Lori Montgomery, a normally sensible budget reporter at the Washington Post, has written a confused and unbalanced article that seemingly blames the Bush tax cuts for the current budget woes and thus leads readers to the wrong solutions for the impending debt meltdown. The key indictment:
The biggest culprit, by far, has been an erosion of tax revenue triggered largely by two recessions and multiple rounds of tax cuts. Together, the economy and the tax bills enacted under former president George W. Bush, and to a lesser extent by President Obama, wiped out $6.3 trillion in anticipated revenue. That’s nearly half of the $12.7 trillion swing from projected surpluses to real debt. Federal tax collections now stand at their lowest level as a percentage of the economy in 60 years.
It is worth looking at this a bit. Notice that the supposed price tag ($6.3 trillion) intermixes three very distinct factors:
‚—Ź The role of the economy. This is crucial. During my tenure as CBO director, CBO issued any number of “what happened to the surplus” analyses. Roughly speaking, they came to the conclusion that roughly one-half of the swing from surplus to deficit was due to economic performance. Now, it has been fashionable in the 2001–2011era to believe that economic performance is dictated by discretionary Washington policy choices. This belief is deeply at odds with two bubble-driven recessions but nevertheless survived and culminated in the Obama stimulus fiasco. If you buy a fiscal fine-tuning philosophy that failed in the 1960s, failed in the 1970s, and failed again in the 2000s, it makes sense to combine the economic part with policy choices. My advice: don’t.
‚—Ź Bush-era discretionary tax policy. The same analyses that pinned half of the deficit swing on the economy initially concluded that about one-half of the remainder — 25 percent overall — was the result of discretionary tax policy (2001 and 2003 tax cuts). The remainder (25 percent) stemmed from spending increases. Over time, however, the spending spree continued and the mix evolved to much less than 25 percent due to taxes and the bulk of the policy-induced deficit on the spending side.
Montgomery also devotes a bit of space to the particulars of the 2001 and 2003 tax laws. With the need for tax reform looming, this is a discussion that deserves attention. Good tax policy involves more than just taxes going up or down. In my view, there was a clear case for the 2001 tax cuts, but not much to defend regarding the quality of the cuts. In contrast, undertaking the 2003 cuts was a much tougher call, but they were of much higher, pro-growth quality.
‚—Ź Obama-era discretionary tax policy. The president has overseen dramatic discretionary policies on both the spending and the tax side of the budget — contributing strongly to the historic lows referred to by Montgomery.
The bottom line is simple. Obsession with the Bush-era tax cuts is numerically ill-informed.
So, were the 2000s a fiscal high-water mark? Of course not. The most important error of the decade was not action, it was inaction. Social Security remains broken and at risk. Medicaid continues to deliver red ink and bad medicine. Medicare is on track to collapse under its financial woes and leave future seniors at risk.
The latter deserves special mention. History will show that the 2003 drug benefit was a pivotal moment. Obama apparatchiks tend to focus on the fact that it was not paid for, but that is the least of its sins. Originally, the drug benefit was to be available only to those who entered Medicare Advantage, but the Bush administration ultimately caved to the idea that it should be available in fee-for-service Medicare as well. This was a disaster. It implicitly blessed fee-for-service Medicare as a delivery system of equal merit to a managed plan that provided lower co-pays or better benefits for lower costs. Fee-for-service Medicare is the health-care problem. It is the budget problem. It is the debt problem. The failure to insist on a migration of Medicare to more efficient delivery systems was a huge mistake.
Lastly, this retrospective budgetary navel-gazing misses the fundamental point. The problem lies in the future. Standard & Poor’s is not grading past performance in servicing the debt. It is voicing its doubts about the nation’s future. At present the (publicly-held) debt-to-GDP ratio is still below 65 percent. In Obama’s budgets it is projected to reach 90 percent over the next ten years despite the facts that:
‚—Ź The economy is assumed to grow robustly and return to full employment (thereby eliminating the biggest source of historic shortfalls), and
‚—Ź Revenues are assumed to rise — due to repeal of the Bush cuts for the top two brackets and other factors — to levels approaching those present in 2001 (thereby eliminating the central factor asserted in the article).
So why does Obama choose (and let’s face it, you can put anything in a budget, so it is a choice) to run a deficit of $1.2 trillion in 2021? Spending. Why does he choose to drive the federal budget into a debt spiral? Spending. Why are this nation’s growth, social safety net, and credit rating at risk? Spending.
— Douglas Holtz-Eakin is president of the American Action Forum.