Arnold Kling  

Budget Analysis

PRINT
Academia vs. Reality... High-Beta Houses...

The Washington Post lead editorial for August 29 adjusts the baseline budget forecast for several factors. The largest is discretionary spending, which they argue will grow at the rate of the economy rather than at the rate of inflation. The next largest is extension of most of the Bush tax cuts beyond their scheduled expiration date. The other major items are a prescription drug benefit, reform of the alternative minimum tax, and additional interest payments due to higher deficits caused by the other factors.


And the result? Cumulative deficits of $4.3 trillion through 2013 -- three times the CBO's official projection. To look at it another way, in 2008 -- the point at which the administration insists the deficit will be cut in half -- the deficit would be just under $400 billion. By 2013, it would be $550 billion.

For Discussion. Should Congress and the President be required to make Budget decisions that are consistent with a balanced budget at full employment? How do problems in Budget forecasting make it difficult to plan medium term fiscal policy?


Comments and Sharing


CATEGORIES: Fiscal Policy



COMMENTS (14 to date)
Mcwop writes:

It is good to see that the WP admits spending and new programs are a problem. Unfortunately, those that chide Bush don’t propose anything different that will close the budget deficit. They propose a more expensive drug program. They have no fix for runaway Medicare spending. There is no fix to the fact that the general budget relies on less surplus from Social Security. Their only proposal to raise taxes, which if it increases revenue (no guarantee) is not enough to close the deficit.

The Congress and the President should be required to make changes that will help shore up the budget and reduce potential problems before they become a crisis. I know this is politically difficult, when federal spending is used to buy votes.

What needs to happen is the following:
- Limit non defense spending growth to half the rate of inflation for 5 years (does not include Social Security or Medicare, which are obligations)
- Limit Defense spending to no more than 0.5% above inflation for the next 5 years
- DO NOT add a drug plan to Medicare
- Reform Medicare by turning it into a high deductible catastrophic insurance plan with a deductible based on means (income). Additionally, Medicare must be a true insurance program where payouts do not exceed premiums.

Social Security is much more complex. I am not sure how to deal with the fact that SS surpluses will shrink over the next ten years. These surpluses have masked spending in the rest of the budget.

Frank Young writes:

Any requirements to balance the budget should strive to ensure that we not only minimize deficits but that we also minimize surpluses. To that end the requirements should have provisions to avoid the bureaucratic tendency to overspend when times are good that have a whiplash effect when times invariably turn bad.

In terms of the problems with budget forecasting, is anyone aware of a study that shows how accurate our budget forecasts have been? Has anyone ever developed an accurate 10 year forecast?

And why aren't we putting these absolute $ deficits in the context of 1) the size of the total budget in any given year and 2) the size of the cumulative spend over the forecast period?

Also, does anyone know of a good source of information on the sensitivity of the underlying budget forecast assumptions?

I'd like to be able to understand the following types of statements:

- If GDP were to increase to an average X% over the forecast period from the baseline Y%, deficits would be eliminated.
- If non-defense spending is held to X% instead of the assumed Y%, deficits would be reduced by $ZZZ billions.
- etc.

David Thomson writes:

“To that end the requirements should have provisions to avoid the bureaucratic tendency to overspend when times are good that have a whiplash effect when times invariably turn bad.”

Sigh, and I hope Santa Claus brings me presents on Christmas morning. Bureaucrats and politicians perhaps inherently cannot control themselves when there is extra money in the treasury. After all, there are voters to “bribe” and bureaucratic fiefdoms to build. Who normally gets paid more? The individual who manages a few employees or hundreds? I see no other available alternative than privatizing the public sector as much as possible. These folks are akin to drunken sailors who just got their paychecks.

Mcwop writes:

Frank wrote: "If non-defense spending is held to X% instead of the assumed Y%, deficits would be reduced by $ZZZ billions"

The only evidence that I know of is during the Clinton years. Defense spending went down, which certainly helped the budget. Here is one source of data:

http://w3.access.gpo.gov/usbudget/fy2004/sheets/hist04z2.xls

This does not provide a formula, but may help give a feel for it.

Mcwop writes:

Sorry forgot the source link with even more data:

http://w3.access.gpo.gov/usbudget/fy2004/hist.html

Boonton writes:

"Bureaucrats and politicians perhaps inherently cannot control themselves when there is extra money in the treasury"

What's interesting here is that this does not conform to reality. Through the 90's the Treasury as overflowing with unexpected money but spending increases were much harder to come by. Now spending is shooting thru the roof even though the Treasury is bare.

Mcwop writes:

"What's interesting here is that this does not conform to reality. Through the 90's the Treasury as overflowing with unexpected money but spending increases were much harder to come by. Now spending is shooting thru the roof even though the Treasury is bare."

Very true at the Federal level. At the state level, many spent themselves into oblivion.

Boonton writes:

"The only evidence that I know of is during the Clinton years. Defense spending went down, which certainly helped the budget. Here is one source of data:"

Perhaps but the data should be examined a bit more carefully. First of all military spending as a % of outlays is not a useful number, IMO. Neither is spending as a % of GDP. If you have 10 tanks in 1990 and 10 tanks in 1995, your military is basically unchanged. It doesn't matter if your spending on welfare or your GDP growth cut your 1995 spending in half.

Military spending in 1990 is listed as $289.7B. In 1996 it is $253.3B. A drop of $35B. Yes it cut the deficit a bit but the effect is rather small on something as large as the Federal Budget. In 2000 it was back up to $281.2B. Granted the effects of inflation are probably not represented here but let's be sensible. We are not talking about a huge cut...especially considering we were still technically in the Cold War during 1990.

Boonton writes:

"Very true at the Federal level. At the state level, many spent themselves into oblivion."

Which is somewhat by design since states have less borrowing capacity than the Federal gov't. It isn't surprising that their budgets follow a 'feast then famine' routine.

Matt Young writes:

"Social Security or Medicare, which are obligations"

There are no legal or moral obligations to treat these costs any differently than other expenses. Calling these "obligations" is a dirty trick that really means, "Don't cut my favorite programs"

The federal goverment is limited in its budget to spend about 18% of the GNP if it wants on optimum economy. This level of spending leaves 10% for the states and localities.

Over time, the federal goverment has never been able to extract more than 19% of the GNP without causing serious death and destruction to the citizens.

Boonton writes:

Gov't spending has often been in excess of 19% of GDP. During the 90's for example, I noticed no 'death and destruction' caused by surpasing your 18% barrier. Gov't spending continues to exceed 18% today.

Where exactly are you getting this figure?

Lawrance George Lux writes:

Federal spending is often only replaced by expenditure at the State and Local level, with deficit growth not retarded at any level. No Government presents exact data expressing the point where tax revenues would be sufficient to obtain Surplus of Budgeting. No One will allow themselves to be tied to a Projection.

The fact remains Politicians revert to Tax Cuts to eliminate Budget Surplus far faster that they utilize more Spending. The problem comes in the fact these Tax Cuts adopt the sanctity of 'inalienable right' once proposed. There is some evidence suggesting the Federal Deficit would turn into a Surplus, utilizing the Tax rates found when George W. Bush took office. There is no compelling evidence suggesting the GDP would be less than at Present, if the Bush Stimilus Package had not been instituted.
lgl

Boonton writes:

"Social Security or Medicare, which are obligations"

"There are no legal or moral obligations to treat these costs any differently than other expenses. Calling these "obligations" is a dirty trick that really means, "Don't cut my favorite programs""

SSI and Medicare are legal obligations in the sense that Congress has passed laws requiring the Treasury to pay them. In theory Congress could repeal this law, they could also do the same with the Gov't's legal obligation to pay interest on its debt.

As for a moral obligation, I would say there is some obligation to honor SSI and Medicare for those who have paid into the system and planned accordingly. I would balance this though with reforms that are either minor or are phased in over a long period of time giving people time to adjust.

mcwop writes:

Until a law is passed otherwise, then SSI and Medicare are obligations. I do not mean it as a dirty trick, and am 100% for reforming both programs. I despise the structure of both. Problem is, politically these will be very difficult to reform.

Comments for this entry have been closed
Return to top