Jon Chait Watch 2: Yes, Trimming Spending Every Year Means Reduced Expenditures in the Future

Over the past few days, The New Republic's Jonathan Chait and I have engaged in a back-and-forth over the Reason.tv video "Budget Chef Explains How to Balance the Budget W/O Raising Taxes" and the article upon which it's based, "How to Balance the Budget Without Raising Taxes," which I coauthored with Mercatus Center economist and Reason columnist Veronique de Rugy. Those two pieces argue that the federal budget can be balanced in the year 2020 by reducing current outlays to 19 percent of Gross Domestic Product, the amount the Congressional Budget Office (CBO) estimates government revenue will be then if current tax policies are extended.

If you're interested in catching up on the cyber-brouhaha, start with Chait's latest bit, in which he accuses me of innumeracy, "tonal posturing," and certifiable delusions. To be fair to Chait, he pretty much talks this way about everyone.

Indeed, he is given to characterizing differences of opinions not in terms of disagreements but in terms of psychological dysfunctions and moral failings. For him, to believe in balancing budgets with revenues equal to 19 percent of GDP is evidence of "debilitating pathologies" and to write expansively (and I hope, somewhat entertainingly) in reply to Chait produces "word salad," a condition common to various mental illnesses. This is a reflexive debating tactic for Chait, who has recently insisted that opposition to the individual mandate in Obama's health care plan is "a sign of right-wing hysteria." If people who disagree with him are not in need of electroshock or a spray of seltzer to the face, then it is only because they are "total hacks," as he grossly mischaracterizies my coauthor Veronique de Rugy (who, he says, practices "voodoo economics" and "goes all Laffer Curve" at the drop of a hat). He winds up his critique with sage career advice for yours truly:

I really advise Gillespie to confine himself to subjects he understands (motorcycles? picking up chicks with a snap of the fingers?) and find a fiscal writer who is able to make the libertarian case from factual premises.

This isn't "tonal posturing," it's ideological scoliosis and he's welcome to embrace its disfiguring effects on the mind as much as he wants.

I'd like to address one charge that Chait makes, that I "genuinely [do not] understand the article he co-authored." The crux of it for Chait is that I either pulled a fast one in the Reason.tv video or played Lennie to Veronique's George because I did not explicitly mention the compounding of annual budget cuts in the march to a balanced budget in 2020.

Except that I did:

As I say around the 1.20 minute mark, "By making small, systematic cuts in the fatty parts of the budget over the next decade, we'll compound all our savings."

Let me, for the last time (I promise!), lay out the crux of the matter.

Taking a page from the charge given by the president to his commission of fiscal responsibility and reform, Veronique and I wanted to see how we might balance the budget without increasing tax rates and other revenue mechanisms in 2020. According to the CBO's alternative scenario (the one prized for its realism), government revenue will be about 19 percent of GDP; this figure keeps the Bush tax rates, applies ongoing patches to the AMT, etc. Using CBO estimates of economic activity, that means all government spending cannot exceed about $3.7 trillion in 2020 (all amounts are in 2010 dollars). However, the CBO projects that, given current growth trends, etc. that the federal budget will be $5.1 trillion in 2020.

Which means that we need to cut around $1.3 trillion in spending (there's some rounding involved, that's why it's not $1.4 trillion). To effect this sort of cut in a single year would mean a cut of around 25 percent, which is not only politically impossible but immensely disruptive. So Veronique and I factor in $130 billion cuts in each year's projected budget, each of which is expected to grow. So most of the "cuts" in fact come from anticipated increases in spending, which is one of the reasons why the successive cuts of pork in the video look roughly similar (Dear Mom and Dad in heaven, did you ever think you'd witness your youngest son write such a sentence?). A given year's cuts (obviously) get rolled into the next year's and start a new baseline on which continuing cuts or growth is predicated. That is how spending gets reduced over time. This is not pulling a fast one, it's systematically phasing in a reduction in government outlays from at least 23.5 percent of GDP to match a plausible level of revenue (though as Veronique and I point out, still above the historical average since 1950).

Here's Chait:

It is a 24% cut. It involves significant changes in the scope of the government, not just trimming tiny bits of waste. The ideological merit of those cuts is not what I'm disputing.

Indeed, it's a significant cut, phased in over a decade, from where we will be if we stay on auto-pilot versus where we can afford to be. The starting point of the video and the article is precisely that, as we like to say around Reason, We Are Out of Money and if we expect to right the ship of state (at least financially), we need to start bailing water now. On an annual basis, these are not big cuts. If we cannot pull $130 billion in trims from more than the $3.6 trillion in spending (roughly 3.6 percent) CBO estimates the 2011 budget will be, we should give up now as a country. And if we can't keep doing that until we get back to a realistic match between money in and money out, we're totally screwed. And so are our kids, and their kids, etc.

Let me reiterate two points that shouldn't be forgotten in any of this.

First, federal spending has been absolutely out of control for the past decade, rising 60 percent in real terms since Bill Clinton left office (and let's face it, we've got virtually nothing to show for it other than bills).

Second, the 19 percent revenue limit Veronique and I use isn't arbitrary. If the past is any indicator, it's what the feds will have in their pockets for the foreseeable future (if they're lucky). Despite occasional upticks, attempts to goose that number up have not worked over the long haul. So plans to balance the budget that rely on a number higher than that are almost certainly doomed to failure.

Does getting to 19 percent involve "significant changes in the scope of government," as Chait argues. No, at least as it affects your daily life. Again, think back to the Aughts and the out-of-control spending first under Bush and now under Obama. There is precious little to show for it: two seemingly endless wars, free prescription drugs for relatively wealthy seniors, increased federal control of education without any results to speak of… I could go on.

And then think back to the second Clinton term and the first couple of years under Bush, when government outlays were in fact in the 19 percent range.

If that's a world you can live in, keep coming back to Reason.com (you'll even get arguments about the world would be better still if the government had far less control of your money and your life). If it's a world that only a psychopath could stand, I suggest you exclusively read The New Republic.

From what I understand, Veronique de Rugy will be posting a response of her own at National Review's The Corner, where she blogs. When it's up, I'll put up a link here.

Update: Here's Veronique de Rugy's response to Jonathan Chait's posts.

Even More Update: Jon Chait responds to the responses (including a post by Will Wilkinson about regulatory capture).