Matt Yglesias

Public Has Crazy Opinions About the Budget Deficit

Steve Benen observes that the other thing about the CNN poll referenced below is that it shows that the public has absolutely insane ideas about balancing the budget. In particular, 67 percent of voters claim to believe that “the government should balance the budget even when the country is in a recession and is at war.” Take a look at the Congressional Budget Office’s latest report on the budget situation and consider what balancing the FY 2009 budget would entail:

As a first cut, we could return spending to its FY 2008 level (approximately at the historical average, and where we under the right-wing Bush administration) by entirely eliminating Social Security. Alternatively, we could keep Social Security as is, and entirely eliminate Medicare and Medicaid. Having done that, we would still need about $800 billion in additional tax increases. That’d be a tax hike of about twenty times the annual impact of the tax increases included in the health reform bill.

You could get this, maybe, by imposing a 10 percent Value Added Tax. But anyone who thinks that balancing the budget via a 10 percent VAT and the elimination of Social Security payments would be a popular agenda is certifiably insane. But there’s no other permutation of budget balancing that makes any more sense. For example, suppose you wanted to balance the budget entirely on the spending side. Well, the total 2009 deficit is $1.587 trillion. If we entirely eliminated discretionary spending—no electricity in the White House, no military, no FBI, no national parks, no nothing—we’d still have a $346 billion deficit.

People think they think they want a balanced budget even in a severe recession, but that’s because they obviously have no idea what balancing the FY 2009 budget would entail.

Change in Debt-to-GDP Ratio

Brad DeLong offers this chart:

The reason to be concerned about the long-term deficit is that the basic underlying concept of Medicare—the government will pay for health care for old people—implies a gigantic long-term fiscal shortfall. There’s no reason to be concerned about the short-term deficit. As for the medium-term, the main reason to worry is that the odds are pretty good that a Republican President will be inaugurated in 2013 or 2017 and embark on a program of deficit-inducing tax cuts and defense spending hikes. That, at any rate, is the historical pattern.

CBO: Health Reform Deficit Reduction Not Due to CLASS Accounting Gimmicks

Tyler Cowen, looking for reasons to oppose a health care overhaul that will take a bite out of our long-term deficit problem, chooses to speculate that the “ok CBO rating” is due to an account trick related to the implementation of a new long-term care insurance program. The obvious way to resolve this worry would be see what the CBO’s report (PDF) has to say about it:

As noted earlier, the CLASS program included in the bill would generate net receipts for the government in the initial years when total premiums would exceed total benefit payments, but it would eventually lead to net outlays when benefits exceed premiums. As a result, the program would reduce deficits by $72 billion during the 10-year budget window and would reduce them by a smaller amount in the ensuing decade (an amount that is included in the calculations described in the preceding paragraphs). In the decade following 2029, the CLASS program would begin to increase budget deficits. However, the magnitude of the increase would be fairly small compared with the effects of the bill’s other provisions, so the CLASS program does not substantially alter CBO’s assessment of the longer-term effects of the legislation.

The bill contains provisions that have front-loaded positive impacts on the deficit and also have provisions that have back-loaded positive impacts on the deficit. The bill, rather intelligently, seems to balance this out well leading to net deficit reductions in the short-, medium-, and long-terms. The bill by no means solves the considerable long-term fiscal challenges to the United States, but it does improve the situation. If people want to say that on balance they think the bill is a bad idea, that’s fine, but to do so is to oppose what’s far-and-away the most politically realistic way to enact non-trivial long- and medium-term deficit reduction in the 111th Congress.

Putting Health Reform Fiscal Issues in Perspective

John Breaux and Bill Frist have an op-ed in Politico whose exoteric message is that congress should use the 2003 Medicare bill as a model for bipartisan health reform. The esoteric message is a reminder that the easiest way to get a bipartisan deal passed is to just have bipartisan agreement not to pay for it at all. That was the secret to the 2003 bill. First you take something a bloc of voters want—in this case prescription drugs—then you figure out a way to provide it in a manner that’s very good for the interests of stakeholders in the business community. Easy as pie.

What Do Bond Traders Think They Know

We see here the past 30 years worth of interest rates on 30 year US government bonds:

And here’s the CBO’s projection for the volume of debt, with the “alternative fiscal scenario” being what the CBO considers to be the most realistic projection based on current policy:

It’d be interesting to know what the people buying these bonds think is going to happen. Not inflation, based on these yields.

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.

In Semi-Defense of the Public’s Hypocrisy

Obviously on one level Doug Elmendorf is rigth about this:

The country faces a fundamental 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.

But on another level, I think this is really mistaken. What we’re really talking about here, after all, is a future projection not a current situation. Right now, people pay more in Social Security taxes than Social Security pays out in benefits. When the United States began, in 2009, to run a very large short-term budget deficit for reasons that most economists think are perfectly good reasons to run a large short-term budget deficit, public opinion started freaking out. What we really see with the entitlement situation is a public refusal to think seriously about the future—a kind of myopia more than a refusal to pay the tab. What actually happens when the tab comes do? We’ll have to see. But I don’t think we really know what the public’s view of the coming crisis will be when it actually arrives.

Obama Administration Considering Giving in to Deficit-Mania

TARP, the much-derided Troubled Asset Relief Program, has an odd structure. $700 billion in expenditures were authorized, but the program was structured such that much of the money would be paid back—some with profit—and indeed a lot has been paid back. Consequently, the executive branch has the ability to either make the net cost of the program much less than $700 billion or else to in effect spend the same money twice. In principle, this could have been a good way to get additional stimulus into the economy without additional legislation. Leftover TARP money and TARP repayments could be used, for example, for small business loans to support entrepreneurs looking to expand their operations.

Instead, Deborah Soloman and Jonathan Weisman report that the White House is considering letting short-term political optics dictate policy:

The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal responsibility: the $700 billion financial rescue.

The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.

They say that the idea “is still a matter of debate within the administration.” Let’s hope they reject it. There is one and only one good reason to prioritize short-term deficit reduction, and that’s if you believe that prioritizing short-term deficit reduction will improve economic growth. We know from previous reporting that nobody on the White House economic team believes that this is the case. The pressure to look at deficit reduction is political pressure, “pressure to show it is serious about tackling the budget deficit.” In brass tacks political terms, however, a substantial deficit in 2010 is inevitable either way. The question is whether it’s a substantial deficit that voters will find forgivable thanks to the robust economic recovery and falling unemployment, or if it’s a substantial deficit that voters deem intolerable thanks to an anemic recovery and high, flat unemployment. The politics here are all about getting the policy right.

Nicholas Poussin, The Adoration of the Golden Calf

Realistically the best use of these funds might be semi-corrupt pork barrel projects designed to persuade key legislators to stop threatening the country with a debt default and start voting “yes” on key legislation. We could build a giant golden calf in Indiana in place of the false God of fiscal austerity. And as I’ve had occasion to note in the past, the administration has arguably been too eager to ask what substantive policy concessions Olympia Snowe wants and unduly reluctant to ask what our country can do for the lobster industry. Contractionary fiscal policy would be an extremely costly way of buying congressional breathing room.

Your 2010 Entitlement Commission

The combination of egomania, self-righteousness, irresponsibility, and cowardice that characterizes many United States Senators is pretty hard to take. For example, instead of doing their jobs, this gang wants to pretend that they’ll force the United States to default on its debt unless a commission of other people is appointed to propose cutting Social Security and Medicare:

“You rarely do have the leverage to make a fundamental change,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.), who said he hasn’t ruled out offering the independent commission legislation as an amendment to the healthcare reform bill. [...]

Among its chief responsibilities would be closing the gap between tax revenue coming in and the larger cost of paying for Social Security, Medicare and Medicaid benefits. The Government Accountability Office recently reported the gap is on pace to reach an “unsustainable” $63 trillion in 2083. [...]

But before Tuesday’s hearing was over, Sens. Conrad, Gregg, Evan Bayh (D-Ind.), Dianne Feinstein (D-Calif.), Mark Warner (D-Va.), Joe Lieberman (I-Conn.), George Voinovich (R-Ohio) and Jeff Sessions (R-Ala.) publicly vowed to vote against raising the debt ceiling if a budget reform commission bill doesn’t come along with it.

Why not throw it back at this crew? Tell the Irresponsible Threat Caucus that instead of asking for a commission, they should just start calling themselves a “budget commission” and then they can specify their own proposed set of tax hikes and Medicare cuts.

Note that Senators Gregg, Bayh, Voinovich, and Sessions didn’t have these concerns about the budget when voting to give hundreds of billions of dollars in tax cuts to the children of multi-millionaires. And I continue to await congressional support for making the war in Afghanistan deficit neutral.

On a Budget Commission

Politicians love commissions. They love them so much that journalists have come to love cynically deriding them. So now that talk of a “budget commission” to tackle the long-term deficit is in the air, people are being cynical about it. I actually think commissions are a pretty good idea since congress is so bad at designing policy. The real question is what would a serious budget commission look like?

I think Pete Davis and Bruce Bartlett have some pretty good posts on this matter. I would say the most important thing is for congress to not entirely abdicate its policymaking role. The key is to actually tell the commission, in a real way, what it wants studied. Reduce the deficit to such-and-such a percent of GDP relative to baseline and do it this percent with tax cuts and this percent with spending cuts. That’s a real mandate, and exactly the sort of decision elected officials should be making. Similarly, if congress wants the Pentagon to get special treatment, they should say so. With that done, having a commission try to work out the details within the framework of a congressional mandate makes sense.

Voters Reject Anti-Government TABOR Proposals in Maine and Washington

An excellent point from Kristina Wilfore who observes that if you want a decent test of the “tea party” movement you could do worse than to look at TABOR proposals that would put arbitrary caps on state government spending and force meaningful reductions in the size of government. Two such proposals were on the ballot last night in Washington and Maine and they lost:

A central tenant of the right-wing agenda has been rejected with the defeat of TABOR (known deceptively as the “taxpayer bill of rights”) in these two states – states that are diverse from each other in almost all respects. Maine’s measure went down with a resounding defeat, 60% to 40%, while Washington’s campaign came from behind with a 55% to 45% rebuff.

A few weeks ago, conservative columnist and tea party champion John Fund wrote in the WSJ that: “If voters in Maine or Washington state pass a taxpayer bill of rights, it will be a clear sign that even in blue states the public is coming to believe that government spending is out of control and that elected officials can no longer be trusted to rein it in. That’s a message that will likely reverberate in Congress regardless of who wins in the New Jersey and Virginia gubernatorial races.”

Iris Lav from the Center on Budget and Policy Priorities notes that “by rejecting TABOR, officially Question 4 in Maine and I-1033 in Washington, voters have helped these states preserve needed public services and improve the business climate.”

It’s also worth emphasizing that the reason radical budget-cutters have started turning to TABOR ballot initiatives to get their way is that even politicians who like to talk about cutting government in the abstract don’t actually want to take responsibility for specific cuts. That’s why Bob McDonnell made sure to stay nice and vague about what he’ll actually do once he takes over in Virginia.

Markets Really Do Convey What Market Participants Think

Paul Krugman on an underdiscussed point:

And right now, deficit-phobia has quickly congealed into the latest CW. You can see it in editorials (not from the Times, I’m happy to say, but almost everywhere else), in what the talking heads say, even in supposedly objective news reporting. Not a day goes by without my reading some assertion that “markets are anxious/jittery/worried about the deficit” — an assertion based on no evidence whatsoever. (Long-term interest rates on US debt are near historic lows; CDS spreads show no concern about default.)

It’s really maddening that at the same time preposterous idea like strong forms of the Efficient Markets Hypothesis continue to be respectable that people seem unwilling to trust financial markets to accurately convey the beliefs of participants in financial markets. I would add to Krugman’s observations the fact that we have Cato’s Chris Edwards blaming anticipating inflation for the lack of private investment when the TIPS spread shows that markets aren’t anticipating inflation.

Right now economic conditions are bad. And the budget deficit is high. So I find it understandable if the man on the street chooses to conclude that the budget deficit is causing or contributing to the bad economic situation. But people writing about these matters ought to know better—interest rates are low and markets are assessing both default risk and inflation risk as low. So what about the deficit is supposed to be causing the problem? Meanwhile, to repeat myself the wise elected official is going to spend less time worrying about what voters think is to blame for the economic situation than he does on fixing the bad economic situation. Results matter more than folk theories.

Estate Tax Cuts and Deficit Hawk Hypocrites

One good way to tell the difference between a member of congress who’s genuinely concerned about the long-term budget deficit and a hypocritical jackass is to ask them where they stand on the Kyl-Lincoln $250 billion budget-busting giveaway to the children of extremely rich people. The bill now has a House counterpart. Key sponsors include Rep Artur Davis (D-AL) and Rep Shelley Berkley (D-NV).

Health Care and the Long-Run Budget Deficit

The CBPP did an interesting analysis of the long-term budget deficit issue yesterday that reformulated the familiar point about health care costs and deficits by observing that there’s a revenue-side impact here too:

Long-term spending projections. After 2019, we extrapolate components of the federal budget based on the growth rates estimated in CBO’s June 2009 report. We adopt CBO’s rate of growth for Social Security spending in our projections. Our projections of Medicare and Medicaid spending assume that each program will grow at the rate CBO assumes for the two programs combined.

We assume that all other spending will grow at the rate of inflation and population growth combined, meaning that it will gradually shrink as a percentage of GDP.

Long-term revenue projections. Our revenue projections largely follow CBO’s alternative fiscal scenario, which assumes extension both of the 2001 and 2003 individual income tax cuts and of AMT relief. In addition, our numbers — like CBO’s — assume a decrease in revenues due to increased private health care spending: as health care costs rise, workers are likely to receive more of their compensation in the form of tax-exempt health care benefits and less in the form of taxable wages, so total revenues decline. But because we project that excess cost growth in other health-care spending will mimic that in Medicare and Medicaid, whereas CBO estimates it will be somewhat lower than in those programs, our revenue estimates are lower than CBO’s.

Thinking about the long-run deficit you can really abstract away from all the present political controversies and just focus on two facts. One is that the US has an existing commitment to provide generous comprehensive health care to all senior citizens. The other is that health care costs are rising faster than GDP. That means that unless we’re prepared to violate that commitment (which it seems to me we aren’t) we need to prepare ourselves for taxes to steadily increase as a percent of GDP (which it seems to me we also aren’t). The broad “center” of the political spectrum, ranging from the leaders of both parties, is stuck in the middle of this pincers movement. You have left-wing and right-wing versions of ideas about how to slow the growth in health care spending, but I’ve never seen a credible argument that any of these things can actually slow health care growth to less than the rate of GDP growth.

Note that some sectors or other have to grow faster than GDP. The mere fact that something is doesn’t show that anything has “gone wrong.” We just happen to have substantially assigned one such category to the public sector; and we’ve so assigned to to an even greater degree than most people realize via implicit tax subsidies.

Doing it With Tax Increases

Writing for CAP, Michael Ettlinger and Michael Linden say that achieved a balanced budget by 2014 solely through higher taxes “is not a likely or necessarily desirable policy.” Still, as they say it’s certainly a feasible policy:

Much is said about the economic effect of tax increases, but it is worth noting that there is little risk of the United States becoming economically disadvantaged relative to other advanced economic nations by raising its aggregate tax levels. We have the fifth lowest taxes as a share of GDP among economically developed nations (counting all federal, state, and local taxes). If we raised taxes in aggregate to a level that would safely balance the budget, the United States would still be in the bottom 10 out of 30.

Obviously that’s not a politically kosher solution. But on the merits I think the case for doing this almost entirely through tax side measures is pretty strong. Higher taxes on the scale under consideration would simply leave the United States with the kind of tax levels found in Australia and Canada, exactly the kind of countries you would expect to be similar to America.

The larger issue is that no matter what happens in 2014 as long as the US is committed to providing health care to senior citizens and the cost of health care grows faster than GDP, over the long run taxes as a percent of GDP will need to consistently rise. And as far as I can tell Republicans aren’t prepared to break that commitment to providing health care to senior citizens and Democrats aren’t prepared to back continually higher taxes. Across some margin of time you can fudge this by messing with defense and domestic discretionary spending but ultimately the choice will have to be made.

Defense and the Long-Term Budget Outlook

Paul Krugman writes about the long term deficit:

What I read from this is that between the slightly unsustainable deficit in 2019 and the demography to follow, we’ll eventually have to find 3.5% — call it 4 — in fiscal consolidation even if health reform ends excess cost growth.

That’s a big but not disastrous number. We could raise that much in taxes alone without inflicting huge economic damage. We could make up some of the number if health reform does more than end excess cost growth, and rolls spending as a percent of GDP part way back toward European levels. We could cut Social Security benefits — although if you look at the numbers, it would take draconian cuts to make a major dent that way.

Actually reducing health spending as a percent of GDP strikes me as very unlikely to happen. The politics of just getting cost growth under control are very difficult. But one thing I’m surprised Krugman didn’t mention is the Department of Defense. The Pentagon’s budget has, in percent of GDP terms, varied a lot over the years:

The Heritage Foundation purports to think it’s strange that defense spending is lower (as a percent of GDP) than during its Cold War averages “despite the War on Terror.” One might respond to this by trying to compare the budget of al-Qaeda to the budget of the Soviet Union. For that matter, you could try to compare the budget of al-Qaeda to the budget of Czechoslovakia or East Germany or whatever other random Warsaw Pact member you choose.

Maintaining a level of defense spending well above anything that seems to meet a strict self-defense test has a lot of advantages for the country. But those are advantages that need to be weighed against the costs in terms of higher taxes or lower spending on things like Social Security.

Our Crazy Electorate

Steve Benen observes that according to the latest NBC/WSJ poll voters are weirdly averse to budget deficits:

Which of the following two statements comes closer to your point of view?

Statement A: The President and the Congress should worry more about boosting the economy even though it may mean larger budget deficits now and in the future.

Statement B: The President and the Congress should worry more about keeping the budget deficit down, even though it may mean it will take longer for the economy to recover.

Thinking about it rationally, the reason to worry about large deficits is that they can impede economic growth. That makes it generally worthwhile to try to run balanced budgets over the course of the business cycle. But under circumstances when running a larger deficit doesn’t hurt growth, there’s no real reason to try to avoid deficits. It’s not like the Gods of budgetary balance have some other way to punish countries for large deficits other than reduced growth.

I assume the real issue here is that many people are explicitly rejecting the premise of the question and just think that deficit spending aimed at boosting the economy won’t actually boost the economy. They’re wrong about that, but lots of folks are out they saying fiscal policy can’t boost growth so it shouldn’t be shocking that some people believe them.

The Irving Kristol Legacy

When a major figure from the other ideological camp dies, I think the common thing to do is to praise the dead guy and disparage his modern-day co-ideologues by comparison. But as Brad DeLong points out, Irving Kristol’s own account of his role in popularizing nutjob anti-tax politics is sufficiently damning that I don’t think that strategy will really fly:

Among the core social scientists around The Public Interest there were no economists…. This explains my own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority – so political effectiveness was the priority, not the accounting deficiencies of government…

The presence of a major ideological movement in the United States of America dedicated to the dual propositions that taxes must never go up, and that government expenditures don’t need to relate to government revenue in any real way as long as the Republican Party is in charge simply makes it almost impossible for the country to be governed in a responsible manner. If we had a different political system, it’s possible that such an ideological movement would marginalize itself, lose elections, and the other guys would run the show responsibly. Maybe. You could at least imagine it happening. But in our system even a defeated minority gets a ton of influence over policy and becoming completely dogmatic and irrational actually enhances that level of influence.

Fiscal Responsibility

Back in April, Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) proposed an amendment that would deliver a $250 billion cut in the estate tax. This was described as an effort to help farmers and small businessmen, but in reality “only 0.2 percent of the proposal’s cost, relative to the cost of making 2009 law permanent, would go to tax cuts for small business and farm estates.” The other 99.8 percent of the cost, about $249.5 billion dollars, was aimed at inheritors of estates worth over seven million dollars.

Bayh's Looking Out for Her!

The proposal passed, with Evan Bayh (D-IN) as one of those taking the view that the best way to handle the country’s long-term budget situation was to cut taxes on multimillionaires.

Coincidentally, there’s an op-ed in today’s Wall Street Journal by Senator Evan Bayh making the case that deficit reduction is super important and Democrats need to start learning to restrain their hunger for new spending. You can tell that the argument is offered in 100 percent good faith, because everyone knows that when you want to launch a serious conversation inside the progressive family the WSJ editorial page is the place to be. It’s a venue with an unparalleled credibility on the left.

Kent Conrad Erecting New Procedural Hurdles to Health Reform

Budget master Kent Conrad

This is a bit in the weeds, but you should go read Ryan Grim’s story about Kent Conrad directing the CBO to score health care reform in a 20-year budget window rather than the usual ten. This will tend to make the score less accurate, since projections get more and more uncertain the further you go out. It will also make it harder to pass a health care bill. But it will disadvantage the more-liberal House bill more than it disadvantages the Senate bill. And I think it’s usually best to assume that members engage in these kind of procedural moves because they understand their impact—Conrad is trying to kneecap the liberal version of health reform, and considers making it harder to pass any kind of health reform an acceptable price to pay to meet that goal.

Officially, though, we’re just supposed to think that Conrad really, really hates budget deficits. But as Ezra Klein notes, Conrad’s record doesn’t totally support that:

The first came earlier this year when Conrad modified Obama’s first budget. Obama had eliminated a couple of Bush-era gimmicks that made the deficit appear smaller than it really was. Bush, for instance, shortened the budget window from 10 years to five, so the total deficit sounded smaller. Obama’s budget returned it to the traditional 10. And then Conrad changed it back. The Politico reported that Conrad made this decision “because of the uncertainty of long-range forecasts.” Others thought he did it to hide the size of the deficit. In any case, 10 years, as the alert reader will notice, is less than 20 years. If 10 years was too long a time period for certainty, then it is difficult to see how 20 years could possibly be acceptable.

The second came in 2003, when Conrad voted for the Medicare Modernization Act, better known as Medicare Part D. The Congressional Budget Office estimated that the bill would increase the federal deficit by $421 billion and reduce federal revenue by another $174 billion. The total cost to the deficit, then, neared $600 billion. Conrad not only accepted the CBO’s 10-year time frame, but he voted for the bill. His press release enthusiastically touted the fact that the bill would “bring more than $70 million to North Dakota hospitals over the next ten years.”

Conrad’s record in the Senate, then, would lead you to believe a couple of things. For one, he distrusts long-range projections. Even 10 years is too uncertain. He also believes some priorities overwhelm deficit concerns, health-care coverage being one of them. But when faced with a health-care reform that will be deficit neutral within the 10-year time frame, he is demanding that it instead be measured against an even more uncertain 20-year time frame, and by an agency that he claims underestimates savings. The CBO’s scores are terrible, in other words, and come in such small portions!

To be fair to Conrad, the vast majority of soi disant “deficit hawks” on the Hill are huge hypocrites, much worse than Conrad. Conrad didn’t vote for the 2001 Bush tax cut, the invasion of Iraq, the 2003 tax cut, or the Kyl-Lincoln estate tax cut all of which attracted Democratic support, typically from the kind of members who complain about deficits. So in the scheme of things, he really is a committed deficit hawk. Still, per Ezra’s post there’s still lots of wiggle-room in this commitment, and the latest twist makes very little sense on the merits.

Note that the theory that the CBO underestimates the cost savings in health reform isn’t just some nutty theory. Among others, the Institute of Medicine agrees. I think there are sound reasons for the CBO to be conservative in its approach, but we should keep in mind the fact that the CBO’s approach is deliberately designed to be conservative.

Financial Mutually Assured Destruction

Noam Scheiber has a fascinating article on Chinese worries about the U.S. budget deficit and American policymakers’ efforts to calm those fears. The piece doesn’t really point to a hard-and-fast conclusion about how to resolve the situation and that’s more or less the problem:

The day China consumes more, relies less on exports, and accumulates far fewer dollars as a result can’t come soon enough. There’s a certain mutually-assured-destruction quality to our current relationship–Larry Summers calls it the “balance of financial terror”–in which one false move by either side could bring down both economies, and probably the entire global financial system, too. This makes dialogue a necessity. But what it really does is make you pine for a way back from the edge.

As The Atlantic’s James Fallows has pointed out, even if both sides behave responsibly, there’s the persistent risk of miscalculation–or maybe a rumor that triggers a bond market sell-off China didn’t intend. During the cold war, the hotline Kennedy and Khrushchev established was genuinely stabilizing, but it would have been far more stabilizing had the United States and Soviet Union stopped training thousands of nuclear warheads at one another. If, to stick with the analogy, the U.S.­-China relationship is only in the early 1960s, then it’s going to be a long couple of decades indeed.

It strikes me that any rational person looking at how the health care debate has unfolded is going to grow substantially more skeptical about the ability of the United States to pass major legislation in general. What’s more, if you contrast the health care situation with the relative ease with which it was possible to enact debt-financed tax cuts (in 2001 and 2003) and a debt-financed increase in Medicare spending (in 2003) you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future.

Grassley Claims Large Deficit Compels Him to Embrace Budget-Busting Status Quo

Senator Chuck Grassley continues to cast about for pretexts to spike health reform and please his party leadership so he’s hit upon an unusually nonsensical reason:

Senator Charles Grassley of Iowa, one of three Senate Republicans negotiating on health care, said the soaring federal budget deficit “puts a stake in the heart” of $1 trillion measures being debated in Congress.

Obviously, the scope of the budget deficit in 2009 and 2010 has nothing to do with how the health care system ought to look in 2013 when the bills under consideration phase in. If the bills are affordable in 2013, then they’re affordable in 2013 regardless of current deficits. And if they’re not affordable, then small current deficits wouldn’t change that either. But more to the point, as the administration was emphasizing before Grassley’s “death panel” demogoguery helped scare them off the point, health care reform is integral to getting the long-run budget deficit under control:

Whatever you think of the current budget predictions, nothing about sticking with the status quo makes things better.

The Need for Higher Taxes

I like this version of the CBO’s fiscal outlook chart that has the light blue horizontal line showing the average level of revenue in the 1968-2008 period:

What we see here is that the current budget outline has revenues rising, slowly, to a level somewhat below its average level during the 40 year conservative ascendancy. But in the future, the country is going to undergo demographic shifts that imply higher spending, and progressives are hoping that the conservative ascendancy is now over. But clearly a period of progressive ascendancy—especially when combined with demographic realities—implies that revenues ought to be higher, not lower, than their average level from the conservative period.

In other words, progressives are going to need to start thinking about ways to raise taxes in the not-so-distant future.

The Sources of the Budget Deficit

Two key political points on the recent deficit numbers. One, per Michael Ettlinger and Michael Linden, is that this is primarily about Bush legacy policies and the economic downturn rather than the results of any new post-election initiatives:

We’re not just seeing here that Bush’s policies were irresponsible, but an illustration of what was so irresponsible about them. When a giant recession comes, you wind up running large deficits. Then you need to pare back afterwards and start reducing your debt-GDP ratio. And it’s really unhelpful to heard into that situation with a pre-existing large debt overhang.

The other point is what Tim Fernholz says here—large looming structural deficits are a reason to start reforming the health care system ASAP not a reason to delay action. It’s very fair to say that the proposals on the table in congress don’t go as far as would be ideal in terms of changing the long-term cost equation. But that’s a reason to put additional constructive ideas on the table and open up political space for bolder action. Stalling the legislative process—and ultimately hoping to derail it—will only make things worse.

It’s Easy to Avoid Tough Choices

Stan Collender tells Ezra Klein that he thinks next year it’ll be necessary to propose tough measures to put us back on the path to deficit reduction:

First, the Democrats with the most difficult reelection battles are the freshmen elected in Republican-leaning, fiscally conservative districts. They’ll need something to show for their time in Washington, and along with the Blue Dogs, they may well be able to get it.

Second, and arguably more importantly, the markets are increasingly nervous about the size of our long-term deficits, and without credible action to reduce them, interest rates could rise, choking off the recovery. That would be the worst possible outcome for the administration, as nothing will be as politically potent as tangible evidence of recovery, and nothing will be as damaging as a return to recession. As Collender sums it up, “proposing difficult reductions next year will be difficult and dangerous. But so will not doing them.”

That first point is, I think, almost certainly wrong. If you recall what happened with the FY2010 budget, what happened is that the Obama administration proposed a budget that (a) dispensed with some Bush-era accounting gimmicks, and (b) left medium-term deficits at the outer bounds of sustainability. Centrist Democrats, being somewhat electorally vulnerable and enjoying the politics of deficit reduction, complained about this and swore they’d produce something better. But what they did, in practice, was make the deficit bigger by striking out some tax increases and then make the deficit seem smaller by putting some of the accounting gimmicks back in. Ta-da!

Which is just to say that the politics of deficit reduction are different from actual deficit reduction. Back in 1993 among wonks it was centrists who were most eager to see Bill Clinton prioritize deficit reduction. But that meant putting forward a “tough choices” budget. And centrist politicians are incredibly averse to voting “yes” on unpopular measures, so lots of center- to center-right Democrats wound up joining with the GOP in voting “no” on exactly the sort of balanced deficit reduction package that they notionally would favor.

The bond market issue is another matter.