Matt Yglesias

Orszag on the New CBO Numbers

Responding to today’s new, more pessimistic CBO scoring of the president’s budget in light of the deteriorating economic situation, Peter Orszag was at pains to emphasize that deficit projections are highly sensitive to relatively small changes in assumptions. For example, suppose that first you project revenues of $100 and spending of $103 for a $3 deficit. Then you get some bad news about the economy so projected revenue drops by five percent. Well, suddenly you’re looking at a deficit of $8. The alarming way to put this is that the deficit has nearly tripled. The calm way is that revenue has fallen by 5 percent.

Beyond that, Orszag observes that differences between OMB and CBO projections are normal, observes that CBO’s growth estimate is not only lower than OMB’s, but also lower than the Fed’s and lower than the blue chip forecast. He says that to put the issues in perspective, but “we recognize that the budget resolution will be written off the CBO numbers.” Thus, he reiterates the four main principles that animated the administration’s budget proposal. He doesn’t expect congress to return exactly what they wrote up, but he does expect it to adhere to these principles:

• “must invest in health care”
• “must invest in education”
• “must invest in clean energy”
• “must cut the deficit in half by the end of his first term”

In general, Orszag downplayed the significance of this report, saying that of course it will be taken into account as congress does its work “it’s not like the process would normally just have them take the budget, xerox it, and vote on it” so we shouldn’t think of congress tinkering with the proposal as being in response to the budget projections as such. “It’s a normal part of the legislative process to take the core things the president wants to get done and then work within those boundaries … beyond that, developments are ongoing and you’ll see the chairman’s marks some time next week.”

Animal Spirits

For the past few days, I’ve been reading Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George Akerlof and Robert Shiller. I’ve also been feeling like over the same time span, the Obama administration has shifted its public rhetoric in the direction Akerlof and Shiller would suggest. Turns out this is not a coincidence. Michael Scherer reports:

White House Budget Director Peter Orszag is a numbers guy, a propeller head as President Obama would say. But as David Von Drehle and I write in this week’s print version of TIME, Orszag has been spending his time recently reading not about spreadsheets, but about psychology. In particular, he has been reading a new book by the economists George Akerlof and Robert Shiller called “Animal Spirits: How Human Psychology Drives The Economy, and Why It Matters For Global Capitalism.” [...]

The White House is trying to recreate a sense of confidence by pointing out all the measurements that suggest the sudden loss of confidence may be causing the same irrational result that the confidence bubble created. Of course, the White House must walk a delicate line here, for even the smartest people in the Washington do not know when the markets will stop sinking. No one can predict the animal spirits. As Obama said Thursday, “The market is going to be responding to all this information out there and, you know, the whole issue of animal spirits in the marketplace and when suddenly a rally catches, you know, you guys know that better than I do. But my focus has to be on the long term. And my long-term projections are highly optimistic — if we take care of some of these long-term structural problems.”

Reading: It’s fundamental.

Orszag: “No One Should Be Surprised” By Administration Ag Subsidy Proposals

An important quirk of the budget process is known as “congress.” The President isn’t a Prime Minister who can outline a budget and then commit the country to sticking to it. He can outline a budget and then do his best to get congress to pass legislation that conforms to the budget. Consequently, you wind up with a mix of predictions (GDP will be such-and-such leading to such-and-such tax revenues), policy reaches (the cap & trade proposal), and proposals that I think are best characterized as wishful thinking. The Obama administration’s proposal to curtail farm subsidies for the wealthiest farmers most likely fits into the latter category. I asked OMB Director Peter Orszag if he thought that their projections on that score were realistic given the politics of the situation and he responded in a very upbeat and confident manner that the president “was very clear” about his desire to do this on the campaign trail, and so “no one should be surprised” to see the proposal in the budget. Which is true, but a long way from saying that the administration has been putting its shoulder to the wheel to try to find some way to see this initiative through congress.

Meanwhile, the key legislative players are predictably uninterested in changing things:

“We’ll have to see what specifically the president is talking about, but we just finished the farm bill last year, and I don’t think we’ll open it up,” said Rep. Collin C. Peterson, Minnesota Democrat and chairman of the House Agriculture Committee.

Likewise, the ranking Republican on the Senate Agriculture, Nutrition and Forestry Committee, said the farm bill, which lasts for five years, “should not be changed midstream.”

“I believe it is premature to make any sweeping changes to the makeup of the farm safety net before we have even had the chance to implement the current farm bill,” said Sen. Saxby Chambliss of Georgia.

It’s remarkable how even a hard-bitten rightwinger like Senator Chamblisss can suddenly see the virtues of a safety net when the beneficiaries are well-to-do agricultural firms. A Christmas miracle, you might say, except that the magic of interest-group politics works 12 months a year. Still, if there are any Republicans out there who are both interested in curtailing domestic discretionary spending and in bipartisan cooperation, it might be smart to try to take this up and make the White House try to live up to its own promises of bipartisanship as well as its budget commitments. The prospects for reform of this sort of thing are never good, but the farm bill written in the Gingrich-Clinton era was substantially less bad than the more recent versions have been, so these things are possible to some extent.

The Cult of Peter Orszag

A colleague sends this along, hoping to spark a cult of personality around American history’s first blogger-turned-OMB director:

Just remember, only comprehensive health care reform can solve the long-term budget crisis!

That said, I did want to associate myself with something Chris Bowers said yesterday namely that I wasn’t, and continue not to be, enthusiastic about the Diamond-Orszag Social Security proposal that was unveiled back during the last run of talking about Social Security. I thought that was a useful document in some ways. For one thing, it highlighted the fact that conservatives’ desire to phase Social Security out and replace it with an entirely different, riskier, less-progressive retirement scheme with more profits available to financial services firms has nothing to do with long-term Social Security actuarial projections. For another thing, it highlighted the essentially small-bore nature of the changes that would need to be made to make the actuarial projections line up. With Medicare and Medicaid, in other words, you need to do something structural. With Social Security, you can just get by with tweaks.

That said, the Diamond-Orszag proposal not only partakes of benefit cuts, but of further extension of the prefunding/trust fund model of actuarial solvency. I don’t think that particular path, chosen back in 1982, has any any really noteworthy benefits for fiscal responsibility over the past 25 years, for progressive politics, or for Americans’ retirement security. In effect, it served as a way for the Reagan administration to sell a less-progressive tax base as somehow related to Social Security. In reality, benefits are paid out of current taxes, and that’s fine, but there’s no real need to pretend they aren’t.

Elmendorf to CBO

Doug Elmendorf, formerly of all the major public sector economic policy institutions (specifically the Federal Reserve Board, U.S. Treasury Department, Council of Economic Advisors, and Congressional Budget Office) and then the Hamilton Project at Brookings, will replace Peter Orszag at CBO. Elmendorf’s a moderate Democrat who wins praise from Greg Mankiw. I liked this paper he co-authored on the Bush tax cuts some months ago which concluded that “the 2001 and 2003 tax cuts made most U.S. households worse off” while helping to further enrich the already richest.

Readers may be interested in this and this from him on TARP. I’d be interested to know what’s the nature of the norm that ensures that the CBO Director’s job seems to stay consistently in the hands of broadly respected moderates even during a time of massively increasing polarization inside the congress.

One also wonders if Elmendorf will continue the CBO blog and/or whether Orszag will be blogging from his new perch at OMB.