Mick Mulvaney’s Magic Budget

The White House recently released their complete FY 2018 budget proposal. There is much to pick apart. Though a predictable number of Democrats have called the budget “immoral” and used the release as an opportunity to label Republicans as attempting to destroy beloved services like Meals on Wheels, it is also very unlikely that the final budget will look anything like Trump and Mulvaney’s proposal — because moderate Republicans have many problems with it as well. But fights about funding levels for are not new — even if the disagreements over social welfare spending this FY will be particularly contentious.

What is new, is that the Office of Management and Budget, led by Mick Mulvaney, and in service of the President, has made an obvious accounting error. Were it not so obvious, it could be called a deception. It’s simple: the White House is proposing tax cuts. Tax cuts reduce how much money the government takes in. They assume this loss of revenue will be made up for by increased economic growth, which will mean taxpayers handing a lower percentage — but higher total — in income. Few experts in public economics think that is possible. But set that aside and assume it will happen. Now, the White House released a budget that assumes the amount of government spending in excess of revenue will shrink because of the same high growth rate. In effect, the White House is double counting the boon from the tax cuts — or assuming that the tax cuts are “magic”: they are an investment that costs nothing to make.

There are two problems with this particular accounting mistake. The first is that under the rosiest assumptions, it will probably add $2 trillion to the national debt. Personally, I have a hard time understanding how much money that is — so I prefer to break it down per US household. So, if you are your household’s budget person, it’s analogous to setting $16,000 on fire, then making interest payments on it.

The second problem is that the White House is digging in its heels. Here is the text of Mulvaney’s defense of the numbers:

“We stand by the numbers. We thought that the assumption that the tax reform would be deficit-neutral was the most reasonable of the three options that we had. We could either assume that our tax reform was deficit-neutral. We could assume it would reduce the deficit. We would assume it would add to the deficit. And given the fact that we’re this early in the process about dealing with tax reform, we thought that assuming that middle road was the best way to do it.”

Mulvaney has a economics degree from Georgetown, and specialized in anti-trust law while working on his JD at UNC Chapel Hill. He knows that the statement above does not make sense. When evaluating the effect of a policy, you do not have three options — you have a continuum of options. It could cost a lot, it could cost a little, or pay a little — and so on. When you analyze the effect of a policy, you try to incorporate information. In the statement above, Mick Mulvaney says they picked $0 because it was between negative infinity and positive infinity — the golden mean! In effect, he is admitting that there was no attempt to evaluate the effect of the program at all. He is giving Bayesian statisticians his uniform prior. Moreover, he also knows that the statement above does not actually address the question about the double count.

It is important to understand that Mulvaney knows this, and why he choses to defend the budget in these terms. The fact is, he cannot stand in front of cameras and say what he likely believes: taxes should be lower, full stop. It does not matter what it does to the debt, how much growth it generates, or what programs the government has to cut. The federal government spends too much of other people’s money, and those who are not well off are too dependent on it.

To be clear, I think Mulvaney is right to call out more extreme fear-mongering associated with this budget. Even if you believe that the budget will do damage to well-being of millions (I do), it is just a proposal. And it is so extreme that Republicans will probably have to start over. Mulvaney has called attacks on his budget “demagoguery of the highest level.” That’s rather dramatic, but even if there is some truth to that, it pales in comparison to way Mulvaney and the Trump administration have conducted themselves.

For almost a hundred years, the President has been legally obligated to aggregate the expense requests of federal agencies into a single budget proposal. The OMB has been (and probably still is) staffed by professionals who do their best to get projections right. For decades, this has included projections about the relative impact of spending decisions on the deficit and national debt. If these professionals were in charge, the Trump budget proposal would not look the way it does. That is because the proposed budget contains a central set of assumptions that have been backfilled to justify a particular conclusion. It assumes that dramatic tax cuts for the top income brackets, along with reduced taxes on corporate profits will generate enough economic growth to both dig the government out of the revenue loss hole and balance the budget. That is nothing short of absurd. I’m willing to guess that there is no magic bullet that can fix the government’s revenue problem and the US’s growth problem simultaneously.

The only people who benefit from assumptions so wild are those who directly benefit from the policies enacted based on them. When governments get basic accounting wrong, most people lose out. Politicians leave office and businesses record (and keep) profits. But Americans, mostly likely the young and millions yet unborn, will someday pay their debts.

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