Obama’s chief economist: Trump’s economic projections are “the most absurd I’ve ever seen”


With the release of Donald Trump’s 2019 budget proposal, the Trump economic vision is becoming clearer than ever. Trump envisions a world where the US taxes dramatically less and cuts spending significantly too, leaving little funding for things like roads, scientific research, and safety net programs. He predicts huge growth rates, of 3 percent a year, without explaining how he’d get there. And independent analysts believe his agenda will lead to trillion-dollar-plus deficits as far as the eye can see.

Jason Furman, who worked as deputy director of the National Economic Council and then chief economist in the Obama White House, finds this vision of the future alarming, to say the least. He’s totally supportive of deficits, even massive ones, when they’re needed to overcome economic downturns, but now that the economy is recovering and deficits are still large, he’s more worried. And the answer, he argues, is raising taxes and getting more revenue, especially from the rich but ultimately from everyone.

I talked to Furman, who is now a professor of practice at the Harvard Kennedy School, on the phone about the fiscal future of the country; a lightly edited transcript follows.

Dylan Matthews

You’ve said that Trump’s budget demonstrates that we have a revenue problem, not a spending problem. We aren’t taxing enough or getting enough money from the taxes we have. Walk me through your reasoning.

Jason Furman

We have a large budget deficit over the indefinite future. I think a lot of the problem we have is that revenue is just exceedingly low, especially for this part of the business cycle. We won’t be able to have the type of government I think we should have — or the type of budget balance that everyone, in theory, thinks we should have — if we don’t have more revenue.

To put some numbers on that, revenue is projected to be only 16.3 percent of GDP in fiscal year 2019. The only times in the past 50 years that has happened were in the aftermath of the past two recessions. Even in the 1980s, you had tax cuts and a deep recession and we were collecting more than that in revenue as a share of GDP.

The deterioration in the budget forecast relative to what was projected a year ago is largely because revenue has come down, both because the tax cut passed and because revenue collections are lower.

Finally, you can look at the spending side of the budget, and you don’t see the type of out-of-control spending growth people talk about. The amazing thing is that Medicare in 2019 will be 3 percent of GDP. In 2009, it was 3 percent of GDP. That’s despite the fact that the number of Medicare beneficiaries has gone up from 45 million to 60 million. You’ve had a 33 percent increase in Medicare beneficiaries and no increase in Medicare as a share of GDP.

You’ve seen very surprising restraint in growth of spending programs.

Dylan Matthews

Let’s dig into that a little more. Medicare is a big part of the federal budget but it’s not the only big part — there’s also other health programs like Medicaid and Obamacare subsidies, there’s Social Security, defense spending, programs for the poor like the Supplemental Nutrition Assistance Program (SNAP, or food stamps), and so on.

Is the situation only sunny for Medicare, or for the other parts too?

Jason Furman

On Social Security, we’ve seen gentle growth. It’s a couple tenths of a percent of GDP more this year than it was a decade ago and it will continue on that trajectory.

Low-income programs have been roughly flat as a share of GDP, and that’s largely because some of them, like TANF [Temporary Assistance to Needy Families, or cash welfare], are fixed in nominal terms. They’ve shrunk dramatically relative to the population and economy, while others like SNAP/food stamps have grown. All of that is roughly offset. So you have Social Security gradually growing while low-income programs are staying about the same relative to the economy.

The extraordinary thing is health care. We’ve had a system-wide slowdown in health care costs. Layered on top of that you had very substantial savings in the Affordable Care Act, all of which on spending side has been sustained by Congress.

Dylan Matthews

These revenue and spending projections depend really strongly on how the administration sees the economy developing, and it sounds like they’re committing to some very unrealistic expectations for growth — 2.8 to 3 percent GDP growth per year, rather than the 1.8 to 2 percent growth the Federal Reserve predicts. How does that change some of the numbers we’re talking about?

Jason Furman

The economic forecast made by the administration is done at a political level. You always want to look carefully at that. Even in our administration, there was a lot of technical advice that went into it, but there was certainly some political judgment that went into the forecast.

The economic forecast underlying the Trump budget is the most absurd I’ve ever seen. The second most absurd, just narrowly behind it, was last year’s Trump budget. The third most absurd is a really distant third.

They’re forecasting economic growth about a percentage point higher than anyone else. If you look underneath the numbers, there’s not some implicit coherent theory of how we get that growth, other than having productivity grow at twice the rate we’ve had over the past decade.

It’s detached from reality.

Dylan Matthews

Let’s take the growth projections seriously for a minute. What kind of economy is the White House describing when they’re saying growth will reach 3 percent? What assumptions about the way things are going might lead to a prediction that optimistic?

Jason Furman

The biggest issue there is essentially the bandwidth: Do you look at just data from the past decade, in which case you’d be very pessimistic, or do you look at data from the past 60 years, in which case you’d be more optimistic?

How abnormal do you think recent history is versus how normal do you think the 1950s and 1960s are? Does it make sense to factor in the great productivity growth in the 1950s and 1960s in trying to infer what’s going to happen going forward?

To get to 2.8 percent, you need to assume the same productivity growth rate we’d had over the past 50 years, you need to add a little to it, and then you need to assume that the labor force participation rate adjusted for age is going to rise reasonably strongly over the next decade, after it has fallen for about 60 years now for men and nearly 20 years for women.

I don’t think there’s any basis in the past for an extrapolation like that. That’s not to say it can’t happen. Of course, it might happen, but it might be 60 degrees on Christmas Day in Boston also. I just wouldn’t go out and forecast that.

Dylan Matthews

One of the more surprising things in the budget was the proposed cuts to Medicare, which both violate a promise Trump made but also bring to mind some of the cuts in the Affordable Care Act, which tried to save money by reducing wasteful and ineffective care rather than by reducing access or passing costs onto consumers.

Is that fair? Are the reforms here good?

Jason Furman

The Medicare savings in the budget were along the same lines as the policies that President Barack Obama proposed in his budgets. Some of them I think are especially good, like parity for the reimbursement of hospitals that set up a physician facility versus physicians that set it up. Right now we pay hospital-owned physician practices more, and that leads to greater consolidation and reduces competition. That’s something that’s not just about saving money on reimbursements, it’s about creating a level playing field and competition. I think a proposal like that is a good idea.

The bulk of the Medicare savings, though, are your usual provider cuts. You think providers are being paid a bit too much, you’re going to pay them less. I’d think they’re probably a fine thing to do if you’re doing a budget that asked for sacrifice from all sides but they weren’t particularly inspired in terms of delivery system reform. The budget was less aggressive on Medicare Advantage than Obama’s were, and was actually much less aggressive on prescription drugs, notwithstanding the rhetoric, than Obama’s was.

So if the question is “What do you think of the Medicare savings by themselves,” I’d say B+. Uninspired, mostly fine. But then there’s a second question of, “What do you think of saving money on Medicare in the context of, we’ve just had massive tax cuts and have no plan for additional revenue going forward?” I think that’s a different and very important tactical, strategic question that may well have a different answer than what you think about them on their own in a different context.

Dylan Matthews

Speaking of the rhetoric, the White House has bragged a lot about the infrastructure investment in the budget, saying they could get $1.5 trillion in investment out of just a $200 billion contribution from the federal government.

Is that just nonsense? Are they doing anything for infrastructure?

Jason Furman

The budget gives with one hand and takes with the other.

It takes $122 billion out of the Highway Trust Fund. I’m sympathetic to the administration’s view that the Highway Trust Fund should pay for itself. I’m not sympathetic that they’re not proposing a way for it to continue to fund the current levels.

They have a new proposal that is centered around leverage. The higher the claimed leverage ratio for a public program, the more I’m suspicious that it’s a windfall for an activity that would’ve been done anyway. If I came to you and said that I had a plan that for every $1 you’ll get $1 trillion of investment, chances are that means the $1 trillion was going to happen anyway, and you’re just giving the happy investor $1 for free.

This $200 billion to leverage $1.5 trillion looks an awful lot like, at best, it would be for projects that don’t have a very large public benefit but have a large private benefit, and at worst it’s for projects with a large private benefit that would’ve happened anyway.

Dylan Matthews

During the 2008 campaign, when you were running his campaign’s economic policy team, President Obama famously promised to not raise taxes on anyone making under $250,000 a year.

So you have a dynamic now where a Republican president like Ronald Reagan, George W. Bush, or Donald Trump comes in and cuts taxes across the board — in a way that mostly helps the rich, but lowers taxes for the middle-class overall too, at least temporarily — and then a Democratic president like Bill Clinton or Barack Obama comes in and raises taxes on top earners, while largely keeping the cuts for people lower on the income scale in place.

That back-and-forth feels like it’s what has gotten us into the situation we’re in on revenue, where Republicans just keep cutting dramatically and Democrats aren’t willing to undo the cuts in full for fear of raising taxes on the middle class.

Is it time for Democrats to change their strategy, and accept that they might have to raise taxes for the middle class too, to get us out of this revenue hole?

Jason Furman

With my current hat, I have the luxury of recommending the policies I think are best and the priorities I think are the highest. In 2008, I was working for the Obama campaign, and I think he made the right call in making a pledge not to raise taxes below $250,000.

But certainly, pledges like that going forward would make it exceedingly difficult to fund the type of government we want to fund.

If you look at the 2017 tax law, there are really only two provisions that exclusively benefit high-income households. Now, there’s corporate cuts, there’s other things that disproportionately benefit high-income households. But if you want to only focus on high-income tax cuts, all you’d do is raise the top rate from 37 to 39.6 percent, and bring the estate tax to where it was.

If that’s all you did, you’d get about $30 billion of revenue a year, or 0.15 percent of GDP. That’s nowhere close to enough to deal with our existing obligations, let alone what we want to do going forward. I think at least at a policy level the right way to approach the next revenue debate is not picking and choosing which provisions to make permanent and which to repeal, but start from scratch with a reformed tax system, or a tax system that has a new tax instrument like a carbon tax, and do it on a scale that will make a lasting contribution to making progressive priorities sustainable and permanent.

Dylan Matthews

I’ve noticed more and more left-of-center people who write about economic policy getting skeptical about the need to reduce the deficit. Not just opposing efforts to cut social programs to reduce the deficit, mind you, but questioning whether it’s even desirable, especially when interest rates are as low as they are now.

Economically, the argument is that we could sustain much more debt than we have now so long as we control our own currency (Japan, for instance, has far more debt than we do without experiencing massive inflation as a result). Politically, the argument is that it’s stupid for Democrats to keep cleaning up the deficit messes Republicans make and that the party should instead just pass spending programs it wants and not pay for them.

You think that’s all wrong. Why?

Jason Furman

I’m data-dependent in my views. When I thought the deficit was going to be about 3 percent of GDP for the next several years and the debt was going to be roughly stable as a share of the economy, I thought it was a low priority to deal with.

Now that it looks like the deficit is going to be 5 percent of GDP starting next year, which is the highest it’s ever been as a share of the economy outside of a major war or recession, I think that starts to have some costs. I don’t think the costs are huge and catastrophic. But they chip away at capital formation and increase foreign borrowing, which reduces our future national income.

We still have a lot of other problems: we have a labor force participation problem, we have a productivity problem, we have an inequality problem. I still wouldn’t let the deficit become the consuming number one issue, but I think it’s going to start getting in the way of achieving all of those other goals.

I hate worrying about the deficit. It’s not an end unto itself. It’s not that important compared to how families are doing in the economy. But I think it’s now getting to a point where it is important.

The second point is that you can’t evaluate any public policy without evaluating the financing for it. Everything sounds good when you don’t have to pay for it. The question is, is it worth the money?

In my view, the tax cuts that we passed at the end of 2017 weren’t worth the money, because we’re eventually going to have to repay it. I think there’s a lot of low-income spending and investments in the future, like infrastructure, that I think are worth the money. But I think one would do better if everyone stuck by PAYGO [a Congressional rule requiring all new spending be paid for], because that requires you to ask, “Is this important enough that there’s something else I’m willing to do now [to pay for it]?” as opposed to pushing those costs off in an uncertain, indefinite way into the future.

I think there are three arguments [for not worrying about deficits]. One is we need stimulus. I think that’s crazy when the Fed is raising rates. If the Fed is raising rates, they’re going to undo your fiscal stimulus.

The second argument is that deficits don’t matter. I think that’s also wrong. The third is that there’s a lot of other important investments we need to make, so let’s make them now and let the deficit sort itself out in the future, and it’s not prohibitively costly to wait. That last view, I don’t think is crazy. It doesn’t happen to be mine because I think the costs of deficits are a little higher than some of those people think. I think the system works better if you try to obey norms, even if others aren’t.

At a minimum, I’d be a PAYGO hawk — let’s pay for everything. I would also do what I could to get revenue.

Dylan Matthews

And to be clear: you’re describing your view so long as the economy stays healthy, right? If we go into another recession, this all changes.

Jason Furman

Oh, absolutely. If the economy is turning down, I don’t care what our debt to GDP ratio is. I’m going to be out there advocating for stimulus. I think stimulus at a time of zero interest rates is much more powerful than the economics profession had previously given it credit for, and is a really important part of our arsenal going forward.

Dylan Matthews

You say you think the costs of deficits are higher than some lefties think. What costs, specifically, are you talking about? Is the fear just that deficits push up interest rates, which makes it harder for companies to borrow money and invest?

Jason Furman

It is directly less savings. National savings is lower when the deficit is higher. That’s an accounting identity, unless private savings makes up for it, and the opposite is happening right now.

When national savings is lower, one of two things happens: either investment is lower or foreign borrowing is higher. Either one of those means national income is lower in the future. I don’t think you necessarily need to think of this manifest itself as lower interest rates leading to lower future investment, though I think that is partly how it manifests itself. There isn’t any really great solution to having low national savings when it comes to future income growth.

Obama’s chief economist: Trump’s economic projections are “the most absurd I’ve ever seen”

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