The fiscal-cliff negotiations have deteriorated into an embarrassing travesty of competing press conferences, off-the-record remarks, closed meetings, and sound bites. The Republican side is frustrated and flabbergasted by the absence of a concrete proposal from the President that can be scored by the Congressional Budget Office and then “marked up” by Congress according to standard procedures. Vague offers of so and so many trillions of revenue increases and spending cuts spread over a decade are just words, not real proposals.
The last serious fiscal-cliff projections date back to the Congressional Budget Office’s (CBO) August 2012 assessment of the budgetary effects of various fiscal policy alternatives. In its August study, the CBO – the “gold standard” of budget projections — calculated the budgetary consequences of going over the fiscal cliff in its “baseline projection.” It then projected the budgetary effects of alternative fiscal policies, among them, extending the Bush tax cuts and shelving the sequestered spending cuts.
We may agree or disagree with the CBO’s projections, but they are the most authoritative we have. President Obama has been vocal with respect to the fiscal policies he wants, and each item on his wish list can be scored using the CBO’s August study. Therefore, we can approximate the five-year deficits that would result if President Obama gets what he wants. This is not rocket science. Anyone can do this using the CBO’s excel files.
The CBO’s bottom line: If we go over the fiscal cliff, the second Obama administration will accumulate $1.5 trillion in deficits for 2013-2017 ($300 billion per year), for a “modest” deficit of less than two percent of GDP. If Obama gets his full wish list and avoids the fiscal cliff, the CBO’s alternate fiscal policy projections yield a cumulated 2013-2017 budget deficit of $4.5 trillion. In this case,the second Obama administration will run annual deficits of almost a trillion dollars a year. Only this time round, Obama does not have the convenient excuse of a deep economic crisis inherited from the previous administration. As he assured voters in the election campaign – the recovery is underway. Do not worry.
Remember that the CBO’s $1.5 trillion baseline-budget assumes that everyone’s taxes are raised and automatic spending cuts go into effect, more middle class families fall into the Alternative Minimum Tax trap, and eligibility periods for unemployment revert to previous rates. Payments for food assistance and other income security benefits are cut, and Congress really does, after years of threats, cut payments to Medicare physicians. These events are unlikely to happen, unless the fiscal cliff talks fail entirely or, if they do, no remedial action is taken in the early 2013.
In a word, the fiscal cliff negotiations are about avoiding the CBO baseline scenario.
The President, while not presenting concrete proposals, has been quite clear on what he wants: to raise taxes on the top two percent, keep the Bush tax cuts for everyone else, offer only vague promises of future spending cuts, and gain the unprecedented authority to raise the debt limit without Congressional approval. He does not plan to reform the entitlements so dear to his heart and his base’s.
Instead of less spending, he would like to spend more on “stimulus” and “investments.” Obama knows that physicians will desert Medicare if he cuts their compensation by the scheduled 26.5 percent. That is simply not going to happen.
Here are Obama’s desired alternative fiscal policies to avoid the fiscal cliff in order of their effect on the five-year budget as estimated by the CBO:
1. Preserve Bush tax cuts and other tax provisions for everyone except the top 2 percent: Raises the five-year deficit by $2.0 trillion.
2. Drop the fiscal-cliff sequestration of spending and expand discretionary spending by the rate of inflation: Raises the five-year deficit by another trillion dollars.
3. Raise the tax rate on the top 2 percent: Lowers the five-year deficit by $300 billion.
4. Extend enhanced unemployment benefits: Raises the five-year deficit by $200 billion.
5. Do not cut Medicare payment rates to physicians: Raises the five-year deficit by some $100.
Four of the five fiscal policies on Obama’s wish list raise the deficit. Only one – the vaunted tax on the rich on which he based his campaign – lowers the deficit, but only by a miniscule $300 billion ($60 billion per year). If Obama gets the tax and spending changes he wants, his 2017 successor will inherit a national debt in excess of $20 trillion.
A warning: The 2013-2017 budget deficits could be much higher. No one knows what the costs of Obama Care will be. By 2017, the federal government will be spending more on health care than on social security. The CBO projection assumes that the costs of Obama Care come in on target. If Obama Care cannot contain health care costs, we could easily see a five-year deficit well in excess of $5 trillion, for an annual deficit of more than a trillion dollars. The CBO also uses a historically low rate of increase of discretionary non-defense spending equal to the rate of inflation. If we return to “business as usual” in Washington, the discretionary spending figure could also be blasted out of the water.
Obama based his re-election campaign on “the rich should pay their fair share” and “I killed Osama.” Well before the election, it was clear from the government’s own figures that taxing the top two percent would make only a tiny contribution to solving our deficit problems.
Why was this not pointed out by the media, who played along with the “tax the rich” fairy tale? Why was this not the central theme of the Republican campaign?
Five trillion dollars in new debt will allow Obama to pursue his second-term political objective of a bigger and more intrusive federal government that serves his interests and those of his political allies. With a compliant Fed and willing foreign bond buyers (largely in Asia), he might be able to stave off the bond market vigilantes throughout his second term, if he is lucky. But he will leave his successor with a $20 trillion debt. At a “normal” interest rate of five percent, Obama’s successor will face annual interest payments of one trillion dollars. To gain some perspective, the CBO projects social security to cost one trillion in 2018. Our interest payments on the national debt (at 5 percent) would roughly equal the entire cost of social security!