Why a Lack of Transparency in the Administration’s Budget II is a Problem

A transparent budget proposal—such as the Administration’s first 2012 Budget presented by President Obama on February 14 or the House Budget presented by Paul Ryan on April 6—contains year-by-year tables showing the proposed path for government outlays over time. These are needed to estimate the economic impact of a budget and assess its credibility.

But the second Administration budget for 2012 and beyond presented by President Obama this week contains no such information, either in the speech or in the fact sheet to go along with the speech. How can one determine the impact of a budget on the economy if one does not know the path of proposed spending? This lack of transparency is not simply an issue for policy wonks as William Galston of Brookings explains in his critique of the Administration’s Budget II. It raises questions about the credibility of the budget process.

To illustrate the issue in concrete terms I “reverse engineered” one possible year-by-year path for government spending over the next ten years that is consistent with the information in the speech and the fact sheets on the Administration’s Budget II. In particular the path reduces the deficit by $4 trillion over 12 years compared to Budget I and there are three dollars of spending cuts and interest savings for every one dollar of tax increases. In other words, under Budget II, spending would be down by $3 trillion relative to Budget I over 12 years. The resulting path is one of several possibilities because one cannot go uniquely from a multiyear total to year-by-year amounts. The path calculated here for Budget II may have more spending up front and less in the out years compared with actual Budget II, but we do not know for sure because the budget is incomplete as presented.

The path for government outlays as a share of GDP under Budget II is shown in this graph along with the Administration’s Budget I, the House Budget, and recent history.

The graph focuses on the next 10 years because that is the frame of reference for Budget I, the House Budget, and the current budget process. It is important to note, however, that my calculations imply that $1 trillion of the $3 trillion outlay reductions in Budget II compared with Budget I occur in the two years after the 10 year window. So in reality the proposed reduction in spending growth is $2 trillion rather than $3 trillion.

There are several implications of these calculations. First, if you view Budget I as an opening to a negotiation and the House Budget as a counter offer, then Budget II has moved in the direction of the counteroffer. But it is a relatively small move compared to the outcome of the 2011 negotiations, where the Administration moved two-thirds ($39 billion of $61 billion) in the direction of the House proposal. But stay tuned.

Second, the new Budget still leaves a great deal of the recent spending binge in place, at 22.3 percent of GDP compared with 19.6 percent in 2007.

Third, if the Administration wants Budget II to be part of the negotiations, then OMB should either submit a revised budget to replace the one sent to Congress on February 14 or provide the needed transparency in some other way.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

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