How Much Worse Is Obama’s Budget Than A Hypothetical President McCain’s?
Let me be the first to state that I have long considered the national debt to be one of the nation’s most pressing issues. There is very strong evidence that long term growth rates are affected more by national debt levels than just about any other variable. Also I think that massive deficit spending leads to bad governance because it creates an incentive mismatch: in sum the voting populace doesn’t have to weigh consequences of government size because it is kicked towards the future. I am critical of many of Keynes’ ideas for various mathematical and social reasons, but I’ve always thought that the government should try to run surpluses in good times and deficits in the bad, and they should roughly balance out (my actual opinion on this is very complex because of secular trends and whatnot but it’s a good simple goal).
The reason why Bush was so awful fiscally had little to do with the size of his deficits. Sure they were large, but even more importantly, they were that large during an expansionary period. He presided over the creation of a very large “structural deficit” in the truest sense of the term. Instead of running a massive deficit because of a deep downturn [the recession he faced was the weakest post WWII] or because of large strategic objectives that had specific goals [remember Iraq and Afghanistan weren't even part of the budget] his Administration pushed for a fundamental imbalance between revenues and expenditures when applied to core parts of the government that were not going to change without immense political reassessment. On top of that they passed the Medicare drug bill which I think goes down as the most wasteful piece of spending in contemporary governance by a mile.
It’s from that background that Obama’s budget should be measured, at least realistically. I’ve read that when including the downturn and the costs of the wars, Bush left Obama with around a trillion dollar deficit; this means that his spending increases amount to about $500-$750 billion on top of that. That’s quite a chunk of change, especially because he has yet to unveil explicit benchmarks for decreasing spending. I think that much is needed to repair our infrastructure and move us to a new energy economy, but I’d have preferred him to unveil a public works program or similar national mobilization rhetoric to demonstrate clear cut measurable goals and the temporary nature of the increased spending. I look forward to seeing what the actual budget is like, but it’s clear that the enormity is giving him image problems amongst moderates and conservatives. However, I think that the perception is misplaced that McCain would have done much better; at least if he had followed his campaign promises.
McCain’s tax plan called for reducing revenues by about $400 billion a year. For my simple analysis I’m going to assume that he would stick to that. The primary spending decrease I heard him cite were earmarks, but reducing those would only save about $10 billion a year even if he were successful. Some commenters (like CStanley) have argued that he was looking to change the philosophical and operational approach in Washington and would have used that to further reduce the core programs I referred to above. I can be sympathetic to that viewpoint, but he never detailed how, and I don’t think it’s fair to give him the benefit of the doubt while not giving Obama the benefit of the doubt about his promises to cut the programs at some point in the next ten years. I’d rather just assume that neither is likely to occur as easily as hoped.
So on its face, McCain’s deficit would have run about $1.4 trillion when added on top of Bush’s. Is that what would have actually happened? No, probably not, because I doubt he could have gotten them through an all Democratic Congress, but this is primarily about intentions. That still leaves a $350 billion gap between Obama and McCain, which is nothing to scoff at. Yet wait, $250 billion of that is marked to help prop up the financial system. You can call me cynical but I don’t think there is anyway McCain wouldn’t spend similar amounts to try to “save the economy.” So that is down to a $100 billion gap.
But then I decided to expand this process out a bit more and how the type of spending would affect things. Obama’s tax plan called for $2.7 trillion revenue reduction over 10 years or about $270 billion a year, but his actual budget looks relatively revenue neutral on tax cuts, or at least the summaries I’ve read. OK time out to explain why I’m cheating marginally. As Hilzoy says, the $4 trillion vs $2.7 trillion was assuming that a) Bush’s tax cuts were made permanent and b) that the AMT was fixed. Without it the difference was -$600 billion for McCain to +$700 billion for Obama. Well the reason I’m cheating is that I assumed that McCain would also be for keeping Bush’s tax cuts permanent and fixing the AMT because well, he pretty much said he would. His $400 billion a year in cuts was on top of that. Meanwhile we know Obama isn’t, but somehow his plus +70 billion got wiped out to be roughly neutral. You can quibble with my reasoning but it’s what I thought was most fair to approach this.
The primary reason why the deficit is rising $500 billion — ex. financial system rescue — is due to direct government spending on healthcare, science, infrastructure and the like. Well that has a vastly different effect on government revenues than $400 billion of tax cuts primarily to the upper income brackets. Using the multiplier effect given by Mark Zandi, I’ll say that the total tax cut multiplier averages out to 0.4 and the total government expenditure averages out to 1.4. Taxing at say 30% (I have no idea if this is right but it sounds roughly accurate) for GDP increase and a 15% bonus to McCain assuming that about all of the non-GDP multiplier yields dividends and capital gains, McCain’s $400 billion of tax cuts would give $108 billion in revenue for a first round (I’m not going to calculate out for each time things go out and flow back in) total of $1.292 trillion non-financial system saving deficit. Obama’s $500 billion of government expenditures leads to a $700 billion increase in GDP so that gives revenue of $210 billion for a $1.29 trillion deficit.
I swear I didn’t know that was going to happen.
So what’s the moral of the story? Well other than I like doing pointless accounting based on hypothetical scenarios, it’s that we shouldn’t give the actual details in this post very much credence as being an actual alternate reality. McCain’s budget could have been $800 billion in deficits, or $2 trillion. I don’t know, and neither does anyone else. But what I do think is important is to realize that looking at the professed policy of McCain shows that the Republicans aren’t really any better at being fiscal managers than the Democrats. I mean their Congressmen had equal amounts of pork (and more per person) than Democrats in the omnibus bill.
If you want to be generous, you can say that it comes down to ideological differences. The Democrats think that government investment will be better for the economy and Republicans think tax cuts do because of private enterprise. Personally I think that there are severe problems in healthcare, blah blah that the government will need to spend massive amounts of money over the next 10 years to fix even if things are done right…and I say this as I’m trying to venture out for the first time through entrepreneurship of my own, so I’ll see if that perspective changes.
Cynically one could argue that the Democrats are just wasting a lot of money for pet projects and that little will be done with that increased spending. I am very concerned about that possibility and that’s why I am disappointed there hasn’t been any sort of grand program with vision presented. One could also argue that tax cuts that the wealthy benefit from the most, when measures of wealth inequality are near historical highs, is a very bad idea and that the Republicans (or at least McCain’s policy) would do little good. I’d be one of those people.
Not like this will surprise anyone that reads the site, but our problems are so big that neither side seems able to handle them. I just felt I had to write this post because it seems like people have buyer’s remorse and that McCain may have been better or something; he wouldn’t have, at least not based on his campaign promises.
13 Responses to “How Much Worse Is Obama’s Budget Than A Hypothetical President McCain’s?”
If the polling is accurate, the people who have buyer's remorse are the ones who voted for McCain. Frankly, I can't imagine any President handling the economic problems we face any better…and that's not to say that Obama has been perfect. His banking plan is still in flux, which is strange considering how much time he has had to develop a response. My guess is that the one plan necessary to solve the problem – nationalization – will cause a total disaster on the stock market in the short term – and Geithner doesn't want to take that heat yet.
BTW, if McCain were President the Treasury Secretary would be either Phil Gramm or John Thain.
Yeah their response to the banks has been really weird in how off the cuff it's been. I expected them to have a plan for nationalization on day one. Things are quickly getting so bad that I fail to see how even the worst case side effects of nationalization would be worse than status quo.
Well. I for one do not have buyers remorse because its very simple.
You look at how a man votes and that is what the man is. Obama was a liberal. Pure and simple. Moveon.org said almost nothing during the campaign and Michael Moore was absolutely silent……Translation. Bill Clinton told Jesse Jackson to shut up till after the election and Barak Obama told Moveon and Michael Moore to shut up so they could get elected.
Result. A far left liberal in the White House. It was pure genius on the Democrats part and it begs the question. Will America really be happy as it unfolds and they were deceived into believing that Obama would be a centrist……..Moderate and not a mouthpiece for the far left? Time will tell.
In the meantime it seems the left needs to deflect and so they have piled on board Rush Limbaugh to keep the public riled up over the right while the left does whatever the hell they want.
When the Republicans ran the government, they ran a huge deficit.
The current bail-out plans are a continuation of the bail-out plans of the previous Republican president–you know, that former president Republicans are now afraid to mention by name.
Institutions that are, as they say, too big to fail would still be too big to fail even if John McCain were President.
Obama is, without a doubt, the most liberal President we've had since LBJ – and probably since FDR. What's striking is that the moment seems to call for liberalism in a way that no other moment since the 1930s has. People's faith in unfettered free markets has been utterly shattered, which has opened the door for a far more interventionist approach to the economy.
If this were 1993 and Obama went as far to the left as he has, he would be pilloried to no end. But this is not 1993. The Reagan Revolution has run out of steam and the rump of conservative Republicans left just don't affect elections anymore the way they used to.
The only question now is whether or not people who hold liberal views but call themselves “moderates” will now start to call themselves “liberals” or “progressives.” My guess is that if you had together the number of people who call themselves liberal and those who use the term “progressive” you would get an equal number as those who say “conservative.” When you add the modestly liberal moderates to the mix, you have a center-left nation.
Excellent article Mr. Fishman! I had a few posting here (Marc Pascal) and admit that I was working on a similar alternate universe comparison. Either I now ditch big parts of my article, change a lot, or dump it and work on some other subjects.
You really made a decent comparison because more tax cuts vs more spending may work out the same with respect to federal deficit in a few years. However, major policy differences will fundamentally change the economy and society as well. Healthcare reform would be a major long-term change. I also agree with your call for more infrastructure spending but in a quasi-independent National Infrastructure Bank that has specific and dedicated revenue sources to pay off the bonds and related interest that it would issue (i.e. a higher gas tax). Perhaps a comprehensive energy and transportation approach is coming soon.
Both parties are still clueless on what might be a way to reorganize our financial sector so it functions as a trustworthy mover of credit in our economy instead of being the uncontrolled gambling casino it became during the past decade. No economy stimuli, including tax cuts or spending programs, are sufficient to end this recession until and unless we get our nation's financial sector in order.
I have noticed that many comments following articles on various editorials snd blogs (not only at TMV but across the Internet) often reflect those who generally disagree with the author. Many postings have such angry invective and expouse such extreme positions as to be embarassing to read. I urge those who can say something positive to also chime in sometimes. It would lend some balance and feed the egos of those who take the time to think and write these commentaries.
Congratulations again and keep up the thought-provoking good work!! – MP
I don't have buyer's remorse because as usual I held my nose and voted for the lesser of two evils. There was never any emotional attachment to McCain and I had no illusions about him.
I have to think the reason that there would be a significant difference in the way McCain would have handled this is that the Democratic House/Senate would have a moderating influence on McCain and vice versa. Right now there is no one to say “no”. Supposedly the GOP is the Party of No but they hold little power to actually back it up.
Make no mistake I think there are some good ideas and programs in Obama's budget, but the whole thing seems rushed and bloated. I would like to hear more details but I think in many cases the details aren't there because they haven't yet been thought through.
If your point is there would be little or no difference between Obama and McCain budgets, then how are we supposed to think of Obama as the 'hope and change' President? You seem to be arguing that he misrepresented himself during the election, and is just another typical politician.
That of course is the case, and I, for one, am glad to see the Left beginning to admit THAT truth.
Oh, and it isn't being cynical to “argue that the Democrats are just wasting a lot of money for pet projects and that little will be done with that increased spending” – yet again it is accepting the truth of the situation.
Um he's the “hope and change” President because he is aiming to alter government on a fundamental level and be a 21st century FDR. I'm not saying that there is little difference between the size of government (as defined by expenditure) or that the programs would be similar (they're not) but that based on McCain's tax proposals the deficits would be similar and it's wise to remember that.
I for one think that Obama is doing exactly what he said he would in the election. From his largest goals to his smallest, I think he has very followed through on every level (but one which I am going to write about tomorrow). I feel the same way I've felt about him since I first read his governing philosophy back in late '05; completely ambitious in a constructive way and with the potential to rewrite American history for the better, but ultimately he is an incrementalist, not a radical. In this case being an incrementalist means trying to prop up a financial system that can't be propped up, trying to augment infrastructure and health care spending through traditional government sources that aren't really suited for it, etc. The government is broken on many levels and trying to expand it drastically without fundamental reform probably won't work so hot, but it's not his style to rail against the system.
So really I've always fully expected him to fail astronomically even while I thought if he was President in 92 he could have been amazing. The question is how he'll respond to failure and I have no idea.
Thanks and sorry for jumping the gun. I just had the idea out of nowhere and hammered it out in 40 minutes. I was surprised actually that the numbers were so close (well I mean obviously so close that it's a rounding of a rounding error was amazing but I meant close in general) and when I started Obama was going to cost about $200 billion more but then I read that the $250 billion for the financial bailout was actually included in the budget and deficit projections…who knew. What was the conclusion of your piece?
As for whether the deficits would actually be similar based on the multiplier figures I used…well I think those are crap. I have severe skepticism that they represent “reality” as in what we'll actually see, especially with so many unknown variables. However that's the closest apples to apples comparison there is based on the budgeting intent and that's what I'm trying to focus on. We'll have to see what the specifics of the budget are before we'll know how things will work over the long term. I thought it was funny that he had a $680 billion package to reform health care and said it wouldn't really reform it.
Um he's the “hope and change” President because he is aiming to alter government on a fundamental level and be a 21st century FDR.
Lord I hope not. 1/2 of FDR's stuff was struck down as unconstitutional. He rounded up Americans and put them in Internment camps and we passed a Constitutional amendment after his presidency preventing what he did from ever happening again.
Great article with a surprising conclusion. If I read you right, both budgets fail to really solve any of the root causes of our downturn, specifically, the global credit crisis. Many have commented that nationalization is long over due. and Geitner's lack of action is at best puzzling.
I believe no solution implemented in America alone can be sufficient. World economies are so inter-twined that a perfectly healthy economic US would not remain that way as long as European credit is dysfunctional.
The G20 are scheduled to meet soon, and I have always figured that Geitner is just tap dancing until some global plan is agreed upon that makes simultaneous changes to world markets. IMO.
I missed this post until now, but I'll just second the comment made by DaGoat. You simply can't dismiss the effects of divided government.
And aside from that, of course, I fundamentally disagree with the 'hope and change' of moving toward bigger government solutions, so it's not just the size of the deficit that matters to me.