Babies with Candy IV

Krugman's latest Climate of Change:

...Obama’s new budget represents a huge break ... with policy trends over the past 30 years ... he will set America on a fundamentally new course.

The budget will, among other things, come as a huge relief to Democrats ... fears that Mr. Obama would sacrifice progressive priorities in his budget plans, and satisfy himself with fiddling around the edges of the tax system, have now been banished.

For this budget allocates $634 billion over the next decade for health reform. That’s not enough to pay for universal coverage, but it’s an impressive start. And Mr. Obama plans to pay for health reform, not just with higher taxes on the affluent, but by putting a halt to the creeping privatization of Medicare, eliminating overpayments to insurance companies.

Obama, it seems, after studying Clinton's failure to enact health care reform, appears to have identified the problem: Clinton made the mistake of announcing he was setting off to reform health care, with town halls and committees and negotiations. Obama has, evidently, decided fundamental change is best attempted under-the-table. Hidden in fiscal stimulus bills and buried in budgets.

He has also, apparently discovered the generally un-acknowledged reality that we already have nationalized health care. The government already -- via tools such as existing regulatory authority, Medicare policies, etc -- fundamentally controls our health system. Sweeping changes can be made without dramatic new legislation and attending political debate.

His approach may be a blessing in disguise for his political opponents in that it will make it easier for them to argue that the problems we have had with health care all along were due to too much, not too little, government control+interference.

On another front, it’s also heartening to see that the budget projects $645 billion in revenues from the sale of emission allowances. After years of denial and delay by its predecessor, the Obama administration is signaling that it’s ready to take on climate change.

As far as I can tell the only benefits a cap-and-trade system has over a carbon tax are political -- allowing democrats to misleadingly claim they are not creating new taxes. The costs are likely to be substantive. Government created artificial markets exist to be gamed by savvy players. All sorts of perverse economic incentives are inevitable. And from what I've read, these systems don't actually do a particularly good job of reducing emissions.

I tend to support a Carbon Tax. Conservatives, at least, are willing to acknowledge that when the government taxes an activity it discourages it. In as much as the Government needs revenue, it therefore ought be taxing activity we would benefit from discouraging. Whether or not one believes the earth will be destroyed by melting ice caps in 2012 unless we act RIGHT THIS MINUTE, its not hard to imagine that reducing our environmental footprint is a good idea. Ergo, taxes on environmentally destructive activities make sense.

It says a lot then about the administrations reading of public opinion that they prefer a less effective under the table policy, to a more effective above board policy.

In any case, Krugman should not be over-heartened. The administration has to project what revenue it can to project a semblance of fiscal responsibility.

And these new priorities are laid out in a document whose clarity and plausibility seem almost incredible to those of us who grew accustomed to reading Bush-era budgets, which insulted our intelligence on every page...

Many will ask whether Mr. Obama can actually pull off the deficit reduction he promises. Can he actually reduce the red ink from $1.75 trillion this year to less than a third as much in 2013? Yes, he can.

Right now the deficit is huge thanks to temporary factors (at least we hope they’re temporary): a severe economic slump is depressing revenues and large sums have to be allocated both to fiscal stimulus and to financial rescues.

But if and when the crisis passes, the budget picture should improve dramatically. Bear in mind that from 2005 to 2007, that is, in the three years before the crisis, the federal deficit averaged only $243 billion a year. Now, during those years, revenues were inflated, to some degree, by the housing bubble. But it’s also true that we were spending more than $100 billion a year in Iraq.

So if Mr. Obama gets us out of Iraq (without bogging us down in an equally expensive Afghan quagmire) and manages to engineer a solid economic recovery — two big ifs, to be sure — getting the deficit down to around $500 billion by 2013 shouldn’t be at all difficult.

Krugman notes that this years deficit is about 7 times the average deficit from 2005 to 2007 and that Obama aspires only to "reduce" the deficit to twice what it was then by 2013. Krugman describes the assumptions required to achieve even Obama's limited fiscal responsibility goals as being "Big ifs" yet somehow he lauds their plausibility.

The politics of war open a bit of a can of worms for Obama. He campaigned on the need to draw down in Iraq more to re-focus on Afganistan then to save money to spend on health care. If he does recognize substantial cost savings, he will be politically vulnerable if one or both of those wars goes poorly. On the other hand -- and this may be his calculation -- so long as the economy is awful in 2012, foreign policy will not be high amongst voter's priorities.

Which actually gets to the heart of Obama's re-election calculus. He and his advisors have to recognize that the economy is unlikely to recover by 2012. He needs to figure out, then, how to get re-elected having presided over economic catastrophe. His apparent strategy seems to be taken from FDR's playbook: create spending programs that people grow dependent on, associated with you, and which your defeat will jeopardize. The more people he can make more dependent on his programs the next four years the better his chances of re-election.

...What’s not to like about this budget? Basically, the long run outlook remains worrying.

According to the Obama administration’s budget projections, the ratio of federal debt to G.D.P., a widely used measure of the government’s financial position, will soar over the next few years, then more or less stabilize. But this stability will be achieved at a debt-to-G.D.P. ratio of around 60 percent. That wouldn’t be an extremely high debt level by international standards, but it would be the deepest in debt America has been since the years immediately following World War II. And it would leave us with considerably reduced room for maneuver if another crisis comes along.

Furthermore, the Obama budget only tells us about the next 10 years... But America’s really big fiscal problems lurk over that budget horizon...

I at least find it hard to see how the federal government can meet its long-term obligations without some tax increases on the middle class...

But I don’t blame Mr. Obama for leaving some big questions unanswered in this budget. There’s only so much long-run thinking the political system can handle in the midst of a severe crisis; he has probably taken on all he can, for now. And this budget looks very, very good.

In summary then, Krugman describes a budget which, in its favor allocates $600 billion over 10 years to healthcare reform, expects to raise a similar amount from a cap and trade scheme and whose plausibility is merely highly suspect unlike those damn bush budgets which insulted the intelligence.

On the other hand it will likely require middle class tax-hikes down the road to pay for it, it doesn't address America’s really big fiscal problems, which lurk past its horizon, and it projects to stabilize public indebtedness at record levels which leave us with considerably reduced room for maneuver in facing those problems.

I think an ordinary observer, given those trade-offs, would be substantively less enthusiastic then Krugman apparently is.