Who You Gonna to Believe? The Former Director of OMB… or Me?

I was only off a little bit, I swear.

by James A. Bacon

Peter Orszag, President Obama’s former Office of Management and Budget (OMB) chief, has finally come around to my way of thinking. His new thesis, explicated on Bloomberg.com, is almost identical to one of the core arguments I made in Boomergeddon, to wit, that the economy has entered a business cycle marked by tepid economic growth and that an anemic expansion will push budget deficits higher than forecast over the next several years.

Too bad he didn’t think that way back when he was running OMB and had some influence over President Obama, the stimulus package and health care reform. Oh, well. Better late than never.

Pardon me while I gloat. After all, gloating is really all I have. I’m not influencing national policy like Orszag did, nor am I making zillions of dollars on Wall Street, like Orszag, now vice chairman of global banking at Citigroup, is now doing. I have to take my pleasures where I can find them.

In Boomergeddon, I critiqued the economic-growth assumptions embedded in the 10-year budget forecast that accompanied Obama’s proposed FY 2011 budget. I compared the projected growth rate of the United States economy, prepared by Orszag’s team, with that of previous business cycles under Reagan, Clinton and Bush. The Obama forecast assumed a business cycle that would almost equal those of the super-heated Reagan/Bush I and Clinton, Internet-era expansions. While most mainstream economists found that to be perfectly plausible at the time, I did not.

It was clear to me that the collapse of the real estate boom marked the end of massive consumer borrowing — the end of the era of mass overconsumption, to use a phrase bandied about this blog. Consumer spending, which had fueled the previous three economic expansions, would be a drag. It was equally clear that there was a massive overhang of bad debt in the real estate markets, both residential and commercial. Those critical sectors also would be laggards. I also foresaw that state/local government spending would remain depressed for longer than normal during the business cycle, and I predicted that inflation in commodity prices (energy, raw materials, food) would exercise a dampening effect on expansion earlier in the business cycle than in the past.  Finally, as any doofus could have foretold, federal fiscal and monetary stimulus would have to end, and when it did, the economy would lose even more momentum.

That doesn’t sound especially prescient today — those are basically the factors that anyone would cite to explain the economy’s lackluster growth. Trouble is, back when I was writing Boomergeddon a year to a year-and-a-half ago, only a handful of gold bugs and other gloom mongers were paying attention to those indicators. Looking toward the longer term, I noted that slower population growth, the steady drift of corporate America toward rent-seeking behavior (competing in the political sphere by seeking subsidies, loan guarantees and favorable regulations instead of through market innovation), the uncertainties created by massive government indebtedness and turmoil in European sovereign bond markets also would depress growth.

What I underestimated, although I did allude to it, was the negative impact of Obama economic policies. For the most part, however, I left Obama’s policies out of the equation because I knew that advancing that argument would ignite the partisan passions of those who would defend the president to the death. It was enough to know, I said, that economic growth would remain depressed no matter who was in charge, and no matter what economic policies they pursued.

So, how did my analysis play out? Listen to Orszag: “If we are in for sluggish growth over the next few years, the labor market won’t be the only aspect of the economy that does worse than official projections; the budget deficit will be significantly bigger as well.” He continues:

The CBO paints a surprisingly auspicious picture of the fiscal shortfall, averaging 3.4 percent of gross domestic product over the next decade and dipping to about 3 percent by 2020. … [The Center for Budgetary and Policy Priorities] predicts a more realistic deficit for the next 10 years of 5.7 percent of GDP under current policies, and hovering around 6 percent toward the end of the decade. The dollar amount of the cumulative deficit over the next decade is projected to exceed $11 trillion.

But the actual picture could be even worse. Just as I asked Chmura Economics & Analytics, a Richmond-based consulting firm, to calculate the fiscal impact of slow economic growth and a late-2010s recession on the budget, Orszag asked Richard Kogan with the CBPP to run a similar exercise.

The CBO assumes economic growth will exceed 3 percent per year from 2012 to 2016 before gradually declining to a bit more than 2 percent in 2021. What if, instead, growth remains at 2 percent to 2.5 percent for the next decade? I asked Kogan to recalculate the budget numbers assuming a constant growth rate of 2.25 percent per year, which seems a plausible hard-slog scenario.

He found that the deficit then averages more than 7 percent of GDP. By 2021, it is more than 8.5 percent of GDP and increasing.

There you have it. All Orszag’s analysis now lacks is an understanding of what happens when interest rates start pushing higher than he was predicting a year and a half ago. That’s when the deficit really goes through the roof. All things considered, the economic thesis of Boomergeddon is holding up remarkably well. If you want to understand the economic dynamics driving the budget crisis today, try reading the analysis of someone (me) who saw what was coming. Order Boomergeddon today. It is incisive yet written in language that any well-read layman can understand.

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15 responses to “Who You Gonna to Believe? The Former Director of OMB… or Me?”

  1. larryg Avatar

    not a pretty picture… for sure… are we saying that Obama is not doing what needs to be done or…….. what?

  2. I believe that despite the worst our politicians can do, we will be dragged kicking and sccreaming out of the doldrums by the worlds emerging economies.

    For one thing we will have to ramp up our space program to match the emerging Chinese threats to our
    satellites. We will likely build a sea level canal across Guatemala. Match Brazil’s fuel technology, solve the tracking mess, and develop solar molten salt generators. New Arab states will flood our universities with students. India will throw off their stifling bureaucracy wiith American business models ( that we got from Japan). New prosperity in the rest of the world will mean less population growth and less need for American military expeditions overseas. The immigrgation issue will be solved when brown majorities elect representatives of their own. More Americans iwill be multilingual.

    Etc. etc.

  3. Larry, Many conservatives are blaming the weakness of the current economy all on Obama’s policies. Obviously, as noted in other posts, I believe that those policies have aggravated the downturn. But my argument here also could be read as a partial defense of Obama, as in, it ain’t all Obama’s fault. The negative long-term trends antedate Obama, and they will still slowing the economy when he’s gone.

    Of course, that undercuts Obama’s narrative that it’s all George Bush’s fault.

    In truth, the policies leading to Mass OverConsumption since World War II were promoted by Democrats and Republicans alike. For all their political polarization and posturing, Rs and Ds share far more blame than either side would care to admit.

    1. Richard Avatar

      Jim – you wrote a great book and yes we are all coming around to your assessment of the mess we’re in (the mess we all made together). It only took a year after your book was published for the whole country to get the point! Too bad you didn’t write it 6 years ago!

      As one of those partisans you complain of, I have to be the downer in your conservative party and remind everyone that Bush II was a disaster for the fiscal health of this country, because of 1. the tax cut (“we really don’t need a surplus,” and “deficits don’t matter”), 2. the Medicare drug benefit (quite an entitlement, and conveniently timed for the next election), 3. two off-the-books wars (“let’s not tell everyone how much it costs and let’s not film the coffins, it might be upsetting”), and 4. that great economic policy/game of “let’s consume” our way out of our fiscal/economic problems. After all that, now you want to trust the Republicans to fix it?

      Now Childe Eric is turning his nose up at a deal in which the D’s would bring Medicare onto the table for the very first time. They’re talking about a $4 trillion reduction of the deficit. This is the bipartisan deal that we all know is necessary, and yet the Republicans, who are supposed to be the adults here, won’t step up. Is it because they believe that default isn’t such a bad thing if the President doesn’t get credit for dealing with it and with the deficit? One might get the impression that the R’s don’t really care much about the deficit, except as a talking point.

      1. Richard, You are quite right, Bush II was a fiscal disaster, and in Boomergeddon I assigned him and the Republican Congress that went along with him appropriate blame for deficits for the very reasons you noted (as well as for hiking agricultural subsidies and passing the SCHIP law). The area where you and I differ is the impact of the Bush tax cuts. They didn’t help matters, but they didn’t hurt nearly as much as the Dems claim. The top 1% and top 5% of income earners are paying as big a percentage of their taxes as they ever were. Put those taxes back into place, and your revenue will not increase much at all — but you could damage long-term economic growth. I think Cantor is right about that.

        The area where I part company with Republicans is on the issue of tax expenditures. Obama rightly targets this spending-in-guise-of-tax-cuts and Republicans refuse to consider them. Tax reform needs to be part of the equation.

        1. Richard Avatar

          It’s a matter of Republican orthodoxy that tax cuts never hurt, but I did a quick review of estimates of the lost taxes because of the Bush tax cuts and they run from $150 to $250 billion a year.

          Interestingly, in my brief search I found an article from the Heritage Fdn saying that because of the 2001 tax cuts, the deficit would be eliminated by 2010
          [ http://origin.heritage.org/Research/Reports/2001/04/The-Economic-Impact-of-President-Bushs-Tax-Relief-Plan ]
          Wow! Thanks Heritage Fdn for helping us along our merry way!

  4. larryg Avatar

    well.. he got elected during the worst recession ever almost as bad a the great depression and there are objective disagreements about how it should have, should be handled but I note where most economists fall and most politicians fall and it aint the same.

    they’re Monday Morning quarterbacking…. in some respects.

    Do I believe the folks who want to fight two wars off budget… and gave tax cuts at the same time – and now can’t even show how they’d balance the budget or fix health care… do I believe these folks have the answers?

    do you?

  5. Groveton Avatar

    Two wars are a bargain compared to Obama. Let’s see … he is still engaged in Libya without Congressional approval, he has invaded Pakistan and he is in a covert shooting war in Somalia.

    In addition, the Bush tax cuts still stand, Guantanamo Bay is still housing war prisoners and Obama’s rosy economic predictions are the laughing stock of the financial world.

    Funny what a few years in the real world can do to all that hopey / changey hogwash.

    At a time when we needed a leader we elected a poet.

    Let’s hope our Poet in Chief can grow into the job before the whole country goes down the drain. In fairness, I sometimes see that growth. We elected a leadership infant. All “goo goo” and “ga ga”. Over the 2 1/2 years he has been president he has grown as a leader. But he is still an adolescent when it comes to national leadership. Time to finish the maturation process. The US needs a fully mature president not a trainee. The ongoing budget talks represent a great chance for a growth spurt.

  6. larryg Avatar

    we are not nation-building in Pakistan, Libya and Somolia…. and trying to figure out how to extract ourselves. I call that grown-up leadership myself.

    No Republican on the charts when Obama became president nor now had/has the leadership and guts to admit that tax cuts – cut revenue – and deepen the deficit and that when you cut taxes at the same time you get into two nation-building wars – will take a budget surplus to a 10 trillion deficit.

    No Republican lifted one finger when Fannie/Freddie ran amok and instead they blamed it on one minority Congressman. That’s the kind of leadership that some call “adult”.

    And now that we have a 1.5 trillion ANNUAL deficit – the Republicans don’t want to pay for it nor do they want to do the cuts necessary to balance it.

    If Groveton thinks the current crop of Republicans are “leaders”, he must be smoking something good.

    If Obama was a bad as Groveton sez, then any of the current gaggle of jerks would be shoo-ins but the country senses the problem and that is for better or worse, Obama is more man and leader than anything the Republicans offer right now.

  7. larryg Avatar

    anyone who claims to be a fiscal conservative and is of the opinion that the leadership prior to Obama was “good” or that the current leadership which screams for “cuts” but refuses to provide cuts including Paul Ryan who says cut entitlements and use supply side to make up the rest is not “leading” in anything other than ideology.

    We have an entire party that eschews fiscal responsibility and integrity at the same time it yammers about the need for “cuts” that they will not themselves specify.

    Obama calls their bluff and what happens? If Republicans were truly “adult” leaders, we have, in hand, a list of cuts that total 1.5 trillion dollars but instead what we have is little more than hot rhetoric and senseless blather.

  8. larryg Avatar

    Health care – private, Medicare and MedicAid are major factors in the budget that have not been addressed since Bill Clinton attempted to do so and was shut down by Republicans.

    In the intervening years since Clinton – the ONLY THING that the Republicans did about health care was to ADD to the already struggling Medicare system – Part D – a major additional taxpayer-subsidized program.

    Obama ATTEMPTED to do SOMETHING about health care – and one could arguably make the point that what he tried to do was wrong, ineffective, a failure, etc but I ask everyone – WHERE is the Republican REPLACE plan?

    Is that leadership?

    The only plan that has been advanced by Republicans has been to put Medicare on vouchers and to bail out of MedicAid while ignoring what is going on with private healthcare.

    is THAT leadership?

    Here’s the question.

    Tell me what the, ANY, Republican Plan for the economy and health care?

    I’m NOT in favor of entitlement programs per se. I do not think they are sustainable in their current form but we can easily fix SS and Medicare Part A and B by any one or combination of about 1/2 dozen measures outlined in both deficit commission reports but which of these have the Republicans chosen?


    their “plan” is to NOT FIX those programs but to disable and disassemble them and my question is – is this a reasonable approach given the realities?

    It’s not.

    but these programs – right now – are not the reason for the 1.5 trillion structural deficit. These programs, if not fixed, WILL ADD even more to the 1.5 trillion deficit.

    Keep in mind that only a trillion dollars of the 2.1 trillion in revenues comes form income taxes. The “other” trillion is FICA taxes.

    So we have about 1.3 trillion in revenues (from corporate and personal) income taxes and we have a 1.5 trillion deficit – that has NOTHING what-so-ever to do with SS and Medicare (Part A).

    so what is the Republican plan?

    What is Mr. Cantor’s Plan? Boehner? McConnell? Palenty? Gingrich? Perry? Bachman? where are THEIR PROPOSALS?

    There is one Republican who I would trust right now…. to deliver an honest plan… but he is hiding because ObamaCare was modeled after his plan for Massachusetts.

    And again… if you don’t like Romney’s Plan or Obama’s Plan – fine – what is the plan you support and who among the Republicans is offering it?

  9. Groveton Avatar

    “If Obama was a bad as Groveton sez, then any of the current gaggle of jerks would be shoo-ins but the country senses the problem and that is for better or worse, Obama is more man and leader than anything the Republicans offer right now.”


    Perhaps Gallup has been brainwashed by Fox News?

  10. larryg Avatar

    interesting poll and it does look like the public will vote Republican but I still ask the question – what will the Republicans do about the deficit and health care? WHY would you vote for ANYONE if they don’t have real proposals for reducing the deficit (beyond supply-side voodoo economics) and health care (other than denying it to the poor and elderly?)

  11. Right now it appears that Obama has more campaign money than all the Republicans combined.

  12. Republicans have three constituencies. The rich conservative base who understand how the game is played. The poor, ignorant conservative base who buy into conservative , not realizing they are being duped into increasing the wealth gap. And independents who think the Democrats are crazy.

    If the Republicans succeed, they lose. The increasing wealth gap decreases the number of wealthy conservatives, and it decreases the number of poor consersvti vs That think they have a chance, on their own.

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