Deinonychus antirrhopus

Kevin's Continuing (Mis)Adventures in Economics, Part 7

This is an older post of Kevin's, but what the heck. Kevin is responding to a reader who writes,

After the SOTU, you ran a post on Bush's claim that by holding discretionary spending increases to 4 percent, the deficit will be cut in half in 5 years, showing this is highly unlikely.

Last night on the Newshour Margaret Warner asked [CBO Director] Douglas Holtz-Eakin about this claim and he said (approximately) "in 2009 the deficit will be 2% of GDP, it is now 4%, so it is cut in half". So apparently it boils down to what the definition of "half" is.

Many Bush supporters cite "percent of GDP" as a meaningful statistic in assessing the deficit, but is it?

Kevin's response is captured by this quote (I strongly recommend reading the whole post to make sure you have the complete picture here),

But wait! A better question is, "Will Bush's policies actually lead to the deficit being reduced to 2% of GDP?" Answer: No. Not even close. Here are the numbers from the latest CBO report:

• This year's deficit: $477 billion. As percent of GDP: 4.2%

• 2009 "baseline" deficit: $268 billion.
  As percent of GDP: 1.8%

• 2009 real deficit: $552 billion.
  As percent of GDP: 3.8%

So using real numbers the deficit is reduced by a whopping .4% even when calculated as a percentage of GDP. This number is based on the CBO's own estimates of three things: (1) making the tax cuts permanent, a stated Bush policy, (2) reform of the Alternative Minimum Tax, and (3) discretionary spending rising at 4% per year.

What is the problem? I can't find the $552 billion dollars Kevin is talking about in either report.

Well okay, I did find $552 billion mentioned in the second report in the following quote,

Net Medicare outlays for the Part D drug program will total about $640 billion through 2013, CBO estimates--$771 billion in payments to prescription drug plans offset by $131 billion in premium receipts (see the table below). Of that $640 billion cost, $552 billion is estimated to come from the general fund of the Treasury.

But that isn't talking about the deficit per se, "real" or otherwise.

Kevin does claims the following,

Note: the CBO report itself includes one deficit projection based on 2.5% growth in discretionary spending and another based on 4.8% growth in discretionary spending. My figure above is an interpolation that estimates the deficit if we assume Bush's goal of 4% growth.

Now, the problem is I can't find the budget numbers based on the 4.8% growth in discretionary spending numbers anywhere. There is a scenario with discretionary spending of 4.6% (i.e., the expected rate of economic growth--details found here), but even with this case the deficit is $387 billion not $552 billion. This means the deficit would be 2.7% of GDP so not half either, but...where is Kevin getting his numbers?

Now there are a couple of points here. First, we can have all sorts of fun with projections. You make your assumptions, I'll make mine and we'll then argue over which assumptions are right. The bottom line though is that unless we do something about this kind of profligate spending it will entail not just a repeal of Bush's tax cuts, but additional tax increases on top of that. Neat, huh? Of course, Kevin doesn't tell you that.

Update: I thought it might be helpful to show where some of these numbers broken down a bit. The baseline projection for the deficit according to the CBO in 2009 is $268 billion dollars. Here are some of the alternative growth scenarios.

Alternate Growth Scenarios		Amount Added to Deficit	Total Deficit
Discretionary Spending Increases with Growth in GDP	Increased Spending	-119	-402
	Increased Interest	-15
Discretionary Spending Increases at 6.9%	Increased Spending	-219	-513
	Increased Interest	-26
Amounts in billions of dollars, Source (Table 1-3)

Update II: Still curious as to how Kevin got his "real" deficit numbers I once again tried my hand at it, and I think I got it.

1. First you have $268 billion baseline deficit.
2. Add to that the $48 billion for making permanent the tax cuts.
3. Add $40 billion for partial expensing.
4. Add $24 billion for additional debt service.
5. Add $51 billion for Reforming the Alternative Minimum Tax and $7 billion for additional debt service.
6. Now comes the somewhat more difficult part.
   1. Divide 4% by 4.7% to get (about 85%).
   2. Now the additional amount added to the deficit if Discretionary spending increases to match growth in GDP is $134 billion (including debt service).
   3. Now multiply $134 by 85% to get $114 billion.
   4. This is the amount added to the deficit if discretionary spending increases by 4%.
7. Now add them all up and you get $552 billion.

So the numbers aren't completely made up, just a fairly complicated way to get to them. Why 4% growth vs. the 4.7% (or there abouts)? Beats me. But lets note a few things here

1. The Bush tax cuts being made permanent with cost, in 2009, about $59 billion.
2. Reforming the Alternative Minimum Tax will cost about $58 billion.
3. In looking at Table 1-3 we see that Partial Expensing, "Other" and debt service for these two will cost $73 Billion. (Strangely enough Kevin omits Other, but includes the interest for Other...go figure.)

What does this tell us? It tells us that if we let the parts of the Bush Tax cuts expire we will reduce Kevin's "real" deficit by only $59 billlion. We'll go from $552 billion to $493 billion dollars. So Kevin isn't saying, "Lets just get rid of the Bush tax cuts." Oh my no. No. No. No. Kevin is saying we'll let those things expire, plus we'll raise taxes a whole shit load more (that's a technical term in economics by the way--it's when you raise people's taxes so much that they think their lives have gone to shit).

Don't forget that Kevin also wants some sort of government provided health care. In the short run he'll settle for a partial provision vs. universal, but universal is something he'd ultimately like to see. That'll cost alot too. And this does not address the tax increases to cover things like Social Security and Medicare. Remember we need about a 13% increase in taxes right now today to make the system solvent through 2077.

Posted by Steve at February 28, 2004 09:55 AM