The New Republic

"Winston Churchill famously remarked that you can always count on Americans to do the right thing—after they’ve tried everything else. I hope he’s right, because we’re getting close." The same quote should also be applied to real health care reform, rather than insurance reform. Real health care reform would save many of the billions needed to help balance the budget -- a situation not as catastrophic as Galston tends to imply (read several Krugman columns and blogs). Savings can also be quickly obtained by rapidly terminating US involvement in unwinable and costly wars. There is another famous and relevant quote from the 40's that for his next column that Galston might consider by Von Rundstedt: "Make peace you fools". Sound advice was not taken then--- and in all likelihood not now, either.

- drofnats1

March 30, 2010 at 7:26am

But let’s look at what the CBO said a year ago, and what it is saying now. A year ago, the CBO projected the effects of Obama’s budget plans. It predicted that 2009 would have tax revenues of 2.2 trillion dollars and spending would be 4 trillion dollars, with a deficit of 1.85 trillion (13.1% of GDP) and the debt to GDP ratio to be 57%. For 2010, they predicted revenues of 2.3 trillion dollars, expenses of 3.7 trillion, and a deficit of 1.4 trillion (9.6% of GDP), and debt to GDP ratio climbing to 65%. Going out to 2019, they predicted revenues of 4 trillion, expenses of 5.1 trillion, and a deficit of 1.2 trillion (5.7% of GDP), with debt to GDP ratio climbing up to 82%. These were scary numbers, and generated significant political opposition to Obama’s stimulus (which was a mix of spending and tax cuts) and his unaccounted for healthcare proposals. But in the last year, things turned out much better than the CBO anticipated. Expenses came in lower, primarily because the banking sector healed and 250 billion dollars of TARP money did not get spent. In addition, the improvement in the economy helped the biggest TARP recipients such as Citigroup, Bank of America, General Motors, and AIG to pay back far more than was anticipated. The latest numbers suggest that the final cost of the 700 billion dollar TARP program, after repayments, will be under 100 billion dollars. Cheap actually, for preserving our financial and auto sectors. It may turn out to even be a wash depending on what price the government sells its shares for in the next few years. This month the CBO released new numbers, including actual results for 2009, and projections for the future. 2009 actually had revenues of 2.1 trillion, expenses of 3.5 trillion, a deficit of 1.4 trillion (9.9% of GDP), and debt to GDP ratio came in at 53%. So the actual deficit for 2009 came in 450 billion less than what the CBO was saying in March 2009. For 2010, they predict revenues of 2.2 trillion, expenses of 3.5 trillion, and deficit of 1.4 trillion (9.4% of GDP), with a 62% debt to GDP ratio. For 2019, they now predict revenues of 4.4 trillion, expenses of 5 trillion, and a deficit of 640 billion dollars (3% of GDP) with a debt to GDP ratio of 67%, a number that will have been stable since 2011. So based on this it looks like America’s fiscal situation has stabilized to a large degree, albeit with total debt a little high. But these numbers assume no changes to current tax laws and make conservative predictions about future spending growth. One big assumption is that the Bush tax cuts on income and capital gains and dividends, which are supposed to expire in the next two years, will not be renewed. And these predictions did not include the cost of the healthcare program. So what does Obama intend to do? The CBO has taken preliminary Obama proposals for the 2011 budget and projected them out. In these proposals the main fiscal items are that the wars in Iraq and Afghanistan are wound down, the healthcare reform is enacted, and the Bush tax cuts are extended for most Americans, except those making over 250,000 dollars. The taxes on capital gains and dividends will be raised to 20% for those making over 250,000, while keeping the current rate schedule for those making less. Also the inheritance tax will be reinstated with an exemption for the first 3.5 million dollars, and the excess taxed at 45%. In addition, Obama is proposing to index the Alternative Minimum Tax to inflation and reduce the marriage penalty. The net result of all this can be guessed. Using the President’s preliminary budget, the CBO projected in 2010 revenues of 2.1 trillion, expenses of 3.6 trillion, a deficit of 1.5 trillion (10.3% of GDP) and 63% debt to GDP ratio. For 2019 they now project revenues of 4.2 trillion dollars, expenses of 5.4 trillion, and a deficit of 1.2 trillion (5.3% of GDP). Debt to GDP ratio will have risen to a scary 87%, and continue to rise further. Obviously, these numbers are unsustainable. At some point, the deficit will have to be narrowed further, to probably less than 3% of GDP, and the debt burden ratio put on a downward path. When will Obama do this? I predict it will happen in 2013. Between now and then the natural rebound of the economy is predicted to send tax revenues soaring by a trillion dollars per year, while spending will rise only 200 billion dollars. So for the next three years, we will have a falling deficit despite a partial renewal of the Bush tax cuts and the increased spending plans of Obama. But by 2013, that trend will have played out, and further deficit reduction will mean hard choices. In 2014, the CBO projects the President’s plan will yield a deficit of 4% of GDP. To create financial stability, Obama will probably aim to get that down to 2%. Which will mean 2% of GDP worth of spending cuts or tax increases. 2% of GDP in 2014 will be around 350 billion dollars. Spending cuts will have to come out of mainly defense, social security, and medical programs (Medicare, Medicaid, etc.). Tax increases will likely be broader based than Obama campaigned on in 2008. The political calendar favors this scenario. Obama will not have to make these hard choices until 2013, which means after he is safely reelected. Obama may also benefit from the CBO’s conservatism in projections. The CBO was very pessimistic in early 2009, but the actual numbers came in much better than they had guessed. If the economy rebounds faster in 2010 and 2011 than the slow pace the CBO is guessing, then Obama may find the deficit picture brightening on its own. This happened to Bush from 2004 to 2007, and to Clinton in the late 90’s. Prudence however dictates to plan for a major tax hike in 2013.

- nayyer_ali

March 30, 2010 at 10:44am

The debate over the deficit and public debt is highly polarized, but what to expect when the party that incurred debt at a historic rate when times were good now lectures the party that is left to clean up the mess now that times are bad. But I digress. The US faces difficult but not impossible choices. Difficult, if all groups contribute; impossible if they don't. I would start with the stimulus. End it now. It served it's purpose by helping avoid a total collapse. But that's behind us. Those who argue for more stimlus to offset the drop in private demand are not Keynesians; a high unemployment, low output equilibrium does not exist, as reflected in the healthy growth in the economy. Next, I would require both high income earners and middle income earners to contribute, the former via higher tax rates (income and payroll) and the latter via lower (or deferred) transfer payments (social security and Medicare); unless both ends of the income scale believe everybody is making a sacrafice, nobody will. As for tax rates, I find it preposterous that someone earning $100,000 per year pays a marginal federal tax rate of almost 45%, while someone earning $10 million per year pays a marginal federal tax rate no higher than 35% and even as low as 15%. And it's equally preposterous that age 65 is treated as a magic number for social security and Medicare eligibility, when many can do without until later in life and many need it earlier in life. And then there's defense spending. Do we make the difficult choices now about where and how to spend in order to maximize our security. Or do we continue to spend almost unlimited amounts until forced into retreat for lack of resources. When Churchill made his comment, America had (what seemed) unlimited resources, so America could afford the luxury of wasting resources until stumbling into the "right thing". No longer.

- raylward

March 30, 2010 at 10:45am

raylward - we don't have a high unemployment/low output equilibrium? It might not be in equilibrium, but the improvement in the "economy" (read: the financial and related sectors) does not appear to be dragging employment or output up with it. As it also conspicuously failed to in the last two recoveries. Otherwise pretty much agree with everything else.

- Nari224

March 30, 2010 at 1:01pm

Inventories are very low and companies are awash with cash. Interest rates also remain low. The new theory is that companies clamped down so harshly last year because they thought the banking system would collapse. Since it didn't, they now must amp up employment and spending, ie return to old normal, not new normal. And considering that all the Obama spending will directly cycle through the domestic populace, unlike Bush war spending, I can't imagine how what he's doing is as bad as what Bush Jr. did.

- haricot

March 30, 2010 at 6:09pm

raylward writes: "I find it preposterous that someone earning $100,000 per year pays a marginal federal tax rate of almost 45%, while someone earning $10 million per year pays a marginal federal tax rate no higher than 35% and even as low as 15%. The good news is that someone earning $100K is paying an effective tax rate of 23%, and someone earning $10M is paying an effective tax rate of of 32%. And there's just not that many people earning $10M/year (about 50,000 households) and those that earn $10M one year have a 50% chance they won't earn anywhere near that the next year. The US has the most progressive tax system in the world, just behind Ireland, according to the OECD.

- seattleeng

March 31, 2010 at 3:28am