Saturday, July 09, 2011

Why the GOP should trust but verify on Democratic budget promises

As the GOP and Democrats head into a weekend of negotiations on the debt ceiling, they should be especially wary of any deal that relies on promises for future cuts. The Americans for Tax Reform has put forth this chart based on the deal that George H.W. Bush negotiated with the Democrats in 1990 comparing the promises on spending cuts with what actually happened.
n 1990, President George H.W. Bush was promised $2 in spending cuts for every $1 in tax hikes by Congressional Democrats. That's not what happened.

All $137 billion in tax hikes went through. Most notable was raising the top marginal tax rate from 28 percent (the Reagan low) to 31 percent (itself a setup for the 1993 Clinton tax hike of this rate all the way up to 39.6 percent). There were also increases in "sin" taxes and the Medicare payroll tax, as well as the yacht "luxury tax" that President Obama seems so intent on re-visiting on the jet plane manufacturers.

Not only did the $274 billion in promised baseline spending cuts never materialize--baseline spending was actually $22 billion higher than what CBO projected it would be before the deal. This despite another tax hike/baseline spending cut deal in 1993 (the Clinton tax hike) and the GOP takeover of Congress in 1995.

The lesson is simple--tax hikes are real in these deals, but the spending cut promises are a fraud, plain and simple. Raising taxes for fake spending cuts is no deal at all.
Get those cuts enacted before the debt ceiling increase is agreed to - if necessary, have a short-term, smaller increase to get us past the supposed witching hour and then hammer out the real deal. Don't rely on some misty-eyed promises on spending cuts that will never come to pass.

Meanwhile, Fred Barnes warns against accepting any phony spending cuts. Whatever cuts that are agreed to, there must be some sort of adjustment to budgetary practices that will make difficult to bring back the spending a few years later.
The key word is "permanent." And to work, a cap must be enforceable.

Caps on spending come in different sizes, all of them likely to be opposed by Mr. Obama and most Democrats. The Republican Study Committee, the caucus of House conservatives, wants a cap at 18% of GDP—the average level of tax revenues in recent decades—with automatic cuts if spending exceeds the cap. To waive the cap, a two-thirds vote of both houses of Congress would be required.

Republican Sen. Bob Corker of Tennessee has proposed a cap of 20.6% of GDP, the average level of federal spending over the past 40 years, also with a two-thirds vote of both Houses required to override the cap. The Corker plan has some Democratic support in Congress. Erskine Bowles, co-chair of the president's National Commission on Fiscal Responsibility, favors a cap at roughly that level.
And Republicans should forget about placing their faith in a balanced budget amendment. It probably wouldn't pass. Even if it could get through the Congress with the necessary two-thirds votes, it is doubtful if three-fourths of the states would ratify such a methodology that would cut off the spigot of the federal dollars that they've come to depend on. Even if it would be ratified, it would not go into effect for several years.

All proposed spending cuts are for naught if there are not reforms to entitlements. That is where the massive holes in our future budgets are going to come from.
Radically altering entitlements may be too ambitious and complicated for a debt-limit bill that must be passed within a few weeks. But that might not be the case with other mammoth programs that could be turned over to the states and funded with block grants from Washington, such as Medicaid and food stamps. Along with a cap on federal spending, the pressure for spending restraint in such programs would be doubled, since balanced budgets are mandated in most states.

At his press conference last week, Mr. Obama said negotiators have already identified more than $1 trillion in spending cuts. No doubt they have, but whether they are real or not, spending cuts are evanescent. Reductions one year are followed by increases the next, whether Democrats or Republicans are in charge in Washington. Members of Congress elected a few years after future cuts are promised today won't feel obliged to impose them. In 1982, Mr. Reagan believed he had arranged to get three dollars in spending cuts for every dollar of additional tax revenues. The cuts either didn't materialize or were soon overtaken by more spending. By the way, Mr. Obama says he favors the same 3-to-1 ratio.

Republicans should understand that an enforceable spending cap at a level most Republicans and even some Democrats support would reduce federal spending by trillions of dollars over 10 years even in the absence of serious Social Security and Medicare reform. It won't be easy to get Mr. Obama to agree. It is certainly worth a try.
And watch out for games-playing on the how they count up the deficit. Keith Hennessey tels us how such games are played. Computing the how much money a budget deal would save in the future is more than totaling up the amount the deficit will be over the next ten years without any deal and then subtracting the amount the deficit would be over ten years with the deal.
CBO says budget deficits under current law will total $7 trillion over the next ten years. But by making certain assumptions about how the realistic future (without a deal) will differ from current law, one can redefine the starting point for measurement, X, to be as high as $12 trillion over that same timeframe. For any given resulting level of deficits Y, the bigger your starting point X is, the bigger your claimed deficit reduction X-Y appears to be.
And this is exactly what the Obama administration is doing.
It’s pretty clear the White House is doing this aggressively at the moment, as they try to make the deficit reduction effects of the policy changes being discussed look large.

Suppose, for instance, that a budget deal would result in $5 trillion of total deficits over the next decade (Y = $5 trillion). If we compare that to current law, then the deal will “reduce future deficits by $2 trillion.” If, however, we compare it to a starting point in which taxes don’t increase, troops aren’t reduced, and Medicare payments to doctors aren’t cut, then that same deal, those same policies, and that same $5 trillion of deficits will “reduce future deficits by $7 trillion.” By changing the baseline, we can make the same deficit reduction package look $5 trillion bigger.
Ah, statistics and damned lies. Expect such tricks in whatever deal emerges.

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