The Fiscal Cliff and Tortured Budget Logic of House Rs

May 9th, 2012 at 5:14 pm

Debating the 2013 fiscal cliff later tonight with Larry Kudlow et al.  Obviously, Larry and the R’s he’ll recruit to rumble with me on this want to extend all the tax cuts.  I don’t.  But more importantly, neither does the President—he wants the sun to finally set on the high-end Bush cuts.

It doesn’t take a genius to see where this starts, though it’s much harder to say where it ends.  It starts with House R’s voting to extend full Bush (which they say they’ll do in coming weeks) and turn off the automatic cuts (“sequestration”) as described by CBPP’s Richard Kogan here.  Neither the Senate nor the administration will accept these proposals.

Then we’re into the familiar scrum over adding new revenues to the deal and that’s where I fear things once again break down.  That probably takes us to the post-election lame duck.  A lot of folks around town assume that regardless of the election’s outcome, the White House will agree to kick the can in the interest of protecting the fragile recovery.

I’m not one of those folks.  So if House R’s refuse to countenance the high-end sunset or any other revenue agreement in any shape or form, strap on your parachutes, folks.

That said, what I think happens next—in Jan or Feb of next year—is a retroactive agreement to avoid a fiscal contraction of well north of 3% of GDP.

Nuf said on that for a moment.

In reviewing R-type arguments around this stuff, I took a moment to actually parse some of the talking points.  Rep Jeb Henserling (R-Tx–who I believe will be on with me tonight), for example, in criticizing current spending levels says,

“These levels of spending and borrowing are economically unsustainable, but unfortunately, the fiscal situation is only getting worse. By 2024, entitlement programs and interest payments will consume all of federal revenue, and public debt will reach 190 percent of the total economy by 2035, according to CBO’s most realistic estimates. This will invariably lead to fewer jobs, higher taxes, a lower standard of living, and weakened national security for generations to come.”

Here’s why this stuff makes my head really hurt really badly.

–Current spending is elevated because of the recession, of course.

–Those scary CBO numbers he’s citing–they are fully a function of exactly the policies he and his colleagues are insisting upon. The reason the public debt goes to 187% of GDP in CBO’s 2035 forecast is largely due to the permanent extension of the Bush tax cuts, as can be seen by comparing the path of spending, revenues, and debt under current law, in which the cuts sunset, and the alternative scenario, in which they live on (see Table 1.2 here).

–Note that under the alternative scenario, primary spending (i.e., not including interest) rises only from 23% of GDP today to 25% of GDP in 2035.  This is the horrific runaway spending they’re talking about—two points of GDP.

–Meanwhile, revenues rise from 15% of GDP in 2011 to 23% in 2035 under current law with the Bush sunset, yet only up to 18% under the alternative where everything’s extended.  Moreover, by refusing to countenance higher revenues, interest payments on the growing debt become a much larger burden as well.

–And yes, Rep Henserling’s correct that CBO predicts worse economic outcomes under the alternative, high-debt scenario.  But again, that’s their scenario!  By stonewalling on the revenues, they’re delivering the very result they’re inveighing against.

OK, I’m going to reserve the rest of my rant for TV.

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6 comments in reply to "The Fiscal Cliff and Tortured Budget Logic of House Rs"

  1. cm says:

    Tortured vocabulary, too.

    Invariable is not the same as inevitable, even in adverbial form.


  2. NP says:

    The saddest thing about the whole segment was the apparent “authority” with which Kudlow makes his baseless assertions. It is hard to believe that a supposedly serious financial/political commentary program can make completely incorrect statements on broadcast TV without some sort of federal oversight. I commend you on beating your head against that brick wall – keep up the good fight.


  3. Michael says:

    Dude, they’re Republicans. It’s just meat noises.



  4. Joe Marinaro says:

    Historic spending averages ~18% of GDP. Spending historically runs around 21%. Due to the recession and tax incentives including the Bush cuts spending has risen dramatically and revenues have fallen dramatically.

    How about getting both in-line? Republicans can always point to the fact that real spending cuts essentially never happen. There always seems to be a legislative make good that reduces or eliminates any real reduction in actual spending (NOT a reduction off of the spending trajectory!!!). Their fear is that a paper spending cut just won’t materialize while tax increases immediately (often ex post facto even!) take effect.

    Somehow we need to find a path that encompasses real spending cuts so that necessary tax increases (on EVERYONE) are balanced and mitigated by corresponding spending cuts and are locked in.

    The problem is that when tax increases are booked and revenues increase, the government somehow, someway finds a way to spend that money (guess where the SS “trust fund surplus” went?).

    Set specific revenue and spending targets as a % of GDP and stay to those limitations on both sides of the ledger. You want to raise taxes that will increase revenues by 2% of GDP? Then you have to reduce spending by a corresponding 2% of GDP.


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