>If Barack Obama gets elected President, the first thing he should do is hire Doug Holtz-Eakin to be his budget director. A highly-respected non-partisan budget wonk, who is leaning Obama’s way in the election, threw out this seemingly crazy idea at lunch the other day. And the more I thought about it, the more sense it made.

Why would Obama want to hire John McCain’s chief policy advisor to run his OMB, perhaps the most critical policy shop in the Administration?

To start, Obama often talks about a post-partisan Presidency. This would be a way for him to show he means it.

Second, Holtz-Eakin would enjoy fiscal credibility in the financial markets. The bond vigilantes have not cared about deficits for years, but they tend to get interested when Democrats run the government. Just ask Bill Clinton. Today, they see Obama as little more than a big-government liberal with a good speech. This might show them he is more complex than that.

Most important, though, Holtz Eakin would help lower the stratospheric expectations the left has of Obama. The candidate has already made trillions of dollars in promises he cannot possibly keep, and liberals will demand hundreds of billions more if he and a Democratic Congress are swept into office in November. Of course, McCain has his own problems with super-sized promises, but that’s for another day.

How can Obama lower these expectations? He needs a Dr. No—someone who can bring some reality into the political debate. And who better than Holtz-Eakin, who even many liberals like and respect? They’d detest Obama’s decision to pick him, but someone has to play the heavy.

I don’t know if Holz-Eakin would take the budget job in a McCain Administration, much less in Obama’s. And I can’t imagine he’d get the offer. Besides, with the election still nearly 12 weeks away, the whole thing is more than a bit premature. Still, it is an idea worth musing about in the heat of a Washington August day. Just a thought.

To paraphrase the oily Captain Renault of Casablanca fame, we in Washington are shocked, shocked to find that deficits are going on here. To listen to the cries of outrage and dismay, one might think the Bush Administration’s latest projection of nearly $400 billion in red ink for the fiscal year ending on Sept. 30, and almost $500 billion for next year was unexpected.

After all, if we happily run significant budget shortfalls when the economy is flush, why should we surprised that they grow when it is soft?

The Bush math is very simple, really. Based on the White House projections, from the time the President came into office in 2001 until he leaves in fiscal 2009, Medicare spending will nearly double from $214 billion to $417 billion, fueled in large part by his new Part D drug benefit. Military spending will more than double. Officially, OMB says defense costs will rise from the ’01 level of $334 billion to $675 billion, but that assumes only $70 billion for the wars in Iraq and Afghanistan in 2009—far below the real price, which is likely to hit $200 billion.

While this big ticket spending explodes, income tax receipts will be less than one-third higher, or about $500 billion more, in ’09 than in ’01. And medium-term revenues are likely to be lower than projected since Bush assumes no fix for the Alternative Minimum Tax after 2009, an item which will cost more than $70 billion. Ironically, while John McCain and Barack Obama want us to assume a budget baseline where the costs of the war and an AMT patch go on forever, Bush does not.

As Budget Director Jim Nussle said yesterday, in a bit of uncharacteristic understatement, “This is going to be a challenge.”

Indeed. Especially if, like Obama and McCain, you hope to govern the country after Bush moseys on back to Texas. Yet, while the budget hole deepens in front of their eyes, the candidates keep making implausible promises.

McCain insists he’d balance the budget by 2013 but proposes a tax plan that would increase the national debt by $5 trillion over the next decade, even as he offers no credible way to slash spending by close to that much.

Obama economic adviser Austan Goolsbee told TPC last week that the campaign is aiming for a deficit no larger than this year’s $400 billion by 2013. Yet even meeting that low bar won’t be easy in the face of his tax plan, which would increase the debt by $3.4 trillion by 2018, and his ambitious new spending plans for health care, the environment, and education, which would add billions more.

Bush’s new budget estimates are a reality check on both candidates. They tell us that there is no way McCain can cut taxes by as much as he promises and there is no way that Obama will cut taxes and boost spending by as much as he wants.

That is, I suppose, comforting in some inside the Beltway way.

It wasn’t exactly So You Think You Can Dance, but watching Congress and President Bush boogie their way through the final song of the recent Medicare prom was still a hoot.

In the end, Hill Democrats stomped Bush and, despite his veto, easily passed a Medicare bill that delayed, yet again, mandated cuts in physician payments. The Dems did so while insisting they were for both true competition and fiscal responsibility. Bush, trying to claim those same virtues for himself, had unsuccessfully tried to block the bill, insisting it would hurt beneficiaries by curbing their access to managed care plans.

Even by Washington standards, Bush wins a chutzpah award for attempting to justify a 13 percent subsidy to private managed care companies in the name of market competition. Medicare managed care, done properly, might improve patient outcomes and save money. But we have never seen it done right, despite at least three tries over the past two decades, in part because insurers built their business models around these unsustainable subsidies, then cut and ran when the largess dried up.

Congress shares the chutzpah award, however, for trying to wrap itself in the cloak of free markets while trashing efforts to require competitive bidding for both private lab services and durable medical equipment such as wheelchairs. When it comes to slashing subsidies for insurance companies, Congress loves markets. When it comes to ending high-cost sweetheart deals for a handful of equipment companies, not so much.

Then, there is the doctor fix, which set off this whole hullaballoo. Last century, Medpac, an independent body that advises Congress on Medicare, recommended that physician reimbursement rates be trimmed. Each year or so, Congress dutifully bows to pressure from the doctor lobby and effectively freezes, rather than cuts, physician payments. This year, the reduction was supposed to be 10.6 percent, mostly because prior cuts had been repeatedly put off. When this comes up again in 2010, the docs will be in line for a 20 percent cut in payments. Care to guess how that will come out?

This fracas shows just how hard it is to do anything to control Medicare costs. These ballooning expenses are the biggest single risk to the nation’s long-term fiscal sustainability and, thus, a critical driver of tax policy over the next decades. Yet, Washington is not willing to reduce payments, or even encourage a tiny bit of price competition, for providers. And it took a huge battle to trim subsidies for Medicare managed care, which has become a honey pot for private insurers, especially the four companies that dominate the market.

And remember, all of this blood was spilled over payments to docs, equipment suppliers, and insurance companies, not patients. Just imagine what will happen when Washington tries, as it inevitably must, to tell seniors that Medicare will no longer pay for tests and treatments they want but which have no proven medical benefits. That, I promise you, will be no dance contest.

My blog on “How the Budget Baseline Favors Spending” stimulated numerous thoughtful comments. Some implied that my proposal would reward those who wish to make the Bush tax cuts permanent and ignore the fact that dubious accounting was used to get them passed in the first place. Those arguing this point did not pay sufficient attention to my last paragraph which implied that baseline reform would have to await the disposition of the Bush cuts. Further, I alluded to the possibility that whatever portions of the Bush policy are extended, the extension will again be temporary, thus making it difficult to finally settle the point.   more »

Unlike many bloggers, I am not going to bash John McCain’s renewed interest in balancing the budget. It is nice to see his on-and-off love affair with fiscal responsibility heating up again. There is just one problem with his vow to balance the budget by 2013. He can’t do it. Or, to be more precise, he can’t do it while extending the Bush tax cuts, cutting other taxes of his own, and maintaining a costly military presence in Iraq.    more »

Barack Obama’s tax plan will either raise $262 billion over the next 10 years or increase the national debt by $2.7 trillion. John McCain would add either $615 billion or $3.6 trillion to the debt.

What’s going on? Don’t everyone turn your computer off at once, but we need to talk about budget baselines.

There is nothing more esoteric, but Obama and McCain have made them hugely important. Trillions of dollars important. In fact, the only way either candidate can establish even a nanobit of fiscal credibility is by dramatically reframing the deficit discussion.

Both want to convince us that the Bush tax cuts will go on forever, even though they are due to expire in 2010, and that the Alternative Minimum Tax mess has already been fixed, although a permanent solution is nowhere in sight. With these helpful assumptions, their trillions of dollars in tax cuts look modest. Both candidates can make it appear as if they are merely moving around a bit of loose change, rather than massively increasing their grandchildren’s debt.

This is nothing more than a fiscal parlor trick. McCain, at least, can argue that he has supported the Bush tax cuts—well, he supported them after he opposed them. Obama has voted time and again against extending them and calls them irresponsible. What is likely to be a strongly Democratic Congress will never vote to sustain them as is. Yet, both Obama and McCain would like us to believe these tax cuts are cast in stone—the fiscal Ten Commandments, if you will—even as they propose to change them.

Neither seems to have noticed that Washington routinely overhauls the tax law every decade or so. When it comes to taxes, change is the status quo.

There is an easy way to cut through this palaver. Forget the baseline. Just think about three numbers: How much would either candidate collect in taxes as a share of the Gross Domestic Product? How much is government likely to spend? And, how much would they have to cut that spending to keep the national debt from ballooning.

TPC estimates that in 2013, Obama would collect revenues of 18.2 percent of GDP. McCain would bring in about 17.8 percent. Spending that year would be about 19.5 percent, according to the Congressional Budget Office, assuming the Iraq war will be winding down.

Thus, Obama would have to cut spending by 1.3% of GDP or $230 billion, to balance the budget in 2013. McCain must find 1.7% of GDP, roughly $300 billion. For context, Bush and the Congress have been battling for years over budget cuts one-tenth that size.

I await word on the candidates’ additional spending cuts. Obama has embraced costly new initiatives for infrastructure, education, health care, and energy, but said little about exactly where he’d cut spending. McCain vows to cut pork, which might get him 5% of what he needs. On the other hand, he is not likely to end the war any time soon.

For another take on my debate with George Yin on whether temporary tax breaks are a good idea George) or not (me), take a look at economistmom, the new blog by former House Ways & Means Committee chief economist Diane Lim Rogers. She’s got a great anecdote about a conversation with a committee member during a late night markup of an extender bill.

Kudos to Rep. Paul Ryan (R-WI), the senior Republican on the House Budget Committee, for proposing an ambitious plan aimed at bringing government spending under control over the next 75 years. Actually, Ryan would do even more than that. He’d also restructure the tax code, Social Security, Medicare, and Medicaid.    more »

Howard Gleckman continues to think that temporary tax cuts are no better than permanent ones from the standpoint of enhancing political accountability and fiscal restraint (“Tax Extenders and Fiscal Restraint,” May 22, 2008). So here’s some data.    more »

It is the fifth anniversary of President Bush’s dramatic landing on the deck of the aircraft carrier USS Abraham Lincoln where, in front of that massive “Mission Accomplished” banner, he declared “major combat operations in Iraq have ended.” They have not, of course. And it has me thinking about how those of us who do not have loved ones in combat operations are sacrificing nothing for this conflict.    more »

There are few things more frustrating in life than being a budget hawk. You spend your days predicting dire consequences that never quite come to pass, trying to convince voters that their government can’t keep expanding popular programs without paying for them, and hectoring politicians into making votes that would be political suicide. Like Cassandra of Greek myth, you have the ability to foretell the future, but suffer the curse of being unable to change it.   more »

After a brief winter break, the AMT wars have resumed. By next week, the House will pass a fiscal 2009 budget that, among other things, would extend the annual Alternative Minimum Tax patch for another year. The House Budget Committee projects this would keep 20 million mostly middle class taxpayers off the dreaded levy. But, as it did last year, the House will also insist that the $62 billion fix be paid for with offsetting tax hikes.    more »

The political Left claims the war in Iraq is ruining the U.S. economy. At the very least, they insist, we would be using the money that is supporting the occupation for more important domestic priorities, such as reforming health care. At worst, they insist, the war is to blame for current economic slump.    more »

For years, conventional wisdom in Washington said the nation's long-term fiscal crisis is being driven by the aging of the Baby Boomers and their impact on entitlements, such as Social Security and, especially, Medicare and Medicaid.    more »

Not to spoil the stimulus party or anything, but the budget deficit this year could well approach $500 billion.    more »