Washington is Spending Too Much

In the Wall Street Journal, former Chairman of the Council of Economic Advisers, argues that the real budgetary problems are (much further) down the road:

The deficit shot up in basically equal measure from taxes falling and spending rising. Spending rose to 25% of GDP from 20.5% in the recession and soon it will fall back down. Taxes fell to 14.5% of GDP from 18.5% and will also return to more normal levels.

The true fiscal challenge is 10, 20 and 30 years down the road. An aging population and rising health-care costs mean that spending will rise again and imply a larger size of government than we have ever had but with all the growth coming from entitlements—while projected federal revenues as a percentage of GDP after the rate cuts of the 2000s will likely remain below even historic levels of 18%…

The election should lay out each candidate's fiscal grand bargain and growth strategy. Let us compare them. They matter. This could make up the heart of a historically important presidential contest. Instead, Iowa showed us a series of candidates trying to outdo one another with condemnation for the short-term rise in spending while simultaneously proposing tax policies that would add trillions to the long-term deficit.

Goolsbee argues that the Obama Administration’s record on fiscal policy is sound. According to him, high levels of spending (and low levels of taxation) during the past several years were justified as responses to the recession. The real challenge lies instead in managing fiscal headwinds going forward, and political candidates ought to be judged on that basis.

Goolsbee is absolutely correct to focus on the importance of setting up a long-run fiscal balance. But, the problem, as John Cochrane points out, is that the Obama Administration has an abysmal record in addressing long-run finances.

One measure of the President’s plans on this issue comes from the CBO analysis of the President’s last budget, which Goolsbee oversaw before leaving the White House. It’s also instructive to review this material given that the President will be rolling out his next budget in about a month. The CBO presents the following picture:

That is, even years after the current recession, the CBO projects that the President’s budget will lead to steadily rising levels of public debt. The CBO’s report highlighted the following:

Deficits over the next two years. If the President’s proposals were enacted, the federal government would record deficits of $1.4 trillion in 2011 and $1.2 trillion in 2012. Those deficits would amount to 9.5 percent and 7.4 percent of gross domestic product (GDP), respectively. (By comparison, the deficit in 2010 totaled 8.9 percent of GDP.)

Deficits over the next 10 years. The deficit under the President’s proposals would fall to 4.1 percent of GDP by 2015 but would generally rise thereafter. Compared with CBO’s current-law baseline projections, deficits under the proposals would be higher. By 2021, the deficit would reach 4.9 percent of GDP, compared with 3.1 percent under CBO’s baseline projections. Over the 2012–2021 period, deficits under the President’s budget would total $9.5 trillion, compared with $6.7 trillion under those baseline projections.

Comparison with the Administration’s Estimates. CBO’s estimate of the deficit for 2011 under the President’s budget is $220 billion less that the Administration’s figure, mostly because of lower estimates of outlays. In contrast, largely because of lower projections of revenues, CBO’s estimate of cumulative deficits over the 2012–2021 period is $2.3 trillion greater than the Administration’s.

Debt. Under the President’s budget, debt held by the public would grow from $10.4 trillion (69 percent of GDP) at the end of 2011 to $20.8 trillion (87 percent of GDP) at the end of 2021, about $2.8 trillion more than the amount in CBO’s baseline projections.

That is to say: the Obama Administration’s record on the short-term fiscal balance is as poor as their record on the long-run fiscal challenge. The CBO projects that the Administration’s budget will result in steadily rising debts and deficits as far as the eye can see — and that’s based on the assumption that the economy will run into no future recessions.

Goolsbee is to be congratulated for correctly recognizing and highlighting the importance of long-run fiscal balance, even as many other commentators continue to use today’s low rates on government bonds as a way to discount the severity of the fiscal challenge ahead. Observers like Goolsbee note that expectations of future fiscal behavior can impact market willingness to bear debt today, and this fact makes it essential to mind the long-run fiscal challenge. Perhaps Goolsbee’s influence on the Administration has grown since leaving the White House. The evidence is but a month away...when the President presents his next budget.