While repairing the damage I did this week to the technical back end of this blog, I lost about 150 recent comments.  I can see them in the database but am having trouble recovering them and linking them to their respective posts.  I’ll keep working on it.

I also switched commenting systems.  I am now using Facebook Comments rather than the Intense Debate system.

I have also updated my comments policy.  The new policy is quite close to the old one.  I have tightened up the language a lot and placed a slightly greater emphasis on filtering out off-topic comments.

Over the past two years I have had mixed feelings about comments on KeithHennessey.com.  Some comments really increase the value of what I post, and there are some great commenters who add enormously to a discussion of American economic policy.  That’s important to me.

Then there are the trolls, who post insulting, offensive, wildly off-topic, or otherwise childish things.  Comment trolls suck.  I despite them.

I try to find time to read every comment posted, with varying degrees of success.  I have found that reading troll comments discourages me from writing.  I think it also discourages others from reading and from participating in the discussion.  Why should someone join a policy debate when half the people in the discussion are jerks?

There is an inverse relationship between blog traffic and comment quality.  When a big site or a high-profile person links to one of my posts, my traffic spikes.  That’s great.  At the same time, I get a lot more comments, which would also be great, except that the average comment quality plummets.  That’s when I get the drive-by commenters, many of whom are trolls.

At times over the past two years I have considered eliminating comments entirely, and I noticed that others whom I respect did this long ago.

I am therefore excited to try this new commenting system from Facebook.  It shifts the balance in favor of higher quality posts by making it harder to post anonymous comments.

To leave a comment here you will now need either a Facebook or a Yahoo! ID.  Without one you can no longer comment here.  Since Facebook IDs are linked to real identities, this means that anonymous commenting will be seriously diminished here.

The downside of the new system is that a few of my best commenters may no longer comment.  I’m not sure how important anonymity is to them.  If it is important, I hope they will get a Yahoo! ID and continue to contribute to the discussion.  This is a hassle for those few, and it is an unavoidable cost.

I expect the average quality and decorum of comments will increase as the quantity decreases.  I hope that higher quality will over time attract more people to join the discussion.

There are two other benefits for me.  Fewer trolls means I will less frequently get ticked off when working on this site.  I think that means I’ll write more and feel better about it.

Also, since comments posted with a Facebook ID will default to cross-posting on your Facebook wall, it should drive more traffic here.  That’s great, since this is a one-man site.  I want more readers and more commenters.

A vigorous discussion of this shift is taking place at TechCrunch.  I studied their analysis and the debate closely before making this decision.  If this subject interest you, you can start by reading their excellent post The Pros and Cons of Facebook Comments.

Thank you to everyone who has contributed comments over the past two years.  For those who didn’t click above, here is my updated comments policy.

Comments policy

I invite and enjoy substantive comments from any ideological perspective. I especially welcome those who disagree with me.

Please help me make this site a place of impassioned and respectful debate by following these commenting guidelines:

1. No profanity or patently offensive language.
2. No personal attacks on anyone, including other commenters.  Treat this as a discussion among friends.  Debate vigorously and play nicely, please.
3. Please stay on topic.  If your post begins with, “You’re missing the point, the real problem is …” then please start your own blog.
4. No commercial advertising or spam.

During more than seven years working in the United States Senate, I developed respect for the Senate floor rules of decorum. Senators must always address the Chair, rather than speaking directly to each other. Personal attacks are a violation of the Senate rules. Members from radically different ideological perspectives refer to each other as, “My good friend, the Senator from [State],” even when they despise each other. Personal attacks are a violation of Senate rules.  Over time, this artificially created politeness creates an environment of vigorous, impassioned, yet civil debate that mostly focuses on policy questions and infrequently descends into gutter attacks. I hope to create the same environment here, and will do what is necessary to enforce a respectful discussion.

If you’re a jerk, I’ll ban you. Permanently.

I am now using Facebook’s commenting system on this blog.  When you post a comment using a Facebook ID, there is a checkbox labeled “Post comment to my Facebook profile” that defaults to on.  If you don’t want your Facebook friends (or others you have allowed to view your profile) to see your comment, you will need to uncheck this box each time you comment.

I reserve all rights to ignore, edit, delete, move, or mark as spam any and all comments, for any reason, even if they don’t violate the above guidelines. I also retain the right to block anyone from commenting or accessing this blog.

Your comments are your responsibility. By submitting a comment on this blog, you agree that the comment content is your own, and you agree to hold this site, Keith Hennessey, and all representatives harmless from any and all repercussions, damages, or liability.

Having totally fouled up the back end of this blog, I am now in the process of restoring it after a complete from-scratch reinstall. Arrgh.

I think I have fixed most of the big stuff, but please don’t be surprised if there are some glitches over the next few days. In particular, I lost a bunch of comments (157, to be precise) that I have yet to figure out how to restore. Also, I’m still restoring pictures and graphs to some posts.

Please bear with me.

(photo credit: Dario Villanueva)

Yesterday Meet the Press host David Gregory asked White House Chief of Staff Bill Daley if the President was considering releasing oil from the Strategic Petroleum Reserve (SPR):

MR. GREGORY: But what about the shorter term? Does the president—there’s calls to tap the strategic petroleum reserve, which comes up during these spikes. Is the president considering doing something that can arrest that spike?

MR. DALEY: Well, we’re looking at the options. There’s—there—the spike—the, the issue of, of, of the reserves is one we’re considering. It is something that only is done—has been done in very rare occasions. There’s a bunch of factors that have to be looked at, and it is just not the price. Again, the uncertainty—I think there’s no one who doubts that the uncertainty in the Middle East right now has caused this tremendous increase in the last number of weeks.

MR. GREGORY: But it’s on the table, which I think is the significant development.

MR. DALEY: Well, I think all consider—all matters have to be on the table when you go through—when you see the difficulty coming out of this economic crisis we’re in and the fragility of it.

Let’s look at the Strategic Petroleum Reserve and the President’s option to release oil from it.

What is the Strategic Petroleum Reserve?

The SPR is a bunch of holes in the ground. The Strategic Petroleum Reserve is a collection of salt caverns at four locations in Louisiana and Texas along the Gulf Coast.  Those salt caverns hold 727 million barrels of oil, managed by the Department of Energy.

The SPR is a national insurance policy. Specifically, it insures the U.S. against a severe oil supply disruption. Without this insurance, our economy could be even more sensitive to a big oil supply shock than it already is.

Created in 1975 after the Arab oil embargo, the SPR is designed to be an emergency reserve.  If Venezuela’s Hugo Chavez suddenly were to decide he is no longer going to sell oil to the U.S., we would face a short-term supply disruption while we waited for supplies to arrive from other producer nations.  President Bush (41) released oil from the SPR when Operation Desert Storm began in January 1991, in anticipation of supply disruptions in the Middle East.  When Hurricane Katrina damaged much of the Gulf of Mexico oil infrastructure, we suddenly lost about 25% of domestic production and President Bush (43) released oil from the SPR.  If terrorists were to blow up major elements of the global or domestic oil supply chain, that could cause a severe supply disruption.  The SPR is not a backup supply to be used frequently when gasoline gets expensive, it’s an emergency strategic supply to be used only in a crisis.

Releasing oil from the SPR is a Presidential decision, based principally on the advice of the Secretary of Energy.  The President’s White House economic and national security advisors are usually involved in the decision as well.

The U.S. relies more heavily on government stocks than private reserves.  The same is true for the Japanese.  The Europeans rely more on privately held commercial stocks.  Since their governments don’t own that oil, the Europeans mandate that commercial storage facilities hold a certain amount of emergency reserves.  Also, you can’t drain your stocks down to zero; you have to leave some oil in the tanks and especially the pipes to make the hydraulics work.

The U.S., Japan, and Germany have the biggest reserves.  Then there are the Chinese, who so far have not been full participants in the international coordination system run by the International Energy Agency (IEA).  Reserve withdrawals are more effective when they are coordinated among the countries with the largest reserves.

The U.S. government fills the SPR in two ways.  They buy oil on the open market, and they receive oil as payments in kind for drilling leases granted by the government (called Royalty-in-Kind).

How big is the SPR?

The Strategic Petroleum Reserve can hold 727 million barrels of oil.  At the moment it’s full, at 726.6 million barrels.

Here are some figures for comparison:

• The global oil market is about 86 million barrels per day (bpd).
• The U.S. consumes about 19-20 million bpd of oil and petroleum products.  We import about half that.
• The Desert Storm SPR release totaled 21 million barrels.
• The Katrina SPR release coincidentally also totaled 21 million barrels.
• There are 42 gallons of oil in a barrel.
• A barrel of oil results in about 44 gallons of products, including about 19 gallons of gasoline, 10 gallons of diesel, 4 gallons of jet fuel, and 11ish gallons of other stuff.  This means you get a gallon of gasoline from about 2.1 gallons of oil.

As the economy grows, any fixed-size SPR gets effectively smaller. Insurance is measured in “days of import protection”: take the average number of barrels per day that we import, and divide it into the oil we have, and that’s how many days of import protection we have.

The U.S. imports (net) about 10-11 million barrels of oil each day.  At the moment the SPR is full:  there are 726.6 million barrels of oil stored in these salt caverns.  Divide 726.6 M by 10-11 M and you get 66-73 days.

Since you won’t replace lost imports barrel-for-barrel, the number is more of a relative than an absolute measure of how much your insurance is worth.  A significant SPR release might be 100,000 bpd.

We don’t worry about losing all of our imports simultaneously.  Almost one-quarter of our imports come from Canada.  Our next biggest suppliers are Venezuela (11%), Saudi Arabia (10%), Mexico (9%), and Nigeria (8%).  There are risks to each of these (much less so for Canada and Mexico).

A 2005 law requires the SPR to be increased to 1 billion barrels.  President Bush (43) proposed doubling the current SPR to 1.5 billion barrels and increasing the size of our insurance policy.  Congress has not provided significant funding for either expansion.

When should the President release oil from the SPR?

The Saudis are the first line of defense when there is a disruption in global supply.  If that worries you, then figure out ways to use less oil, because the Saudis will always have the largest and lowest cost marginal supply in the world.  The Saudis often/usually have spare production capacity that they hold in reserve.  They appear to have dialed up their production in recent weeks, offsetting most of the recently lost production in Libya.

The phrase severe supply disruption is the key to the President’s decision about an SPR release.  Oil is expensive right now for four reasons:

1. Fundamentals — The global economy is recovering and demanding more oil.  Global supply and demand are tight.
2. Some Libyan supply has recently gone offline – maybe 850K – 1M bpd.
3. Oil market participants are worried that events in Tunisia, Egypt, Libya, and Bahrain could spread to other oil-producing nations in the Middle East and North Africa, further disrupting supply.
4. Nobody is quite sure how much unused capacity the Saudis have available.

It’s hard to conclusively tease out the price effects of each factor, but policymakers need to try.  High gasoline prices alone are insufficient to justify an SPR release.  You have to look at why prices are increasing.  One expert recently surmised that about $100 of the current $115/barrel world price (Brent) results from tight fundamentals, and the other $15-ish is from actual and feared supply disruptions.

If global economic growth accelerates (oh please oh please), then global demand will increase and the price of oil will continue to climb.  That’s unfortunate and a medium-term economic problem.  It’s not a reason to tap the strategic reserve.

If supplies are further disrupted, for instance by geopolitical events, then that is a viable reason for an SPR release, if the President thinks it is severe enough to justify tapping our emergency reserve.

You also shouldn’t expect an SPR release to have a huge effect on the pump price of gasoline.    With oil around $100/barrel, if the President were to release 100,000 b/d from the SPR, that would probably lower the price of oil by about $2/barrel initially.  That’s about ten cents per gallon of gasoline, maybe a bit more if the release were coordinated with other nations and reduced the fear premium in global oil markets.  The effect would wear off over time as markets adjust to the increased supply.

Should President Obama release oil from the SPR now?

Mr. Gregory asked Chief of Staff Daley if the President is considering releasing the SPR because the price of gasoline has spiked.  He further asked if the President is “considering doing something to arrest that spike.”

The President should consider a release only if he determines there’s a severe supply disruption, not just because the price of gasoline has increased.  And if he does approve a release, it will not “arrest” the price increase at the pump.

The U.S. imports almost no oil directly from Libya – they supply about 0.6% of all our imports.  Most Libyan oil goes to Europe, and some to China.  Still, it’s best to think of oil as if it were a single big global pool.  If more Libyan production were to go offline, prices in Europe would jump.  Oil tankers in the Atlantic headed west for the U.S. might turn around and head east seeking out those higher prices, causing prices to rise in the U.S.  (The reverse happened after Hurricane Katrina – tankers headed for Europe turned around and headed for the Southeastern U.S. after prices jumped from lost Gulf of Mexico supply.)

So far it appears the Saudis are mitigating much of the lost Libyan production.  Based on public information, I think it’s hard to justify an SPR release now.  If a lot more supply goes offline (in Libya or elsewhere), and if the Saudis lack the spare capacity to offset that additional loss, then the President will have a tough call to make.

(photo credit: Department of Energy, Office of Fossil Energy)

The negotiations on the continuing resolution (CR) began yesterday.  The Administration’s new line, echoed by Congressional Democrats, is that their new offer “comes halfway.”

As the players jockey for position they will be throwing out all kinds of confusing numbers. The confusion arises from two factors:

1. Most of the debate centers around “deltas” rather than levels:  the players are talking about the size of proposed cuts rather than the resulting absolute levels.
2. The size of a cut depends upon your choice of starting point.  The players are choosing different starting points from which to measure their deltas.

We can eliminate most of this confusion by focusing on proposed spending levels rather than the proposed changes in those levels.

Yesterday President Obama’s new NEC Director, Gene Sperling, presented the Administration’s perspective on the negotiations.  It’s clear the mantra is “With this proposal we have come halfway.”  I expect the President will start saying this soon.

Update:  Here’s the President in Saturday’s Weekly Radio Address:

My administration has already put forward specific cuts that meet congressional Republicans halfway.  And I’m prepared to do more.

This is called anchoring – trying to frame the negotiations quantitatively to make your own position seem reasonable, and your negotiating partner’s position seem less reasonable.  It appears that neither Congressional Republicans nor the press are buying the Administration’s anchoring.

Here is how the Administration justifies the claim that they have “come halfway” with their new proposal.  As always, you can click on any graph to see a larger version.

• The Administration uses a figure of $1,128 B (the red bar) for the President’s budget proposal.
• They are comparing that level to the $1,026 B bill passed by House Republicans (H.R. 1, in purple) on a nearly party-line vote.
• The Administration says they have a new proposal (the yellow bar) of $1,077 B.  They get to this number by taking the newly enacted short-term Continuing Resolution (the blue bar), which would lead to $1,083 B of spending if it were extended through the end of this fiscal year on September 30th.  They then (say they will) propose another $6.5 B of cuts relative to this enacted law, bringing them down to $1,077 B.
• They define the negotiating space as the $102 B (purple arrow) between the President’s proposal (red) and the House-passed “Republican” bill (purple).
• They define the distance they have “moved” as the $51 B (yellow arrow) between the President’s proposal (red) and the President’s new proposal (yellow).
• $51 B is half of $102 B, therefore they have “come halfway.”

The principal problem with this presentation is that the President chose the height of the red bar.  Everyone understands this is therefore an arbitrary basis for comparison.  Had the President instead initially proposed $1,230 B (a number I made up by adding another $102 B to the $1,128 B shown here), he could then have described his new yellow bar as “coming three-fourths of the way.”

Democrats are struggling to convince the press that the red bar is a meaningful starting point.  They correctly point out that, last fall, when selling their “cut spending by $100 B” campaign platform, Congressional Republicans used the red bar for comparison.  That was a mistake when Republicans did it last fall.  In recent days Republicans have admitted this mistake and are now attacking the red bar and the Administration’s “halfway” claim.

Team Obama is savvy enough to understand that they won’t convince any Republicans with this argument.  They are instead trying to frame the public debate.  I expect this tactic to fail within the negotiating room and mostly fail outside it.

There are other issues with that $1,128 B figure that the Administration says represents the basis for comparison.  You don’t have to worry about these details, but I include them for completeness, and to further demonstrate how shaky it is to compare other levels to the red bar.

• It’s out of date.  That’s what the President proposed 13 months ago.  One month ago he proposed $1115 B, or $13 B less.
• Pushing the other way, it is artificially low by $23 B.  The President wanted to change the way Pell grants (student loans) are measured.  Congress ignored him and the effect of this is $23 B higher discretionary spending for the President’s policies.
• CBO and OMB score things differently.  The $1,128 B figure is OMB, the others are CBO.  In this case the difference matters.

Now let’s look at a different way to frame it.

I have faded the (misleading, in my view) President’s red bar so that we can ignore it here.  I added a new green bar, showing what would be spent if Congress just did a straight extension of last year.

You can see from this graph that the House-passed bill, the President’s new proposal, and the recently enacted two-week CR all cut spending below CBO’s baseline.  In my view, comparing to this green baseline is a fairer comparison than to the President’s proposal.  On this basis, the President’s new $18 B in cuts from CBO’s baseline are only one-quarter (26%) of the way between baseline and the House-passed bill.  This is, I imagine, how a fiscally conservative Republican in Congress would frame it.

The selection of endpoints for calculating the “gap” and how far one side has “moved” is ultimately a judgment call and at least somewhat arbitrary. I don’t blame the Administration for choosing a high bar to make themselves appear reasonable.  I do blame any reporters who unquestionably report the statement “we’ve come halfway” as fact.

I am for the lowest possible spending – I’d be happy to support the purple bar or even lower.  But rather than argue what the spending should be or how the debate should be framed, I’ll offer my prediction of what the final result will be.

I predict a final enacted (non-emergency) discretionary spending level of $1,052 B, halfway between the House-passed H.R. 1 and the President’s new proposal.  I base this prediction on where I am guessing the votes are, rather than on either side’s intellectual justifications or public framing of the negotiation.

My logic is simple.  The House has already passed the purple bar but cannot get that level through a Democratic-majority Senate.  I think Senate Democrats will show next week that they have a majority to pass the President’s new yellow bar proposal, but will be unable to get 60 votes to overcome a Republican filibuster and, even if they could, would be blocked by the House.  In both cases I see the President as backing up the Senate Democratic legislative strength, but his veto is really a fallback rather than the primary line of defense for the side that wants to spend more.

I am making a judgment that this is rough parity in terms of legislative strength.  I assume both sides are equally obstinate/principled and equally skilled at negotiations, even though Democrats have repeatedly fumbled the ball over the past few weeks.  I then predict the midpoint of those two equal-strength positions as the final outcome.  That’s the midpoint of $1,026 B and $1,077 B, or $1051.5 B.  Round up because appropriators control the paper.

It may be asking too much to imagine either side getting to this level in the next two weeks, so I won’t necessarily predict that this outcome will be achieved before the current CR expires.

Conclusions

• The Administration’s argument that “we have come halfway” is nothing more than a negotiating tactic.
• The intellectual basis for this argument is quite weak and borders on silly.
• Any framing of this debate by measuring “cuts” is dicey because the choice of a starting point is arbitrary.
• The final legislative outcome will be determined by legislative strength much more than by either side’s public framing of the numbers.
• I predict a final enacted non-emergency discretionary spending level of $1,052 B.

Today we’ll look at President Obama’s proposed deficit path, as yesterday we looked at his spending and revenue paths.

The red line on this graph compares the last 50 years of deficits with the next 50 years under President Obama’s proposed policies.

The vertical white line at 2011 separates the past from the projected future.

This graph is busy because we have four different bases for comparison.  The first three are standard metrics.

• The white x-axis would be a balanced budget.
• The dotted yellow line shows the 2.1 percent of GDP average deficit over the past 50 years.
• The dotted green line is at 3 percent.  Above the dotted green line, debt will grow faster than our ability to pay it.
• The dotted blue line is the President’s proposed new test for himself and the country.  He now defines success as getting red below dotted blue.

The President proposes a 7 percent budget deficit for 2012 (the red dot).  His deficits would bottom out at 2.9% seven years from now, in 2018, and then rise steadily forever.

The President proposes deficits that are in each year well above the historic average (dotted yellow line).

Until 2015, our debt/GDP ratio will increase every year.  For a few years beginning in 2015, the President’s budget would stabilize debt as a share of the economy.

You can see our severe problem in the large, sustained deficits that are projected to grow forever, beginning a few years from now.  We used to call this a long term problem.

Current short term deficits are high enough to be economically damaging.  That long term deficit path is unsustainable.  Something will break.

The President’s budget doesn’t even pretend to shoot for balance, or to reduce deficits to the historic average.  He has abandoned those goals, and instead draws a new dotted blue line that grows rapidly over time, and then defines success as getting deficits below that.

Here is the President in a press conference Tuesday.

Our budget … puts us on a path to pay for what we spend by the middle of the decade.

… by the middle of this decade our annual spending will match our annual revenues. We will not be adding more to the national debt.  So, to use a — sort of an analogy that families are familiar with, we’re not going to be running up the credit card any more.

I will deal with the “not adding more to the national debt” line tomorrow.  Today I want to focus on “pay for what we spend” and “our annual spending will match our annual revenues.”

The President’s credit card analogy is a good one.  Anyone with a mortgage or a credit card balance knows that you have to make monthly interest payments.  Those interest payments don’t get you any new stuff, they just pay for the past borrowing you have done.  (Technically, they are paying for the service of the loan you have been provided.)  If you stop using your credit card, you still have to make interest payments on your outstanding balance.  In the same way, a portion of your monthly mortgage payment is interest on the loan you used to buy your house.

The same is true for the government.  In 2012, $240 billion of next year’s $3.7 trillion of federal spending is for interest payments on accumulated federal debt.  The President wants to take that amount out of the deficit calculation, and define success as paying only for new spending.  He wants to ignore interest payments when calculating the deficit.

Keith Koffler puts it well:  “So as a practical matter, what he is offering is totally meaningless. If I could stop paying interest on my mortgage, I’d be on a plane to Paris tomorrow.”

The President is trying to politically redefine deficit to mean only the gap between the red and dotted blue lines, rather than the gap between the red line and the x-axis.  Once he gets red down to dotted blue, he would say he has balanced the primary budget, meaning that all revenues in that year will equal all spending except interest payments.

Boring interest payments don’t pay for fun new high speed choo choos, but we still have to make them.  In 2017, the Treasury would still have to borrow $627 billion from financial markets just to raise the cash to make interest payments.

Our unified deficit would still be 3% of GDP.  Our $627 billion unified deficit would still exceed the historic average of 2.1% of GDP.

I had originally thought the President was just trying to lower the bar, to obfuscate his proposed enormous deficits by trying to redefine the word “deficit” in a way that few would understand.  Now I worry about a deeper rationale.

Maybe the President actually thinks it’s not his job to make the hard choices to pay for the interest costs of debt accumulated before he took office.  Is he arguing that his job is not to solve the challenges our Nation faces, but instead only to get to a point (seven years from now) where his actions don’t make things even worse?

I had always thought his “inherited” meme was simply a political tactic – blame your predecessor for everything bad so you look good in comparison.  That’s tawdry but hey, politics can be a rough game.

Now I worry that he might actually believe it.  Our accumulated debt is now 62% of one year’s GDP, up from about 40% when the President took office.  By defining primary balance as his goal, is President Obama saying that he’s not responsible for proposing policies to pay for the interest costs on that debt, one third of which was accumulated on his watch?

I find myself hoping that he is instead simply trying to confuse us and hide the bad news in his budget.  The alternative is even more frightening.

Let’s look at President Obama’s proposed long run budget path.  Click the graph to see a larger version.

I am comparing the past 50 years with the next 50 years under President Obama’s proposed policies.

The dotted red line shows us that, over the past 50 years, federal government spending averaged just over one-fifth of the economy (20.2% of GDP).  The dotted blue shows us that, over the past 50 years, federal revenues averaged just over 18% of GDP.  The small yellow double arrow between the dotted red and blue lines shows the average deficit over the same period: 2.1% of GDP.

The vertical white line at 2011 separates the past from the projected future of the President’s policies.

You can see the assumption of the economy recovering as the blue revenue line recovers from an extraordinary low share of GDP.  As more people get jobs, the government will get more income and wage revenues.  You can also see spending declining from the 2009-2011 phase which spiked principally because of TARP and stimulus.

Three things should jump out at you from the future portion of this graph:

• The red and blue lines diverge enormously, and the gap grows over time.
• The blue line is flat while the red line slopes upward.
• Both the red and blue lines shift upward significantly.

Let’s take each in turn.

The red and blue lines diverge enormously, and the gap grows over time.

The gap between the red and blue lines is the budget deficit.  A deficit of 3% of GDP will hold debt constant relative to the economy.  Under the President’s policies the deficit would dip in 2018 to 2.9%, and would otherwise forever be at or above 3%.  Our government debt burden will increase forever.

In a crisis our economy can handle an enormous temporary budget deficit.  Our deficit problem is that future deficits are large, sustained, and projected to grow forever.  Our little yellow double-headed deficit arrow will grow into a monster and keep growing.

The blue line is flat while the red line slopes upward.

Taxes grow as a share of the economy very slowly.  The blue line is basically flat for two decades.

I’d like the solid blue line to be below the dotted blue line.  Most Congressional Republicans argue to match the historic average of about 18%.  The President proposes just below 20%.  Reverting the tax code to pre-Bush policies (“repealing all the Bush-Obama tax cuts”) would bring us to the high 20s.  In each case the line is basically flat.

The red spending line grows steadily as a share of GDP.  That’s because three enormous spending programs are growing at unsustainable rates:  Social Security, Medicare, and Medicaid.  A better way to think about it is that there are three underlying forces driving spending growth:  demographics, unsustainable benefit promises by elected officials, and per capita health spending growth.

At any point in time, the gap between the red and blue lines can be narrowed by lowering the red line, raising the blue line, or both.  Over time, however, the red line must be flattened, no matter what level you pick for the blue line. If it’s not, any downward red shift or upward blue shift only temporarily narrows the gap.  If you don’t flatten the red line, your solution is only temporary.  It’s the slope of the red line that’s killing us.

Both the red and blue lines shift upward significantly.

We care not just about the gap between the red and blue lines, but also about their absolute levels.  A higher red line means we are devoting more of society’s resources to federal government control.  That leaves less for the private sector (and for state & local governments).

I’m a small government guy, so I want the red line to be as low as possible.  Whatever your policy preference about the size of government relative to the private sector, two things are undisputable:  bigger government comes at the expense of a smaller private sector, and at some point that growth in government has to stop.  This second point is just another way of saying that eventually we have to flatten that red line.

This size-of-government metric is often ignored.  Washington fights about whether a policy (like the new health care laws) widens or narrows the gap (the deficit) without asking whether the policy shifts the lines up or down.  Both things matter.

You can see that President Obama proposes long-term revenues of about 20% of GDP over the next decade.  Other than a brief tick above 20% during the tech stock bubble in the late 90s, that would put federal taxes at an all-time high share of GDP.  That difference, between 18.1% of GDP and almost 20%, is enormous.

Those higher taxes are an explicit policy proposal from the President.  While the new health laws shifted the red spending line up, most of that long-term path long predates him.  The path of entitlement spending has changed over the years, but the shape of this graph has not changed in decades.  Pre-crisis and pre-Obama, the spending line would have bumped around 20% for another several years and then would have begun its steady upward growth.

What has changed is that we used to say this was a long-term problem.  The financial crisis, economic recession, and the President’s policies have eliminated this small amount of breathing room.  This graph makes clear that the long-term problem begins now.

I’ll end with a clean version of this same chart which removes all the explanatory chartjunk.

Sources:  This graph combines three tables from the President’s budget – historical data are from, surprise, Historical Table 1-2; the next ten years are from the principal short-term table (summary table S-1); the rougher long term numbers  are from (table 5-1 on page 51 of Analytical Perspectives), which provides shares of GDP every 10 years.  I combined the streams (the data match in 2020) and interpolated the long run data for intervening years.

I chewed on the President’s budget for a few hours today.  Rather than bore you with a MEGO (“My Eyes Glaze Over”) post filled with numbers and charts, I offer a few overall qualitative and strategic impressions.

• No big surprises here.  The budget tracks the State of the Union address as well as press events and leaks over the past month.  There are a few gems, including a hidden 25-cent per gallon gas tax, a State bailout and unemployment tax increase on almost all workers, and a $315 B unspecified Medicare savings gimmick, but those are to be expected.
• Spending, taxes, and deficits would reach new plateaus, each well above historic averages.  The President proposes sustained bigger government and bigger deficits and debt.  Much bigger.
• The numbers are terrifying.  That terror comes not from big new proposals, but from whistling past the graveyard of unsustainable current law.
• The President says his new goal is “to pay for what we spend by the middle of the decade.”  This clever language suggests he thinks that, since there was existing government debt when he took office, it is not his responsibility to find ways to pay for even the interest payments on that “inherited” debt.  As President, his job is not, however, after eight years to momentarily stop making things worse, as his budget proposes.  It is instead to address the challenges the Nation faces, including those that have been building over the past 70 years.
• In mid 2009 a smart friend observed that President Obama was pursuing an ordinary liberal domestic policy agenda at an extraordinary time in the economy.  It was as if the severe recession had almost no effect on the President’s outlook.  Indeed his chief of staff argued that the national economic crisis created an opportunity to enact the President’s campaign proposals.The same appears to be true with this budget.  The President is proposing an ordinary liberal spending agenda at an extraordinary time in our fiscal history.  His proposals for increased government spending on infrastructure, technology, and education are straightforward expansions of the role and size of government, in line with what I might expect from a Carter or even Clinton in his more expansive years.  Times have, however, changed significantly since the 70s and the 90s.  What were then long-term fiscal problems are now short-term looming crises.

  The fiscal problems of current law, which predate but were exacerbated by President Obama’s expansions of government in his first two years, should be driving the policy agenda.  In this budget they are an afterthought.  The President’s budget ignores the problem of entitlement spending under current law, and proposes Medicare and Medicaid savings only sufficient to offset a portion of his proposed spending increases.  Team Obama’s topline message includes dangerous and misleading reassurances that Social Security is not an immediate problem.  Demographics, unsustainable benefit promises, and health care cost growth are the problems to be solved.  The President instead wants to build more trains and make sure rural areas have 4G smartphone coverage.

• Budgets represent policy priorities expressed as numbers.  It’s easy to focus on the numbers and lose sight of the underlying priorities.  For two years America has been debating whether restoring short-term economic growth or addressing our government’s fiscal problems is a higher priority.  With his State of the Union address and this budget, President Obama  is trying to define a new problem to be solved.  He thinks Americans are at a long-term competitive disadvantage relative to the Chinese because our government isn’t spending enough on infrastructure, innovation, and education.  Suppose you think he’s right (I don’t).  Is this problem more urgent than restoring short-term economic growth?  Is it more important than addressing unsustainable deficits and a federal government expansion that will leave fewer resources for the private sector?  The President apparently thinks it is.  I strongly disagree.
• The President is choosing both a policy path and a campaign strategy.  He is betting that having no proposal to address the looming fiscal crisis is better for his reelection prospects than having one.
• The President has made his strategic choice:  we are headed toward a two year fiscal stalemate in a newly balanced Washington.

(photo credit: Todd Hall)

At the U.S. Chamber of Commerce yesterday the President spoke about trade:

[W]e finalized a trade agreement with South Korea that will support at least 70,000 American jobs – a deal that has unprecedented support from business and labor; Democrats and Republicans. That’s the kind of deal I’ll be looking for as we pursue trade agreements with Panama and Columbia and work to bring Russia into the international trading system.

This sounds like a free trade agenda, or at least a pro-trade agenda, which would be good from a President whose party often leans heavily toward protectionism.  The problem is that the U.S. already has trade agreements with Panama and Colombia.  The President is in reality saying that he is undoing those deals.  He also appears to be saying that “unprecedented support from … labor [and] Democrats …” is a precondition to further progress on free trade.

When President Obama took office, he found three signed Free Trade Agreements (FTAs) on his desk awaiting Congressional approval:  the [South] Korea FTA, the Colombia FTA, and the Panama FTA.

Congress must approve any trade agreement negotiated by the President (more accurately, by his U.S. Trade Representative) with another country.  Under normal legislative procedures, the implementing legislation for a trade agreement would be subject to amendments in Congress.  Since any trade agreement will make compromises that sacrifice certain geographically or economically  limited interests for a broader national benefit, it would be vulnerable to being amended in Congress after it has been negotiated.  Foreign negotiators know this.  They don’t want to negotiate with the USTR and then have their deal reopened by Congress.

The clever solution to this collective action problem is called trade promotion authority (TPA), formerly known as fast track authority.  Congress passes and the President signs a law that gives the President and his USTR authority to negotiate and sign trade deals for a certain number of years.  In this legislation, the Congress limits itself to a simple yes-or-no vote on the whole treaty.  Through this law they surrender their later rights to amend the treaty when it comes before them.  In legislative parlance, we say that the treaty gets a straight up-or-down vote in both the House and Senate.

This binary choice strengthens a U.S. President and his trade negotiator.  While they still must convince the foreign power that they can get Congress to support the agreement being negotiated, they don’t have to worry that Congress will amend the agreement.  This gives U.S. negotiators the ability to get a better deal, because their counterparts have a high degree of confidence that the U.S. team can deliver on its commitments.

The Korea, Colombia, and Panama FTAs were all negotiated under now-expired trade promotion authority that Congress gave to President Bush.  President Bush did not send any of these FTAs to Congress because Speaker Pelosi made it clear she would kill all three trade agreements, either through procedural means or by rallying the votes to defeat them.

When President Obama arrived, he said the South Korea FTA negotiated during the Bush Administration was a bad deal for the United States.  Rather than submitting it to Congress for approval, he directed his USTR Ron Kirk to renegotiate certain parts of it with the Koreans.  Those negotiations resulted in a new Korea FTA which looks a lot like the old one.

The Korea FTA is a big deal for both the U.S. and Korea.  South Korea is our seventh-largest trading partner, and this agreement would rank second only to NAFTA in economic impact on the U.S.  Almost two-thirds of U.S. agricultural exports would immediately be duty-free, and tariffs and quotas on almost all other U.S. agricultural goods would phase out over the next decade.  The treatment of U.S. beef was a hotly contested issue, as the Koreans argued that a 2003 outbreak of mad cow disease in the U.S. justified continued import barriers.  The other contentious issue was trade in autos.

The President now must deal with Republican Speaker John Boehner.  Republicans are by no means universally in favor of free trade, but the party leans more heavily in that direction than Democrats.  Free trade in the U.S. is typically enacted by a center-right coalition.  About a third of Democrats ally with >80% of Republicans to deliver the votes needed.  It is therefore easier for the President to get an FTA through with Speaker Boehner than it might have been with Speaker Pelosi.

In his State of the Union address, the President said,

This [South Korea free trade] agreement has unprecedented support from business and labor, Democrats and Republicans – and I ask this Congress to pass it as soon as possible.

This sounds great.  Other than some complaining by Senate Finance Committee Chairman Baucus over beef (and he is a critical legislative player on trade), the South Korea FTA looks like it’s in good shape.  We finally have a legislative configuration that should allow the implementing legislation to be quickly enacted.

Isn’t it great that this agreement has “unprecedented support from business and labor, Democrats and Republicans?”  The problem is that this unprecedented support, and in particular from labor unions and their allies in Congress, was not costless.  In this case, it slowed things down by two years.

We see from yesterday’s remarks that the President wants this to be the model for future trade agreements.  This gives labor unions and their Congressional allies tremendous leverage to water down or even block FTAs they don’t like.

Some business leaders at the Chamber probably smiled yesterday when they heard the President say “trade agreement … South Korea … Panama and Colombia.”  But opponents of free trade listening carefully heard the President’s hidden message:  I am reopening the agreements with Panama and Colombia, and giving you the ability to block them and other future FTAs by denying your support. If labor and Democrats oppose a future free trade deal, it won’t be “the kind of deal I’ll be looking for.”

This will certainly slow things down, and could easily result in a halt to expanded trade as labor unions and other interest groups that oppose free trade leverage the President’s reluctance to go with a center-right strategy.

The President knows that all the economic juice for the U.S. is in the Korea FTA.  FTAs with Colombia and Panama would be a big deal for those economies, but not for the U.S.  They’re just too small for it to have a measurable economic effect outside of Florida and a few other states.

Congressional Republican leaders fear that they will enact the South Korea FTA and then the President will never get around to finalizing the other two.  The President will repeatedly tout the economic benefits of the Korea FTA.  At the same time he will say he is hard at work on the other two, but never quite able to bring them to conclusion, because they lack “unprecedented support … from labor and Democrats.”  U.S. labor unions that oppose the Colombia FTA argue that the Colombian government has not done enough to crack down on violence against union activists.  Their opposition to the Panama FTA hinges on Panama’s rules for allowing unions to be formed.

If the direct economic benefits to the U.S. of the Colombia and Panama FTAs are small, why should we worry about them?

• Colombia and Panama are free and democratic allies in Central America.  We want to promote freedom, democracy, and friendship with the U.S. throughout Central America, especially relative to that thug Chavez in Venezuela.  We do that by helping their economies grow; by promoting capitalism, free trade, freedom, and democracy; and by further strengthening our ties with them.
• Other small countries outside of Central America will learn about the U.S. from how we interact with these two.  We should show the world that we treat all our friends well, not just the ones who can help us economically.
• Every Free Trade Agreement is a small movement in a positive economic direction.  Economists (and I) generally prefer a few good multilateral FTAs to many smaller bilateral agreements, but I’ll take forward movement wherever we can get it, especially when protectionism is slowly growing around the world.
• It weakens U.S. trade negotiators in future negotiations when the President (or Congress) reopens past agreements.   It should always be the case when you’re negotiating with the U.S. that a deal is a deal.

If you want to put the President’s strategy in a positive light, you would say that he has found a strategy on Korea that seems to be working.  He renegotiated that FTA and in doing so mitigated significant opposition from the left, making it highly likely that implementing legislation will be quickly enacted.  You would argue that he is now trying to replicate that model with Colombia and Panama, and will submit those for approval when they are good and ready.  His strategy is slow, you would argue, but effective.  You would admit that this strategy damages negotiations with other countries by reopening previously signed deals, but would argue that this is a small price to pay for broader Congressional support for the final deals.

If you’re a skeptic, you are nervous that the President intends to let Colombia and Panama languish after enacting Korea.  This would damage two allies in Central America.  It would undermine our ability to strengthen our ties through free trade with other countries, and it would weaken our trade negotiators who would be less able to convince their counterparts that a signed deal would be final.  It would give opponents of free trade and open investment further opportunities to slow things down and erect other protectionist barriers.

You are further worried that the President is signaling to domestic interest groups that oppose free trade that he will not move forward without them.  This will at best slow progress, and at worst it will kill the Colombia and Panama FTAs, as well as any other free trade opportunities while President Obama is in office.

Senate Minority Leader McConnell and new Senate Finance Committee Ranking Republican Orrin Hatch expressed these concerns in a letter to the President:

We appreciate your support for prompt implementation of the U.S. – South Korea Free Trade Agreement.  … We are disappointed, however, not to see the same level of commitment from your administration for trade agreements with Colombia and Panama. … We urge your support in passing these through Congress without delay.

… Colombia and Panama are key allies of the United States in Latin America, a region of particular strategic importance to our country.  Further delay in implementing these agreements risks sending the signal to other countries in Latin America that the United States is not interested in closer economic engagement in the region and is unable to follow through on our commitments to our allies.

Finally, given what we believe is broad, bipartisan support in Congress for these agreements, we would like to make clear that we see no need for further negotiations with Colombia and Panama.  As currently written, they are solid agreements which benefit our nation and our workers.  We are confident that they would receive strong support in the Senate and the House of Representatives. We urge you to immediately engage with Congress to achieve Congressional approval to get these agreements signed into law as soon as possible.

This letter reinforces the same message from Speaker Boehner, “Now more than ever, America needs strong leadership to complete and implement the three pending trade deals in tandem with one another.”

We should neither abandon our friends in Central America nor risk leaving them behind.  The President should submit and Congress should quickly pass Free Trade Agreements with South Korea and Colombia and Panama.  He should not give labor unions or anyone else the ability to block progress on free trade.  This is an area where Congressional Republicans will happily work with the President, if only he will do the same.

(photo credit: Wikipedia)

The President did not break major new substantive ground in his speech today to the U.S. Chamber of Commerce.  I assume the press coverage will instead focus on the optics and political framing – the President is reaching out to business leaders, no longer taking an antagonistic tone as he did during his first two years.

Let’s do a quick review of the speech, which is at least a useful summary of the President’s top line economic message.

We know what it will take for America to win the future. We need to out-innovate, out-educate, and out-build our competitors. We need an economy that’s based not on what we consume and borrow from other nations, but what we make and sell around the world. We need to make America the best place on earth to do business.

And this is a job for all of us. As a government, we will help lay the foundation for you to grow and innovate. We will upgrade our transportation and communications networks so you can move goods and information more quickly and cheaply. We will invest in education so that you can hire the most skilled, talented workers in the world. And we’ll knock down barriers that make it harder for you to compete, from the tax code to the regulatory system.

Now, I understand the challenges you face. I understand that you’re under incredible pressure to cut costs and keep your margins up. I understand the significance of your obligations to your shareholders. I get it. But as we work with you to make America a better place to do business, ask yourselves what you can do for America. Ask yourselves what you can do to hire American workers, to support the American economy, and to invest in this nation. That’s what I want to talk about today – the responsibilities we all have to secure the future we all share.

The President lays out what he calls the responsibilities of government.  Thee are his words, not mine:

1. to encourage American innovation;
2. to provide our people and our businesses with the fastest, most reliable way to move goods and information;
3. to invest in the skills and education of our people;
4. to cut the spending that we just can’t afford;
5. to break down barriers that stand in the way of the success of American businesses – he cites trade, corporate taxes, and outdated and unnecessary regulations.

He then describes what he thinks are the responsibilities of American businesses.  Again these are the President’s words:

1. to recognize that there are some safeguards and standards that are necessary to protect the American people from harm or exploitation;
2. to share the benefits of a growing economy with American workers and not just go to greater profits and bonuses for those at the top;
3. to create new jobs and manufacturing in the U.S. rather than overseas.

Finally, he jawbones the business leaders:

Now is the time to invest in America. Today, American companies have nearly $2 trillion sitting on their balance sheets. I know that many of you have told me that you are waiting for demand to rise before you get off the sidelines and expand, and that with millions of Americans out of work, demand has risen more slowly than any of us would like.

But many of your own economists and salespeople are now forecasting a healthy increase in demand. So I want to encourage you to get in the game. And part of the bipartisan tax deal we negotiated, businesses can immediately expense 100 percent of their capital investments. As you all know, it’s investments made now that will pay off as the economy rebounds. And as you hire, you know that more Americans working means more sales, greater demand, and higher profits for your companies. We can create a virtuous cycle.

I wouldn’t be surprised if “Now is the time to invest in America” becomes a new tag line for the Administration and its allies.  It serves a dual purpose:  to justify the President’s proposed government spending increases, and to jawbone private firms.  Anything is better than “Winning the future.”

(photo credit: The White House / Pete Souza)

Ronald Reagan was born 100 years ago today.  In his honor, here are photos of the 40th President of the United States.

All photos are from the National Archives and are in the public domain.  They would make great Facebook profile photos today.

Enjoy.  Click on any photo to see a larger version.