WSJ: The Deficit Is Much, Much Worse Than You Think

Hot Air:

How much worse? So much that even Paul Krugman might be slightly uncomfortable with it.

Emphasis on might and slightly.

Many of the current budget assumptions are laughably implausible. Both the White House and CBO predict that Congress will hold federal spending at the rate of inflation over the next decade. This is the same Democratic Congress that awarded a 47% increase in domestic discretionary spending in 2009 when counting stimulus funds. And the appropriations bills now speeding through Congress for 2010 serve up an 8% increase in domestic spending after inflation.

Another doozy is that Nancy Pelosi and friends are going to allow a one-third or more reduction in liberal priorities like Head Start, food stamps and child nutrition after 2011 when the stimulus expires. CBO actually has overall spending falling between 2009 and 2012, which is less likely than an asteroid hitting the Earth.

Federal revenues, which will hit a 40-year low of 14.9% of GDP this year, are expected to rise to 19.6% of GDP by 2014 and then 20.2% by 2019—which the CBO concedes is “high by historical standards.” This implies some enormous tax increases.

CBO assumes that some 28 million middle-class tax filers will get hit by the alternative minimum tax, something Democrats say they won’t let happen. CBO also assumes that all the Bush tax cuts disappear—not merely those for the rich, but those for lower and middle income families as well. So either the deficit is going to be about $1.3 trillion higher than Washington thinks, or out goes Mr. Obama’s campaign promise of not taxing those who make less than $250,000.

In other words, a $9 trillion hole over 10 years is the pie-in-the-sky best-case scenario. Fun fact: Back in March, when the White House was still scoffing at CBO’s $9 trillion estimate, White House budget director Peter Orszag actually admitted that if CBO was right then The One’s budgets would be unsustainable. And now here we are, five short months later. Our options:

“We’ll either need wrenching, wrenching spending cuts, a boom in the economy or a new funding source or some combination to get this fiscal house back in order,” Darda said.

Income tax hikes alone won’t be enough, said Darda. We may need a national sales tax.

“We’re all going to have to have a stake in this game,” Darda said. And we’re all going to have to pay a little bit more and probably get a little bit less.”

So how did such a gross misjudgment on the order of multiple trillions of dollars happen? Check it out:

Nearly all of the revision comes from a deteriorating economy, one that has not responded to the government’s fiscal policy thus far. In their original budget they expected 3.5 million jobs “created or saved”. That language is not in the [Midsummer Review], and unemployment is expected to be 2% higher than previously supposed for 2010. That would mean 2.8 million fewer jobs. Now, one might wish to argue that there were more jobs to be lost than they expected, momentum was worse, etc. Let me give you two looks at this from comparing the original OMB budget economic assumptions and the MSR. The first is the unemployment rate (fourth quarter average.)

Notice the glidepath for reaching full employment (which is a 5% unemployment rate in their modeling.) You end up in the 2012 election with a 7.5% unemployment rate. Now it may be that the change in unemployment in 2012 is good for the electoral chances of President Obama, but there will be much long-term unemployment by then, and how will this be expected to change?

The article goes on to talk about how Obama's numbers on wages, inflation, and tax receipts just don't seem to add up. Some think OMB chief Peter Orszag should resign or be fired, but the bottom line is that Obama chose to ignore the CBO earlier in the year, actually mocked their numbers, and delayed his report to try to get cap-n-tax and Obamacare passed before the nation knew just how bad the economic and deficit situation was. Now, the OMB can do nothing but retreat, tucking their tails and finally agreeing with what the non-political non-hack professionals were saying all along.

Yet another politically damaging mistake by an incompetent and hyper-partisan administration.

There's my two cents.