The Budget Free-for-All

There are three separate divides in the current budget battle in Washington. The one that has garnered the most attention concerns the near-simultaneous release of the first budget from Senate Democrats in four years and a competing plan from Wisconsin Republican Congressman Paul Ryan, the House Budget Committee chair.

The two plans are a trillion dollars apart in terms of taxes, and four trillion apart in terms of spending and deficit reduction over the next ten years -- the Grand Canyon would be easier to cross on a high-tension wire than bridging this gap.

Ryan has, in essence, reissued much of his earlier deficit-reduction plan, relying primarily on large reductions in the rate of growth of health care spending (still growing, but not as fast) in order to achieve savings of over $4 trillion in ten years on the way to a balanced budget. The Senate Democrats’ plan argues that it relies on an equal mix of tax increases and spending cuts, about 2 trillion in total over ten years, though over a quarter of the spending cuts are interest cost savings.

The Senate plan also includes $100 billion in new spending (sorry, "investments"), as well as about $700 billion in real cuts over ten years spread equally among health care, defense, and discretionary spending.

There is almost as much verbiage in the Senate budget attacking the GOP budget as there is explaining what they are offering.

There are two other divides that underlie the battles over any specific tax or spending changes in the new budget releases.  The biggest one concerns whether there is a need for deficit reduction at all. For close to two decades, the general Washington, D.C. consensus was that at least lip service needed to be paid to the concept of deficit reduction; that is no longer the case. Both parties maintain that their new plans meet the targets set by the Simpson- Bowles Commission, or the the $4 trillion in ten years total deficit-reduction target that some say will put the nation’s finances on a more stable path.

The Ryan plan targets this level of deficit reduction just with its new spending cuts. The Democrats argue that when you include already enacted deficit-reduction steps, their new budget changes will also hit the big deficit-reduction targets. The Democrats, of course, claim that their approach is a "balanced" deficit-reduction plan, making use of the poll-tested language that President Obama has used frequently.

The multi-trillion dollar distance between the two plans is really an argument over several distinct questions:

  1. Is government spending too high, or too low?
  2. Are deficits too large or too small?
  3. If deficits are not a problem now, will they be a bigger problem when the percentage of Americans who are over age 65 is much higher, and the health care and retirement costs for this much larger group of Americans gets a lot bigger?
  4. Is the real problem now the deficit and accumulated debt (the latter growing as a share of the national economy), or the slowly growing economy and high long-term unemployment?

There is a significant chorus today among left-wing members of the D.C. punditocracy who are now arguing that government spending is not high enough, and that current federal deficit levels are too small. The loudest megaphone in this group belongs to New York Times columnist Paul Krugman.

Krugman has much in common with another well-paid and respected Times columnist, Tom Friedman. The Times has been paying for two columns a week from these writers, presumably in the expectation that they would get some new content every now and then. In Friedman’s case, most of his columns seem to focus on two pet peeves:

  1. Jewish settlements in the West Bank. If these were removed, it would presumably be only a few days until every other problem in the Middle East would resolve itself peacefully and successfully.
  2. Global warming. If America established a carbon tax and spent more on alternative energy, the Earth would stop warming and be saved for future generations (until a big asteroid hit).

Krugman is more single-issue obsessed, even more repetitive. He is also very influential with President Obama and congressional Democrats. Krugman’s belligerent columns declaring that deficits do not matter and, if anything, should be larger now are a major reason why Democrats in Congress have been happier to have no deals and to propose or pass no budgets than to commit the sin of deficit reduction (what Krugman calls "austerity"). The Princeton economics professor argues that government needs to step in aggressively if the economy is weak, and run big deficits to replace missing private spending. And his notion of government stepping in to strengthen the economy means that  government needs to spend a lot more, not provide new tax cuts.

Krugman thought the near $900 billion stimulus in 2009 was far too small. He is unconcerned with the details of new spending in stimulus bills: the only thing that matters it that the money go out the door.

Krugman is far less supportive of tax cuts to stimulate the economy. That is because he is more comfortable with government-directed spending (even though he does not care where it is spent) than he is with people having more money in their pockets from tax cuts and making decisions for themselves.

Krugman, who has been hypocritical almost as often as he has been flat-out wrong, supported austerity when it came to the Bush tax cuts back in 2001. Those cuts also occurred at a time of a faltering economy. But then, Krugman was concerned with deficits. Now Krugman hates austerity, and has written several dozen near-identical columns to attack the stupid Europeans for taking austerity measures to balance their budgets. Krugman believes our deficit needs to be much larger today, since all that additional spending will reduce the number of long-term unemployed. Exactly how Krugman believes the hundreds of billions in new spending he proposes will accomplish that is unclear.

The third major division is over whether the American people have already voted in November for Obama and the Senate Democrats' approach rather than the Ryan plan. This argument was put in play in the fight over the sequester. Had  Americans already decided that they wanted to replace a big part of the sequester spending cuts with tax increases, as opposed to keeping the cuts or replacing them with alternative spending cuts? The big proponent of “the people have already decided approach” has been the Washington Post’s Ezra Klein, who has lately appeared in the role of Paul Krugman’s acolyte by pushing hard with the anti-austerity theme.

The self-styled wonk and graphs lover who has played the role of Obama protector for several years was quick on the draw with an article attacking Bob Woodward after Woodward argued that Obama was moving the goalposts by pushing for more taxes instead of sequester spending cuts. Klein said Woodward was wrong since the voters had already moved the goalposts in November. Klein must not have been referring to these Obama voters who were interviewed about the sequester, and were unsure whether it was a good idea for the president to “pardon the sequester and send him to Portugal."

House Speaker Boehner also entered this argument this week, saying the 2012 election results were decided on personality more than policy. Klein is, of course, wrong that the sequester was a key issue for voters, or even came up much in the presidential campaign, though Obama was quite persistent with his broader theme that he favored targeted investments (spending) and higher taxes on rich people.

In any case, the two parties will not agree on a budget approach or a grand bargain to reduce the deficit. One side thinks deficits really matter (and need to come down through slowing spending growth), and the other side, whose core belief is that government (other than defense) should always expand, believes deficits matter little or maybe should be bigger, and if they come down at all, they should only be addressed through tax increases on the rich or defense cuts.

What we will get is continuing resolutions and more campaigning than compromise. It is, after all, only 20 months until the 2014 midterms.