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Fiscal Finger Food Adds Up to One Big Feast on the Budget

This is one of those weeks when there’s time to catch up on new developments on a few items that I’ve already written about and to deal with a few stories that so far haven’t been big enough to merit a column of their own. Think of it as budget tapas, a series of small portions that are not that filling by themselves but make a complete meal when eaten together.

[IMGCAP(1)]California Really Is Too Big to Fail. Ask yourself this question: If AIG and other Wall Street firms are considered by policymakers to be too big to fail, what does that say about California?

California, which like many other state and local governments is still experiencing extreme budget problems, has an economy larger than all but about 10 countries. Even without the actions that the federal government has already taken to provide corporate bailouts, there is little likelihood that Washington, D.C., could or will allow a default in the municipal bond market to occur in the current economic and financial environment. In fact, through the stimulus bill and other actions, the federal government has already taken a number of steps to make that less likely.

That’s why the rumor about a plan being prepared in Washington to deal with the financing needs of state and local governments should be taken seriously even though it could have a significant effect on the federal budget. Especially with California’s large economy (and 55 electoral votes), there really isn’t much of a choice.

Obama Optimism Now Not as Unlikely. The Obama administration’s economic forecast, which when it was first released caused many experts to say it was reminiscent of Ronald Reagan’s “rosy scenario— from almost 30 years ago, is no longer considered to be as unrealistic as it was originally.

Although last week’s economic statistics were not as good as many people had expected, the economy clearly has improved since President Barack Obama’s forecast was released in February. That’s leading some to say that while the president’s numbers are still on the high side, they seem to be less optimistic than 10 weeks or so ago.

What Happened to the Second Budget Resolution? Senate Budget Chairman Kent Conrad (D-N.D.) earlier this year floated the idea of doing a second budget resolution.

Conrad’s plan was not to include reconciliation instructions in the budget resolution that Congress considered early in the year and, therefore, to avoid the Republican criticism that Democrats were considering using reconciliation for health care reform. But he held out the possibility of including reconciliation instructions on health care in a second budget resolution later in the fall if Senate Republicans filibustered what was developed under the standard legislative process.

Conrad dropped the second budget resolution plan when Democrats came up with something very similar but far easier to implement. Instead of having to adopt a second budget resolution later in the year, Congress agreed to a budget resolution with reconciliation for health care now but postponed the date by which the health care reconciliation bill had to be reported until the fall.

This is essentially the equivalent of what Conrad proposed. Reconciliation won’t be used if Senate Republicans participate in the regular health care reform legislative process and don’t filibuster the bill so it needs 60 votes. If they do filibuster, health care reform will be brought to the Senate floor in late September or October as a reconciliation bill, which will only require a simple majority to be adopted.

The biggest difference between the Conrad plan and what was actually adopted is that the House and Senate now don’t have to take another vote on a budget resolution and, therefore, on a second vote agreeing to the deficit. Democrats likely would have approved a second budget resolution had the Conrad plan been used and there was no other way to get health care adopted this year. But there is little doubt that they would have preferred not to again have to vote on a deficit that likely will be projected to be even higher in the fall than the record high that they agreed to in April.

Second budget resolutions used to be commonplace. As originally enacted, the Congressional Budget Act required two budget resolutions each year: a tentative one in May and a binding one in September. Congress is now required to do only one budget resolution a year, but it always has the option of passing another, with reconciliation, if it chooses to do so.

How Much Bigger Is the Obama Deficit? Ed Lazear, former chairman of the Council of Economic Advisers with the Bush administration, said on CNBC this past Friday that he was not happy with the Obama administration’s projected $1.5 trillion fiscal 2009 deficit. But as I’ve pointed out before, the Obama deficit is not all that different from what would have occurred had President George W. Bush remained in office and Lazear still been the CEA chairman.

As Bush was leaving Washington, the Congressional Budget Office estimated that the 2009 deficit would be around $1.2 trillion. A month or so later, Congress and Obama agreed to something that the Bush administration would have strongly supported, yet another one-year patch for the alternative minimum tax. That added around $70 billion to the deficit.

The $1.2 trillion estimate also didn’t include a supplemental appropriation for activities in Iraq and Afghanistan for this year. Although Bush didn’t request a supplemental before he left, he certainly would have had he been in office. Obama requested $75 billion for this in his budget.

These two additional expenditures increase the $1.2 trillion to about $1.35 trillion. Add to that the effect of the economy not performing quite as well as had been assumed when the original $1.2 trillion estimate was released, and you’re not that far away from what Lazear said was the Obama number.

Stan Collender is a partner at Qorvis Communications and author of “The Guide to the Federal Budget.— His blog is Capital Gains and Games.

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