No, not unless you like the “fiscal cliff” tax rate increases and you like the government owning Fannie Mae and Freddie Mac. Those are the reasons why the deficit projection declined.

Deficits and Debt

You should know three benchmarks when thinking about federal budget deficits, each measured in % of GDP:

1. A roughly 3% deficit will hold debt/GDP constant;
2. The historic average deficit (pre-2008 crisis) is about 2% of GDP; and
3. Of course, a balanced budget is zero deficit.

Any time you hear a deficit number, compare it to zero, two and three, and you’ll have a good feel for where we are. A 4 percent deficit for this year is not good: it’s almost twice as high as the historic average, and it’s high enough that our debt will continue to increase faster than our economy will grow.

You will hear “But that 4 percent projection is much lower than the 5.4% projected in January. Surely that’s good news.  It is certainly an improvement over where we thought we were this year.”

This is where we need to review levels, rates of change, and expectations. This is tricky so I’ll break it down into small steps.

• The level of our debt/GDP is quite high: 73% at the end of last year.  That’s bad, and there’s a debate about just how bad it is.
• The deficit is the change in our debt for this year. A deficit means our debt is increasing, and a deficit greater than 3% of GDP means our debt is increasing relative to our economy. So our level is high (bad), and because our 4% deficit is greater than the 3% benchmark, our level is increasing (getting worse).
• But it’s getting worse much more slowly than it was getting worse a few years ago. In 2009 the deficit was 10% of GDP.  With a 4% deficit this year, our situation (level, debt/GDP) is getting worse much more slowly than it was four years ago.
• That does not, of course, mean we’re in a better position (debt level) than four years ago. Our debt/GDP at the end of 2008 was 41%. At the end of last year it was 73%, and CBO projects it will increase to 75% at the end of this year. That our debt is growing much more slowly this year than it was four years ago is hardly cause for celebration.
• Looking for a silver lining, our projected deficit (4%) is significantly smaller than was projected just four months ago (5.4%, projected in January). It is therefore a better (less bad, really) number than prior expectations.

I know that’s probably more complicated than you want.  Sorry, best I can do.

Why did the projection change so much?

CBO was not particularly surprised by this change. Their estimate changed mostly because they are required to project current law, even when they are pretty sure it will change.

They did their January baseline estimates before tax laws changed on January 2nd, so that baseline does not incorporate the effects of the “fiscal cliff” tax increases. CBO did not change their economic forecast, and other than tiny tweaks to Social Security and Medicare, they didn’t change their spending forecasts much either. Their new deficit estimate for this year came down by $203 B, and $200 B of that is from more money coming into the government:

• The payroll tax credit expired;
• Tax rates on income, dividends and capital gains all increased for “the rich”;
• In anticipation of those rate increases, some individuals realized income in late 2012 rather than 2013, shifting tax collections on that income into this year’s column on the government ledger;
• Corporate tax receipts are recovering a bit faster than CBO had previously estimated;
• and Fannie Mae and Freddie Mac, now quite profitable, are making big dividend payments to the Treasury. These payments show up on the outlay side of the federal budget ledger, but they are in effect receipts of the U.S. government.

The other big consequence of the nature of these changes is that they are mostly one-time bumps. So the 2013 numbers improved quite a bit, but the numbers for following years don’t increase nearly as much.

Enough already! How should I feel about this?

If you supported the tax rate increases then this is marginally good news. But don’t celebrate; our fiscal picture is still grim.

If, like me, you hate tax rate increases on anyone and detest having the government own two massive mortgage finance companies, then you should feel no comfort from today’s deficit news, which is almost entirely the result of those policies. I’d happily return to a 5.4% deficit if you let me repeal the tax rate increases and replace Fannie & Freddie with a private mortgage securitization market.

And then I’d cut government spending.  A lot.

The key substantive point of the paper and op-ed is a $6.3 trillion number:

An exhaustive study by the Heritage Foundation has found that after amnesty, current unlawful immigrants would receive $9.4 trillion in government benefits and services and pay more than $3 trillion in taxes over their lifetimes. That leaves a net fiscal deficit (benefits minus taxes) of $6.3 trillion.

I expect making 8-9 million people here illegally into U.S. citizens would increase future deficits once these people are eligible for benefits. But there are so many problems with the Heritage study that this $6.3 trillion number is useless for making policy decisions. It might as well be plucked out of thin air.

Others have criticized the Heritage study, including a detailed critique from Cato’s Alex Nowrasteh. I’m adding to that here.

The basics of estimating government expenditures for an entitlement program are simple.

1. Figure out the number of people who will receive subsidies;
2. Figure out how much the government will spend, on average, per person per year;
3. Choose your timeframe, measured in years;
4. Multiply (1) by (2) by (3) and you’re done.

The Heritage study makes errors in each step.

1. The study purports to measure the “cost … of amnesty.” Let’s set aside whether amnesty is the appropriate word to describe what is in the Gang of Eight’s bill. The fiscal cost of “amnesty” is the incremental cost of making those here illegally eligible for government payments and services relative to what we have now. People here illegally are already imposing fiscal costs by driving on the highways, using public parks, relying on local firefighters for emergency services, and in some cases receiving uncompensated care in emergency rooms. Some children here illegally are already receiving free public education. Making those children U.S. citizens doesn’t increase the cost to the state of educating them.

There are significant incremental costs to amnesty, mostly from millions of people eventually becoming eligible for Social Security, Medicare, Medicaid, food stamps, and cash assistance.

But in addition to these incremental costs, Heritage incorporates all of the baseline costs in their $6.3 trillion estimate of “amnesty.” By measuring total rather than marginal costs, they are telling us the cost of making millions of people legal relative to the cost of somehow finding and deporting all of them. Setting aside my view that such an alternative is infeasible, it is inaccurate to describe such an estimate as the cost of amnesty. It is instead the cost of amnesty relative to some other state of the world that Heritage would prefer. That is both misleading and not particularly useful to policymakers.

The study authors acknowledge this. On page 29 of they write:

The $6.3 trillion figure represents the lifetime fiscal costs of unlawful immigrant households after amnesty. It does not represent the increased fiscal costs caused by amnesty alone. The increased lifetime costs caused by amnesty would equal $6.3 trillion minus the estimated lifetime fiscal costs of unlawful immigrant households under current law.

The killer problem comes with the way Heritage is marketing the study. $6.3 trillion is Heritage’s estimate of the total costs of illegal immigrants if “amnesty” is granted. But the op-ed is titled “What amnesty for illegal immigrants will cost America,” and the op-ed says “amnesty has a substantial price tag,” thus mistakenly presenting $6.3 trillion as the marginal cost of a proposed policy change. The study says one not very useful thing, while the op-ed markets the study’s results as something else entirely.

2. In addition to not being an estimate of the cost of “amnesty,” the $6.3 trillion number does not measure the cost of illegal immigrants, either. The study includes a number calculated from looking at 12.7 million people, then labels that the cost of “illegal immigrants.” Contained within those 12.7 million people are 4.5 million children born in the U.S. to at least one parent here illegally. These children are U.S. citizens. Heritage is inflating the population of “illegal immigrants” measured by 55% = (4.5 / (12.7 – 4.5)).

The Heritage logic is that those 4.5 million children are in the U.S. only as a result of illegal immigration, so the costs of providing them with taxpayer services are costs of illegal immigration. Heritage is correct that, had those 8.2 million adults here illegally never arrived, those 4.5 million children would not have been born in the U.S.

But you can’t unring the bell. Whatever your view on whether policy failed by granting citizenship to the U.S.-born children of an illegal immigrant, these children are now U.S. citizens and entitled to benefits (and with the requirement to eventually pay taxes). The fiscal costs of these citizen children can’t be counted as the cost of “amnesty for illegal immigrants,” since (a) they are being paid now and (b) they will continue to be paid even if their parents do not get benefits.

At best Heritage’s estimate is not the cost of “amnesty” for illegal immigrants. It is an estimate of the cost of “amnesty” for 8.7 million illegal immigrants plus the costs of benefits for 4.5 million U.S. citizen children.

While the study acknowledges that their estimate depends heavily on this unusual redefinition, the op-ed and Heritage’s subsequent promotional efforts do not. In the study the authors carefully acknowledge:

For example, any study that excludes the welfare benefits and educational services received by the minor U.S.-born children of unlawful immigrant parents from the costs assigned to unlawful immigrant households will reach very different conclusions about the fiscal consequences of illegal immigration.

The DeMint/Rector op-ed makes no such distinction and is factually incorrect because it includes the benefit spending for 4.5 million U.S. citizens (emphasis added by me):

… current unlawful immigrants would receive $9.4 trillion in government benefits…

As we’ll see next, the study is also not really a complaint about the fiscal effects of illegal immigrants, or even of immigrants generally. It is instead a complaint about low income people receiving net government subsidies.

3. The logic behind the study can be summed up like this:

• Poor U.S. citizens cost the government money because they receive more in benefits than they pay in taxes;
• Immigrants tend, on average, to be fairly low on the income scale;
• Illegal immigrants even more so; therefore
• Making illegal immigrants legal (at some point) will therefore increase future deficits.

But other than the “even more so” point, this isn’t really an argument about illegal immigrants. It’s an argument about the existence of low-income Americans, a redistributive safety net and old-age subsidies, and an income tax system that exempts about 45% of Americans from paying income taxes.

Senator DeMint and Dr. Rector write:

Yet immigrants should come to our nation lawfully and should not impose additional fiscal costs on our overburdened taxpayers.

I agree with the first part, but they run into trouble on the second.  If you believe their numbers, legal immigrants also impose additional fiscal costs on our overburdened taxpayers.

The Heritage logic would apply equally to legal immigrants and to babies born to low income U.S. citizens. I know Heritage is not opposed to either of those, but the logic of this study (and the language in the op-ed) would seem to lead to such a conclusion.

4. Even more generally, the study is actually a critique of our unbalanced federal budget for everyone, and not just for the poor, much less for a subset of the poor. The federal budget is terribly out of whack, the result of promising way too many entitlement spending benefits without raising the taxes needed to pay them. (I would of course solve this by changing the spending promises, not by raising taxes.) Entitlement spending promises to seniors are the largest cause of this problem and are the drivers of unsustainable federal and state government spending trends.

Illegal immigrants are being promised far more in benefits than they will pay in taxes not just because they are on average low income, but because almost everyone is being promised old age benefits that will exceed the taxes they will pay.

In addition, Heritage’s calculations mistakenly assume that Social Security and Medicare benefits will be paid in full to newly legal immigrants for the next 50 years, even though (a) it’s obvious that neither program’s spending is sustainable in its current form for even half that time; and (b) current law includes a mandated 27% cut in Social Security benefits once the Social Security “trust fund” has a zero balance, and a 13% cut in Medicare part A benefits when the Hospital Insurance “trust fund” hits the wall. As a result, Heritage’s estimates of the direct old-age benefit costs for newly legal immigrants are too high.

5. The authors do a lot of work to group illegal immigrants by educational level (as a proxy for income) and to estimate the fiscal costs for various eligibility phase-in timeframes. But, as best I can tell, they assume that a poor, low-skilled, poorly educated illegal immigrant will remain poor, low-skill, and poorly educated, and that he will draw government subsidies his entire life. Incomes typically climb as a worker ages (including for low-skilled, low-wage workers). Some people who arrive in the U.S. illegally may initially take jobs well below their skill level because of language barriers that they later overcome. Others will get further education or build skills over time. Since government subsidies relate inversely to income, if you assume illegal immigrants will never see their education, skills, or income increase, then you’ll overestimate the government subsidies spent on their behalf and underestimate the taxes they pay. Ignoring the potential for self-improvement and economic advancement inflates the cost estimate.

Let’s not forget that those here illegally are the subset of those back home who had some combination of skills, determination, and savvy to make it to the U.S. despite significant barriers.

6. More broadly, the fear of discovery and deportation has to constrain the labor supplied by those here illegally. A talented electrical engineer here illegally might now be working in an unskilled job because green card verification is weaker for driving a cab than for working at Cisco or Intel. A spouse here illegally might choose to stay at home with the kids rather than seek paid work because the former has significantly lower risk of being discovered by immigration authorities. Eliminating these deportation risks will increase the available labor supply. Increased labor supply means a larger GDP, a larger tax base, and higher government revenues. Heritage appears to ignore all these supply-side labor effects, which is unusual from an organization that in other contexts has championed consideration of supply-side effects in fiscal estimates.

7. To get their huge numbers Heritage sums up spending over a 50-year period. They adjust their estimates of future spending and taxes for inflation but not for the time value of money.  Most official legislative cost estimates are done for a 5 or 10-year period, in which these effects are small and customarily ignored. But nobody adds up a 50-year fiscal stream without either discounting it or measuring it as a % of GDP rather than in real $. Using a 3% real long-term interest rate (CBO’s assumption), a dollar of cost 50 years from now is equivalent to a 23¢ cost today. Heritage counts this cost as a dollar rather than 23 cents. They should be showing us net present values if they want to do long-term estimates. It’s tough to say exactly, but a back-of-the-envelope calculation suggests this almost doubles their final number.

8. Finally, the DeMint/Rector op-ed purports to describe what illegal immigrants “will cost America,” when in fact they are looking only at what they will cost American governments. This is an important oversimplification and a surprising one from an institution as reliably conservative as Heritage, which I would never expect to make the mistake of equating the Government with the Nation. I happen to think the cultural and non-governmental economic benefits of a robust immigration system and a resolution of the problem of a stock of 8-9 million people here illegally far outweigh the likely impact on the federal budget, but you might make a different judgment call. Either way, it’s obvious that the federal budget is only part of the calculus, and the op-ed erred in suggesting otherwise.

To summarize, the $6.3 trillion number offered by Heritage as “the cost of unlawful immigrants and amnesty”:

• Does not estimate the marginal cost of an amnesty program or whatever is in the Gang of Eight bill relative to anything other than a fantasy state of the world;
• Includes costs for 4.5 million U.S. citizen children in its estimate of the costs of illegal immigrants;
• Employs logic extensible to both legal immigrants and poor U.S. citizens, and thus is actually a critique of government tax-and-spending redistribution more than of illegal immigration;
• Mistakenly assumes that unsustainable Social Security and Medicare benefits will be paid to newly-legal immigrants for 50 years when both programs will go bankrupt long before;
• Ignores supply-side labor effects by mistakenly assuming that an illegal immigrant who is poor and receiving government benefits will remain poor for 50 years, that he will not learn new skills or increase his income, and that he will not find a better-paying job or take additional work after eliminating the risk of deportation;
• Ignores the time value of money; and
• Mistakenly labels the cost to the Government as the cost to the Nation, ignoring the cultural and non-fiscal economic benefits and costs of changing immigration policy.

There is a significant fiscal effect from making 8-9 million people into U.S. citizens and making them legal taxpayers and eventually beneficiaries eligible for the full panoply of government subsidies. But Heritage’s $6.3 trillion figure is not a good estimate of that effect and is useless for making policy decisions.

I am a fan of Heritage and respect many of their scholars and their policy work. Unfortunately this study and op-ed are not up to their usual standard. They subtract value from an informed policy debate about an important topic.

In the mid 2000s Fannie, Freddie, and their hordes of lobbyists were able to delay GSE reform legislation until it was too late to do any preventive good. Despite the efforts of President Bush to push aggressive reforms for several years prior, legislation was enacted only in July 2008 as the firms were in the process of imploding. Congress allowed the barn doors to be closed only after the horses had escaped.

For GSE reformers the most important vote was on a bipartisan May 2007 House floor amendment by Rep. Randy Neugebauer (R-TX) and Rep. Melissa Bean (D-IL).

At the time Fannie and Freddie held portfolios of mortgage-backed financial assets of about $700 billion (each!) GSE reformers were afraid that these large hedge funds within the firms were carrying too much risk and had little to do with the core mission for which Fannie and Freddie were created. Because Fannie and Freddie (a) were so big, (b) held such huge portfolios with poorly-understood risk; and (c) were interconnected with so many other financial firms large and small, reformers feared they posed too much risk to the financial system.

The House Financial Services Committee reported a bill to strengthen the GSE regulatory agency (and to rename it as FHFA). The bill reported by committee would have given the new strengthened FHFA head the authority to limit the GSEs’ portfolios. He would be required to consider “any potential risks posed by the nature of the portfolio holdings.” This language is critical because it includes any risks posed by the portfolios to the rest of the financial system.

The Neugebauer-Bean amendment simply inserted three words.  The regulator would be required to consider:

any potential risks to the enterprises posed by the nature of the holdings.

Before Neugebauer-Bean passed, the regulator would have been required to consider the risks these two firms’ multi-hundred billion dollar portfolios posed to the financial system. After it passed, he had to consider only whether these portfolios caused risks to the firms. A weak or captured regulator could, if he wanted, ignore the risks posed to the global financial system by $1.4 trillion of housing finance assets held by these two firms.

I continue to hold the view prevalent at the time, that the Neugebauer-Bean amendment was offered at the behest of those two firms, which were engaged in a decades-long campaign to weaken the authority of their regulator.

This amendment passed the House on a huge vote: 383-36. Blame here is solidly bipartisan: House Democrats voted 221-3 in favor, and House Republicans voted 162-33 in favor. Such was the pre-collapse political power of Fannie Mae and Freddie Mac. Kudos to the 36 brave members who stood up to Fannie and Freddie and voted for strong regulatory oversight. These members cast an unpopular vote that was later borne out by the facts.

There are few floor votes that can be linked directly to the financial crisis. Members who voted aye on Neugebauer-Bean contributed to the crisis, members who voted no deserve credit for trying to limit this one contributing factor to systemic risk. Along with most of his colleagues, Mr. Watt voted aye, to weaken the authority of the regulatory position for which he will now be nominated.

We know how this movie ends. Fannie and Freddie collapsed and were placed into conservatorship by then-FHFA Director James Lockhart in September 2008. These two firms were the first dominos to fall that month.

No member of Congress who voted in May 2007 with Fannie and Freddie and against a stronger FHFA regulator should head that agency now. That includes Mr. Watt.

I am not one of those who argue that Fannie and Freddie were the sole cause of the 2008 crisis, or even the most important cause. They were, however, contributors to that crisis in many ways. The man the President wants to lead FHFA voted in May 2007 to weaken that regulatory agency’s responsibility.

By nominating Mr. Watt the President signals a return to the pre-crisis philosophy of regulating housing finance risk.  That is a huge mistake.  Mr. Watt should not be confirmed to head the FHFA.

I teach a class at Stanford Business School titled “Financial Crises in the U.S. and Europe.” During one class session while explaining the events of September 2008, I kept referring to the efforts of the threesome of Hank Paulson, Ben Bernanke, and Tim Geithner, who were joined at the hip in dealing with firm-specific problems as they arose.

One of my students asked “How involved was President Bush with what was going on?” I smiled and responded, “What you really mean is, ‘Was President Bush smart enough to understand what was going on,’ right?”

The class went dead silent. Everyone knew that this was the true meaning of the question. Kudos to that student for asking the hard question and for framing it so politely. I had stripped away that decorum and exposed the raw nerve.

I looked hard at the 60 MBA students and said “President Bush is smarter than almost every one of you.”

More silence.

I could tell they were waiting for me to break the tension, laugh, and admit I was joking.

I did not. A few shifted in their seats, then I launched into a longer answer. While it was a while ago, here is an amalgam of that answer and others I have given in similar contexts.

I am not kidding. You are quite an intelligent group. Don’t take it personally, but President Bush is smarter than almost every one of you. Were he a student here today, he would consistently get “HP” (High Pass) grades without having to work hard, and he’d get an “H” (High, the top grade) in any class where he wanted to put in the effort.

For more than six years it was my job to help educate President Bush about complex economic policy issues and to get decisions from him on impossibly hard policy choices. In meetings and in the briefing materials we gave him in advance we covered issues in far more depth than I have been discussing with you this quarter because we needed to do so for him to make decisions.

President Bush is extremely smart by any traditional standard. He’s highly analytical and was incredibly quick to be able to discern the core question he needed to answer. It was occasionally a little embarrassing when he would jump ahead of one of his Cabinet secretaries in a policy discussion and the advisor would struggle to catch up. He would sometimes force us to accelerate through policy presentations because he so quickly grasped what we were presenting.

I use words like briefing and presentation to describe our policy meetings with him, but those are inaccurate. Every meeting was a dialogue, and you had to be ready at all times to be grilled by him and to defend both your analysis and your recommendation. That was scary.

We treat Presidential speeches as if they are written by speechwriters, then handed to the President for delivery. If I could show you one experience from my time working for President Bush, it would be an editing session in the Oval with him and his speechwriters. You think that me cold-calling you is nerve-wracking? Try defending a sentence you inserted into a draft speech, with President Bush pouncing on the slightest weakness in your argument or your word choice.

In addition to his analytical speed, what most impressed me were his memory and his substantive breadth. We would sometimes have to brief him on an issue that we had last discussed with him weeks or even months before. He would remember small facts and arguments from the prior briefing and get impatient with us when we were rehashing things we had told him long ago.

And while my job involved juggling a lot of balls, I only had to worry about economic issues. In addition to all of those, at any given point in time he was making enormous decisions on Iraq and Afghanistan, on hunting al Qaeda and keeping America safe. He was making choices not just on taxes and spending and trade and energy and climate and health care and agriculture and Social Security and Medicare, but also on education and immigration, on crime and justice issues, on environmental policy and social policy and politics. Being able to handle such substantive breadth and depth, on such huge decisions, in parallel, requires not just enormous strength of character but tremendous intellectual power. President Bush has both.

On one particularly thorny policy issue on which his advisors had strong and deep disagreements, over the course of two weeks we (his senior advisors) held a series of three 90-minute meetings with the President. Shortly after the third meeting we asked for his OK to do a fourth. He said, “How about rather than doing another meeting on this, I instead tell you now what each person will say.” He then ran through half a dozen of his advisors by name and precisely detailed each one’s arguments and pointed out their flaws. (Needless to say there was no fourth meeting.)

Every prominent politician has a public caricature, one drawn initially by late-night comedy joke writers and shaped heavily by the press and one’s political opponents. The caricature of President Bush is that of a good ol’ boy from Texas who is principled and tough, but just not that bright.

That caricature was reinforced by several factors:

• The press and his opponents highlighted President Bush’s occasional stumbles when giving a speech. President Obama’s similar verbal miscues are ignored. Ask yourself: if every public statement you made were recorded and all your verbal fumbles were tweeted, how smart would you sound? Do you ever use the wrong word or phrase, or just botch a sentence for no good reason? I know I do.
• President Bush intentionally aimed his public image at average Americans rather than at Cambridge or Upper East Side elites. Mitt Romney’s campaign was predicated on “I am smart enough to fix a broken economy,” while George W. Bush’s campaigns stressed his values, character, and principles rather than boasting about his intellect. He never talked about graduating from Yale and Harvard Business School, and he liked to lower expectations by pretending he was just an average guy. Example: “My National Security Advisor Condi Rice is a Stanford professor, while I’m a C student. And look who’s President. <laughter>”
• There is a bias in much of the mainstream press and commentariat that people from outside of NY-BOS-WAS-CHI-SEA-SF-LA are less intelligent, or at least well educated. Many public commenters harbor an anti-Texas (and anti-Southern, and anti-Midwestern) intellectual bias. They mistakenly treat John Kerry as smarter than George Bush because John Kerry talks like an Ivy League professor while George Bush talks like a Texan.
• President Bush enjoys interacting with the men and women of our armed forces and with elite athletes. He loves to clear brush on his ranch. He loved interacting with the U.S. Olympic Team. He doesn’t windsurf off Nantucket, he rides a 100K mountain bike ride outside of Waco with wounded warriors. He is an intense, competitive athlete and a “guy’s guy.” His hobbies and habits reinforce a caricature of a [dumb] jock, in contrast to cultural sophisticates who enjoy antiquing and opera. This reinforces the other biases against him.

I assume that some who read this will react automatically with disbelief and sarcasm. They think they know that President Bush is unintelligent because, after all, everyone knows that. They will assume that I am wrong, or blinded by loyalty, or lying. They are certain that they are smarter than George Bush.

I ask you simply to consider the possibility that I’m right, that he is smarter than you.

If you can, find someone who has interacted directly with him outside the public spotlight. Ask that person about President Bush’s intellect. I am confident you will hear what I heard dozens of times from CEOs after they met with him: “Gosh, I had no idea he was that smart.”

At a minimum I hope you will test your own assumptions and thinking about our former President. I offer a few questions to help that process.

• Upon what do you base your view of President Bush’s intellect? How much is it shaped by the conventional wisdom about him? How much by verbal miscues highlighted by the press?
• Do you discount your estimate of his intellect because he’s from Texas or because of his accent? Because he’s an athlete and a ranch owner? Because he never advertises that he went to Yale and Harvard?
• This is a hard one, for liberals only. Do you assume that he is unintelligent because he made policy choices with which you disagree? If so, your logic may be backwards. “I disagree with choice X that President Bush made. No intelligent person could conclude X, therefore President Bush is unintelligent.” Might it be possible that an intelligent, thoughtful conservative with different values and priorities than your own might have reached a different conclusion than you?  Do you really think your policy views derive only from your intellect?

And finally, if you base your view of President Bush’s intellect on a public image and caricature shaped by late night comedians, op-ed writers, TV pundits, and Twitter, is that a smart thing for you to do?

(photo: The Bush Center)

Background

At almost any point in time the Senate is technically either debating or voting on a yes or no question. Typical questions the Senate considers look like this:

• Should amendment A by Senator B to bill C be adopted?
• Should the Senate pass bill C?
• Should the Senate consent to the nomination of person D to job E?
• [Now that it has finished F,] Should the Senate next proceed to working on G?

Most questions the Senate considers are debatable. This means that any of 100 Senators, or all of them, can speak about the question for as long as he or she wants.

A few types of questions are non-debatable. As soon as the question is asked, the Senate immediately proceeds to vote on the question. Nominations are debatable questions.

There’s a middle ground as well, used mostly for two types of fiscal policy legislation. The Senate has a fixed amount of total time to debate a budget resolution or a budget reconciliation bill.

How a filibuster works

A filibuster is probably better labeled extended debate. To filibuster a question, there isn’t some formal procedural move you make. You simply get recognized by the presiding officer to speak on a debatable question, start speaking, and don’t stop. You talk, and talk, and talk, and talk. At some point people say, “Hey, he’s filibustering,” but there’s no bright line between a filibuster and a really long floor speech. As a procedural matter they are identical.

There are a few interesting technical limitations once you have been recognized to speak. These apply at any time you are recognized to speak on the Senate floor but are particularly important during extended debate.

• You can’t sit down. If you do, you have yielded the floor and the Chair will recognize someone else to speak.
• You can’t eat on the Senate floor. You can drink water or milk, nothing else.
• You can’t leave the Senate floor, even for a bathroom break. If you do you have yielded the floor and the Chair will recognize someone else to speak.
• You don’t have to discuss the pending question. You can talk about anything you want. You can read a book aloud if you like.
• You can only speak once on any particular question.

These limits create some practical limitations on how long a single Senator can filibuster a particular question. At some point you’ll get tired of talking continuously and need a momentary break. If you’re talking a lot you’ll drink something, and that will at some later point provoke a need for a bathroom break.

You can solve the first problem by yielding for a question. Here’s an example which I saw Senators Paul and Cruz implement last night. Note that the “question” itself is substantively irrelevant. The procedural point is to allow someone else to speak for a while while technically maintaining control of the floor.

Sen. A: <discusses the question of the Brennan nomination for a couple of hours>

Sen. B: <interrupting> Will the Senator yield for a question?

Sen. A:  I yield for a question from my good friend Senator B.

Sen. B:  Is the Senator aware that … <talks for an hour or three while Senator A stretches, walks around a bit, and enjoys not speaking, all the while remaining standing and on the Senate floor>

Sen. A:  No, Senator B, I wasn’t aware of that, but thank you for asking. <continues discussing the question for a few more hours>

Through this “friendly yielding for a question” a single Senator can continue his filibuster for quite a long time while his or her allies are doing the speaking for much of that time. Other Senators C, D, and E could additionally play the role that Sen. B plays above.

In addition, at some point Senator A may tire and yield the floor, probably for a bathroom break if nothing else. At that point any other Senator could seek recognition and begin his own period of extended debate. Therefore, if you have a group of Senators teaming up, you can keep a filibuster going for a quite a long while.

Cloture: stopping a filibuster

There are two ways to limit debate: in advance by unanimous consent and while it’s occurring by invoking cloture. If neither of these occurs a question can be debated for as long as Senators are willing to speak.

A unanimous consent (UC) agreement to limit debate looks like this:

Majority Leader: Mr. President [of the Senate], I ask for unanimous consent that debate on this amendment be limited to two hours, with one hour under control of the committee chairman Senator X and one hour under the control of the committee’s ranking member Senator Y.

Presiding Officer of the Senate: Is there objection?  <pauses to allow any Senator to object> Hearing no objection, it is so ordered.

Any single Senator can block a UC request to limit debate simply by standing when the UC request is made and saying the two most powerful words in Senate procedure: “I object.” In doing so she ensures that she and her colleagues can engage in extended debate until and unless the Senate invokes cloture.

Let’s say a group of Senators have been debating a question for a couple of days straight and show no signs of letting up. The Senate majority leader says to himself, “That’s it, we need to shut down this filibuster and bring this debate to a close.” He then finds 15 other Senators to join him in filing with the Senate clerk a cloture motion to limit further debate on this question.

If they do this today, the cloture vote will “pop up” automatically the day after tomorrow, one hour after the Senate begins business for the day. The extended debate will be automatically interrupted for the cloture vote. If at least three-fifths (60) Senators vote to “invoke cloture,” then further debate on that question is automatically limited to 30 additional hours, then followed by a vote on the question. If cloture is invoked, those involved in the filibuster usually fold after a few additional hours, not burning all of their allowed 30 hours of post-cloture time since they know that they can no longer infinitely delay a vote on the question.

The power to invoke cloture and shut down extended debate is a big deal, but the cloture process is cumbersome for two reasons. First, it’s still quite slow. Even if the cloture vote is successful, the Senate will burn 2-3 additional days of floor time on the filibustered question. Second, the majority leader must find an affirmative 60 aye votes (rather than requiring the minority to produce 41 or more votes against cloture), so the majority leader has to make sure everyone he needs to vote aye will actually show up and vote. This last factor helps explain why filibusters are so rare.

Why filibuster when you can just threaten to filibuster?

Let’s say you’re a Senator who really, really, really hates a particular amendment to a bill the Senate is now considering. You approach the bill manager, a committee chairman, and threaten to filibuster the amendment.

You: Mr. Chairman, I hate this amendment and intend to debate it indefinitely. I have several colleagues who have promised they will assist me in this task. I know you support the amendment, but I’m guessing it’s not as important to you as the underlying bill that you wrote. I support your bill, but if this amendment is adopted I’ll have to filibuster the underlying bill as well.

Chairman: I appreciate that, but the amendment sponsor is a close ally of mine. I’m sorry, I can’t help you. And I’m fairly confident that I can get 60 votes to invoke cloture and shut down your filibuster.

You: Yes, but that will cost you two, maybe three days. And I’ll slow you down at every stage of the process. You’re under pressure from the majority leader to finish this bill soon, and you have plenty of other Senators who want to offer other amendments. If you force me to, my colleagues and I will slow the process down enough so that the leader will tell you he’s pulling your bill to move onto other legislation, because it will be clear you’re not going to get the bill passed in the next few days given my filibuster.

Chairman: OK, I believe that you’re serious in your threat. I’ll tell the amendment sponsor I want him to drop his amendment or else I’ll be forced to oppose it to protect my bill from your threatened filibuster.

Note that you never had to filibuster the amendment. You just had to threaten to filibuster it. Maybe the Chairman asked for UC to limit debate, knowing that you would object, so he could demonstrate to his ally the amendment sponsor that you were serious in your threat. By simply threatening to filibuster the amendment and slow down the bill, you achieved the same objective as if you had actually filibustered it.

The simplest reason why there are so few filibusters is that it’s almost never necessary to filibuster a question to block something you hate. You simply have to threaten to filibuster and maybe object to a UC or two. Then the majority leader and/or chairman managing the bill or nomination usually fold to your demand or at least negotiate a compromise with you.

Why doesn’t the majority force a Senator to carry out his filibuster threat?

Your exchange might instead have ended like this.

Chairman: Sure, you can slow me down, but filibustering is hard work. You can slow things down, but to do so you and your friends will need to stand on the Senate floor for the next two days, day and night, talking the whole time. You have other things to do and some of your colleagues are quite old and need their sleep. And frankly I’m sick of you threatening every bill I bring to the floor, so this time I’m calling your bluff. Maybe you can slow down my bill and maybe the majority leader will pull it from consideration because it’s taking too long. But I’ll bet you and your colleagues tire and end your extended debate tonight sometime around 1 AM. I will then be able to continue moving forward with amendments, and we’ll pass this amendment that you hate and I support. I’m filing my cloture motion now. If you want to filibuster, go right ahead. I’ll wait.

In this scenario you and your colleagues could still probably kill the bill by slowing it down for at least a few days, hoping the majority leader will move on to other items. But doing so would cost you a lot. The temporary hassle of staying overnight isn’t the significant cost, it’s the burden you’d be imposing on your allies who join to help you. All of you will be severely limited in the work you can do on other topics during that time. If every once in a while the majority leader and/or bill managers forced those threatening filibusters to actually stay all day and all night, then threats to filibuster would involve some cost that the bluff would be called. Filibusters would be more frequent and filibuster threats less so. The most fiercely debated questions would be subject to all-night filibusters, and the threats to slow down legislation on smaller questions would be relatively infrequent.

So why doesn’t this ever happen? It turns out there is a procedural reason that imposes much greater costs on the majority when the bluff is called.

Why doesn’t the majority leader ever force those threatening a bill to engage in a real filibuster?

Technically a majority of Senators (51) must be present on the Senate floor to do any business. This is called a quorum.

Since it would be super inconvenient for 51 Senators to have to sit on the floor all day when the Senate is in session, the Senate almost always operates with a presumptive quorum. The Senate simply pretends that a quorum exists and they don’t count noses on the floor. Everyone knows that there are typically only a handful of Senators on the floor at any given moment, but they “presume a quorum is present” so they can keep doing business without inconveniencing all of their colleagues and forcing them to be present on the Senate floor.

The trick is that at any point in time, any Senator can challenge this presumption by “suggesting the absence of a quorum” to the Chair. After a while the Chair will have to initiate a mandatory quorum call, in which the Senate Sergeant of Arms has to find Senators and bring them to the Senate floor. If this fails and at least 51 Senators don’t show up, then the Senate automatically adjourns for the day and convenes the next morning.

This is the key procedural weakness that makes the majority leader hesitant to force Senators to carry out their filibuster threats. Suppose last night Senator Paul and a few of his colleagues had kept their filibuster going until 2 AM. At that point Senate Majority Leader Reid would still be around, as would be Senator Paul. Senator Paul could then suggest the absence of a quorum. There clearly aren’t 51 Senators present, so a mandatory quorum call would soon begin. Most other Republican Senators, who are sympathetic to Sen. Paul’s filibuster but aren’t participating, would be sleeping soundly in their beds and would ignore the mandatory quorum call when the phone rings.

But Leader Reid wants to force Sen. Paul to continue filibustering, so Leader Reid needs to keep the Senate operating in the face of the mandatory quorum call. Leader Reid must therefore get 51 Senators to the Senate floor at 2 AM, and he’s probably limited to working with a universe of 55 Democrats sympathetic to his situation.

If Leader Reid can’t produce 51 Democratic Senators on the floor at 2:15 AM, the Senate adjourns for the night. Senator Paul can get several hours of sleep, freshen up, and begin again.

If Leader Reid succeeds, Senator Paul can wait until the very grumpy Democrats leave, then again suggest the absence of a quorum, maybe at 3 AM. And then again at 3:30 AM, and at 4 AM. He can do the same the next night, since cloture doesn’t “ripen” until after two nights.

Senator Paul only has to inconvenience himself by staying all night, maybe joined by a colleague or two who is equally fervent and committed to the filibuster.

Leader Reid must get 51 Democratic Senators to the floor at any time of night (or day) that Senator Paul feels like initiating a quorum call, and as many times as Senator Paul would like. Calling Senator Paul’s bluff of a threatened filibuster means Leader Reid must inconvenience his entire caucus, probably forcing them to sleep on cots in the Capitol building for two nights in a row.

Senators are powerful, independent types. Their average age is around 60. If you’re the majority leader and you’re trying to break a filibuster on a major piece of legislation that is a top national or your party’s top priority, then you can probably persuade 50 of them to foul up their schedules and to join you in sleeping in the Capitol for a couple of nights. But you can’t do this too often, and if you’re asking them to do so on a relatively minor amendment or bill, some of them are going to say no.

The majority leader and his bill managers usually yield to credible filibuster threats because they assess that they cannot rally enough of their colleagues to bear the personal and schedule costs of breaking the filibuster, or because the long-run cost of asking them to do so on this particular issue is significantly higher than the cost of yielding to the demand or negotiating a compromise.

Congratulations to Senator Paul and his colleagues for reviving the old-school filibuster.

Let’s review:

• The sequester is modeled after a similar provision in law from more than 20 years ago.  That earlier sequester exempted certain programs from spending cuts, most notably Social Security, and it limited any Medicare cut to at most 2% 4%. These are the two largest entitlement programs in the federal budget.
• When the terms of this sequester were negotiated in the summer of 2011, the President’s advisors expanded the list of programs exempt from spending cuts to include most low-income/safety net entitlement programs. Most notable here is the exemption of Medicaid, the third largest entitlement. They also limited the Medicare cut to no more than 2%.
• In the summer of 2011 President Obama wanted the sequester to raise taxes as well but Congressional Republicans refused. For the past few months the President has been trying to rewrite the terms of that deal so that tax increases will be substituted for spending cuts, at least for the first year. His insistence has contributed to a stalemate.
• The sequester is now cutting spending in FY13 by the following percentages:
  • defense discretionary:  7.8% cut;
  • domestic discretionary:  5.0% cut;
  • Medicare:  2.0% cut;
  • small pots of defense and domestic mandatory spending are cut by almost the same percentages as their discretionary counterparts above.

tsaLet’s do a thought experiment: suppose the sequester now taking effect was instead structured as a true across-the-board spending cut?  Suppose we wanted to cut government spending this year by the same $85 B as is being cut now, but we didn’t exempt huge swaths of entitlement spending?  And suppose we cut all spending by the same percentage?

The discretionary programs now being cut by the sequester would take smaller hits. Let’s see how the numbers change.

In my hypothetical across-the-board spending cut I will exempt only interest payments and defense spending in a combat theater. Everything else, including all non-combat theater defense and the three largest entitlements of Social Security, Medicare, and Medicaid is on the cutting block along with all other non-interest, non-combat spending. And I’m going to cut everything by the same percentage rather than having a higher percentage cut for defense and a lower percentage cut for Medicare.

My arithmetic shows that such a true across-the-board spending cut would save the same $85 B this year through a 2.6% cut to all spending except interest and defense spending in a combat theater.

A true across-the-board spending cut would therefore be about one-third as deep of a cut in defense spending as the current sequester, and about half as deep of a cut in nondefense discretionary spending as the current sequester.

Seniors wouldn’t like a 2.6% cut in their Social Security checks, and the poor wouldn’t like the same percentage cut in Medicaid, cash welfare, food stamps, and other low-income support programs. Medical providers and health insurers wouldn’t like the larger cuts in Medicare and the inclusion of Medicaid and CHIP in the cuts.

But there would be upsides for other things the federal government does relative to where we are now. Let’s look at the effect of this alternative on spending this year for some popular programs relative to the effect of the sequester now in place. If we substituted a true 2.6% across-the-board spending cut for our current sequester, this year the federal government would spend:

• $300M more for Special Education;
• $732M more for medical research at the National Institutes of Health, $138M more for National Science Foundation grants, and $424M more for NASA;
• $124M more for the Food & Drug Administration and food safety;
• $131M more for airport security, $110M more for the FAA, and $23M more for air marshals;
• $333M more for the FBI;
• $139M more for immigration and customs enforcement and $242M more for customs and border protection;
• $53M more to operate the National Parks and $141M more for the Forest Service;
• $24M more for the Smithsonian;
• $54M more for child are and development block grants, and $238M more for children and families services programs;
• $195M more for global health programs;
• $142M more for the Coast Guard;
• and about $27B more for defense.

By insisting that the deficit reduction debate is a choice between cutting spending and raising taxes the President has frozen Washington in a stalemate position that is likely to last for the remainder of his term. If policymakers were instead to set the tax stalemate aside and examine more closely the choices they are implicitly making within the universe of government spending, they would see that by exempting huge swaths of popular entitlement spending from any cuts they are focusing the pain on programs that to many are more important and more popular.

Our federal budget process is fouled up in that it gives procedural advantages to entitlement spending over discretionary spending.  Benefit programs that primarily help particular individuals are advantaged, while programs that principally provide for the common good are disadvantaged.  The current sequester exacerbates those procedural advantages and, as a result, means that many broadly-supported functions of government are being cut even more that they would be if the spending cuts were distributed evenly across all government spending.

(photo credit: Anita Ritenour)

THE PRESIDENT: So economists are estimating that as a consequence of this sequester, that we could see growth cut by over one-half of 1 percent.  It will cost about 750,000 jobs at a time when we should be growing jobs more quickly.  So every time that we get a piece of economic news, over the next month, next two months, next six months, as long as the sequester is in place, we’ll know that that economic news could have been better if Congress had not failed to act.

And let’s be clear.  None of this is necessary.  It’s happening because of a choice that Republicans in Congress have made.  They’ve allowed these cuts to happen because they refuse to budge on closing a single wasteful loophole to help reduce the deficit.  As recently as yesterday, they decided to protect special interest tax breaks for the well-off and well-connected, and they think that that’s apparently more important than protecting our military or middle-class families from the pain of these cuts.

The President’s initial attempt to blame Republicans in Congress for current and future economic weakness is flawed because House Republicans passed a bill that would have the same macroeconomic effect as the President’s proposal, at least for this year.

CBO estimates the sequester will knock about 0.6 percentage points off the growth rate of GDP in calendar year 2013, and therefore that undoing the sequester (in 2013) would increase GDP growth by the same amount. For the moment I’ll set aside the concerns often expressed on the right about estimating the GDP effects of fiscal expansion or contraction and take CBO’s estimates as given.

The key flaw in the President’s argument is that the first year effects of the House-passed sequester replacement bill and the Senate Democrats’ failed bill are nearly identical.  Each would unwind almost all of the 2013 effects of the sequester, and each would therefore increase GDP growth by the same amount.

The proposals differ in the amount and composition of their deficit-reducing offsets, but in both proposals those would be spread out over a long timeframe beginning next year.  Senate Democrats proposed to offset in future years all of the $85 B they would spend this year, while House Republicans passed a bill that would reduce the deficit even more in future years. But $8 B (Senate Democrats) to $20 B (House Republicans) of deficit reduction for each of the nine years after this one is too small to show up in any estimate of macroeconomic effects. The competing proposals would have the same growth benefit this year, and similar and trivially small growth costs in future years, beginning in 2014.

The President says there wasn’t a deal because Republicans refused to accept his proposed offsets. House Republicans can make exactly the same argument. This 0.6 percentage point growth drag is because the two sides couldn’t agree, not because one party wanted to fix the problem and the other party didn’t.

I expect the President will fail to mention that CBO also says that the tax increases he championed and got will slow this year’s economic growth by an additional 0.6 percentage points this year on top of the effects of the sequester.

Sequester replacement was mostly for show

As best I can tell there were no negotiations across the partisan aisle on how to replace the sequester. The President did some campaigning outside of Washington. Even if he had expected Congressional Republicans to fold to this pressure, his team was not doing the staff-level work needed to actually make legislation happen. And while leaders of both parties claim to hate the sequester, neither side hated it enough to be willing to even begin negotiations over how to pay for its replacement. The competing sequester replacement plans and the rhetoric on both sides look like they were mostly for public positioning and Member management within the Congressional caucuses rather than serious attempts to change the law.

Why the sequester will hold

There are two distinct legislative coalitions that in theory could unwind the sequester. In both hypothetical coalitions cuts in both defense and non-defense discretionary spending would be unwound.

One would be a center-left alliance formed by pro-defense spending Republicans agreeing to raise taxes and cut farm subsidies. These Republicans would be deciding that avoiding defense spending cuts is more important than preventing additional tax increases.

The other would be a center-right alliance formed by Democratic appropriators agreeing to drop their party’s tax increase demands and pay for higher discretionary spending offset entirely by entitlement spending cuts. These Democrats would be deciding that they care more about spending money than about extracting more from the rich.

These coalitions will never form as long as the sequester issue is being controlled by the President and the four Congressional leaders. Each of these five is working principally to hold his or her party intact, and each has so far succeeded. A coalition to replace the sequester would have a chance only if the issue were being handled below the leadership level, most likely in the House and Senate Appropriations Committees. In these committees everyone’s priority is to increase discretionary spending and both sides would be more likely to show flexibility on offsets. Since the issue remains squarely in the hands of the President and the party leaders I expect the sequester will hold indefinitely.

In addition, the optical damage of the cuts affects only the next seven months. If the continuing resolution extends post-sequester spending levels, then the implementation of next year’s sequester won’t show up as a “spending cut,” but instead as a slight increase (say, +2% for inflation) from this year’s spending levels. To the extent the political and press blowback from cutting spending arises from the optics of a decline in spending, that decline takes effect only this year. After that it’s built into the baseline, at least in a political sense.

Watch the CR for spending flexibility and maybe a little money

I instead expect the appropriators to instead pursue more modest versions of the same goals through quietly shaping the upcoming Continuing Resolution. The appropriators appear poised to give targeted flexibility to the Administration in a few limited areas where they agree that the sequester will impose too much pain, and they might even try to shift a few billion dollars around here and there. The Administration claims they are still opposed to funding flexibility. I think they’re irrelevant on this point and the Appropriators will now quietly exert process and legislative language control to minimize the policy harm from the sequester. And the more flexibility the appropriators provide, and the more they shift funds (within what I hope is a fixed post-sequester topline) to address sequester-driven policy harm, the more likely the sequester will be sustained over time.

The White House’s management challenge

While Team Obama now says the sky will now drop gradually rather than fall suddenly, they are sticking to their line that the pain from these spending cuts will be intolerable and will/should force Congress to increase taxes and discretionary spending.

With this argument they create a management challenge for themselves. They need the harm from these cuts to be severe and visible. The more harm is done and felt, the more likely that Republicans will relent to the president’s position (or so goes this logic). More policy harm creates more legislative pressure.

But the TSA manager at O’Hare or Logan or LaGuardia wants to minimize policy harm in his area, not maximize it. Sure he’d like more funding, but from his perspective there’s little he can do to influence Congress on something as big as the sequester. And since he will personally take the public heat for long security lines in his airport, his goal is to make do as best he can and minimize the harm done by the cuts.

The same is true for every program manager throughout the government. Each is judged on how well her program meets its goals given the funding available. If we simply assume that these managers will try to do their jobs as effectively as possible, both for noble policy reasons and for personal reputational reasons, then they will be working at odds with the President’s strategic goal of maximizing visible harm to undo the sequester. They will be trying to minimize the damage done while the President wants the opposite.

Playing a longer game?

It is possible the President’s primary goal is not to replace the sequester with offsets that he prefers. Sure he’d prefer that policy outcome, but it’s hard to believe that he and his team were so clueless that they actually thought his recent barnstorming would cause Republicans to fold and agree to raise taxes. Again.

Charles Krauthammer has suggested the President is instead playing a longer game, that his strategic goal is instead to win Democratic majorities in 2014 rather than to win a tactical victory by extracting a few tens of billions of dollars now from the House Republican majority. If Mr. Krauthammer is right, then the goal of barnstorming is to further damage the Republican brand rather than to enact legislation in the short run.

The other obvious benefit to the barnstorming is that without a deal to replace the sequester, the President now has a new target for blame-shifting in his macroeconomic message.

• Old message: All economic bad news is George W. Bush’s fault, all good news is because my policies are working.
• New message: All economic bad news is Congressional Republicans’ fault, while all good news is because my policies are working.

Both these “long game” explanations are dispiriting. That doesn’t mean they’re wrong.

Let me repeat – nothing I’m proposing tonight should increase our deficit by a single dime. It is not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.

Let’s set aside for the moment the question that others have raised, the credibility of his claim that his proposals will not increase the deficit. Even if the President’s new proposals don’t increase the deficit they will still make government bigger because they increase government spending.

The deficit does not measure the size of government. It instead measures how economic resources are allocated over time to finance government spending. When we increase the deficit we reallocate some future income to today for government to spend. When we reduce the deficit we are taking less future income to pay for today’s government spending.

When the President says he won’t increase the deficit, he is saying he will not increase the amount of future income taken to pay for increased government spending today. In effect he is promising not to create an additional burden to raise future taxes beyond what’s in current law. He is not saying he won’t increase government spending today and raise current taxes by an equal amount, which is what we mean by government getting bigger.

As a fiscal matter we should measure the size of government by the amount government spends, not by the difference between what it collects and what it spends (the deficit). Suppose in our $16 trillion economy you were to increase government spending by $320 billion per year and increase taxes by the same amount. The deficit would be unchanged but government would be $320 billion per year bigger.

For the 50 year period before the 2008 financial crisis total federal government spending averaged 20.1% of GDP. CBO tells us it’s 22.2% this year and projects that under current law it will average 22.1% over the next decade. That means the federal government is and will continue be 10% bigger than it his has historically been, relative to the economy. If we were to use real dollars rather than percent of GDP we’d measure an even bigger increase. As a fiscal matter the federal government is and will be significantly bigger than it has historically been.

If you increase government spending you make government bigger, even if you pay for that spending with higher taxes. To make government smaller, cut government spending.

In addition to fiscal expansion the federal government has also massively increased its regulatory scope in the past four years, especially in health care and financial services. The President proposes that in the next four years he’ll do the same to the energy sector.

President Obama is correct that we don’t need a bigger government. Unfortunately, that is what has resulted from his first term and what he proposes for his second.

Each year the federal budget cycle begins with release of the baseline from the Congressional Budget Office in a document titled The Economic and Budget Outlook. If you want to learn more about economic and fiscal policy I recommend you read carefully at least CBO’s short summary.

My former White House colleague Charles Blahous wrote a great piece that highlighted ten fiscal policy lessons you should draw from CBO’s latest baseline report. With this post I’d like to look at one important macroeconomic graph from that same report.

This graph compares actual GDP with what GDP would be “if everyone were working,” a rough description of what the economists call potential GDP. They estimate the lowest unemployment rate that they think would be consistent with inflation not accelerating. CBO thinks this number is 5.5%. They then estimate what economic output would be if we were at 5.5% unemployment rather than where we are, which is now 7.9%.

The gap between the light blue (actual GDP) and dark blue (potential GDP) lines above therefore represents an estimate of the output lost due to high unemployment. To the left of the dotted line that output gap is in the past and cannot be recovered. To the right of the dotted line we see CBO’s projections for actual and potential GDP in the future. We want actual GDP to converge with potential GDP, to “close the gap” quickly.

Now let’s zoom out and look at a similar historical graph measured in decades rather than years.

From this graph we can see that in the long run, actual GDP tracks closely with potential GDP, and that the recent output gap is quite large in comparison.

Let’s zoom back in and examine the recent past, the left half of CBO’s graph.

The downward sloping part of the light blue line is the recent recession, also marked by the vertical white stripe. If you look closely you can see actual GDP flattening out in early 2008 as potential GDP continues to rise. Actual GDP then plummets as the financial shock hits in the second half of that year. The recession ended and the recovery began where the line started sloping upward in mid 2009.

In trying to frame this story positively President Obama draws your attention to the fairly steady growth of actual (real) GDP since the recession ended, the upward slope of the light blue line from mid 2009. This graph also shows that in recent years actual GDP had been growing at roughly the same rate as potential GDP. Because the light blue and dark blue lines have almost the the same slope, the distance between them is almost as large now as it was when the recession ended. So while the President is right that the economy has been growing for 3+ years, the output gap is almost the same size as it was in mid 2009. We’re not catching up.

Here is how CBO describes it.

By CBO’s estimates, in the fourth quarter of 2012, real GDP was about 5½ percent below its potential level. That gap was only modestly smaller than the gap between actual and potential GDP that existed at the end of the recession because the growth of output since then has been only slightly greater than the growth of potential output.

To close the output gap we need much faster short-term economic growth than we have had over the past three and a half years. We need the light blue line to slope sharply upwards until it meets up with the dark blue line.

Now let’s turn to CBO’s projection for the future. I’ll hide the left half of the graph this time.

Now we can see more closely that CBO’s GDP projection has three significant features:

1. CBO projects that real GDP will continue to grow only as fast as potential GDP this year;
2. They then project that growth will accelerate; but
3. They project that the output gap won’t close until the end of 2017, almost five years from now.

Attaching numbers to this, CBO projects real GDP will grow 1.4 percent in 2013, 3.4 percent in 2014, and 3.6 percent per year from 2015-2017, reaching potential GDP at the end of 2017.

This translates into their (un)employment projections as well. CBO projects an 8.0% unemployment rate in the fourth quarter of this year and a 7.6% rate at the end of 2014, only three-tenths of a percentage point below where we are now. They then project that the unemployment rate will decline to reach full employment by the end of 2017.

On our current path CBO projects we won’t reach full employment for almost five more years.

CBO also estimated the total size of the output gap and it’s depressing:

With such a large gap between actual and potential GDP persisting for so long, CBO projects that the total loss of output, relative to the economy’s potential, between 2007 and 2017 will be equivalent to nearly half of the output that the United States produced last year.

You may have noticed that I have avoided discussion (here) of why the economy has grown so slowly, how much of that is because of or in spite of policy decisions, and why it’s projected to continue to do so for the next year. That’s where the food fight begins, including the debate about whether and how much the 2009 fiscal stimulus increased growth, and the debate about how much of slow future growth is because of business uncertainty about the economy, about drags from policy and regulation, and about allowing more time for balance sheet repair after the financial shock of 2008.

Those are incredibly important debates but today I just want to highlight the basic historic facts and a mainstream projection from an unbiased source. On our current policy path CBO projects continued slow growth for 2013 and a gradual acceleration after that, returning the U.S. economy to full capacity output by the end of 2017. That projection excludes:

• the downside risk to growth from policy shocks like further tax increases proposed by the President, repeated unresolved fiscal conflicts that exacerbate business uncertainty, and additional regulatory burdens rumored to be coming from HHS, IRS, EPA and financial regulators; and
• the downside risk to growth from possible external shocks from a possible Middle East crisis or a sudden unraveling of Europe’s financial system.

I told you this wasn’t a happy post.

Summary

• While the U.S. economy has been growing fairly steadily since the recession ended in mid 2009, it has been doing so far more slowly than we need. Actual growth has been just sufficient to keep up with growth in our national economic capacity.
• CBO projects that 2013 will be yet another year of slow growth with acceleration beginning in 2014. They project we won’t reach full employment until the end of 2017, almost five years from now.
• CBO estimates that the total lost economic output over the decade will be equal to the entire U.S. economic output for half of last year.