One of my Concord colleagues recently relayed the following "old joke" to me, remarking that a fiscal policy issue we had been discussing reminded him of it. But when he said it, it reminded me instead of a different fiscal policy issue (and my favorite): the Bush tax cuts and the impending "fork in the road" for them -- whether they will largely endure as the "Obama tax cuts," or whether they will be allowed to expire as scheduled under current law, at least partially and/or eventually.
"Could you loan me ten dollars but just give me five? That way you'll owe me five, I'll owe you five, and we'll be even."
Conveniently, last week the Congressional Budget Office released their update to their budget and economic outlook, so I have some updated numbers for my Bush/Obama tax cuts version of that joke:
President Obama: "Could you loan me ten dollars $2.65 trillion for 10 years' worth of all of the Bush tax cuts but just give me five about $2 trillion for the "middle-class" ones? That way you'll owe me five, I'll owe you five, and we'll be even about $700 billion, and I'll say "no problem, keep it," and I'll claim to have reduced the deficit by that $700 billion."
Here's a footnote to that joke:
My main point in relaying this little "joke" is to say that President Obama is proposing to deficit finance (increase the deficit by) $2 trillion in extended Bush tax cuts rather than $2.7 trillion; he is not proposing to reduce the deficit relative to current law in forgoing extension of the upper-bracket tax cuts. And those figures don't even count associated net interest costs, by the way. (For interests costs and more baseline analysis see the Concord Plausible Baseline.)
The new CBO report tells us more about the Bush/Obama tax cuts. Beyond the ugly numbers about the effects on the deficit, the effects on the economy aren't great either. Page 36 in the economic outlook chapter provides a very clear illustration of the problem with permanent, deficit-financed tax cuts -- in particular, the precise (and large) portion of the Bush tax cuts that President Obama is proposing to permanently extend. These are assumed in CBO's "alternative fiscal scenario," which the report explains would increase GDP level and growth over the baseline forecast but only in the first 2-3 years of the 10-year budget window. It underscores how the economic effects of deficits differ in the short-term vs. longer-term -- why deficits (and deficit-financed "stimulus") may be helpful now but harmful if they persist beyond the next couple years -- and hence why the current weakness in the economy does not justify permanent deficit financing of even the "middle-class" portions of the Bush tax cuts (which are the only portions CBO now includes in their "alternative fiscal scenario").
The CBO report also reminds us that all hope is not lost for getting deficits down to more sustainable levels within the next few years. Under CBO's current-law baseline, deficits are under 3 percent of GDP (considered "economically sustainable" because then the debt grows no faster than the economy) in 2015. That would be in keeping with the shorter-term goal of the President's fiscal commission (the Bowles-Simpson commission). This is an important fiscal policy lesson for the Obama Administration and Congress: the current-law baseline shows us a path (not the only path, but at least a path) to sustainable budget deficits within the ten-year window. We don't literally have to stick to current law to get there, but we need to stick to PAYGO -- without exemptions -- relative to current-law revenue and spending levels. We need to pay for things as we go along. That includes paying for continuing policies if they aren't already continued under current law. And if we can't or aren't willing to pay for extending these policies, then perhaps we shouldn't extend them -- especially when it doesn't make economic sense to extend them.