Understanding the Coming Arguments About the Federal Budget

Paul Krugman’s new column sets the scene for this year’s dispute regarding the federal budget. It will be in the news a lot so it’s good to know what’s going on:

[Today], the White House released its budget [proposal]; Republicans haven’t offered a specific counterproposal, but they seem to be coalescing around a plan released by Russell Vought, [the former president’s] last budget director. Neither plan will become law. Instead, they’re intended to position the two sides for the looming confrontation over the federal debt ceiling.

But let’s not engage in false equivalence. The Biden budget may be political theater, but its numbers make sense. The Republican numbers don’t.

In some ways we’ve been here before. A decade ago President Barack Obama also confronted a Republican-controlled House, which sought to use blackmail over the debt ceiling to extract policy changes it couldn’t have enacted through the normal budget process. And Vought’s plan bears a strong family resemblance to the plan advanced back then by Paul Ryan, who would become speaker of the House in 2015.

But the political and intellectual environment is different this time. In 2013 Washington was full of Very Serious People who were obsessed with the budget deficit and believed Republicans who claimed to be deficit hawks. Ryan, in particular, was the subject of much media swooning, although anyone who looked at the details of his proposal realized that it was flimflam.

These days the deficit scolds are much less influential than they were. The news media is, by and large, treating Republican claims that they have a plan to balance the budget with the ridicule they deserve. And the parties themselves have changed: Democrats have become more unapologetically progressive, while the [Republicans seem] far less interested in fiscal policy, or policy in general, than in the past.

So, about President Biden’s budget: The starting point for this budget is that Biden’s people evidently view deficits as a source of concern, but not a crisis. Overall, Biden’s budget proposes increasing social benefits on a number of fronts even in the face of rising debt. It nonetheless proposes to reduce the budget deficit, but only modestly — it claims to shrink the deficit over the next decade by almost $3 trillion, but that’s less than 1 percent of G.D.P.

How can Biden reduce deficits while expanding social programs? Mainly by raising taxes on corporations and wealthy individuals, with an assist from cost-cutting measures in health care, especially using Medicare’s bargaining power to reduce spending on prescription drugs.

Are Biden’s numbers plausible? Yes. Notably, the economic projections underlying the budget are reasonable, not very different from those of the Congressional Budget Office. The projections even assume a substantial but temporary rise in unemployment over the next year or so [as the Federal Reserve raises interest rates].

Now, even economists like yours truly, who have been fairly relaxed about budget deficits, generally believe that at some point we’ll have to do more than this. We’ll need a much broader effort to bring down health care costs, and we’re also going to need more revenue than you can raise solely by taxing Americans with very high incomes. But Biden’s plan is a step in the right direction.

What about the Republicans? They claim to believe that rising federal debt is a major crisis. But if they really believed that, they’d be willing to accept at least some pain — accept some policies they dislike, take on popular spending programs — in the name of deficit reduction. They aren’t. The Vought proposal calls for preserving the [Orange Menace’s] 2017 tax cuts in full, while also avoiding any politically risky cuts in defense, Social Security or Medicare.

Yet it also claims to balance the budget, which is basically impossible under these constraints. In fact, even with savage cuts to Medicaid and drastically reduced funding for the basic functions of government, Vought is able to claim an eventually balanced budget only by promising that tax cuts and deregulation will cause a big rise in the economy’s growth rate. Tax cutters often make such claims; they never, and I mean never, deliver on their promises.

What I find a bit puzzling is why Republicans are still rallying around this stuff. The modern Republican Party gets its energy from culture war and racial hostility, not faith in the miraculous power of tax cuts and small government. So why not give up on the ghost of Reaganomics? Why not come out for a strong social safety net, but only for straight white people?

Part of the answer may be that the party still needs money from billionaires who want to keep their taxes low. But it also seems to me that the peddlers of right-wing economics have done an extremely good job of marketing their wares to politicians who don’t know or care much about policy substance. That Vought proposal, as I said, looks a lot like Paul Ryan’s plans a decade ago — but it’s titled “A Commitment to End Woke and Weaponized Government,” and somehow manages to mention critical race theory [CRT] — which is not exactly a line item in the budget — not once, not twice, but 16 times.

In any case, where we are now is that Biden is offering a basically reasonable fiscal plan, while Republicans are talking meanspirited nonsense.

A few weeks ago, Krugman was interviewed and offered his opinion about the debt ceiling. He said he knows of at least six different strategies that would allow the government to keep paying its bills and avoid a financial crisis even if Republicans refuse to raise the debt ceiling:

I think a lot of us are operating under the working assumption that the Biden people will deny up till the last minute that they’ll do any of the funny strategies. But then if push actually does come to shove they will. And they’ll mint the trillion dollar coin or they’ll invoke the [14th Amendment to] the constitution. [These] different, exotic strategies … all have zero economic significance. They’re all about just exploiting the fine print in the law to avoid [a crisis].

… America does many things well and many things badly. But one thing we do have is smart lawyers…. I assume that there is an ultra-secret team of lawyers maybe working under Cheyenne Mountain preparing debt strategies.

Where the Billions Go: a Periodic Reminder

From Paul Waldman of The Washington Post:

On Tuesday the House passed a massive bill authorizing spending for the military for next year; it is expected to quickly pass the Senate, after which President Biden will sign it. Despite objections from some progressives (and a few conservatives who have decided the Pentagon is too liberal), the vote to allocate $768 billion in spending was bipartisan, with a final tally of 363 to 70.

While there were intense backroom negotiations over certain provisions that got dropped, such as a proposal to have women register for the draft, the basic idea underlying the bill — that we should always and forever spend spectacular amounts of money on guns, bombs, tanks, planes and ships — is simply not a matter of debate.

The contrast with how we treated the far less costly bills Democrats have recently advocated, particularly the infrastructure law and the Build Back Better bill, could not be more stark.

We spent endless TV hours and newspaper column inches debating the precise size of those bills and how they would be paid for. Is $3.5 trillion too much? How about $1.9 trillion? Would $1.7 trillion work? Should we increase taxes on the rich to fund them, and if not, where do we get the money?

Nobody ever asks “Where do we get the money?” when it comes to a defense bill. And that $768 billion? It’s a single year’s figure, unlike the 10-year totals that are used to describe infrastructure and BBB.

So I did some quick calculations based on previous spending. If the defense budget were to rise 4 percent a year (about what it has over the past couple of decades), 10 years from now we’d spend $1.1 trillion a year . . . 

But here’s what you won’t see: headlines about how Congress is voting for a projected $9 trillion in spending oh my god!

You will not hear that from Sen. Joe Manchin III (D-W.Va.). You will not hear that from any Republicans, of the ordinary conservative or more extreme T____ist variety. You will not hear it from the sage pundits on the Sunday shows.

No one will talk about how irresponsible it is to spend like a drunken sailor, no one will cry that it’s terribly cruel to saddle our children and grandchildren with so much debt, and no one will warn darkly that such spending will surely send inflation rocketing upward.

Conservative Republicans are ranting angrily about the fact that Senate Minority Leader Mitch McConnell (R-Ky.) made a deal with Majority Leader Charles E. Schumer (D-N.Y.) to raise the debt ceiling, as though it betrays everything conservatives are supposed to believe in. If you asked them how that concern applies to the defense spending bill, they’d either look at you like you were mad or just say they’re committed to making sure the American military is the finest in the world.

Which reveals a fundamental truth: Nobody thinks we should worry about debt or potential economic consequences when it comes to the spending they happen to like. It’s only when we’re talking about things they don’t want to spend money on at all that they marshal those arguments.

There has long been a collective agreement that we’ll simply exempt military spending from those kinds of budgetary worries. Everyone just assumes that spending as much on the military as on everything else we decide to do on a year-to-year basis is just how things work. We usually spend at least half our discretionary budget on the military (mandatory spending, which includes Social Security and Medicare, is a different category).

Nor do we ever have a real discussion about what the military ought to be for. We might debate whether a particular war was a bad idea, or whether we ought to be less eager to launch full-scale invasions, but we don’t debate the fact that even referring to this spending as “defense” is a kind of self-delusion.

That’s because only a small portion of the military budget is about “defense” in any meaningful sense. Instead, it’s about maintaining our ability to project our power outward. F-35 fighter jets (total cost: $1.6 trillion and climbing) are not patrolling the skies over California and New Jersey to watch for a foreign invasion.

All those personnel (1.3 million active duty, another 750,000 or so civilians, and hundreds of thousands of contractors) spend most of their time working and training for operations that we assume will take place outside our shores. We maintain hundreds of bases in dozens of countries. We define our “security” in a way that is profoundly different from nearly every other nation, in that we conceive of it as something that is won and lost elsewhere.

There are plenty of people who consider that perfectly appropriate. But the point is that we almost never debate whether that’s what we actually want, or how much we should be spending on the military relative to the other things we’d like to do with our money.

There’s an old lefty bumper sticker that reads, “Imagine if the schools had all the money they need and the Air Force had to hold a bake sale to buy a bomber.” It’s funny because it’s absurd. But it represents a choice we made — and one we continue to make, without much public debate, every year. . . . 

Biden’s Budget Would Make a Difference

Presidents present a proposed federal budget every year, but it’s Congress that decides what the budget will be. Nevertheless, President Biden’s budget is a welcome change. From Paul Krugman of The New York Times:

Many reports about the Biden administration’s budget proposal, released Friday, convey the sense that it’s huge. President Biden, scream some of the headlines, wants to spend SIX TRILLION DOLLARS next year. . . . It takes some digging to learn that the baseline — the amount the administration estimates we’d spend next fiscal year without [Biden’s] new policies — is $5.7 trillion.

In fact, one of the most striking things about Biden’s budget initiative — arguably about his whole administration — is its relative modesty in terms of both money spent and claims about what that spending would accomplish. He is neither proposing nor promising a revolution, just policies that would make Americans’ lives significantly better.

And I, for one, find this hugely refreshing after Former Guy’s achievement-free bombast.

Now, the Biden plan is by no means trivial. The budget proposes spending 24.5 percent of G.D.P. over the next decade, up from a baseline of 22.7 percent. That increase, mainly driven by increased expenditures for infrastructure and families, is bigger than it looks because so much of the baseline is devoted to the military, Medicare and Social Security. But it’s not socialism, either. It would still leave the United States with a smaller government than most other wealthy countries’.

Still, the extra spending would make a huge difference to some economic sectors, notably renewable energy, and vastly improve some American lives, especially those of lower-income families with children.

Notably, however, the administration is not claiming that these policies would dramatically accelerate economic growth. Former Guy’s economists predicted that their policies would produce sustained G.D.P. growth of 3 percent a year, which would have been extraordinary in an economy whose working-age population is barely growing. Biden’s economists are projecting growth of less than 2 percent after the economy has bounced back from the pandemic.

Why this modesty? Part of it may be political strategy: Biden likes to underpromise and overdeliver, the way he did with vaccinations. The administration’s economists are actually quite optimistic, for example, about the possibility that child care and other family policies would expand labor force participation and that investing in children would yield big economic returns in the long run.

But they also know history. Governments can do a lot to fight short-term recessions (or make them worse), but the fact is that it’s very hard for policy to make a big difference to the economy’s long-term growth rate.

This is something the right has never understood. (It’s difficult to get people to understand something when their salaries depend on their not understanding it.)

Conservatives are constantly pushing the claim that tax cuts, in particular, will supercharge growth; they love to cite the supposed economic triumph of Ronald Reagan. But Reagan presided over only a couple of years of very rapid growth, as the economy recovered from a severe recession. Over the course of the 1980s, the economy grew only 0.015 percentage points faster — basically a rounding error — than it did in the troubled 1970s.

And looking more broadly across history at both the national and the state levels shows predictions that tax cuts will produce economic miracles have never panned out — not once. Neither, by the way, have predictions that tax hikes, like the increased levies on corporations and the wealthy that Biden is proposing, will lead to disaster.

So it makes sense for the Biden administration to avoid making big claims about economic growth. But does this mean that its plans are no big deal? Not at all.

. . . While government policies rarely have major effects on the economy’s overall growth rate, they can have huge effects on the quality of people’s lives. Governments can, for example, ensure that their citizens have access to affordable health care; they can drastically reduce the number of children whose lives are scarred by poverty. The Biden plan would take big steps on these and other fronts.

And this is the sense in which the Biden plan, despite its relatively moderate price tag, represents a radical departure from past economic policy.

For the past four decades, U.S. economic debate has been dominated by an ideology fundamentally opposed to spending money to help ordinary citizens: We can’t borrow more, lest we provoke a debt crisis. We can’t raise taxes on those able to pay, lest we destroy their incentive to create wealth.

The Biden budget, however, reveals an administration free from these fears. The budget doesn’t propose huge deficit spending, but it does point out that the burden of federal debt, properly measured, is minimal. And administration officials have made it clear that they don’t buy into low-tax propaganda.

You could say that the most important thing about this budget isn’t so much the dollars it would deliver as the dogma it dismisses. And if Biden’s presidency is seen as a success, this ideological liberation will have huge consequences.

More Budget Baloney From a Leading Political Party

Republican Congressman Paul Ryan, chairman of the House Budget Committee, issued his proposed federal budget yesterday. The Republican majority on the Budget Committee is expected to approve it. Fortunately, even if the full House of Representatives approves it, the Senate won’t.

Nevertheless, Ryan’s budget is worth knowing about. It will influence the budget Congress eventually agrees on and it offers yet another clear statement of the Republican Party’s insane priorities. 

In brief, the Ryan budget calls for a big tax cut on high incomes, a lot more spending on the military, and a lot less spending on programs like Medicare and food stamps. In addition, Ryan would repeal the Affordable Care Act, even though there are now some 10 million people who have health insurance because of that law (via private insurance or Medicaid).

Ryan claims his budget will eliminate the federal deficit in ten years, despite the tax cuts and increased military spending, because he makes stuff up.

One part of the Republican budget document deals with Social Security. I plan to write more about that in a future post, but for now, consider this amazing sentence from page 66: 

Any value in the balances in the Social Security Trust Fund is derived from dubious government accounting. 

The Treasury Department says the government bonds in the Social Security Trust Fund were worth almost three trillion (not billion, but trillion) dollars at the end of December and were paying the Trust Fund an average interest rate of 3.6%. But, according to the authors of the Republican budget document, those bonds are basically worthless. They’re an accounting fiction. Such is the financial insight demonstrated by Congressman Ryan and his Republican colleagues as they go about planning our economic future.