Thursday, February 17, 2011

Obama's magical mystery budget

Brian Riedl exposes the dirty secret of President Obama's newly released budget plan. Quite conveniently, the candy in the budget - the spending increases are all spelled out, but the bad-tasting medicine - the spending cuts are left unspecified.
Past presidential budgets have been declared “DOA,” or dead on arrival. President Obama’s budget should be declared “TBD” — to be determined. Despite taking an extra week to release this year’s budget, the president’s budget is an incomplete list of magic asterisks.

Overall, the budget’s claimed $2.2 trillion in deficit reduction over the decade is based on smoke and mirrors. It claims $315 billion saved from eliminating “certain tax expenditures” — but doesn’t list which ones. It claims to finance a $328 billion transportation trust fund without specifying what taxes would be raised. It takes credit for $321 billion in spending cuts to offset the Medicare “doc fix” from 2014 through 2021. What are the cuts? To be determined. It claims more than $150 billion in “program integrity” savings so vague that the Congressional Budget Office could not even score them in past budget estimates. The budget takes credit for $700 billion in “cuts” by comparing the long-planned drawdown of Iraq and Afghanistan spending against a baseline that implausibly assumes those costs would rise forever.

Throw in $200 billion in net interest savings from the above “cuts,” and it means that $2.0 trillion of the $2.2 trillion in claimed savings are pure gimmicks and magic asterisks, rather than specific, legitimate, measurable policy proposals.

Of course, the proposed spending increases — the Medicare doc fix, new transportation spending, high-speed rail, more Pell Grant entitlements, and another round of $250 checks for senior citizens — are all real and scoreable.

The biggest punt of all is on Social Security, Medicaid, and Medicare, where the president who once said he “refuses to pass this problem on to another generation of Americans” did exactly that by ignoring the entitlement recommendations of his own deficit commission. This prompted deficit commission co-chairman Erskine Bowles to add that the president’s budget is “nowhere near where they will have to go to resolve our fiscal nightmare.”
If you want to know what this will look like, check out this scary table from Keith Hennessey of what the deficit will look like under Obama's vision for America.
Click to enlarge. Check out Hennessey's website for an explanation of the table.

And this is relying on Obama's rainbows-and-sugar-fairy assumptions about how the economy will grow under his plan. As the Washington Examiner says, these are fantasyland numbers.
Rosy scenario certainly applies to the Obama budget's assumptions about economic growth, unemployment, and inflation between now and 2013. The president's proposal assumes real gross domestic product growth of 3.1 percent this year, 4 percent next year and 4.5 percent the year after. To grasp the unreality of that projection, recall that in only four years of the past 30 has the economy grown 4 percent or more. Two of those years, 1983 (4.52 percent) and 1984 (7.19 percent), were at the outset of the economic boom sparked by President Reagan's tax cuts. The other two years, 1997 (4.46 percent) and 1999 (4.83 percent), both followed on compromises between President Clinton and Republican congressional majorities that restrained federal spending and debt, and cut taxes. White House assertions to the contrary notwithstanding, the proposed Obama budget raises taxes, adds more debt and raises federal spending.

In other words, the chief executive and his economic policymakers are assuming the most positive possible rate of economic growth for the next three years. Their optimism is also seen in their inflation projection of 1.3 percent this year, 1.8 percent in 2012 and 1.9 percent in 2013. Ditto on Obama's assumption that unemployment will dip from 9.3 percent this year to 8.6 percent next year and 7.5 percent the following year.
Just move those numbers a bit in the other direction and all those rosy numbers about spending and revenues will start moving in the opposite directions from Obama's projections. Spending will rise and revenues will sink. And how is this for magical, mystery accounting. In talking to the press about his budget, the President said,
"What my budget does is to put forward some tough choices, some significant spending cuts, so that by the middle of this decade, our annual spending will match our annual revenues. We will not be adding more to the national debt. To use a sort of an analogy that families are familiar with, we're not going to be running up the credit card anymore. That's important, and that's hard to do, but it's necessary to do."
Er, except that the President is not counting interest on the debt when he is talking about bring spending in alignment with revenues. It took a follow-up question for the President to admit that, yeah, we're going to have to pay the interest on the debt so that his previous statement was not exactly correct. So those families figuring out their debts, if they followed the President's happy talk, they wouldn't be including their debt payments in their analysis of how much money was coming in and going out. Try that at home!

So if you're dreaming happy dreams based on Obama's promises, don't forget what will happen once reality comes into conflict with those projections.