Reverse engineering the president's budget

The proposed budget for fiscal year 2016 was sent to Congress a week ago. Basically, the plan is to hike taxes on the well to do and big business, fritter away the resulting revenue increases, and continue running annual deficits in the $0.5T+ range indefinitely. Not exactly what we were hoping to see.

When the president leaves office in January 2017, he will have been in charge for eight fiscal years (which ones depends on whether the results of transitional years are attributed to outgoing presidents or incoming presidents) with heavy-duty deficits (roundly $7T for 2009-16 or $6T for 2010-17) and even larger debt increases. See last week’s entry for a comparison of the president’s fiscal record to those of his immediate predecessors.

One could look at the numbers and say “dead on arrival,” but the current package deserves thoughtful consideration. Although less eloquent than the president’s speeches, it explains the direction in which he has been trying to steer the country more clearly than any of his previous budget proposals (we’ve read them all) or policy statements.

This week’s entry will focus on the major segments of the budget and why it doesn’t represent a sensible fiscal blueprint. Wrong goal – misleading assessments – dubious prioritization – wishful thinking.

A. Goal – Just as it is tough to win a war without identifying the enemy, effective fiscal management requires a clearly defined bottom line. SAFE’s proposal is to balance the budget and thereafter keep it that way except in time of true national emergency. Postelection update: Deficits & debt, 11/24/14.

The president’s idea is to run sustainable deficits, meaning that Public Debt should not grow faster than the overall economy.
Fiscal Year 2016 Budget of the U.S. Government, page 13. (download PDF)

The key test of fiscal sustainability is whether debt is stable or declining as a share of the economy, resulting in interest payments that consume a stable or falling share of the Nation’s resources over time. The Budget meets that test, showing that investments in growth and opportunity are compatible with also putting the Nation’s finances on a strong and sustainable path.

Public Debt is shown as growing by $6.9T over the next decade, but gradually declining versus Gross Domestic Product from a high point of 75.1% this year – never mind that the PD/GDP ratio was much lower just a few years ago. Budget proposal, Table S-1.

Table1

Attempts to grow the debt more slowly, or even stabilize it by balancing the budget, are referred to as “austerity,” “needless austerity,” or in the case of budget sequester caps “mindless austerity.” Time to put aside the austerity mindset, people, as it is “helping, not hurting the economy.”

We prefer the SAFE approach. It would (A) Divert fewer resources from the wealth creation engine of this country (the private sector) ; (B) Minimize the risk of embarking on new government initiatives that have not been carefully thought through, such as GovCare, the EPA’s Clean Power Plan, or the FCC’s scheme for regulating the Internet like a public utility; and (C) Preserve a margin of safety in case the budget projection turns out to be overly optimistic, which, as will be seen, is a distinct possibility.

B. Economic situation – In brief, an upbeat picture is painted of economic recovery from the “Great Recession” that was in process when the president took office. Every positive development is linked to the president’s policies, whether there is any logical connection or not, while any problems are blamed on his predecessors or the Republican Congress.

This approach tracks the president’s State of the Union address, and indeed whole paragraphs from that speech are incorporated in the budget proposal text. For reasons previously explained, we think the current economic rebound in the US (not globally) has been overstated by selective marshalling of the evidence. State of the Union address missed the mark,
1/26/15 (point 1).

In another recent speech, the president went further by claiming, “there is no economic metric by which we are not better off than when I took office.” This led to pointed questioning at a White House press briefing as to how the country had benefitted from the big run-up in government debt. White House press secretary [Josh Earnest] forced to admit that Obama lied, Onan Coca, freedomforce.com,
2/2/15.

Although the “no economic metric” comment was supposedly impromptu, a similar statement was made in a 10/2/14 speech at Northwestern University and is quoted on page 7 of the budget proposal.

I
t is indisputable that our economy is stronger today than when I took office. By every economic measure, we are better off now than we were when I took office.

There are also encouraging comments about this country’s economic future if the president’s policies are dutifully supported by Congress. Budget proposal, page 1.

With a growing economy, shrinking deficits, bustling industry, and booming energy production, we have risen from recession freer to write our own future than any other Nation on Earth. It’s now up to us to choose what kind of country we want to be over the next 15 years, and for decades to come. Will we accept an economy where prosperity belongs to a few and opportunity remains out of reach for too many? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?

Yet despite accelerating technological advances and the presumed wisdom of the president’s policies, the fiscal projections assume humdrum economic growth. Budget proposal, Table S-12.

Table2

C. Budget baseline – The starting point for a budget projection is baseline spending, taxes, and deficits. These elements are developed on a status quo basis (except for changes prescribed by existing law), reflecting current outlay and revenue amounts, assumed inflation, and in the case of entitlement programs demographic assumptions.

Table S-4 recaps the adjusted baseline by major categories. Here are the totals for 2016-2025: Outlays $50.4T, Receipts $42.5T, Deficit $7.9T.

Table S-2 shows baseline Public Debt in 2025 of $22.5T (80.8% of GDP). This indicates a need for deficit reduction.

Using the president’s test for fiscal responsibility – Public Debt not increasing as a % of GDP – the deficit should be reduced by some $2T (as is duly projected). Substantially greater reduction would be required, of course, to meet the SAFE goal of balancing the budget.

Two steps are involved in projecting baseline versus budget differences. One is to factor in the anticipated fiscal effects of proposed initiatives; the second is to adjust the projected data for other factors.

D. Deficit reduction – The fiscal effects of proposed initiatives and other factors are recapped by Table S-2. Here is a summary of the 10-year deficit reduction (dollars in billions): (1) net tax increases (generally characterized as reforms), $1,467; (2) increased spending, $(438); (3) net adjustments, $914; and (4) debt service reduction as a result of the foregoing, $263. Items 1-4 total $2,206.

TAX INCREASES would fall primarily on affluent individuals (hike the capital gains rate, end basis step-up for inherited assets, reduce the value of tax deductions, enact the Buffet rule), big financial firms (fee on liabilities), international businesses (14% tax on currently accumulated international earnings and 19% tax on international earnings going forward), and smokers (higher tobacco taxes). There would be pluses and minuses for domestic business operations (cut corporate tax rate, make the R&E tax credit permanent, etc. but also slow tax depreciation, end LIFO accounting, etc.), which might tend to favor US vs. offshore manufacturing. Middle class and lower individuals would receive new or enhanced tax breaks, including a higher childcare tax credit that would phase out at a higher income level, a new Earned Income Tax Credit for two-member households, etc.

In general, these proposals clash with our ideas about tax reform. They would not make tax law simpler, fairer and efficient, but rather would make it even more complicated and less economically neutral than at present.

Compare SAFE’s
SimpleTax proposal, which would ensure business profits were taxed only once by exempting dividends and capital gains from taxation, eliminate almost all of the tax credits and deductions in the current tax law except for the foreign tax credit, cut current tax rates dramatically at all income levels, and end federal gift and inheritance taxes.

In addition to these differences in principle, the budget proposal makes no allowance for the drag effect of the proposed tax increases on the US economy. In our view, genuine, revenue neutral tax reform would deliver far more economic benefit for working Americans than the administration’s proposals.

SPENDING INCREASES would principally be in two areas. First, there would be additional spending for roads, bridges, and other infrastructure, which is currently being crimped by a dwindling Highway Trust Fund. Why this spending should be covered by new and in our view punitive taxes on international business earnings is a mystery, backing an increase in the gas tax would be more logical, but in any case that’s the proposal. Second, more money would be provided for welfare programs, e.g., Preschool for All, home visitation programs, the Child’s Health[care] Insurance Program (CHIP is currently scheduled to end this year), and two years of “free” community college.

While there may be merit in some of these ideas, we are not convinced that the federal government should be actively sponsoring them. One of the problems in making large amounts of federal funds available for infrastructure projects, for example, is that the money tends to get spent based on political versus economic considerations.

And although undertaken with the best of intentions, welfare programs often do more harm than good for the beneficiaries by encouraging them to refrain from seeking gainful employment. Tax work, subsidize idleness, and batten down the hatches,
2/17/14.

ADJUSTMENTS include the proposed termination of budget sequestration (permitting $197B of spending growth that would otherwise be blocked, roughly half for the military and half for other programs), handily offset - at least on paper - by Health[care] savings, Immigration reform, and Reductions in Overseas Contingency Operations, i.e., wars.

•Few people on either side of the aisle consider sequestration an effective way to set budget priorities, although agreement has proven elusive as to whether it should be replaced by tax increases (as is once again being proposed by the president’s party) or by spending cuts. In 2011, we repeatedly urged the Joint Select Committee on Deficit Reduction (chaired by Representative Jeb Hensarling and Senator Patty Murray) to agree on a list of spending cuts. SAFE letter,
11/15/11. The two sides failed to reach agreement, however, so the sequestration provisions of the Budget Control Act went into effect.

•The alleged healthcare savings ($402B) are supported by a slowdown in the rate of growth in US healthcare spending. Here’s a chart from the budget proposal (page 60), which makes the point.

Table3

This trend has been reflected in lower real per enrollee healthcare spending by both private insurance companies and the government, as shown by this chart (page 10).

Table4

It is further suggested that slowing growth in healthcare costs is due in part to the provisions of the Affordable Care Act (GovCare), even though most of the provisions of that law did not go into effect until 2014. Budget proposal.

Page 11 - While some of the slowdown can be attributed to the Great Recession and its aftermath, there is increasing evidence that much of it is the result of structural changes. These include reforms enacted in the Affordable Care Act that are reducing excessive payments to private insurers and healthcare providers in Medicare, creating strong incentives for hospitals to reduce readmission rates, and starting to change healthcare payment structures from volume to value.

Page 60 - The ACA is improving the quality of care that Americans receive and reducing cost growth by deploying innovative new payment and delivery models that incentivize more efficient, higher-quality care. *** The ACA is helping to enhance competition among insurance companies, expand coverage choices, and increase affordability, by keeping premiums low and offering tax credits to more Americans to help them purchase coverage.

A series of proposals are outlined that would supposedly keep improving the quality of healthcare services, expanding coverage, and pushin healthcare providers to serve the public better. Budget proposal, pages 61-67.

Extend funding for CHIP – improve access to Medicaid and Chip coverage and services – expand access to Medicaid home and community-based services – improve care delivery for low-income Medicare & Medicaid beneficiaries – encourage high-quality, efficient care among Medicare providers – improve healthcare outcomes for youngsters in foster care –encourage beneficiaries to seek high-value services – lower drug costs for federal healthcare programs (essentially price controls) – aggressively implement new tools for fraud prevention in Medicare, Medicaid and CHIP – require growing use of alternative payment models that link payments to delivery of efficient, high-quality, coordinated healthcare rather than the volume of healthcare services – repeal the Medicare Sustainable Growth Rate formula and reform Medicare physician payments – provide a single (bundled) payment for post-acute care by nursing homes and home health agencies – reduce incentives for doctors to “inappropriately order services from which they would financially benefit” – expand the existing network of healthcare centers [currently 1,300 nationwide, operating over 9,000 primary care sites] – improve access to high-quality healthcare providers.

Some of these ideas may be worthwhile, but one does wonder how doctors and other medical professionals would react. The future healthcare system is likely to differ markedly from the picture being painted of high-value services for all. Healthcare predictions, Dr. Christopher Casscells, SAFE Newsletter,
Spring 2014.

From a patient perspective, look for marginal hospitals and clinics closing, fewer doctors to see patients, and more medical services performed by nurse practitioners or nurses. Some of these changes may seem innocuous, but the cumulative result will be a lower standard of medical care with longer wait times (i.e., de facto rationing).

When the dust settles, we will have a two-tier system. Baseline healthcare will be provided for everyone, with government subsidies as necessary. Blue ribbon healthcare will be available on a pay as you go basis for people who are willing and able to pay for it. The only silver lining is that prices for medical services will be trimmed when they become the subject of negotiation with consumers versus the government or insurance companies.


Policy questions aside, it’s unclear how the projected healthcare savings have been reflected in the budget categories presented in Tables S-4 (baseline) and S-5 (proposed buget) – or indeed what the projected cost of GovCare is at this point. All the reader sees is three line items – Medicare, Medicaid, and “Other mandated programs” - with a total 10-year budget cost of $20.1T (which is higher, not lower, than the corresponding baseline total of $19.9T). Wouldn’t it be helpful to see a more detailed projection of healthcare outlays (perhaps as a new table), specifically breaking out the cost of subsidies for healthcare insurance policies purchased on exchanges, CHIP, and any other major components of the “Other mandated programs” category that are healthcare related?

And given the considerable uncertainty as to the future status of GovCare, which will almost certainly be amended in a major way before the dust settles (quite possibly resulting in higher costs because a wave of opposition is building to healthcare rationing), the savings currently being projected are far from a sure thing.

•Immigration reform ($158B) is a shorthand reference to changes in immigration policy that have been made without congressional approval. There is also a reference to “the comprehensive reform supported by the president and passed by the Senate [only] in 2013 [to] fix the Nation’s broken immigration system,” and a Congressional Budget Office report is cited that the Senate bill would have reduced the deficit by about $160B over the first decade, with bigger savings in later years. Budget proposal, page 58.

In our opinion, the CBO scoring of the Senate bill (now extended to the administrative actions, which are not entirely comparable) was dubious at best. While a continuing influx of entry level immigrants may find employment and pay taxes, they will also require government services and draw welfare benefits. A bigger fiscal opportunity by far would be to get current residents who are on the dole back to work. Immigration reform,
June 2013.

True, the CBO estimates that S. 744 would result in overall fiscal gains of some $700 billion over the next two decades. More people – more jobs – more taxes – Social Security retirement benefits down the road conveniently overlooked. But one might think a proposal to encourage more unemployed Americans to find jobs by pruning overly generous welfare benefits would produce considerably larger fiscal gains.

Beyond this, many people – ourselves included – view the administrative actions on immigration (aka “executive amnesty”) as unconstitutional. Although congressional Republicans may not be able to do anything about the matter, they have certainly committed to try. Postelection update: Illegal immigration,
11/17/14.

All things considered, the claimed deficit reductions appear speculative at best. We think it was rather cheeky to claim them.

•Reductions in Overseas Contingency Operations ($557B) are projected based on the assumption that the incremental cost of US military operations will keep coming down. OCO outlays peaked at $187B in 2008; the 2016 request is for $58B. If Congress agrees to end sequestration, it’s planned to fold the OCO funds into the regular budget starting next year. Budget proposal, page 49.

OK, fine, except that it’s hard to know what sort of spending will be required for future foreign crises. Wars are expensive, and they can come up unexpectedly. The projected savings could easily evaporate.

For example, the air strikes against the Islamic State in Syria and Iraq were reportedly costing some $7-10 million a day last fall – which would work out to $3+ billion for a full year. How much the war on ISIS is costing the US, Business Insider,
10/1/14.

But if it were decided to step up the air strikes or provide US “boots on the grounds,” the cost could soar. And as we go to press, the use of US ground troops is reportedly being considered for an effort to retake Mosul, the second largest city in Iraq. Pentagon considers ground troops against Islamic State, Zack Colman, Washington Examiner,
2/7/15.

* * * *

Oops, we are out of space and time. Tune in next week for further discussion of the budget proposal, which will include terminology (e.g., buzz words that keep coming up), values (such as equal opportunity vs. equal outcomes), and beliefs as to who should be calling the shots in this country.

FEEDBACK

Nice to see you’re still on the beat!
- Stephanie Harmon (Bill Morris's daughter)


I would take issue with the president’s statement, quoted in the budget proposal, that "our economy is [indisputably] stronger today than when I took office.” What about the lowest workforce participation rate since the 1970s, soaring debt, and failed wars in the Middle East? But unless the general public wises up, he is likely to get away with claiming to have saved the country from disaster. – SAFE director


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