Monday, March 2, 2009

On the Obama Budget

I haven't had a chance to go through that much of the Obama budget that just came out, but Mankiw points out a Committee for a Responsible Budget article that's kind of interesting.

Basically, Obama has done one big thing right, and an arguably bigger thing wrong.

He has taken the (praiseworthy) step of acknowledging all of the costs the government has in the government budget, instead of excluding some temporary, extraordinary or non-law ones (including the Afghanistan and Iraq wars). Under Bush, Afghanistan and Iraq received "emergency funding" every year, and didn't show up in the official government budget.

This is bad accounting. Obama's accounting is much more transparent.

However, Obama did something else to set a very dangerous precedent. Functionally, he has included these expenses in the official "baseline", which means that all future budgets are measured against the (often short-term) expenses of this budget. Therefore, if you end the war in Iraq (which is, despite media perception, still an "extraordinary" expense in that it's not supposed to last forever) and replace half of the spending with permanent government budget expenditures, you get to say that the government's "baseline" budget has been cut when you've actually increased the baseline by half of the cost of the Iraq war. In this way, Obama's legislation has been misleading.

In other words, a war that lasted way too long and came in way over cost has provided a mask for Obama to vastly increase the size of US government expenditures every year for the long term.

The correct option would have been to include all of those budget expenditures in the official budget report, but to exclude them from the baseline. That forces future government spending to drop down to the true "baseline" level of government spending (already way too high) when we're not doing big temporary projects, like wars.

Mankiw is obviously biased when he says this, but he claims Obama's budget will create over 50% higher long term budget deficits in equilibrium than Bush's budgets did (and Bush's budgets were already huge). He claims this is the case even if Obama's economic projections come true (and they're rosier than most peoples' projections, leading to higher forecasted tax revenues). If consensus GDP numbers come true, the deficit will be even higher.

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