Friday, February 5, 2010

Obama's abysmal budget

The data for the forecast section of these charts is taken directly from Obama's FY 2011 Budget. The forecasts presented in this budget rely, as all forecasts ultimately do, on several critical assumptions. Together, these are among the most heroic and daring assumptions I have ever seen coming from the Office of Management and Budget. They are so off the charts that I don't think they will ever see the light of day. And that would be a good thing, because otherwise we will be facing a very unpleasant economic future.

To begin with, economic growth is expected to average about 4% per year over the next 5 years. That is quite a bit higher than the "new normal" consensus, which sees growth averaging about 2.5-3% per year. I don't really have a problem with that, since I think the "new normal" consensus is too pessimistic. But regardless of how optimistic 4% sounds, the growth projections the administration is using imply that it would take 10 years or more for the economy to return to its potential, or full employment growth. That would amount to a decade of very frustrated voters.

Next, we have the assumption that, thanks to 4% growth and higher tax rates, there will be a surge in tax receipts stronger than we have ever seen before in post-war history. Amazingly, the administration is making little or no allowance for the likelihood that rising tax rates (e.g., the expiration of the Bush tax cuts, the imposition of big taxes on cadillac health insurance policies, the limitation of deductions on high-income earners) and rising tax burdens might a) retard economic growth and/or b) result in lower-than-expected revenues (e.g., due to increased evasion). In other words, if the Laffer Curve asserts itself and/or the economy performs according to the "new normal" consensus, we would likely discover that tax receipts are significantly lower than the administration is projecting.

In the past, strong growth in tax receipts has been primarily a function of unusually strong economic growth, but the administration is not projecting unusually strong economic growth, as I have noted above. This is yet another reason to think it very unlikely that the economy would generate the spectacular growth in profits and incomes necessary to fuel the revenues projected in this budget.

Conclusion #1: it is very likely that the budget is seriously over-estimating federal revenues.

On the spending side, the administration is projecting a significant increase in the size and scope of government. The chart below, from Keith Hennessey's excellent blog post, shows that Obama's 2011 budget projects a substantial increase (on the order of 1% of GDP per year for the foreseeable future) in the size of government relative to what was proposed in last year's budget. Talk about daring assumptions! This alone is a very disturbing development, because it projects a permanently and much higher level of government involvement in the economy than we have ever before seen in peacetime.

I think it's safe to say that the projected level of spending shown in this chart is the absolute minimum that is likely to result if Obama's budget wishes become reality. Never in postwar history has any government program (and Obama is assuming the creation of quite a few new ones) not exceeded its initial cost estimates. Few if any programs are ever terminated, and most just continue to grow like Topsy.

Conclusion #2: it is very likely that the budget is seriously underestimating federal spending.

And from these conclusions, it follows that Obama's budget is very likely underestimating the federal budget deficit by an order of magnitude.

To think that U.S. federal deficits could end up being on the order of 7-10% or more of GDP for the foreseeable future is simply mind-boggling. The only precedent that exists in modern times for a developed economy with these kinds of deficits is Japan over the past 20 years, and that is not exactly an encouraging comparison—Japan has experienced an average real growth rate of only 1.1% per year since 1990.

Many will call me a starry-eyed optimist, but I simply can't accept the proposition that the voters will allow Congress and the President to lead us down a budget path such as is laid out in Obama's 2011 budget. Already it is becoming clear that cap-and-trade is dead, that card check is dead, and that healthcare reform is all but dead. The January Massachusetts Senate vote was the tipping point, as I predicted last month. Who would have thought, just one year ago, that Obama would now be on the defensive? That the only piece of legislation he championed would be an economic stimulus package that has completely failed to deliver its promised results? This is not the stuff upon which heroic and transformative budgets are built.

The Tea Party is now advancing, and the liberal agenda is retreating. This year will likely prove to be a very exciting time in the political and economic spheres. It still pays to be optimistic.


UFormula said...

---Many will call me a starry-eyed optimist, but I simply can't accept the proposition that the voters will allow Congress and the President to lead us down a budget path such as is laid out in Obama's 2011 budget. ----

I wish I could agree with you friend, but it is politicians with corporate allies that pull the strings. The US Supreme Court effectively canceling the campaign finance reform is very very bad for the nation -- but that is more long term, let's look at the short term.

While Bernanke being reappointed was possibly better for the financial markets, he was reelected against the will of the people. Why? Because politicians were scared into voting him back as the financial markets held them hostage. It's becoming evident that financial power (held by bankers who are deemed as corrupt and for good reason) is trumping the will of the people.

One more point that i'd like to make is that neither political party has any idea what it's doing. It is just trying to appease (still unsuccessfully) the will of the people, most who don't know squat about setting a budget anyways (no need to provide proof of this). It is truly like the blind leading the blind.

W.E. Heasley said...

Mr. Grannis:

Excellent article.

Your analysis focuses on the federal government. Two thirds of the states are in miserable budgetary shape.

Matter-of-fact, two thirds of states are in budgetary shambles due to exactly what you describe in the Obama budget: every increasing size and scope of government coupled with the mind set that revenues would increase forever. In other words, the states in crisis are perfect examples of what happens if you follow the Obama budget described in your article.

One particular problem the states are suffering from is state employee pensions. These pensions need funded by tax revenue. In essence, the retired and future retired state employees have a claim against current and future tax revenue. That these unionized employees have negotiated very rich pensions. The future obligations of these pensions is daunting. To paraphrase Milton Friedman, these unionized public sector employees have become the Aristocrats of labor.

If Obama proposes to increase the size of government and consequently the number of federal employees and with the vast majority of these government workers unionized and consequently with negotiated pension plans, the federal government is setting itself up for the same pension funding problem the states already are experiencing.

jj said...

I believe there is a growing sense among the electorate that Congress is rapidly turning America into Detroit. I agree with Hennessey that the American people won't stand for it and despite the immediate outlook there is reason for optimism.

Scott Grannis said...

Rodrigo: why do you think that the Supreme Court's decision in Citizens United will harm the country? Why is protecting free speech a bad thing?

UFormula said...

Protecting free speech isn't a bad thing Scott, but who do you think Congress would lend an ear to more, the Executive of a company that donated hundreds of thousands of dollars to get him elected, or me who voted for him.

That's the point. Free speech is completely alright, but "money, the root of all evil" will taint the democratic principle of free speech by weighing more to the person with the deeper pockets.

it's really simple what the Supreme courts decision means. Just ask any congressman who was for the campaign finance reform...just look at all the dirty little secrets permeating from the AIG scandal! it's becoming more obvious that our gov't is corrupted by the people who have the biggest pockets....

free speech that includes the ability to donate large sums of money isn't really free speech, it's more like a popularity contest

brodero said...

Question about The Tea Party....

Would say this group is in favor of abolishing the Federal reserve??

Paul said...

"..but who do you think Congress would lend an ear to more, the Executive of a company that donated hundreds of thousands of dollars to get him elected, or me who voted for him."

How about Soros and all his shell game groups like Media Matters, OSI,, etc?

And then there are the unions. I'm pretty sure Congress and Obama bend an ear to the people that spent over $60 million in last year's election helping Democrats get elected.

And don't forget the Leftist mainstream media. Their advocacy hidden in a shell of "objective journalism" is worth several points in any given election. Their slobbering love affair with Obama certainly didn't hurt his chances.

Democrats are just pissed they might have a little more competition now.

marcusbalbus said...

how do you answer the chartalists who contend under current conditons of depressed growth/employment deficits don't matter and indeed must be run higher.

Scott Grannis said...

Rodrigo: The Citizens United decision did not say that big corporations can give gobs of money to politicians. It said that corporations and unions can spend money on advocacy--on advertising. We've seen time and again (starting with Ross Perot) that no amount of money spent on advertising can elect a person who does not otherwise appeal to the people. The more advocacy the better. Before this ruling, incumbents had a huge advantage, and the only corporations that could speak out were the newspapers. That was just plain wrong.

I trust the people to filter out the bad messages, no matter how many there are.

Scott Grannis said...

brodero: I can't speak for the Tea Party, but I think there are a goodly number of people that are very upset with the Fed. I've heard a lot of calls for reforming the Fed along the lines of the gold standard.

One reform that doesn't get much airtime is the Humphrey Hawkings Act, which gave the Fed a dual mandate: to control inflation and pursue full employment. This was a big mistake, since a central bank can only achieve one objective, never two. The Fed's mandate should be restricted to stabilizing the value of the dollar. Full employment should follow from that.

Scott Grannis said...

marcusbalbus: There is a rationale for running deficits during recessions, but I think we've gone far beyond any reasonable limits. Not being a Keynesian, I don't think government spending has much power to influence the economy for the better, if any. Most government spending is anti-stimulative since it takes resources from the private sector and uses them inefficiently.

Government intervention in the economy is what causes recessions, so to argue that we also need government intervention to recover from recessions is peculiar.

Public Library said...

Freedom of speech should not be confused with the freedom of corporations.

We are handing over every last inch of power to corporations which by no happenstance, represent the government. This was just another nail in the coffin.

George Orwell will prove Orwellian!

Scott Grannis said...

Public: Why do you think corporations are always on the side of the government? I think there are many great companies out there that have the best interests of the consumer and the public in mind.

Scott Grannis said...

Public: Why do you think corporations are always on the side of the government? I think there are many great companies out there that have the best interests of the consumer and the public in mind.

Public Library said...


"When American colonists declared independence from England in 1776, they also freed themselves from control by English corporations that extracted their wealth and dominated trade. After fighting a revolution to end this exploitation, our country's founders retained a healthy fear of corporate power and wisely limited corporations exclusively to a business role. Corporations were forbidden from attempting to influence elections, public policy, and other realms of civic society.

or 100 years after the American Revolution, legislators maintained tight controlled the corporate chartering process. Because of widespread public opposition, early legislators granted very few corporate charters, and only after debate. Citizens governed corporations by detailing operating conditions not just in charters but also in state constitutions and state laws. Incorporated businesses were prohibited from taking any action that legislators did not specifically allow.

But the men running corporations pressed on. Contests over charter were battles to control labor, resources, community rights, and political sovereignty. More and more frequently, corporations were abusing their charters to become conglomerates and trusts. They converted the nation's resources and treasures into private fortunes, creating factory systems and company towns. Political power began flowing to absentee owners, rather than community-rooted enterprises.

One of the most severe blows to citizen authority arose out of the 1886 Supreme Court case of Santa Clara County v. Southern Pacific Railroad. Though the court did not make a ruling on the question of "corporate personhood," thanks to misleading notes of a clerk, the decision subsequently was used as precedent to hold that a corporation was a "natural person."

From that point on, the 14th Amendment, enacted to protect rights of freed slaves, was used routinely to grant corporations constitutional "personhood." Justices have since struck down hundreds of local, state and federal laws enacted to protect people from corporate harm based on this illegitimate premise. Armed with these "rights," corporations increased control over resources, jobs, commerce, politicians, even judges and the law.

A United States Congressional committee concluded in 1941, "The principal instrument of the concentration of economic power and wealth has been the corporate charter with unlimited power...."

Scott Grannis said...

Public: why should people that organize as a corporation lose their constitutional right to free speech? Barring any citizen or group of citizens from speaking freely for whatever reason is a very slippery slope that leads to all kinds of nefarious attacks on individual liberty.

Public Library said...
This comment has been removed by the author.
Public Library said...

We should never bar the freedom of speech of individuals.

However, individuals voting via proxy statements or through other convoluted methods within corporations should not be considered under freedom of individual speech.

Most shareholders do not even vote. This is akin to entire districts of voters allowing the the superintendent to vote on their behalf. Maybe we should allow people to pass their votes to people they "trust". Why not?

Do you know all of the governmental dealings Apple undertakes in its/your best interest? I highly doubt it but your votes surely propagate the current boards political agenda.

Corporations are not people. People are people. Seems obvious but when profits are wedged in between, it is easy to see how blinded people can become.

And I am a free market kind of guy who likes limited government involvement + profits!

Scott Grannis said...

Public: I a big fan of the Cato Institute, and they have a large collection of essays on this subject, all of which make a lot of sense to me:

ronrasch said...

AS long as disclosure of ad sponsors are made, the voters are capable of deciding on the basis of the issues. To believe otherwise is concede the idea that government obtains power from the people. A far greater threat to the republic is the large number of people who do not pay taxes. The group of non tax paying voters support increased taxes on more productive members of society. What do you think the solution to voting your government subsidy interest vs the good of the country interest?

Dave C said...

Thanks for this graph, Scott. It inspired me to ask my congressman about the jump in federal spending as a percent of the economy, and in particular whether the Republicans would recapture the brand of limiting the growth of government (after the Democrats self-destruct). Even though he's one of the better Republicans, he dodged the question, instead launching on a populist rant about corporate greed and banker bonuses.

Seems like the choice continues to be between Democrats who rapidly expand the Federal government and Republicans who slowly expand the Federal government. I guess it will be up to those who bankroll us to impose fiscal discipline.

Scott Grannis said...

Dave C: Don't despair, check out the Tea Party. Glenn Reynolds has an excellent article on the Tea Party movement in today's WSJ:

Unknown said...

Would you mind viewing the following videos about the laffer curve? Care to comment for all to see on your blog? your opinion is greatly appreciated.

Scott Grannis said...

Orphe: I think those are great videos that serve a valuable public service. Thanks for adding them to the thread. I'm a big fan and supporter of Cato because they do consistently good work on a wide variety of issues.

You can see my own greatly simplified explanation of the Laffer Curve here: