Is the deficit reduction deal being negotiated by U.S. President Barack Obama and Speaker of the House John Boehner likely to be small-ball, medium-sized or a massive grand bargain that restructures the federal budget? Or is all the talk of deficit reduction misleading, camouflaging a deal that would actually increase deficits dramatically?
The answer is all of the above.
Measuring these deals is a frustrating exercise in a subspecialty of physics known as budget relativity. For example, viewed from one angle, the tentative Obama/Boehner deal is surely small-ball. It includes about $1 trillion in tax revenue and $1 trillion in spending cuts, for a total of about $2 trillion in deficit reduction over 10 years. That’s not nothing, but it’s on the small side of the various fiscal plans circulating Washington.
If you prefer a medium-size total, change your vantage point. Previous negotiations between Republicans and Democrats in 2011 led to the Budget Control Act, which will cut discretionary spending by about $1.5 trillion over the next decade. If you add that amount to the $2 trillion currently under discussion, you achieve a 10-year deficit-reduction package of $3.5 trillion. Now we’re getting somewhere.
Want an ambitious grand bargain instead? Take the $3.5 trillion outlined above and add savings from the drawdown of the wars in Iraq and Afghanistan. Winding down the wars is expected to cut about $1 trillion over 10 years.
In addition, savings on interest on the debt would produce about $200 billion for every $1 trillion of spending cuts or tax increases. That pushes the value of the total deficit reduction above $5 trillion for 10 years — more than enough to warrant celebration of a grand bargain.
Yet even a grand bargain comes out looking like a budget buster with a modest change of perspective. Under current law, a combination of tax increases and spending cuts — the “fiscal cliff” — will take effect Jan. 1.
That law slashes the deficit by about $600 billion in 2013 alone and keeps cutting thereafter. The deal being negotiated by Boehner and Obama falls far short of that amount. Consequently, measured against current law, Obama and Boehner are actually proposing to increase the deficit by trillions of dollars over the next decade.
The point? Judging a deal based on an arbitrary bottom-line number is a mug’s game.
“The problem with relying on the number $4 trillion or $3 trillion is you can always game those numbers,” said Marc Goldwein, policy director at the Committee for a Responsible Federal Budget.
The sainted Simpson-Bowles plan, said Robert Greenstein, president of the Center on Budget and Policy Priorities, uses an accounting baseline that assumes that a variety of tax cuts — including those on income over $250,000 — have either expired or been paid for with spending cuts. “If you use that as your baseline,” he said, “relative to that, the Obama offer is a tax cut!”
I asked Goldwein, a budget hawk’s budget hawk, how he would evaluate any deficit deal. “What’s important is what’s happening to the debt,” he said. “I would define stability as the debt declining as a percentage of the economy, particularly in the second half of the decade.”
Greenstein employs a similar yardstick. But he pointed out that health-care costs, which are the biggest driver of deficits, may be more influential than a deficit deal in determining the long-term budget outlook.
“The ultimate goal is to stabilize debt-to-GDP for the long term,” he said. “However, I think that is not something we should be trying to do for future decades right now. For those decades, the key is health care, and we neither know what health-care costs will look like then — they’re slowing down now, but we don’t know if that’s permanent or temporary — and we don’t know enough about what changes we need to make to the health-care delivery system to slow costs. So stabilize the debt for the current decade and buy yourself time to figure out health care.”
Both experts focus not on the precise ratio of debt to GDP, but on the direction, up or down, in which the numbers are moving.
According to Goldwein’s calculations, the deal proposed by the White House earlier this week would produce declines in the debt-to-GDP ratio until about 2020, after which the trend flattens out. Greenstein agreed. “The administration’s package comes close, but probably doesn’t get you all the way there,” he said.
On the other hand, Robert Shiller, an eminent economist at Yale, thinks it’s a mistake even to try to get “all the way there” on deficit reduction. We’re far too obsessed with debt, he said, whether measured as a percentage of GDP or by any other means.
“We tend to focus on debt because it’s moralizing,” he told me over the phone. “It has an emotional impact on us. Religions talk about debt,” he said. “This moral dimension gives it excessive importance.”
Even the focus on the annual debt-to-GDP ratio is skewed, Shiller said. “There is nothing special about using a year as that unit,” he has written. “A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.”
He said that if you measured Greece’s debt against its GDP over 10 years — which, he said, would be more appropriate since the government doesn’t have to pay off its debt in a single year — Greece’s debt burden would be only 15 percent of GDP.
There is no way to understand an entire economy and its relationship to government debt from a single number, Shiller said. So what data would he look at instead? “You want a scoring system?” he asked. “I don’t have one of those. There’s too much to focus on one number.”
The right way to judge a deal, in his view, is policy by policy. If the policies make sense on their own terms, the deal is a good one.