The President Proposes Greece

Sixty days after the President delivered a budget that did nothing to curb the growth in federal debt, he produced a new "Framework for Shared Prosperity and Shared Fiscal Responsibility." The "Framework" (one cannot call it a budget since there is no indication of what revenues will be raised from where or what will be spent on what) purports to be a plan to reduce the deficit by $4,000,000,000,000 over 10, excuse me, 12 years.

Why the sudden concern for fiscal responsibility? It is unlikely that some new bit of economic information suddenly convinced the President of the seriousness of the problem. What moved the President to act was the release of the Ryan Plan. The President views the Ryan plan simultaneously as an opportunity and a peril. He can use it to demonize the Republicans and he must. If Americans really come to fear national fiscal insolvency more than a loss of personal benefits, he doesn't want to be seen as part of the "do nothing" party.

The Ryan Plan, whatever you think of it as a whole, is a serious proposal for fiscal reform. The President's Framework is a political document, long on blame shifting and "save grandma" rhetoric, and very short on specifics. It does, however, concede the essential point to the Republicans and, I dare say, to the Tea Party Movement: something really, truly, no kidding must be done about the growth of public debt. Here is what Obama said in his speech today:

Even after our economy recovers, our government will still be on track to spend more money than it takes in throughout this decade and beyond. That means we'll have to keep borrowing more from countries like China. And that means more of your tax dollars will go toward paying off the interest on all the loans we keep taking out. By the end of this decade, the interest we owe on our debt could rise to nearly $1 trillion. Just the interest payments.

As Powerline observes, this is what happens under the President's own budget. That was his plan, two months ago! Now he is suddenly aware of our fiscal dilemma. That alone is a lot progress in two months.

There are a lot of reasons to be skeptical about the "Framework". For one thing, the 12 year time period is unusual. A decade is customary in budgeting. That gives the President two years and one election to do little or nothing. Like most such proposals, all the savings are delayed. Most of the proposals for spending cuts and increased revenues are vague and/or implausible.

The Framework wasn't, however, altogether unserious. The most interesting nugget is this:

We must provide a strong incentive for Congress to act on a deficit reduction framework and renew confidence that we will hit this goal. Therefore, the President is calling for:

• A debt failsafe that will ensure that our nation's debt is on a declining path as a share of our economy. If by 2014, budget projections do not show that the debt-to-GDP ratio has stabilized and is declining in the second half of the decade, the failsafe will trigger an across the board spending reduction, including on spending through the tax code.
• The trigger will ensure that deficits as a share of the economy average no more than 2.8% of GDP in the second half of the decade.
• Consistent with prior fiscal enforcement mechanisms put in place by Presidents Reagan, George H.W. Bush and Clinton, the trigger should not apply to Social Security, low-income programs, or benefits for Medicare enrollees.
• The trigger should also include a mechanism to ensure that it does not exacerbate an economic downturn or interfere with our nation's ability to respond to a national security emergency.

This is an old idea and one that has never worked yet. If the deficit isn't reduced by a specified amount, the failsafe mechanism will trigger an automatic spending reduction. Sounds good! Let's unpack it.

If, by 2014 (the second year of Obama 2, he hopes), the "the debt-to-GDP ratio" is not "projected" to "stabilize and decline in the second half of the decade" (10 or 12 years?), then a "failsafe will trigger an across the board spending reduction, including on spending through the tax code." So we will now have a governor on the federal budget, like the one that keeps your go kart from going too fast. If the deficit isn't reduced by Congressional action, it will be automatically reduced. Problem solved.

There is a bit of confusion here. The "Debt to GDP ratio" is not the same as the "deficit to GDP ratio." The plan is also dangerously vague. "Budget projections" by who? The Congressional Budget Office? The Office of Management and Budget? Paul Krugman? If real spending cuts are at stake, the pressure to manipulate projections will be overwhelming. Better yet, the failsafe won't trigger if it might "exacerbate an economic downturn," which will be determined by who? Paul Krugman? It will always be easy to think that the economy is too fragile "just now" for cuts.

This plan is a recipe for disaster. Consider that the failsafe mechanism exempts Social Security, low-income programs (see Medicaid), and Medicare. As Keith Hennessey puts it:

It appears that the President's trigger would exempt more than 90% of government spending from the automatic across-the-board cut.

That doesn't mean that the President's trigger would do nothing. Consider these ominous words in the passage above: "the failsafe will trigger an across the board spending reduction, including on spending through the tax code." What does "spending through the tax code" mean? Let's say the Federal Government takes 20% of your income in taxes. The rest of your income is federal "spending through the tax code." The idea here is that the federal government owns all your income and letting you keep any of it is federal "spending".

So let's put the puzzle together. The President's failsafe mechanism would exempt Social Security, Medicaid, and Medicare, the three programs that are driving long term deficit growth. The failsafe would cut virtually no spending, but would trigger automatic income tax increases large enough to close the gap between revenues and expenditures. The President tries to game this by talking about taxes on millionaires and billionaires, but the very rich already pay the lion's share of income taxes. There is no way that ends meet here unless taxes are raised on almost all working Americans.

What the President is in fact proposing is the unrestrained growth of federal spending and the unrestrained growth of taxation to keep up with it. No wonder Paul Krugman likes it. Obama thinks (assuming he thinks) that this will turn the United States into Canada.

In fact, it would turn the United States into Greece. Our big social programs would continue to grow without check, and taxes would increase to the point that everyone stops paying them. Revenue for investment would shrivel. We would eventually reach the point of default, with no European Union to bail us out.

It would be uncharitable to think that the President has thought this through. He isn't thinking about the fiscal future of these United States. He is thinking (assuming he is thinking) about November 2012.

He might have chosen this moment to do something worthy of reelection. Probably we need to raise taxes on almost all Americans. Certainly we need to cut spending on entitlements. At the very least we needed an alternative to the Ryan budget that was serious, so that Congress could work out a rational solution to the present dilemma. I did not expect such from this President and I was not surprised.

Comments

[Stan Gibilisco]

As the Baby Boomers retire and grow old, demand for entitlement payouts will rise relentlessly. People might not favor the notion of socialism (I certainly don't), but they'll like freezing, starvation, and premature death even less. Mark my words: Our tax structure will resemble that of a European country within 25 years. Let us hope we end up more like Sweden and less like Greece.

[A.I.]

Conflating the U.S.and Greece is an absolutely ridiculous scare tactic. Just a few quick points:

Nothing in Obama's proposal expands any entitlement or welfare programs and that expansion would have to be great to approach anything close to those in Greece. At best, he maintains the status quo.

Unlike the U.S., Greece does not have its own currency which greatly limits its options for dealing with public debt.

While U.S. deficits are forecast to drop in the near term, those in Greece were not had they not made changes--and still may not. And while our annual deficit is forecast to top out a 10% of GDP, Greece reached somewhere near 15% as their crisis hit.

[KB]

A.I.: perhaps you have been in a cave since last we conversed, but entitlements are expanding ON THEIR OWN. Nothing in Obama's proposal would do anything to curb them. It would raise the possibility of massive, automatic tax increases to pay for them. The share of the American economy would rise dramatically.

Yes, Greece is the extreme case, but it got where it is the same way we got here, and the President is determined to keep us on that path. Yes, Greece is limited by the Euro. It also has someone bigger and stronger to bail it out.

[William]

Once you add up all the levels of government and all of the ways of demanding more from the taxpayers – income, gas, sales taxes, alcohol taxes, property taxes, automobile fees, etc. it’s no wonder the average taxpayer feels abused and exploited. In most places in America, three separate levels of government demand enough to keep their operations going with minimal cuts to the pre-recession levels of spending. Few of them see the taxpayer as their employer; they see us as the credit card that enables the gratification of spending.

[William]

Ultimately, we have only two choices. In the real world, either more prudent management of our federal fiscal affairs, or else a painful and destabilizing crash, will occur. We will either choose, or the choice will be imposed on us.

[Ken Blanchard]

William: I am not happy to say that I agree with you completely, at least as regards your last post.

[William]

KB,

I'm not happy I feel like I have to say it, but I say it often, usually falling on deaf ears. That's what worries me the most...