The never ending brouhaha over federal fiscal issues has prompted readers to ask good questions. Three common ones are:
"When politicians claim 'cuts' are being made, are those actually reductions from what we are spending now or from mere projected increases?"
"When they cite so many billions in tax increase or spending cuts, do they mean for one year or over 10 years?"
"Are all claims that politicians make about the issue cynical?"
The answers: Claimed "reductions" usually are from projected future levels rather than from actual current spending; most of the big amounts cited involve 10-year projections rather than the year we are in or the next one coming up; and, the whole process involves considerable manipulation and cynicism, although there is useful information for citizens even when it is presented in a distorted manner.
However, there still are two sides to every question. Talking only about one-year changes or only about changes from actual current revenue or spending levels would be just as misleading. And a failure to understand the rigidities we have built into the federal budget leads many people to assume that spending cuts are far easier than they are.
Start with the 10-year projections. Until 20 years or so ago, changes in taxes and spending were evaluated in light of what they would do for the next fiscal year. But many given changes, either on the tax side or on the spending side, might have relatively small effects in the initial year or two, but then balloon as time went on. So advocates for fiscal prudence called for estimates of the effects of changes going out a decade.
The idea was not to toss out looking at the immediate effects, but rather to add useful supplemental information. But projections always depend on assumptions, and the farther out the projections go, the more tenuous the claimed results are.
The tax cuts sought by President George W. Bush in 2001 and 2003 are a good example. Much of the impetus for the cuts came from the fact that some 10-year projections showed the national debt being paid off by 2012. It was obvious at the time to many independent observers that the odds of this actually happening were near zero, since the four years of slight budget surpluses in fiscal years 1998-2001 were due to unsustainable factors. But the tax cuts were passed anyway.
Yet these cuts were of such a size that other 10-year projections predicted that, with these cuts, budget deficits would start to explode in the last few years of the projected decade. Under the Senate's internal deficit limitation rules then in effect, such tax cuts could not be passed. So they resorted to the gimmick that the tax cuts would automatically end after 10 years. The deficit did explode and we now have had a bipartisan flinch on reverting to the old rates, except for those earning over $400,000.
The Part D Medicare Drug benefit is an example of a spending program where looking at the first year only made things look more affordable than they have proved to be over the longer run. Passed in 2003, outlays for 2006, the first year it was actually in effect, were just over $40 billion. But they now are about $60 billion and will average at least $72 billion a year over the 2009-2018 decade.
It was clear from the start that outlays for Part D were likely to grow faster than the overall economy, since, as baby-boomers retired, the population eligible for Medicare would grow faster than the general population. Moreover, there was a long record of drug price increases outpacing general consumer inflation. Looking only at the first year would give a misleading impression of the longer-term effects on the federal budget.
This issue of using one-year estimates or 10-year projections is intimately linked with the question of whether "cuts" are made relative to current spending levels, or the levels of outlays necessary to provide the same level of services.
Frustrated citizens often protest, "Why don't they just stop spending?" The answer is that to do so in a significant way, they would have to change long-standing laws that make open-ended commitments to providing certain levels of benefits. Even among Tea Party members, there is little enthusiasm for cutting Social Security or Medicare benefits, especially for current recipients.
Chicken out by saying, "Well, we won't let these proposed changes apply to anyone 55 or older," and you push the date when spending will be reduced out to 2025 or later. And those reductions will be from far higher levels of spending than now, not from today's levels. Even Rep. Paul Ryan's much touted budget plan did not project a balanced budget until 2040, and it was based on some insupportably rosy assumptions.
Social Security grows with the number of retirees, with increases in average wages that determine initial benefit levels and with changes in inflation level that determine subsequent cost-of-living increases.
Medicare grows with the number of beneficiaries, with new medical technology or procedures, and with the prices of both existing and new treatments. For any given rate of layoffs or unemployment, jobless-benefit compensation will increase with the labor force and with average pay levels.
So it is not realistic to expect that we could somehow freeze spending at 2013 levels.
But also realize that people can and do play games with projections, both in favor of or in opposition to, any proposed changes on either the tax or spending sides.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at firstname.lastname@example.org.