It's getting increasingly hard to sort out fact, fiction, and fantasy when it comes to Bush and the budget. Back in February, Mr. Bush proposed a five-year spending plan that projected a balanced budget by the year 2012. One of the key assumptions in the plan was that the AMT would go unpatched by Congress and continue to produce ever-increasing tax revenues -- a fiscal future fantasy. Without those revenues, the Bush budget would never be balanced.

Of course, everyone knew Congress would patch the AMT. Bush's projected revenue stream could nevertheless continue -- but only if the patch were paid for.

OK, now fast-forward from February to this afternoon, when the White House issued a veto threat against a paid-for patch that protects the revenue stream the Bush budget depends on to reach balance by 2012, saying that "the Administration is extremely disappointed that the House of Representatives continues to demand large tax increases as the price for protecting 25 million taxpayers from an unintended, unexpected, and unwelcome tax increase averaging $2,000."

"Unintended, unexpected, and unwelcome"? Is this now how Bush views his own 2012 balanced-budget plan?

Tax Cuts Don't Boost Revenues

If there's one thing that Republican politicians agree on, it's that slashing taxes brings the government more money....If there's one thing that economists agree on, it's that these claims are false. We're not talking just ivory-tower lefties. Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves--and were never intended to. Harvard professor Greg Mankiw, chairman of Bush's Council of Economic Advisers from 2003 to 2005, even devotes a section of his best-selling economics textbook to debunking the claim that tax cuts increase revenues.

Speaker Pelosi is acceding to Bush's budget numbers, cutting $22 billion from the congressional budget proposal. We're asking that they spare human needs programs, but there's not much else to cut. They should be done crafting a bare-bones budget in the next day or so.

This is probably the worst of all possible worlds, probably worse than what's come of the SCHIP fight, considering this budget will mean service cuts, whereas SCHIP just won't be expanded. And there's something disturbing about the behavior of the appropriations committees, who are protecting their earmarks by making cuts in programmatic budget proposals. Why do they care more about (most likely) b.s. local pandering projects than the public interest?

And for more depressing news, President Bush is expected to veto the SCHIP bill today. (Update: This is non-news news, because everyone expected a veto, and the House doesn't have the votes to override the veto anyway.)

In addition to the report I wrote about earlier, the CBO has made the data underlying that report available in an Excel spreadsheet.

Like Republicans and tax cuts, I just can't resist graphing income and tax data. So, here you go. This graph represents the shares of after-tax income for the lowest 4 quintiles and the top quintile. I knew the 2001-2003 Bush tax cuts were skewed toward the rich, but this graph really puts things into perspective.

(Click on image to enlarge)

In "Budget Gridlock Is a Shameful Legacy for Bush and Many Others," in today's Roll Call, leading congressional scholar Norman Orenstein bemoans the shrinking center in Congress and its impact on budget policy, as expressed in the current AMT and budget debates.

Orenstein fingers the GOP for the fix we're in on AMT, sacrificing PAYGO on its altar and having to fix it at all:

Republicans had many opportunities to fix the AMT when they were in the majority, and instead chose their own year-to-year Band-Aids, because they did not want to tell the American people the truth about the long-term budget drain the fix would entail. That was the same reason they pulled a bait and switch on the big package of tax cuts, deliberately having them all expire after 10 years to mask the costs, then trying to extend them by calling inaction a tax increase.

But Norm, you seem to have forgeten the Cheney Axiom, that Deficits Don't Matter to the GOP, which explains

the even more outrageous and irresponsible behavior of the president on the appropriations bills — vowing to veto the latest version of a bipartisan compromise before it was accomplished, showing no interest in working in divided government across party lines, drawing lines in the sand over $11 billion out of a $3 trillion budget. Of course, $11 billion is real money, but this has nothing to do with the numbers or with fiscal responsibility.

Bush Sr. had some notion of serving as a steward of government. By contrast, Jr. is a kleptocrat, pilfering public goods and distributing them to buds and cronies through contracts and tax cuts. So much self-dealing to do, so little time ... to care about deficits.

Some interesting research (via Brad Plumer's blog) making the case that the estate tax actually makes the economy more efficient. Here's the abstract:

To what degree should societies allow inequality to be inherited? What role should estate taxation play in shaping the intergenerational transmission of welfare? We explore these questions by modeling altruistically-linked individuals who experience privately observed taste or productivity shocks. Our positive economy is identical to models with infinite-lived individuals where efficiency requires immiseration: inequality grows without bound and everyone's consumption converges to zero. However, under an intergenerational interpretation, previous work only characterizes a particular set of Pareto-efficient allocations: those that value only the initial generation's welfare. We study other efficient allocations where the social welfare criterion values future generations directly, placing a positive weight on their welfare so that the effective social discount rate is lower than the private one. For any such difference in social and private discounting we find that consumption exhibits mean-reversion and that a steady-state, cross-sectional distribution for consumption and welfare exists, where no one is trapped at misery. The optimal allocation can then be implemented by a combination of income and estate taxation. We find that the optimal estate tax is progressive: fortunate parents face higher average marginal tax rates on their bequests.

That's a complicated way of making a common-sense point: having lots of idle rich kids blow their parents' fortunes on parties and expensive shoes probably isn't an optimal use of finite resources. But, as far as I know, nobody really tried proving it in any rigorous way until now.

You could also say the same for dynastic political power (AKA the Bush family), which often goes hand-in-hand with dynastic wealth. That hasn't turned out "optimally."

New figures released by the CBO indicate that overall effective federal tax rates have increased from 20.1% in 2004 to 20.5 in 2005%. Through a process known as "real bracket creep," Americans are paying higher tax rates without changes in the tax code. As incomes grow faster than inflation, taxpayers will find themselves paying taxes at higher marginal rates.

But the real story here is that this increase in effective tax rates is due primarily to increases in income inequality. As overall effective tax rates increased from 2004 to 2005 so did the share of income that goes to the top quintile of the income distribution. Meanwhile, shares going to the bottom four quintiles declined.

And an interesting twist to this report, the overall effective tax rate would have been higher in 2005 except for the fact that income from non-wage sources grew faster than than wage income. Because capital gains tax rates are lower than wage income tax rates, this boost in income actually dragged down the increase in effective federal tax rates.

In a beautiful, if perhaps unintended, exposition of the hypocrasy of the McConnell legislative obstruction program in the Senate, a New York Times "Congressional Memo: "Muscle Flexing in Senate: G.O.P. Defends Strategy," quotes the Senate Majority Leader today as follows:

I think we are being consistent here against higher taxes, consistently against greater regulation, consistently against creating new causes of action in bill after bill after bill. It's a positive message of our vision of America.

It is a reiteration of last week's Times article, All the Makings of a Carnival, Except the Fun that we highlighted in Cirque du Senate.

So, how well is the McConnell program working? "We have a pretty good sense that the public has figured out they are not too happy with this new Congress." That is, very well indeed. Positively.

CBO Director Peter Orszag editorializes in the Wall Street Journal today on long-term budget problems. It's a great piece. Key excerpts:

The bottom line is that while we need to address the effects of the coming retirement of the baby boomers and the projected imbalance in Social Security, we have to pay even more attention to the health-care costs that exert the dominant influence on our fiscal future. Policy makers will face both challenges and opportunities in trying to reduce these costs...

But it's too soon to conclude that the fiscal picture is hopelessly dismal. There remains the promising possibility of restraining health-care costs without incurring adverse health consequences. It may even be possible in some cases to reduce cost growth and improve health at the same time. Costs per beneficiary in Medicare, for example, vary substantially across the U.S. for reasons that cannot be explained fully by the characteristics of the patients or price levels in different areas.

One thing to look out for is whether congressional leaders or the presidential candidates listen to Orszag. Getting this message in the media seems like a good first step and the best way to challenge the dominant take on the issue, which is epitomized by wretch-inducing Robert Samuelson columns.

The Progressive States Network just put out an excellent report on privatization. It does three things mainly:

• Documents the failures and dangers of privatizing government on the state level
• Makes the case for increased transparency of privatized state government
• And with the data available, measures the extent of privatization on a number of policy areas in each state.

Much of the privatization that occurs at the state level is in the delivery of federal programs, like the National School Lunch Program, Medicaid, or Temporary Assistance for Needy Families. As for its implications for the federal workplace (emph. mine):

While there have been a few highly publicized privatization efforts in some states in recent years, broad trends in public employment do indicate that this is happening within a context of broader stability below the surface. According to the United States Census Bureau, total state and local employment increased from 14.2 million in 199738 to 15.8 million full-time equivalent employees in 2003,39 then to 16.1 million full-time equivalents in 2006,40 showing stable growth in public employment paralleling growth in state populations.

This is actually in sharp contrast to the federal government, which has seen significant downsizing of federal employees in favor of contractors, with total civilian federal employment actually falling from 2.81 million employees in 199741 down to 2.04 million employees in 2003.42 This reflects what Mildred Warner calls the increasing ideological approach to privatization as you move from the local to the federal level.43 It's worth noting that a few of the states most identified with privatization in recent years have strong ideological ties to the current White House, including Florida, where President Bush's brother, Jeb Bush, began a large drive for privatization; Texas, where President Bush's successor as Texas Governor, Rick Perry, led privatization efforts; and in Indiana, where former Bush White House Budget Director, Mitch Daniels, has been strongly promoting privatization as governor. But in this ideological commitment to privatization, they seem to be in contrast to the broader trends across all the states.

It now appears that the SCHIP expansion is sunk. CQ (subscription) is reporting that a one-year extension for SCHIP, with some additional funds to prevent cuts, will be tied to a bill that tweaks Medicare payments. That means a funding increase will have to wait until probably the year after next.

As Dana mentioned in his post earlier this morning, House Appropriations Chair David Obey is abandoning a "split the difference" approach to passing a budget, because the president is sticking to his guns and insisting that any budget presented by Congress total less than his $933 billion "top line" figure. Obey is folding like a cheap suit acceding to Bush's harsh budget because he (and Congressional leadership) would rather not take a black eye for contributing to a shutdown of the federal government.

While I would like to think that Congress feels more than the political pain of a budget fiasco, I am not so certain that there's a whole lot of empathy for the millions of Americans that will be adversely affected by spending cuts in vital domestic programs. And honestly, I'm not sure how Congressional leadership is supposed make the proverbial lemonade here, but come on - lead!

Maybe it's too late to shift the rhetorical melee, but Senate Appropriations Committee Chairman Robert Byrd (D-WV) nails what should be the frame of this skirmish($):

It is extraordinary that the president would request an 11 percent increase for the Department of Defense, a 12 percent increase for foreign aid, and $195 billion of emergency funding for the war, while asserting that a 4.7 percent increase for domestic programs is fiscally irresponsible...

The newest addition to The View, Whoopi Goldberg, is telling viewers that she wants to repeal the estate tax. Here's EPI's Jared Bernstein on her misinformation campaign.

Another budget deal was scuttled with nine legislative days left in the year when the White House issued a veto threat over the weekend on the "split the difference" approach. It's plus ca change all over again. The only sound you hear, once again, is House Appropriations Chair David Obey, sick and tired of negotating with himself:

"In my view, it's time to fish or cut bait. I'm tired of debating table scraps, and it's clear to me that the White House does not intend to compromise; they intend to sit back like Buddha and keep expecting us to compromise with ourselves. I'm done with navel-gazing. I'm not going to sit here and enable them to chisel domestic money down, down, down, down, so you wind up getting $5 billion bucks in return for $50 [billion] or $90 [billion] or whatever the hell it is they want for the war.

Obey's new "strategy" is to agree to every last spending level requested by President Bush back in February. Oh, minus any earmarks. That really hurts.

Democrats have vowed that if they must cut back on their spending plans, they will attempt to make the GOP pay a political price. "Actions have consequences," said a senior Democratic Senate aide, accoridng to CQ.

So far, there haven't been any.

Sen. Jim Webb's office is saying that the Defense authorization act will include provisions to set up a commission to investigate wartime contracting. The bill is expected to pass later this week. It'll be very interesting to what kinds of recommendations and findings the commission produces. The Defense bill will also reform a number of contracting administration rules.

In other contracting news, the state department's inspector general is stepping down under suspicions of blocking investigations into Blackwater's ties to smuggled weapons in Iraq. As it turns out, his brother sits on Blackwater's advisory board and was heavily involved in getting the company to do government security work.

This weekend, the Washington Post editorialized on what it deems "A Bad Patch," the bill moving through Congress to "patch" the Alternative Minimum Tax (AMT). Congress has taken pains to make sure all of its measures this year that raise mandatory spending or cut taxes are revenue-neutral, to comply with the fiscal discipline requirements of the "PAYGO" rules Congress passed this year.

But the Senate dropped the PAYGO ball completely last week, voting 88-5 to pass an un-paid-for patch -- of which 85 percent of the benefit goes to those earning $100,000 or more, incidentally:

Republicans -- who might as well rename themselves the Grand Old Party of Fiscal Irresponsibility -- refuse to pay the $50 billion tab for the one-year fix. They refuse to do away with the "carried interest" loophole that lets venture capitalists and hedge fund operators pay lower capital gains rates on ordinary income, and they refuse to countenance any other method.

The editorial fixes attention on the House Democrats' next move, with the "patch" ball now in their court. At a meeting with the Post editorial board on Friday, House Majority Leader Steny H. Hoyer (D-MD) "was refreshingly frank about the trade-off involved... Asked why Democrats shouldn't be criticized for this choice, Mr. Hoyer said, 'I think you are right to rake us over the coals for passing an unpaid-for AMT.'"

The Senate's PAYGO rules require a point of order to be raised in objection to any legislation that violates PAYGO. No such point of order was raised during the lengthy Senate debate last week. The House rules are different; a waiver vote must occur before any legislation that breaches the PAYGO rules can be voted upon by the House.

We at OMB Watch, and, we suspect, the House Blue Dogs -- who wrote a letter to Senate leaders last Tuesday saying "Waiving PAYGO rules in the face of tough decisions and political pressure is fiscally reckless, an abdication of our duties, and frankly, a broken promise" -- will be watching carefully this week.

The New York Times has a great article on backlogs in the Social Security Administration. Another example of where more funding and staffing is needed for government to do its job.

The White House is threatening to veto the latest appropriations gambit. What was it that Einstein said about people who try the same thing over and over again expecting a different result?

Update: Stan Collender's insights into what happened.

Posted by Matt Lewis, 10:03:49 AM

Friday, December 07, 2007

CBO estimates that the federal government recorded a deficit of $157 billion for the first two months of fiscal year 2008, about $35 billion more than the deficit recorded for the same period last year. Outlays were about $50 billion (or 11 percent) higher than they were in 2007, while revenues were about $15 billion (or 5 percent) higher.

CBO: Monthly Budget Review

Les Mots Justes about Enough concerning an almost dysfunctional institution are offered by today's New York Times:

Here... there is trash-talking, whining and finger-pointing, bickering and, occasionally, brief flashes of serious disagreement on policy. But with the clock ticking swiftly toward the end of the year and a stack of stalled legislation piling up, little is getting done in the Senate these days.

...

There is no deal on the federal budget, which is needed to prevent a shutdown of the government. The House and Senate remain divided over how to fix the alternative minimum tax, which will drill a hole in the wallets of 23 million Americans next year... A much-heralded energy bill, which the House approved on Thursday, was expected to fail in the Senate on Friday.

Democrats blame Republican obstruction. "They are filibustering as if they are on steroids," [Senate Majority Leader Harry] Reid said.

The repeated experience of seeing legislation passed by the House during the 110th Congress go directly into the Senate Cemetary prompted this scholarly opinion:

"As an amateur student of constitutional history and as a member of Congress, I have come to the conclusion that the Senate was a historic mistake," said Representative Rahm Emanuel of Illinois, the No. 4 Democrat.

Thursday, December 06, 2007

All Quiet on the Budget Front

The quiet that has descended over Washington amid the cold war on the budget has almost nothing to with the blanket of snow that fell on the town steadily all day yesterday. Instead, we heard essentially the same thing we've been hearing for the last several weeks.

We heard that the soft-spoken White House Chief of Staff Josh Bolten and Mr. Invisible, OMB Director Jim Nussle ventured through the snow yesterday to the Capitol for meetings with congressional leaders on both sides of Capitol Hill. "None of the principals would comment, but sources said the meetings with Democratic leaders yielded no negotiations on overall spending levels," Congress Daily reported.

No negotiations? Even though only one of the twelve budget bills has been signed and we are into the third month of the budget year? Despite widepsread concern about the budget impasse and government shutdowns?

Who needs bipartisan negotiations when you have House Appropriations Chair David R. Obey (D-WI) negotiating -- against himself? "There's a Plan A. There's a Plan B. There's a Plan C," Obey explained yesterday. "But there's no point in talking about it because you just undercut your first preference."

You've noticed that, have you? If you keep splitting the difference, pretty soon there will be no difference.