More Hysteria: This Time, the Budget

Today’s most outrageous news story originated with London’s Financial Times, which headlined a supposed scandal: “U.S. Faces Future of Chronic Deficits.” The story begins: “The Bush administration has shelved a report commissioned by the Treasury that shows the US currently faces a future of chronic federal budget deficits totalling at least $44,200bn in current US dollars….[T]he Bush administration chose to keep the findings out of the annual budget report for fiscal year 2004, published in February, as the White House campaigned for a tax-cut package that critics claim will expand future deficits.”
The Financial Times story spread like wildfire through the electronic press today, and will no doubt be headlined in most newspapers tomorrow. Here, for example, is CNN’s report: “White House Scrapped Deficit Story.” And here is the typically hysterical and irresponsible BBC spin: “Bush ‘Buried’ Critical Report.” The BBC elaborated on the Financial Times’ original story by claiming that the “buried” report “advocated tax rises.” For those who missed the point, the BBC adds that “Those [tax] cuts, the opposite of what was reportedly recommended in the Treasury study, were signed into law by President George W. Bush on Wednesday.” Other news sources have written that the “buried” report advocated a 66% increase in income taxes.
But the report in question isn’t exactly buried; it is available here, on the web site of the American Enterprise Institute, where one of the report’s authors is a visiting scholar.
The report, by Jagdeesh Gokhale and Kent Smetters, is highly technical and certainly has not been read, let alone understood, by most of the reporters who have used it as another pretext to bludgeon the Administration and to discredit tax cuts. The point of the report, titled “Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities,” is to propose a new method of measuring the federal government’s long-term budget obligations. The Administration did not include this paper or its findings in the 2004 budget report; instead, it included the 75-year projections for Medicare and Social Security which have been used by the federal government for a number of years. In other words, the current budget used exactly the same projections that have been used in past years, rather than adopting the new measure argued for by Gokhale and Smetters. Some scandal.
The claim that the report advocated tax increases is also false. The report says that the present value of the federal budgetary shortfall, projected in perpetuity, is approximately $44 trillion, virtually all of which is attributable to Medicare or Social Security obligations. This projection assumes that those programs are not reformed. The authors say, on page 5, that if there were no cuts in projected spending, payroll taxes would have to be increased by 17% of total payrolls, forever, or income taxes would have to be increased by two-thirds, forever, to correct the fiscal imbalance they project.
What the authors recommend, however, is not tax increases which on their face are out of the question. Rather, they advocate reform of entitlement programs. In particular, they argue for establishing personal retirement accounts to replace the current Social Security system; see the discussion beginning at page 13 of the report.
The author of the Financial Times article, Peronet Despeignes, can be forgiven for failing to understand the Gokhale-Smetters study. She cannot, however, be forgiven for failing to report correctly on what the authors of the study told her. The text of her interview with Kent Smetters is available here, and it negates the entire thrust of the article that she wrote and other news sources have slavishly copied:
“Smetters:…But the thing is Lindsey went, O’Neill went. It’s perfectly reasonable that the new guys came in, they’re hit with this, and they need some time to think about it. The Boston Globe article was written by two brilliant economists. But, in my opinion, that piece maybe made it sound too much like some kind of a conspiracy to kill honest accounting in order to save the tax cut, or something like that. It really wasn’t. The new guys said, hey, this is something that could go to press within a week, and this is just a completely radical new way of looking at the budget.
“FT: So there wasn’t any high-level conspiracy?
“Smetters: No, there wasn’t. This point has to be really emphasized. In fact, if you look at this framework, the tax plan looks great….This is hardly stuff the Administration would kill because they’re afraid of the tax plan looking bad.”
So the thrust of the article published by the Financial Times, and elaborated on by CNN, the BBC, Reuters, and, no doubt, just about every newspaper in America by tomorrow morning, is the precise opposite of what the Financial Times reporter was told by one of the authors of the supposedly “buried” study.
One more thing: the just-enacted tax cut of $350 billion represents approximately .008 of the $44 trillion shortfall projected by Gokhale and Smetters. So if liberals think that entitlement reform can be avoided by negating the small tax cuts now in prospect, they are sadly misguided.

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