February 12, 2003

Stan Collender on Fiscal Policy

Stan Collender writes that the 2004 Budget's summary tables--especially Table S-3--"contradicts virtually every major claim the [Bush] administration is making about what it is proposing."


Budget Battles (02/11/2003): The Secrets Of S-3

By Stan Collender
NationalJournal.com
Tuesday, Feb. 11, 2003

Summary Table 3, or S-3, is one of the most standard -- and basic -- tables in President Bush's budget. And it contradicts virtually every major claim the administration is making about what it is proposing. (Click here for a PDF of S-3.)

OMB's own projections show that by 2006, the annual increase for interest payments on the federal debt will be larger than the increase in defense spending.
S-3 starts with the baseline -- that is, the White House's estimate of the surplus or deficit if there are no changes in what the federal government is doing. Budget aficionados often say that the baseline shows what will happen if the federal government is on automatic pilot.

The Office of Management and Budget-prepared baseline shows that the deficit will decline precipitously without the changes in tax and spending policies the White House is proposing. In fact, the baseline shows that the budget will be in surplus starting in 2006 and that the surplus will increase every year thereafter. But S-3 also indicates that implementing the Bush budget would greatly increase the deficits in 2003-2005 and obliterate the projected surpluses in 2006-2008.

In other words, in spite of the official line from the White House, S-3 shows unambiguously that the administration's fiscal 2004 budget proposes a massive annual increase in the deficit.

S-3 also shows that the administration's claim that the deficit will bottom out because of its budget is completely wrong. The table shows quite clearly that the deficit would decline slightly from 2005 to 2007 but start increasing again in 2008. (The deficit would likely continue to grow in 2009 and beyond but, in contrast to the common practice in recent years, the administration chose to do five-year rather than 10-year forecasts.)

OMB Director Mitch Daniels told reporters last Monday that the best way to eliminate the deficit is to get the economy growing. He and other administration economic spokesmen also at least implied this budget will do just that.

But the numbers in S-3 belie Daniels' statement. If this budget increases economic growth to the extent and as quickly as the White House says it will, why doesn't S-3 show the deficit being eliminated or at least reduced substantially at some point between now and 2008?

Contrary to what Daniels indicated, S-3 seems to suggest that even if the Bush budget is implemented without change, the economy will not grow as fast as is needed to reduce the deficit. It also makes the connection between economic growth and balancing the budget appear far less strong than Daniels would have us believe.

S-3 shows very convincingly that the economic growth the president says will result from his policies will not be anywhere near enough to offset his proposed permanent changes in outlays and taxes. Contrary to what the White House is saying, the Fiscal 2004 budget projects large structural, not cyclical, deficits, which are very likely to persist even through an economic expansion. And the fact that no one is forecasting such a boom means the deficits the administration says will be short-lived are in fact likely to be around for quite some time.

S-3 also indicates that the increases for defense and homeland security (two of the administration's top priorities) are matched by the projected increase for "related debt service" -- that is, for higher interest payments on a national debt expanded by these growing deficits. In fact, S-3 shows that by 2006, the annual increase for interest payments will be larger than the increase in defense spending.

This puts to rest another of the White House's claims -- that its budget will reduce the size of government. S-3 shows that, while the president's budget does propose tax cuts and limits the growth in appropriated spending, it will also significantly increase the government's participation in the credit markets. Rather than reduce the size of the government, the Bush 2004 budget will really just be changing its shape...

Posted by DeLong at February 12, 2003 07:25 PM | TrackBack
Comments

There has been some debate lately as to whether budget projections can be altered by perceived changes in growth that will result from fiscal policy. In the past growth projections were static for the purpose of budgetary projections. However, some argue for more dynamic growth projections. For example, if supply-siders occupy the White House and slash taxes they can project future budgets based on their opinion that growth will be stimulated, even though that opinion may be disputed.

If the rules still require static growth projections, then the Collender article is meaningless because the budget projections are based on customary rules and not conservative ideology. Conservatives will say the budget projection doesn't show growth because they are not allowed to show that growth. However, if the budget projections use dynamic growth projections then the article is relevant and more evidence of the dishonesty of the Administration. Does anyone know the answer to this question?

Posted by: Dan Jordan on February 12, 2003 09:00 PM

The economic projections used in the administration's budget assume that the budget will be passed into law as proposed, and will have the expected effects on economic growth. The "dynamic scoring" elements of the budget are already built into the economic projections.

Posted by: Brad DeLong on February 12, 2003 09:40 PM

My budget watcher offers me a suggested explanation for this non-sense. The budget document is a Mitch Daniels, OMB product. White House talking points on the deficit during the effort to pass the tax cut are the product of Glenn Hubbard and the CEA. The tax cut is Hubbards offspring, and he is far more optimistic about its virtues than Daniels is. Is Daniels engaging in stealth O'Neill behavior?

Posted by: K Harris on February 13, 2003 06:01 AM

I find it bizarre that Daniels is now suspected of not being optimistic about the virtues of tax cuts.

Brad, the drift of your posts regarding this government's fiscal policy leans toward vigorous head-scratching about whether these people are nearly criminally dishonest or criminally incompetent, or some combination of same. You have
eloquently rejected other motives, defending these people as patriotic public servants, regardless of your policy differences. Could it be, though, that many of these people, based on evidence from their own utterances before they rose to public service, regard it as a patriotic duty to trash, over the long term, the finances of the U.S. Government?

Dishonesty and incompetence would be good in a Shakespeare tragedy, or farce. The stakes here are .... I can't think of a word that doesn't understate the situation.

Posted by: John Thullen on February 13, 2003 07:44 AM

Isn't the clinical definition of insanity the unwillingness or inability to deal with reality? Just asking.

Posted by: Alan on February 13, 2003 05:19 PM

John Thullen: Just to stir the pot a little: how many of these people plan to retire to the Bahamas, or someplace like that, to rejoin their money which is already there.

Posted by: Zizka on February 13, 2003 06:37 PM

I personally have been in the "do nothing" camp now for several months. At the very least it seems that geopolitical pressures make for a "throwing good money after bad" condition. So why bother raising the deficit for no good reason?

I can only hope that the Bush tax cut plan is a bluff, to be reneged on at the last minute, in order to place downward pressure on budgets now.

Posted by: Nicole Tedesco on February 16, 2003 03:38 PM
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