Bloomberg News

Obama and Romney Fiscal Visions Would Fail to Cut U.S. Debt

August 23, 2012

Romney Joins Obama in Offering Little to Jump-Start Economy

The two candidates’ budget prescriptions would probably produce the same result. That’s because neither would probably stop borrowing money to pay for what he wants to do.Photographer: Andrew Harrer/Bloomberg

“Stick with the president’s path,” said Representative Paul Ryan at a fundraiser in Tampa, Florida, on Aug. 18, “and we will be a country in debt and in decline.”

It’s a familiar theme for Ryan, repeated on the campaign trail and in the two Path to Prosperity budget proposals he has written as chairman of the U.S. House Budget Committee.

Ever since Mitt Romney chose the Wisconsin congressman as his running mate, the central arguments in this year’s presidential race have become clear. The election presents voters with a stark choice between two different visions of government: one that is active, President Barack Obama’s, and one that gets out of the way, Romney’s, Bloomberg Businessweek reports in its Aug., 27 issue.

Yet the two candidates’ budget prescriptions would probably produce the same result. That’s because neither would probably stop borrowing money to pay for what he wants to do.

The president offers a detailed budget plan that would be difficult to pass in Congress -- and doesn’t really attempt to unwind the spending. The Republican ticket’s budget proposals lack details, probably can’t pass in Congress, and are unclear how they would reduce spending.

Under both, the government would continue to amass debt to fund what each side says the economy needs: tax cuts, in the Republican view, or investment, as Democrats advocate. In that way, America’s choice is between two different versions of large government.

Budget Experiment

For the past decade, the U.S. has been running an experiment in how much money the government can borrow to push into the economy. In 2002, after a one-year dip into the black, the U.S. began running deficits again.

The Bush tax cuts, extended by the Obama administration, have been blamed for causing these deficits, along with the wars in Iraq and Afghanistan, and Medicare Part D, and reduced revenue from the dot-com bust, and the Great Recession, and Barack Obama’s 2009 stimulus. Once in deficit, if the federal government takes in less money, it makes up the difference by borrowing. If it writes bigger checks, it does the same. Until the budget is balanced, it’s all Treasury bills. It’s all spending.

Less Revenue

In Obama’s budget this year, he takes credit for offering a comprehensive spending-reduction deal to congressional Republicans in 2011. And yet according to the Congressional Budget Office, the White House’s proposed 2013 budget increases debt as a proportion of gross domestic product until 2018, when it flattens out at around 76 percent.

If Obama were willing to raise taxes as much as Republicans claim he intends to, the president would be able to make up some of that shortfall. Yet over the next 10 years, his budget would take in 6 percent less in revenue than under current law.

Obama’s betting that the economy needs investment -- spending -- now, and that it can tolerate debt at 76 percent of GDP, almost 30 percent higher than in 2008, before the economy crashed. His plan doesn’t reduce the debt. It’s a calculation of what he thinks voters can tolerate.

As for the Republicans, it’s still unclear whether their campaign will adopt Ryan’s 2013 Path to Prosperity budget resolution or Romney’s set of campaign ideas. Both say they can reduce corporate and personal taxes and avoid losing revenue by eliminating deductions and loopholes.

Simpson-Bowles

On the surface, this sounds a lot like the recommendations made by the bipartisan Simpson-Bowles commission on deficit reduction. Yet where the Simpson-Bowles report detailed which loopholes should go, neither Ryan nor Romney will commit to any -- save Ryan’s plan to eliminate deductions for alternative- energy companies.

As the Congressional Research Service says, deductions “are broadly used by the public and quite popular,” which means politicians will be reluctant to get rid of them.

Unlike the Simpson-Bowles panel, neither Romney nor Obama anticipates any changes to Social Security. Ryan’s budget does come up with real, detailed savings by reducing overall Medicare costs and turning the program into a system of premium subsidies.

It also reduces the cost to the federal government of Medicaid, turning it into block grants for the states. It reduces fixed payments to farmers. The Path to Prosperity promises some honesty in budgeting, such as bringing federal loan guarantees onto the books as a liability.

Doing Nothing

What it doesn’t do is bring down the national debt. The Path to Prosperity for the 2012 budget year included numbers for each federal agency by year. The CBO examined the estimates, agency by agency, and concluded that Ryan’s plan would raise public debt to 70 percent of GDP by 2022 -- a little worse than if Congress were to do nothing.

For the 2013 budget year, Ryan’s new Path to Prosperity claims to bring the debt down to just 61 percent of GDP by 2022. He did this by getting rid of pages of details, replacing them with a single line of grand totals for government outlays and revenue. And this time, Ryan didn’t ask the CBO for a score.

Instead, he requested what’s called a “long-term outlook.” He gave the CBO his budget totals for each year until 2022 without any details of how he came up with them. The budget office then used them to project the debt from 2022 to 2050.

Unpopular Plan

Ryan’s ideas on Medicare and Medicaid, which would save real money, are highly unpopular and have passed only in the Republican-led House. And they may have passed there only because representatives knew the legislation had no chance of passing in the Senate.

The rest of his plan -- and Romney’s -- assumes that Congress will make cuts because Congress will force itself to make cuts. Taxes will be lower and revenue won’t fall too much, yet it doesn’t say how.

There’s no mystery in Washington or anywhere else about what needs to be done to bring government spending under control.

One option is to do nothing. In its long-term budget outlook for 2012, the CBO presents a future it calls the “baseline scenario.” This is simply what would happen if Congress passed no new spending bills before January.

The Bush tax cuts would expire. Automatic cuts to defense, Medicare, and discretionary spending would go into effect. According to the CBO, the baseline starts reducing debt as a percentage of GDP in 2016; by 2022 debt would decline to 61 percent, the same target the Ryan plan aims for.

Fiscal Cliff

There’s a reason the baseline scenario is often referred to as the “fiscal cliff”: Ending the Bush tax cuts and allowing the automatic spending cuts to take effect would limit growth in real GDP next year to half a percent.

This abrupt timeline would be destructive to the economy and terrible for jobs. So both parties are now negotiating under the shared assumption that neither can tolerate it. Yet whether we make them soon or make them later, cuts of this size will eventually be necessary.

Under what the CBO calls the “alternative fiscal scenario,” the parties in Congress pass a set of laws that allows them to avoid the cliff and keep on spending. This is what they are now attempting to do; the alternative scenario would put the debt at 94 percent of GDP by 2022. Greece is at 160 percent. U.S. debt continues to draw buyers at cheap rates, though that won’t last forever.

Simpson-Bowles

There’s another route to debt reduction that wouldn’t take the economy over a cliff. The Simpson-Bowles plan lands gently, while still reducing debt to 61 percent of GDP by 2023. It has the advantage of not coming from the White House, Romney’s headquarters, or Ryan’s office. It was negotiated by Democrats and Republicans and, conceivably, should stand a chance of passing Congress and being signed by the next president.

Yet Obama, who called the commission into existence, stepped away from its recommendations. And Ryan, who sat on the panel, refused to endorse its report, helping to prevent it from being sent to Congress.

As for Romney, he claims his proposals are similar to the commission’s, though his plans don’t contain as much detail.

In his 2013 budget, Obama points to the “Paygo” bill he signed into law, which requires revenue increases to offset the cost of any new programs and cuts to accompany any revenue losses. Ryan’s Path to Prosperity proposes “Cutgo,” which would force any new mandatory programs to be accompanied by discretionary cuts elsewhere in the budget. Neither one spells out how to pay or cut.

No matter what the candidates say, the 2012 campaign doesn’t pit two radically different ideas about the size of government against each other. Obama and Romney are arguing about different visions of how to borrow money, shift it around, and not pay it back.

To contact the reporter on this story: Brendan Greeley in Washington at bgreeley2@bloomberg.net

To contact the editor responsible for this story: Wes Kosova in Washington at wkosova@bloomberg.net


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