Obama's Excessively Optimistic Deficit Projections
WASHINGTON-Much in America has changed since Woodstock, the pot-smoking outdoors pop concert that took place in New York State 40 years ago this month. The Soviet Union is no more, laptop computers and smart phones are ubiquitous, and co-ed college dorms are the norm.
In the 1960s, federal budget deficits remained relatively low-most years below one percent of GDP-without benefit of mind-altering substances. No more. This week's publication of the administration's mid-session budget review shows that even without the stimulants that were overused at Woodstock, hallucinations still occur in America, or at least in Washington.
The cumulative $9 trillion deficit projected for the next decade is almost $2 trillion more than the estimate made only three months ago. Presumably this one is a more honest forecast, but even without smoking anything, one is blown away by the notion of a $9 trillion addition to debt by 2019. In 2019, debt held by the public will be 76% of GDP, compared to 56% of GDP in 2009.
Even more disturbing, this enormous increase in federal debt is the outcome of assumptions that themselves seem to suggest an overdose of feel-good substances. To be sure, White House budgets, whoever was president, have been laced with optimism. (No president has forecast a recession.)
Consider this week's projections of growth of gross domestic product in real terms, exclusive of inflation. The White House projects that GDP will grow by 3.8% in 2011 and climb above 4% a year for the next three years, followed by two years above 3%. This is far higher than historical norms-the economy has not seen such a period of growth since the 1960s.
This is self-serving optimism. By assuming higher economic growth, the forecasters can show more tax revenue and lower estimates of future deficits.
Excessive Obama optimism is not limited to economic growth. Despite the enormous monetary stimulus pumped out by the Federal Reserve in 2008-2009, bank credit that is widely regarded as potentially inflationary, the administration assumes that inflation will actually decline from 2.1% in 2008 to 1.5% in 2009 and then to 1.3% in 2010 and 2011, and not rise above 1.8% through 2019.
Assuming lower inflation means predicting lower interest payments on all those extra trillions of dollars of government debt. But few Americans would invest their own hard-earned money believing forecasts of such low inflation.
What about spending for Afghanistan, where America is ramping up its force level? It is not compatible with the White House's projection of $944 billion in budget savings for Afghanistan and Iraq over the next 10 years, ephemeral savings from funding that was never explicitly in the baseline budget.
A lot has changed since Woodstock on the tax-and-revenue side of the budget, as well.
The administration proposes changes in the tax structure that would further increase the burden that falls on upper-income Americans. In 1969, 86% of taxpayers paid federal tax at rates of less than 25%, and only 6,746 taxpayers paid any tax at the highest rate of 70%. In contrast, in 2007, the latest IRS data available, only 70% of American taxpayers faced tax rates of less than 25%.
The Obama administration supports having everyone, not just the well-off, shell out even more. A new energy tax, euphemistically termed "climate revenues" in the mid-session review, would raise $627 billion over 10 years. This tax, which passed the House of Representatives as part of the Waxman-Markey legislation, would be paid by anyone who consumes energy products, not just those making over $250,000 per year. Do you know anyone who doesn't use energy?
The federal income tax burden is now disproportionately borne by people in the upper half of the income distribution. They paid 97% of tax revenues in 2007. The top 5% accounted for 61% of the revenue from income tax, and the top 1% accounted for over 40%.
Mr. Obama would skew the distribution of tax payments even more. His proposal to raise taxes on those who make more than $250,000 (married) or $200,000 (single) would bring in $580 billion over 10 years. Top rates would rise to 36% and 39.6%, with an additional 5.4% surcharge on upper-income earners if the House health care bill becomes law. But $177 billion comes from curtailing deductions for upper-income taxpayers, a proposal that congressional leaders have refused, so the total is closer to $400 billion.
Forty years ago, our federal government was paying for a war in Vietnam and preparing, if necessary, for another war against the Soviet Union. It managed welfare programs and sent men to the moon. It did all of this with far smaller deficits and a tax system that had lower rates than today for most American taxpayers.
Today, even with our sophisticated technology, our federal government seems capable of doing little but planning additional programs that would generate even larger budget deficits. Although the Obama administration projects that the federal debt will grow by $9 trillion over the next ten years, the real figure is likely to be even higher if we continue on the current path. And unfortunately we don't have Puff the Magic Dragon to blow away the deficits.