January 08, 2004

The Budget Picture

David Wessel writes about a serious attempt to think about U.S. fiscal policy--as opposed to the forthcoming clown show that will be the Bush administration's 2005 budget proposals:

WSJ.com - Capital: ...Next week, a band of experienced budgeteers convened by the Brookings Institution think tank -- most of them Clinton administration veterans such as Isabel Sawhill, Alice Rivlin and Peter Orszag, but including Ron Haskins, a former Republican congressional and White House aide -- will detail what it would take to balance the budget by 2014. Without action, they project, that year's deficit would be $687 billion, or roughly 3.7% of what the Congressional Budget Office guesses will be the gross domestic product then.... In a clever analysis that could frame the deficit debate -- if one ever emerges in this presidential campaign -- the analysts offer three paths to eliminating the deficit: a "small government" plan that Republican conservatives can embrace; a "big government" plan that puts numbers on the rhetoric of Democratic candidates; and an in-between plan that is three parts tax increases and one part spending cuts.

Like Goldilocks, the authors think the in-between one is just right.... Two conclusions are particularly important.

First, it is impossible to balance the budget by 2014 simply by cutting spending. Using wish lists of small-government-is-better think tanks such as the Cato Institute and Heritage Foundation, the analysts tally savings from wiping out business subsidies; eliminating federal spending on K-12 education, housing, worker training, environmental protection and manned space flight; squeezing out waste; raising the Social Security retirement age; and trimming Medicare payments to health-care providers.

All of that gets them only three-quarters of the way to the goal; it still takes $134 billion in tax increases during 2014 to balance the budget. You won't read that in Mr. Bush's Feb. 2 budget, which likely will avoid looking beyond the next five years....

Second, undoing all of the Bush tax cuts, as Democratic front-runner Howard Dean proposes, won't be enough to balance the budget either. That yields about $300 billion in 2014. Even if Mr. Dean banked that whole sum and didn't keep his $1 trillion health-care promise, he still would be only 55% of the way to balance.

The Bush administration declined to send budget director Josh Bolten to join former Treasury Secretary Robert Rubin and ex-Congressional Budget Office directors Robert Reischauer, a Democrat, and Dan Crippen, a Republican, at a forum on all this next week.... Once there was a Republican budget director who took the long view. In the official White House budget, he wrote: "At some point, it is appropriate to put games aside -- at least for a while. At some point, partisan posturing must yield to the responsibility to govern. Sooner or later, the American political system will rise to the responsibility to complete the job of fiscal policy correction." His name was Richard Darman.... His message, dated 1990, remains relevant.

Posted by DeLong at January 8, 2004 12:29 PM | TrackBack



Disability rates rose sharply in the past two decades among those under 60, and obesity may be the main reason, a study suggests.


U.S. health-care spending in 2002 rose 9.3%, twice the growth rate of the national gross domestic product, and skyrocketing prescription drug costs are a major part of the gain, two new studies showed.


A new and frank report by the Congressional Budget Office (CBO) shows that rising health-care costs and an ageing population mean that federal “entitlement” programmes—notably for Medicare, Medicaid and Social Security (pensions)—will claim a much higher share of the country's economic output over the coming decades. Currently, Social Security funds run a surplus that helps to finance other parts of government. But by 2015 surplus will swing to deficit, and by 2030, on current policy, the cost of Social Security will have risen from 4.2% of GDP to 5.9%.

Spending on pensions pales in comparison with health care. The range of estimates is necessarily vague, since they involve assumptions about the future rate at which health-care costs will grow faster than per-head GDP each year: since 1970, the “excess-cost growth” for retired people on Medicare has been around 3%. The CBO calculates that, if future excess-cost growth of both Medicare and Medicaid was only 2.5%, then federal spending on these programmes would jump from 3.9% of GDP in 2003 to 21% in 2050.

It is clear that holding back the growth in non-entitlement (or “discretionary”) programmes, such as defence and transport, will not be enough to ensure a sustainable budget in the long run. Unless entitlement programmes are cut too, or taxes raised to unprecedented levels, or both, the country is on a financially unsustainable path over the next half-century. “An ever-growing burden of federal debt held by the public”, the CBO concludes, “would have a corrosive and potentially contractionary effect on the economy.”


The IMF said surging U.S. budget deficits will drive up interest rates world-wide by as much as a percentage point, hampering investment and growth.


"We feel there is a substantial risk that the foreign investors" appetite for U.S. assets, and in particular U.S. government assets, will over time diminish," said Charles Collyns, who heads the IMF team that monitors the U.S. economy.

"We think to some degree over the past year this has occurred, and this is one of the reasons why there has been weakness in the U.S. dollar." He added that the U.S. government finances are "perilous."


[The improvement in the economy, as reflected by the general decline in unemployment claims, has lifted state tax receipts and therefore helped improve state budgets. The improvement in state tax receipts also bodes well for federal receipts.]


[On Wednesday the Treasury auctioned $16 billion in 5-year notes at a rate of 3.260%. With a bid/cover ratio of 2.51, the most in over three years, demand was strong, especially from foreign central banks who purchased up to 40% of the auction.]


[H]olding dollar assets allows Asian central banks to avoid the thing that scares governments: a falling dollar. Asia worries a continued drop in the currency of the world's biggest economy will choke off its post-1997-crisis recovery. So, for better or worse, the dollar remains king and will remain as such until Asians turn to the euro.


[T]he currency of the global policy realm [is] brute force reflation, with a declining dollar playing the role of the brute.

Asian central banks can buy it [dollars] up by printing their own fiat money, if that is in their own best interest. It is right now, and I think it will continue to be so for a extended period, which is much longer than a considerable period .[.]. There is no question that the symbiotic relationship between Americans' love of consuming and Asians' love of saving is a tricky one. But for it to break down badly, I think you'd have to have a geopolitical gerbil fall into the soup.


"According to reports from the MOF in the Nihon Keizei Shimbun, Japan sold ¥20.05 trillion to buy dollars in 2003. It is worth noting that this is very nearly three times as much as had been done in the form of intervention in the previous record year: 1999, when the authorities sold ¥7.64 trillion."

"According to the Nikkei, the MOF has arranged for a bonds-for-cash swap with the US Treasury and the BOJ to replenish its arsenal. The MOF has also arranged a new Yen 61 trillion in borrowing authority. That will get the MOF through the first half of the year at a pace of last year's regular interventions. If the MOF keeps up the pace it has for the first several days of '04, this new arsenal, however, will not make it through mid-February."


"China's State Administration on Foreign Exchange (SAFE) announced yesterday that for all of 2003 the nation's foreign exchange reserves rose $116.84 billion to $403.25 billion. That is, on average, a gain of $320 million every single day of the year. Actually the gain was even larger than that for SAFE noted that the final figures included $45 billion that were injected into two state controlled banks at the very end of the year (the China Construction Bank and the Bank of China), so in reality the nation's forex reserves really rose $161.84 billion last year, or $443.4 million/day."

Posted by: anon on January 8, 2004 02:29 PM


Hmmm. Mr. Bush could indeed get impeached after all.

No, no, I didn't mix up the threads. I mean Mr. Bush is not really going to be impeached for misleading the nation on Iraq, but he may be impeached for lousing up the economy. On what charges he gets impeached is not that important -- Iraq or some female intern, what difference does it make?

But then Mr. Bush might nicely manage to get himself out of Office in 2004, all by himself, without help from any body. Look at this:

"... The tactic is one Mr. Bush has used before, most recently on the Medicare bill, which allows him, Democrats say, to take credit for proposing reforms while leaving Congress to work out the details...."

Link (nyt requires regist):http://www.nytimes.com/2004/01/08/politics/08ASSE.html

Playing that kind of trick twice is one too many and it shows that Mr. Bush is not very sure about winning the election in 2004.

In fact, I'd say Mr. Bush may very well lose the election unless his opponets get totally locked up in complete incompetence.

Posted by: Bulent Sayin on January 8, 2004 02:37 PM


Hmmm, of course the numbers also imply that Gingrich and Armey were right on the need to cut Medicare by a lot and that Clinton displayed gross fiscal irresponsibility by not going along with them on that particular issue...Care to address that one, Brad?

Posted by: K on January 9, 2004 06:09 AM


Dear K: Which hillside are you going to expose your grandmother on?


Posted by: charles on January 9, 2004 07:09 AM


K, The numbers imply that Gingrich and Armey were correct that Medicare needed to be rebalanced. But that in no way means it had to be balanced down. Big difference.

Posted by: tegwar on January 9, 2004 07:14 AM


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