I Was Wrong, part I

I believe it's important to admit when you were wrong. Now that the fiscal cliff and sequester are mostly behind us, I can say that I made a few predictions that proved to be wrong.

Immediately after Obama's reelection, I said,

"First of all, expect the fiscal cliff to stay in place. After all, we just re-elected most of the people who put it there to begin with. … Any compromise will include more tax hikes than spending cuts, if spending is actually cut at all."

As it turned out, the fiscal cliff did not stay in place. The deal to avert the fiscal cliff included $250 billion in lower taxes compared to just $9 billion in higher spending, relative to what would have happened with no deal. At the time, I said,

"If you think that two month delay is a sign that the sequester will never happen anyway, I think you're right. It was never going to happen in the first place, and we lose nothing by delaying it."

This was also wrong. Not only did the sequester actually come to pass, the continuing resolution recently passed by the Senate and House and signed by Obama also keeps it in place for the next six months. While the Senate budget for fiscal 2014 repeals the sequester, the House budget does not, leaving open the distinct possibility that the sequester's lower spending is here to stay.

Color me pleasantly surprised. Even a blog called Expected Optimism wasn't optimistic enough!

How Accurate is the CBO?

Politicians and pundits often talk about budget projections from the CBO. Depending on how the CBO's projections mesh with the commenter's worldview, the projections are either the best possible from the nation's top budget economists, or they're crap, constrained by Congressional rules until they're useless. So just how accurate is the CBO?

A comment over at Bob Murphy's Free Advice inspired me to check out both the 2001 and 2012 "Budget and Economic Outlook" reports from the CBO. While I've got them out, I thought it'd be interesting to compare the CBO's old projections with what actually happened. Conveniently, the 2001 and 2012 reports overlap in 2011, so that's the year I'll compare.

First, Table 1-2 from the 2001 report (page 24 of the PDF), including the 2001 projection for 2011 in the far-right column:

Then, Table 1 from the 2012 report (page 6 of the PDF), including the actual numbers for 2011 in the far-left column:

How accurate was the CBO for 2011? Not at all.

Revenue: The CBO projected revenues of $3.4 trillion, while actual revenues were a full third lower than the projection, at $2.3 trillion.

Outlays: The CBO projected outlays of $2.6 trillion, while actual outlays were a full trillion higher at $3.6 trillion.

Deficit: The CBO optimistically projected an $889 billion surplus for 2011. The actual deficit was $1.3 trillion, a $2.2 trillion difference. (Of course, this error is just the combination of the two errors above. Still, it's interesting to contemplate a United States with an $889 billion surplus!)

GDP: The CBO projected a $16.9 trillion (nominal) GDP, but actual GDP was only $15.3 trillion.

Should we just write off the CBO entirely then? I don't think so. On the revenue side, the CBO could not have accounted for the Bush tax cuts or the revenue lost from the Great Recession. On the spending side, they could not have accounted for the war spending or, again, for the Great Recession, or for Obama keeping stimulus-level spending even after the stimulus was over.

I think the takeaway here, as we approach the end of the fiscal cliff negotiations, is that all projections for a decade in the future need to be taken with a grain of salt. Stuff is going to happen that no one expects. Decide for yourself what that should mean for current policy.

A final note: Some might look at the four areas above and say that in each area, the projections ended up being more optimistic than reality. I think that's a mistake. First, the CBO projected in 2001 that 20% of 2011's GDP would be soaked up by federal taxes, when it was actually only 15%. I think that's a good thing, despite what it means for the deficit.

Second, the GDP numbers above are nominal, meaning they include both real GDP and inflation. If nominal GDP is lower than expected, the cause might be lower real GDP (bad) or lower inflation (good). We've had both in recent years, so I'd have to dig deeper into the reports to see which effect dominates, and that's more playing with PDFs than I'd like to do tonight.

Taxes in the Fiscal Cliff

It is becoming increasingly clear that we are not going to make it into 2013 without tax increases. If we go over the fiscal cliff, taxes are going up, but Democrats have made clear that any negotiated deal would include increased taxes as well. Assuming we do go over the cliff, what would those taxes look like?

• New Obamacare taxes would come into effect.
• The Alternative Minimum Tax would return to full strength.
• The Bush tax cuts would expire.
• The payroll tax cut would expire.

Even if Congress reaches a deal to avoid the cliff, taxes associated with Obamacare are likely to stay in place. After all, changing those taxes as part of a deal to avoid taxes would require the Democrats to admit that Obamacare actually contained taxes in the first place. I'm not holding my breath.

On the other hand, even if Congress does not reach a deal to avoid the cliff, I expect a minor deal to avoid the AMT. After all, Congress has enacted one-year patches to the AMT every year for more than a decade, under both Republican and Democratic Congresses, as well as under the split control we've seen since 2010. This year should be no different.

On the Bush tax cuts, Obama was reelected after campaigning to raise taxes on the wealthy. If no deal is reached, Obama gets his wish; the Bush cuts expire and taxes are raised on the wealthy (and everyone else). The Republicans really don't have any leverage on this issue, so I expect any deal would only keep the Bush cuts for those below some income level, probably $200k or $250k.

The real uncertainty is the payroll tax cut. Normally, I would expect Democrats to abhor the cut on the grounds that it undermines Social Security. Republicans should celebrate it, not only as a tax cut, but because it undermines a massive entrenched entitlement. And yet, in some sleight of hand I still haven't figured out, Obama got the Republicans to oppose (and Democrats to support) a tax cut on every worker in the country. Now that the election is over, will the parties stick to these flipped roles, or revert to their principles? Or will the payroll tax cut expire with no one paying attention?

What Republicans Should Do
Whatever happens with the rest of the fiscal cliff, the rich (and people who work for the rich) are going to get hosed. Obama will probably get his way on the Bush tax cuts, and many of the Obamacare taxes are also aimed at the rich. Health costs are also going to go up, but I think the smart insurance companies have already raised their rates to compensate. There may not be a noticeable increase in premiums because the increase has already happened.

Given this, Republicans need to refocus on what good they can still do. Taxes are going up, and with Obama's reelection, that was inevitable. But if Republicans are smart and tactful, they can still keep taxes low for most of us. Give Obama the tax hike on the rich, since that will happen even with no deal, but secure the payroll tax cut and the Bush cuts for the non-rich in exchange. Obama himself is campaigning for the latter, so this should be easy to do, if Republicans are willing to do it.

Aftermath: Reflections on Obama's Re-election

Barack Obama has been re-elected President of the United States.

For starters, Gary Johnson was not a spoiler. While the results are still coming in, as of 11:30pm Pacific, there was not a single state won by Obama where Romney would have won even if every Johnson voter had voted for Romney instead.

Second, there is no mandate. While Obama won, he won with a far narrower lead in both the popular vote and the electoral college than he had in 2008. While Democrats increased their lead in the Senate, Republicans increased their lead in governorships, and the House is on track to be more or less the same as it was. This was very much a status quo election.

On the whole, will we be better or worse with Obama as president?

First of all, expect the fiscal cliff to stay in place. After all, we just re-elected most of the people who put it there to begin with. While I haven't spent too much time learning about the fiscal cliff, Wikipedia claims a 19.63% increase in revenue and a 0.25% decrease in spending, or a nearly 80-to-1 ratio of tax hikes to spending cuts. This will not end well-- and even if our new old government leaders manage to avoid the cliff, the re-elected Obama is in a prime position to extract concessions he was unable to before the election. Any compromise will include more tax hikes than spending cuts, if spending is actually cut at all.

Second, Obamacare will be implemented fully over the next few years. Expect the nation's health, freedom and balance sheet to all suffer. Although to be honest, I don't believe Romney would have done any better.

The national debt will continue to grow. If the fiscal cliff causes a second recession, expect more stimulus and bailouts, probably for Europe too. We may look back at $1.5 trillion deficits and laugh about how small they were. On the other hand, the same probably would've happened under Romney, considering his plan to index military spending to 4% of GDP.

On other long-term important issues, I don't expect Obama to do much of anything. He'll keep ignoring space (mercifully), Social Security will continue to stumble forward without reform, trade deals will be forgotten, immigration won't change. We'll mostly withdraw from Afghanistan on schedule, although the lack of attention the war gets these days means we'll probably keep troops there for the long haul, same as we've still got troops in Germany, Japan and Korea. On trade and Afghanistan, at least, Romney would have been even worse. While Romney may have avoided the fiscal cliff, his insistence to go after China on trade might have been just as bad for the economy.

The main difference between the two candidates in terms of our long-term welfare is this: With Obama's victory, 2016 will see another wide-open primary for Republicans, where we'll have another shot at nominating a true spokesperson for liberty. Had Romney won, we wouldn't get that chance until 2020. So hold onto your hats. It's gonna be a rough four years for liberty, but we made it through the last four. We'll make it this time, too.