Wednesday, April 13, 2011

Four questions about Obama's deficit reduction plan

A speech is just a speech, and Ezra Klein seems to have an actual written plan outline from the White House [update: it's on the WH site, here].  On the basis of the speech, though, here are four questions about how Obama gets to $4 trillion in deficit reduction -- one partially answered by Klein:

1. Did Obama propose to cut $400 billion in defense spending?  Here is his wording: 
Just as we must find more savings in domestic programs, we must do the same in defense. Over the last two years, Secretary Gates has courageously taken on wasteful spending, saving $400 billion in current and future spending. I believe we can do that again.

Two sub-questions: 1) does "do that again mean "save another $400 billion," or just "take on wasteful spending"?  More to the point: while Gates did cut an alleged $400 billion out of projected budgets for planned projects, that still left defense with annual budget increases exceeding the inflation rate.  Will the next $400 billion in 'savings' also leave the defense budget growing? [Update: the White House outline says the plan "sets a goal of holding the growth in base security spending below inflation, while ensuring our capacity to meet our national security responsibilities, which would save $400 billion by 2023."  Holding growth below inflation is a departure; according to Bloomberg, 2/16/11, "The U.S. Defense Department’s five- year weapons-buying budget, while lower than the military planned last year, still results in annual, inflation-adjusted growth of about 2.6 percent, according to an analyst.
2. The savings on Medicare and Medicaid that Obama proposed were conflated with savings projected under implementation of the PPACA.  The only hints at how he would get further savings were 1) "by using Medicare's purchasing power to drive greater efficiency and speed generic brands of medicine onto the market" and 2) "we will slow the growth of Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers." Ezra Klein has key clarifying info that isolates what's new:
Directs the Independent Payment Advisory Board to hold cost growth in Medicare to GDP plus 0.5 percent rather than GDP plus 1 percent. To make that achievable, IPAB gets new powers, including the ability to restructure Medicare’s insurance so it pays differently for treatments of different value. Also shortens the patent on biologic drugs from 12 years to seven years, implements the recommendations from the National Governors Association working group on Medicaid, and does a few more things. Total savings: $480 billion.
3. Obama promised to end the Bush tax cuts for the wealthiest 2%, which he said will cost us $1 trillion, presumably over the twelve year horizon of his plan. Plus he called for limiting itemized deductions for the wealthiest 2%, for an additional $320 billion in revenue. More broadly, he embraced the tax reform approach embraced by Bowles-Simpson -- and virtually every other deficit reduction plan -- of reducing tax "expenditures," i.e. targeted tax breaks (presumably for everyone), while also lowering marginal rates. But he suggested that $1 trillion of his $4 trillion in deficit reduction would come from tax reform that will "cut about $1 trillion in spending [i.e., on 'tax expenditures']  from the tax code." Does comprehensive tax reform render sunsetting the Bush cuts for the wealthiest 2% moot? And is Obama suggesting that comprehensive tax code reform would yield no more than leaving the current structure intact but simply sunsetting the Bush cuts for the wealthiest 2%?

4. If you cut $2 trillion in spending and raise $1 trillion in revenue over what today's tax code would yield over 12 years, do you really get $1 trillion savings in interest on the debt over those same twelve years? Ezra Klein says the breakdown of spending cuts to tax increases in the plan is 3:1. It sounded to me like 2:1:1 -- maybe 1.5:1.5:1 if tax revenue increases are more than $1 trillion.  [Update: Ezra flubbed this a little. The WH outline says that the plan provides "three dollars of spending cuts and interest savings for every one dollar from tax reform that contributes to deficit reduction" (emphasis in original). So that's a 2:1 spending-cut-to-tax-increase ratio.  And I guess that $1 trillion in added tax revenue means that sunsetting the Bush tax cuts and reducing deductions for the top 2% specifically is functionally meaningless, assuming that comprehensive code reform takes place.

UPDATE: Paul Krugman reads the riddle in question 4 above, and eureka!  Cutting tax expenditures counts as "spending cuts." That may indeed make the ratio something like 1.5--1.5--1, per above. Brill...I've noted that some conservatives have also cast them that way.  Further thoughts on Krugman's bombshell in the next post.

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