October 31, 2014

What is "Plausible" for the Fiscal Outlook?

The first definition of “plausible” on dictionary.com is:

plausible
[plaw-zuh-buhl]

having an appearance of truth or reason; seemingly worthy of approval or acceptance; credible; believable: a plausible excuse; a plausible plot.

Note that it doesn’t say “likely” or “probable”–it connotes the notion of possibility not probability. I bring this up because many folks, especially the media, want to interpret the “Concord Coalition Plausible Baseline” as our best forecast of what the fiscal outlook will turn out to be. No, we’re not saying that’s the most likely outcome; we’re saying that’s a plausible, possible outcome. And it’s a worst-case scenario, because that’s what we do at Concord: we warn about the possible really bad outcomes if we don’t start making more responsible choices–because we don’t want them to happen.

On Saturday's front page of the Washington Post, Lori Montgomery does an excellent job of laying out the different projections of budget deficits over the next ten years (see the graphic above)–explaining how the CBO baseline shows deficits of $7.1 trillion, while OMB shows $9.[1] trillion (rounding up $9.051 trillion) based on their own economic forecast, while the cost of Obama Administration budget policy applied to CBO’s baseline suggests the larger figure of $10.3 trillion, while if all the (2001 and 2003) Bush tax cuts were made permanent the deficits would grow to $11.3 trillion. (The latter two estimates come from Bill Gale of Brookings.) Then there’s Concord’s “plausible” figure of $14.4 trillion, so one might wonder: what really is “plausible” out of all those estimates?

The answer is that they all are “plausible” estimates of the fiscal outlook going forward over the next ten years–the full $7.3 trillion range of possibilities is indeed all possible and all within the control of policymakers. We’re not talking about re-writing history or even re-writing (repealing) current tax law. The main point of Lori’s story was to highlight the thorny issue of what the Obama Administration will do about their campaign promises about tax policy now that the deficit outlook is so much worse and the Bush tax cuts seem even more unaffordable than they used to. And in showing the different deficit projections and explaining what they have to do with the Bush tax cuts, Lori is pointing out the following facts, which really represent choices or different “plausible outcomes”:

1. Current law commits to the Bush tax cuts only until the end of 2010 ($7.1 trillion in deficits);

2. but President Obama has proposed to extend most of the Bush tax cuts in his budget proposal ($9.1 - $10.3 trillion); and

3. therefore Obama Administration tax policy is not that different from where we’d end up if we extended all of the Bush tax cuts (as Senator McCain had wanted to do had he become president) ($11.3 trillion).

…and throw Concord’s “plausible baseline” into the mix, which relative to Bill Gale’s $11.3 trillion estimate adds in the permanent extension of all the other expiring tax cuts (over $2 trillion with interest costs) as well as a higher estimate for spending which assumes it grows with the economy (boosting spending by about $1 trillion on net after adjusting the baseline defense spending assumption downward), both as estimated by CBO in Table 1-7 of their outlook (pages 24-25), and you get $14.4 trillion in deficits as another possibility (”plausible outcome #4?), too.

So the full ($7.3 trillion) range of estimates–from $7.1 trillion in deficits all the way up to $14.4 trillion in deficits, is all “plausible” in my opinion. Outcome #1 could happen if Congress and the Administration left town, didn’t enact any new policies, and let the nation continue on autopilot with the laws currently on the books. OR outcome #1 could happen if any new spending or tax cuts that Congress and the Administration put into law (that’s ANY and ALL new stuff, not just the stuff covered under Congress’ “pay-as-you-go” rules which now exempt the Bush tax cuts and never included “discretionary” spending) were fully paid for/offset instead of being deficit financed. At the opposite extreme is the Concord Plausible Baseline, which would occur if current policies were all to be permanently extended without paying for any of them–i.e., through continued deficit financing. To be clear and to be fair, this is not Concord’s estimate of deficits under the Obama Administration’s budget, because, as prime example, the Administration proposed: (i) to extend most, but not all, of the Bush tax cuts (still via deficit financing); and (ii) to permanently extend the Making Work Pay tax credit but in a fully offset manner using climate policy revenues.

My point is that these deficit projections are all uncomfortably large, but the Administration certainly has a wide “opportunity set” in front of them. They could do anything from the one extreme of NOT extending any of the Bush tax cuts (or fully paying for whatever they choose to extend or whatever new tax cuts they’d rather have) all the way to the opposite extreme of making permanent all of the tax cuts currently in place and not paying for any of it. There are many fiscal paths the Obama Administration can choose among, and choices over tax policy are a huge factor, as emphasized in the Washington Post story by both Bill Gale and Dave Walker (and my emphasis added):

“If you rule out inflating our way out of the problem and defaulting on the debt, there are two ways [to reduce the deficit]: Cut spending or raise taxes,” said William G. Gale, an expert on fiscal policy at the Brookings Institution. With more than 80 percent of federal spending devoted to politically untouchable programs such as Social Security, Medicare and Medicaid, he said, “it’s going to be really hard to make significant headway on the spending side. So that means you’ve got to think about taxes.”

“There’s no question in my view that Bush was the most fiscally irresponsible president in the history of the republic,” said David M. Walker, the comptroller general under Bush who now advocates for deficit reduction. Obama “was handed a bad deck,” he said. “But the question is, are you making it better or not? And so far the answer is no.”

Obama could raise taxes without taking any legislative action. If he let all the Bush tax cuts expire next year and refused to enact legislation to restrain the alternative minimum tax, deficits would be about $200 billion a year lower and the debt would stop growing as a percentage of the economy, according to Gale’s analysis of new data from the nonpartisan Congressional Budget Office. But that would mean big tax increases for most American families, violating Obama’s pledge

Although the deteriorating economy has certainly been a huge challenge to the fiscal outlook over the past year, what constrains which of these “plausible outcomes” can come true is not the economics as much as the politics–how much political courage the Administration and Congress can muster, hopefully bolstered by Americans who recognize it’s time to face up to tough choices.

--Cross posted from Economistmom.com