold will continue to be pushed up.
Those are reasonable assumptions, since both such measures are supported by the leadership of the less anti-tax political party. Elmendorf, in other words, isn’t wrong to worry about that. But I think it’s pretty understandable that this nuance is lost on the man in the street. The problem, in the medium-term, isn’t actually so much that we’re driving toward the edge of the cliff. The problem is that based on past behavior, congress seems overwhelmingly likely to steer us in that direction. But they could always, as a medium-term solution, not do that. Sticking with current law would buy substantial fiscal breathing room. It’s absurd for politicians to be simultaneously engaged in highly public deficit hand-wringing and not talking about the fact that maybe we can’t afford these “predictable” deviations from current law.
26 Responses to “The Surprisingly Easy Medium-Term Budget Fix”
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November 13th, 2009 at 2:03 pm
“Sticking with current law”=a big tax increase for tens of millions of taxpayers in 2011=electoral disaster for the Dems.
Now this isn’t the Dems fault; the Republicans cynically passed tax cuts that only lasted 10 years. But it’s the Dems who will take the heat if everybody sees their personal income taxes raised. And Obama said in the campaign that he wouldn’t raise taxes on households earning less than $250k.
Plus raising taxes in 2011, with the economy still weak, puts the recovery at risk. So this really isn’t an option.
November 13th, 2009 at 2:06 pm
and yet, even with the tax increases, we’d still be headed for the cliff, albeit at a slightly slower rate. spending cuts will have to come sometime.
November 13th, 2009 at 2:13 pm
yet, even with the tax increases, we’d still be headed for the cliff
If by “heading for the cliff” you mean “not headed for the cliff,” then yes.
November 13th, 2009 at 2:16 pm
The dashed lines, however, represent a “current policy” scenario in which we assume that some of the Bush tax cuts will be extended … Those are reasonable assumptions, since both such measures are supported by the leadership of the less anti-tax political party.
Huh?
The Democrats support extending the Bush tax cuts? Really?
But I thought that the Bush tax cuts were for the wealthy? Why would the Democrats support tax cuts for the wealthy? My recollection is that they opposed extending the Bush tax cuts in the past.
November 13th, 2009 at 2:18 pm
I won’t say it’s a 100% bet, but I’d be willing to put 8 out of 10 down that the Democrats will extend the Bush Jr. upper class tax cuts.
November 13th, 2009 at 2:23 pm
I’m curious, how do people who believe that deficits must one day be paid back decide what is or is not “unsustainably large?” Seems like constant deficit spending would be by definition unsustainable if you think a federal budget is like a household budget.
November 13th, 2009 at 2:35 pm
Seems like constant deficit spending would be by definition unsustainable if you think a federal budget is like a household budget.
What levels of debt are sustainable depends on the size of the economy. If the economy grows faster than the debt then the debt will be less relative to GDP. You can run more or less permanent deficits as long as your economy continues to grow.
November 13th, 2009 at 2:40 pm
This is the view from the rear view mirror. The projections I mean. Tax receipts continue to fall as outlays continue to grow. The former despite the fact that the economy is growing, in its odd way. October tax receipts were down 18% YOY and last October was not the good old days. A disaster of monumental proportion. Problem is this trend of lower receipts in non corporate payment months is accelerating. Since the proportion of the populace at work is on a relentless downtrend it might be well to consider that this crisis signals a structural change in tax revenues. As to the spending side the chances of even no growth are zero for at least 2 years.
Now I am not blaming Obama at all but it is certain that the deficit from his first three years will total at least the accumulated deficit from Americans first 224 years in 1980 of $5 trillion. It took Bush 8 years to do that. It’s structural. It’s a trend. It’s a disaster. A disaster that goes far beyond the nipping at the heels pro forma deficit carping of the politicians. The fiscal situation is trending strongly to the worse side of the ledger and strong trends don’t stop quickly and when they do at least stop the usually plateau for a long time before reversing. The only logical way this seems possible is a consumption tax, regressive, since the income tax is now failing which is hardly a surprise as incomes are doomed to not grow with millions desperate for work.
Throw that chart out.
November 13th, 2009 at 2:42 pm
Al @4:
Word on the street is Obama favors extending them for “middle class” families (Ezra mentions this in the entry Matt cites.)
What’s not clear to me is whether the dotted lines include “extending Bush’s tax cuts for everyone” or “extending Bush’s tax cuts only for the middle class.”
I can’t find anything which clarifies this, and it’s a rather important detail.
November 13th, 2009 at 2:49 pm
Paulie:
I agree. But I’m curious to know what MY thinks? His conception of the monetary system is different from mine.
November 13th, 2009 at 2:50 pm
The chart is actually wrong for 09. Tax receipts have been lower every month on a YOY basis this calendar year. I may not be a trained arithmetician or logician but I think that means the upturn in the chart didn’t happen. The rear view mirror here is thus a funhouse mirror.
November 13th, 2009 at 3:03 pm
I agree. But I’m curious to know what MY thinks? His conception of the monetary system is different from mine.
In what way?
November 13th, 2009 at 3:15 pm
But it’s the Dems who will take the heat if everybody sees their personal income taxes raised.
The way we pay our income taxes is so arcane that almost no one would notice a tax increase. What people notice is someone screaming, Hey, your taxes went up!–regardless of whether they actually went up or not.
Middle class people notice changes in withholding, but not changes in their overall tax rate. Only rich people actually notice changes in their tax rate.
November 13th, 2009 at 3:17 pm
Well, for starters he thinks that “in the long run, levels of taxation are determined by the level of spending.”
Other places he has made clear his belief that the US Treasury can run out of money. I’m just interested to hear this POV fleshed out a bit more, since it’s incompatible with my view of how the finance system operates.
November 13th, 2009 at 3:43 pm
Tony says:
What’s not clear to me is whether the dotted lines include “extending Bush’s tax cuts for everyone” or “extending Bush’s tax cuts only for the middle class.”
It’s extending them for everyone, not just the middle class.
November 13th, 2009 at 3:53 pm
In theory, the fact that the right in America these days attacks the left on the basis of made-up policies — like death panels, “cap-and-tax”, and teaching the joys of gay sex to fourth graders — should liberate the left from having to worry too much about the optics of their policies, since they will be demonized and distorted no matter what. This should free up the left to worry about actually implementing good policy that will noticeably improve people’s lives.
November 13th, 2009 at 3:56 pm
The made-up policy of teaching the joys of gay sex to fourth graders contrasts interestingly with the Catholic Church’s policy of partaking in the joys of gay sex with fourth graders.
November 13th, 2009 at 4:16 pm
Jason L. Have you received your settlement money?
November 13th, 2009 at 4:27 pm
Yuk yuk yuk. Nothing like a little molestation-themed humor. Stay classy, internets!
November 13th, 2009 at 4:32 pm
Huh? They could simply let the AMT consume the middle class? On what planet is that a sound political strategy? Might as well remark that they could “just balance the budget,” considering the enormousness of the task.
November 13th, 2009 at 5:57 pm
Because outside the little circle Matt talks to, having the entire middle class live under the AMT will make politicians ever so popular…
November 13th, 2009 at 5:57 pm
Ape Man,
My molestation-themed humor made fun of a corrupt organization that abets and shields its employees who molest children. Dan Beauregard’s molestation-themed humor made fun of me by suggesting that I was molested.
I personally don’t mind being ribbed by Dan, and I guess if I really tried I could work up some outrage at what you could say is the implication that victims of molestation can be made fun of because they were molested. At first I was indignant that you tried to dismiss my calling of attention of the CC’s pattern of facilitating child molestation by saying I was being classless, but then I realized that I really don’t mind being classless if in doing so I can remind people of the moral bankruptcy of much of the leadership of the contemporary CC.
Speaking of which, the latest gem is the Archdiocese of Washington (DC) basically telling the District, “you keep gays from getting married, or we stick it to the poor!”.
November 13th, 2009 at 5:58 pm
Linking attempt initially failed: http://www.latimes.com/news/nation-and-world/la-na-gay-wed-dc12-2009nov12,0,3335491.story
November 13th, 2009 at 6:07 pm
Re: The former despite the fact that the economy is growing, in its odd way.
That makes no sense. Why wouldn’t tax revenues increase if the economy is growing. It can’t all be tax exempt receipts! I can’t believe. Someone is getting that income and should be paying taxes on it. Will next April 15 account for it ultimately?
November 13th, 2009 at 6:12 pm
Yes, surprisingly easy, if you don’t have to deal with angry constituents angrily shouting at you or face the threat of being voted out of office. Let’s face it; politicians are cowards when it comes to doing unpopular things that also happen to be, you know, the right thing to do.
November 13th, 2009 at 8:58 pm
How big is the AMT portion of that gap? Because I’d always been under the vague impression that the AMT fix was reasonable (at least relative to the Bush tax cuts).
So far as I think a lot of liberals agree, if we’re wrong that topic would be worth a post.