The President’s Budget, Continued: The White House Responds to CBO

Jack Lew, the director of the White House Office of Management and Budget, responds to the CBO analysis released today showing the extent of the White House’s budget optimism over the next decade:

There are two main reasons why our projections differ. First, is that the CBO re-estimate does not reflect two important budget policies. In the budget, the President laid out a plan to make a historic investment in our transportation infrastructure in order that our country can keep pace with our competitors in the global economy. We were crystal clear that this spending had to be paid for with a bipartisan funding source and that if one was not identified, that the Administration would not support making these investments. This way there would be no risk that this spending would add to the deficit. CBO chose to treat this spending as a free-standing initiative, not in tandem with our commitment to pay for it – which is not the policy we proposed.

Similarly, the budget proposes that we fully pay for the cost of fixing the Medicare physician payment formula so that reimbursement rates are not cut dramatically which could lead to doctors refusing to treat Medicare beneficiaries. In past years, this fix was not paid for, but last year, the President signed into law a fully paid for fix for one year, and our budget identified tens of billions of dollars in specific health care savings that will pay for another two years. With three years of the fix paid for, we believe that this establishes a pattern of practice – critically important in scoring policies — that strengthens our commitment to work with Congress on a permanent solution. Again, CBO chooses not to make this assumption.

The second main difference between our and CBO’s analysis is that our economic assumptions differ. The economic forecast in our 2012 Budget, which was prepared in November 2010, is actually more cautious than the consensus forecast for 2011, and is well within the range of the Federal Reserve’s assumptions in all years. Beyond the short-term, we believe that the economy will fully recover after this recession as it has after previous ones. It is our view that the economy will return to full strength, and that is a view shared by the Federal Reserve as well. [Emphasis added]

Two comments on Lew’s arguments. First, recall the magnitude of the difference between the CBO and White House estimates of deficits over 10 years: $2.2 trillion. As the linked chart shows, the White House’s higher revenue comprise make up $2.o trillion, or 90%, of this difference. That’s not just the result of leaving out a doc fix offset ($315 billion through 2021 according to the White House) or transportation revenues ($328 billion through 2021). Lew’s second point about different GDP forecasts gets more to the crux of the difference in revenue forecasts, but note that while OMB assumes an economy that’s 3.5% larger in 2021 than CBO does, their 10-year revenue estimates are 5.5% higher (about 4% if you add in the OMB estimates of the doc fix offset and the transportation pay-for to the CBO estimate). So there’s something fundamentally different about OMB’s revenue assumptions.

My second comment is simple: how can CBO score policies that haven’t been proposed? It’s not like the president’s budget goes to an automatic up-or-down vote before the U.S. Congress; quite the opposite, in fact: it’s usually DOA. So why not propose a concrete way of paying for new infrastructure and the doc fix? Furthermore, what if the president’s budget expressed an absolute commitment to fully balance the budget but didn’t offer a path for getting there?  Would the CBO be expected to score such an amorphous promise? If so, that would seem to open the door to quite of bit of manipulation of CBO by the White House.