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Attention: Deficit DisorderThe budget deficit is $287 billion. Oh, wait a minute, it's $460 billion. No, scratch that, make it $540 billion …

By Daniel GrossPosted Friday, April 4, 2003, at 4:34 PM ET

Under the leadership of new Director Douglas Holtz-Eakin, the Congressional Budget Office has finally done what supply-siders have been urging it to do for years. Its March 25 analysis of the president's 2004 Fiscal Proposal marked the first official CBO deployment of "Dynamic Scoring," a mode of fiscal analysis that takes into account the possible effects of tax cuts on growth, the economy, and government revenues.

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The Wall Street Journal editorial page hasn't been so happy since President Clinton met Monica Lewinsky. "In its first attempt to analyze the 'dynamic,' real-world effects of tax cuts, the office found that President Bush's tax proposals would create jobs and grow the economy, sending money flowing back to Treasury," crowed the Journal. "All you supply-siders and JFK Democrats who have argued this for years, take a bow." (Moneybox contest: a free copy of Profiles in Courage to anybody at the Journal who can positively identify a "JFK Democrat" who has been arguing for years that President Bush's tax proposals would "grow the economy.")

After taking their bows, the dynamic scorers should actually examine their figures, which are less dynamic than they are deceptive. The CBO concluded that, under Bush's latest proposal, "the deficit in 2003 and 2004 would rise to $287 billion and $338 billion, respectively." But it's far more likely the deficit will top $500 billion this fiscal year. As for next year, it's anyone's guess.

The dynamic CBO bases its dynamic calculations on the dynamic assumption that "for 2003, revenues would remain nearly unchanged from 2002, while outlays would increase by 6.6 percent." But the Monthly Treasury Statement, which the CBO's analysts might want to bother to read, tells an entirely different story.

The CBO projects that government revenues will rise marginally in fiscal 2003, to $1.856 trillion from $1.853 trillion in fiscal 2002. But, as the Treasury statement shows, revenues were down 8.2 percent through the first five months of the year (compared to the first five months of last year). Individual income-tax receipts fell 11 percent, and corporate income taxes dropped by half.

The CBO notes that spending is projected to rise 6.6 percent in Fiscal 2003 to $2.143 trillion, from $2.011 trillion in Fiscal 2002. But through the first five months, spending has actually risen 7.5 percent. And neither of these projections counts the $80 billion approved by Congress for the war this week—cash that is to be spent this year. (Not to mention that the $80 billion is itself a gross underestimate of what the war will actually cost.)

If we extrapolate the revenue and spending trends to all of Fiscal 2003, the government will take in revenues of $1.7 trillion and spend $2.16 trillion—a $460 billion deficit. Add $80 billion for the war, and the deficit climbs to $540 billion.

At root, the CBO's report demonstrates Washington's baffling failure to grasp a few simple facts. First, if you cut marginal tax rates, receipts from those taxes will fall, not rise, in the years in which you cut those tax rates. Second, the revenue boom of the late '90s and 2000 was an aberration and should not have been used as a baseline for long-term projections. It was folly to assume revenue growth could continue that torridly. In Fiscal 2003, the government is on a pace to collect the same amount it did in Fiscal 1998. But projected spending for this year is nearly 30 percent higher than it was five years ago!

There is now a huge structural budget gap. It isn't simply a result of the war, 9/11, the tax cuts, and the recession. The gap is growing because neither President Bush nor the Republicans in Congress have shown any inclination to cut spending, despite endless promises to do so. And despite the president's insistence that we will not simply punt our obligations to the next generation, we show every intention of doing just that.

What makes today's deficits scary is that there is no sign that they are temporary. The largest chunks of the tax cuts will take effect in the coming years. What's more, the administration and congressional leaders support big-ticket items that would result in higher spending (Medicare prescription-drug benefit, private Social Security accounts) and lower revenues (fixing the alternative minimum tax, yet more new tax cuts).

The Bush administration's economic policymakers have taken to branding as nonsense the '90s-era conventional wisdom that large and growing government deficits crowd out private investment and lead to high interest rates. (Never mind that some of these policymakers were themselves deficit hawks in the '90s. Their views, you might say, are dynamic.) The Bushies seem confident that deficits are just as manageable at 5 percent of the Gross National Product as they are at 2 percent. In the coming year, we'll find out if they're right.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.

COMMENTS

Remarks from the Fray:

An analysis that addressed dynamic scoring on its own terms would have been more persuasive…Most proponents of DS do not argue that government revenues will surge dramatically in the first year or two after marginal rates are reduced, yet this is the time frame Gross dwells on, while reverting to static scoring assumptions for the out years. Anyone even half-convinced of the validity of the assumptions behind DS would glance at Gross's piece, note his emphasis, and dismiss his argument as lazy at best and disingenuous at worst. A more effective take on DS would first look at CBO's projections of government revenue in those out years…DS might be a valid predictor, or it might not -- not exactly a ringing endorsement of the concept, though in fairness more conventional revenue estimates in the past have often been wildly wrong. Second, a key difference between the proposed Bush tax cuts and those proposed by Kennedy (1962) and Reagan (1981) should be noted. The earlier cuts were both large percentage reductions in very high marginal rates; Bush has proposed much smaller reductions in far lower rates. You don't need to be an anti-supply-sider to balk at the idea that the Bush cut will have a similar economic impact in the same time frame as the first two. The third thing a proper commentary on DS would do is challenge its proponents to do something that to my knowledge they never have: comparative modeling. Subject the Kennedy and Reagan tax cuts…to dynamic scoring using the same input data CBO has used in its budget projections including the Bush tax cut. If the figures for government revenue produced by DS for the Kennedy and Reagan cuts approximate actual changes in revenue, the case for DS becomes stronger. If not, well, it doesn't. I would think a true believer in DS, as opposed to someone looking for any hook on which to hang any tax cut President Bush's political advisers and campaign contributors decide to propose, would leap at the challenge.

--Zathras

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I don't know why Gross is so hard on the CBO. After all, their dynamic scoring actually makes the point that Gross wants to. To wit, that a larger budget deficit reduces national savings and thereby slows capital accumulation, productivity and GDP growth. According to the CBO, the tax cuts that drive the deficit increase do have favorable incentive effects: people work more, save more and maybe even think harder. But but these favorable "supply-side" effects are offset by the damaging rise of the deficit. Basically, the rise in government dissaving trumps the trivial rise in private saving, leading to a decline in total national saving…Hence the economy's potential growth rate slows marginally…Nevertheless, I agree with Gross's basic premise, which seemingly even a journalist or child could grasp. When you cut taxes, government revenue falls and the budget deficit rises. Static scoring showed this and dynamic scoring just reinforced the point, despite Gross's failure to grasp it. Only supply-side fantasizers and liars who would have 2 and 2 be 5 fail to see it. But that is more a matter of psychology than economics…So I think Gross backs the right argument here. But as usual, his own is muddled and short of some facts. Being a blindly partisan Clinton apologist gets in the way of clear thinking, I guess.

--Game_Warden

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