The Fiscal Fairy

by hilzoy

A couple of days ago, the McCain campaign did something it hasn’t done thus far: it provided some actual numbers to back up McCain’s promise to balance the budget. The Post’s editorial board thinks his numbers aren’t particularly credible. They start by noting that his tax proposals would cost a lot more than he says, according to neutral analysts like the Tax Policy Center. But his claims about taxes are at least specific (if wrong), unlike his claims about cutting spending, which are from some fantasy alternate universe:

“The McCain campaign says it will fill the hole with spending cuts. It would “reclaim billions” by rooting out existing earmarks and prohibiting new ones; impose a one-year freeze on discretionary spending other than for defense and veterans; and “reserve all savings from victory in the Iraq and Afghanistan operations” to use toward deficit reduction. These claimed savings are illusory. The campaign assumes $150 billion in savings by cutting in half deployments to Iraq and Afghanistan. But the Congressional Budget Office says that even reducing troops to 30,000, far beyond Mr. McCain’s estimate, would save just $55 billion in 2013 beyond the costs that the CBO projects as part of its deficit calculation. The campaign assumes an additional $160 billion in cuts to the Pentagon procurement budget and other discretionary spending. But eliminating every procurement program that the CBO has identified as a potential budget target would save perhaps $30 billion in 2013.

In any event, Mr. McCain has called for billions more in new spending: increasing the size of the military, launching a new energy independence project, fully funding the No Child Left Behind law. Where’s the savings? Mr. McCain says that he would limit overall growth in discretionary spending to 2.4 percent annually. History suggests that this would not be easily achievable: Discretionary spending has grown an average of 6.9 percent over the past seven years.

Mr. McCain’s campaign says that he would rein in the growth of entitlement spending, saving another $160 billion, but it does not explain how. His campaign cites “excessive agricultural and ethanol subsidies,” but eliminating all farm subsidies would trim less than $15 billion in 2013. Mr. McCain’s opposition to the pending Medicare bill does not offer comfort on his willingness to deal with entitlements. He’s willing to reverse $13 billion in scheduled cuts to doctors but opposes paying for it by reducing overpayments to the private Medicare plans. These overpayments — the plans cost, on average, 13 percent more — are just about the lowest-hanging fruit in tackling Medicare. In fact, Mr. McCain’s chief economic adviser, Douglas Holtz-Eakin, told USA Today in May that the plans should have to “compete on a level playing field” with traditional Medicare.”

It’s also worth noting that there are some very predictable future costs that McCain does not mention — things like the increases in spending for veterans’ benefits that the wars in Iraq and Afghanistan require. Moreover, as the Post editorial mentions, McCain himself often makes promises that are more costly than Douglas Holtz-Eakins’: his promise to repeal the AMT, for instance. It’s not clear why, in estimating costs, we should take Holtz-Eakins’ word about what McCain will do over McCain’s own. Moreover, if McCain is serious about changing Social Security to deal with the “disgrace” of present workers paying for present retirees’ benefits, he will have to come up with a few additional hundreds of billions of dollars to pay for it. And that’s just for its first few years. Over the long haul, it would add trillions.

But I have to disagree with the Post’s conclusion: “Mr. McCain sells American voters short — and he does himself a disservice — with his implausible claim.” They are right to claim that McCain has promised to balance the budget by the end of his first — oops, his second! — term, that the budget is not presently in balance, that McCain has proposed both large tax cuts and a lot of new spending, and that the spending cuts he has proposed don’t begin to pay for them. However, as we know, McCain is a man who calls things as he sees them, and as Bob Schieffer informs us, questioning his integrity is out of bounds. As I see it, therefore, there is only possible conclusion:

McCain and his advisors believe in the Fiscal Fairy, who makes our numbers add up by magic.

If you try to make sense of McCain’s proposals without taking the Fiscal Fairy into account, they look pretty implausible. But that just shows what a narrow and blinkered view of things our MSM has. Real leadership, as any number of motivational posters inform us, involves getting people to see that they can accomplish the impossible, and seeing real possibilities where the rest of us just see insuperable obstacles. And where fiscal policy is concerned, McCain is a real leader and a man of vision: where the Washington Post sees only impenetrable columns of numbers that don’t add up, McCain looks beyond all that and sees a chance for magic to enter the world.

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Once you think about the Fiscal Fairy, a lot of things become clear. For instance, this passage from an LATimes piece on McCain and Social Security might once have annoyed me:

“Later, on CNN, McCain seemed to fully embrace the idea of private accounts. “I want young workers to be able to, if they choose, to take part of their own money, which is their taxes, and put it in an account which has their name on it,” he said. Participation would be a “voluntary thing,” he said, and “would not affect any present-day retirees or the system as necessary.”

The remarks drew fire from Democrats, who accused McCain of failing to understand a system that since its creation in the 1930s has relied on payroll taxes from current workers to fund benefits for current retirees. Some supporters of this system say that allowing younger workers to divert money into private accounts would reduce the tax money needed to provide benefits for older workers once they retired.”

Wrong, I might have thought. It’s not just “some supporters” of the current system who say that McCain’s proposals would reduce the money available to pay for benefits. More or less everyone says this, for the perfectly good reason that it’s true. (See here for an explanation.) This is like saying: “Candidate X has promised to purchase flat-screen TVs for every American citizen. Yet some opponents of his proposal claim that buying all those TVs would cost the government money.” — Of course it would cost the government money, I might once have thought. That should not be up for debate. If, for some reason, someone thought that it would be a good idea to buy everyone a flat-screen TV, they would have to argue that that money would be well spent. Pretending that there’s a genuine debate about whether flat-screen TVs cost money, let alone that this is a partisan issue, is just misleading and wrong. Same here. At present, taxes contributed by present workers are paying for the benefits of present retirees. If those taxes are diverted into private accounts, then someone will have to pay the benefits of those retirees. This is not a controversial or partisan point. It just amounts to thinking that we cannot conjure vast sums of money out of the ether.

But now I see things differently. With the Fiscal Fairy, you can believe that private accounts are cost-free! You can conjure vast sums of money out of the ether! Moreover, to deny the existence of the Fiscal Fairy is partisan: it amounts to thinking not just that McCain’s economic policies make no sense, but to questioning his integrity. And since only a deranged partisan could possibly question McCain’s integrity — well, you do the math.