The Congressional Budget Office released new figures on the federal budget yesterday, which show that the deficit will peak in 2009 at $438 billion and decline thereafter. But budget watchers and CBO economists know that these “baseline” projections don’t describe actual budget realities.

So I constructed a “business as usual” scenario for revenues and spending to get a sense of the fiscal picture that the next president will actually face. The figure illustrates that it will be much easier being the president who enters office in 2009 than the one who enters office in 2013.

The revenue line in the figure assumes that all current tax cuts are extended and the alternative minimum tax is indexed for inflation. Extended tax cuts include income tax rates, dividends, capital gains, child credit, death tax, expiring business breaks, and other items.

The spending line assumes that discretionary spending rises as fast as GDP, the number of troops in Iraq and Afganistan is reduced to 30,000 by 2011, and Medicare payments to physicians are not cut back after 2010 as under the baseline. These adjustments are based on CBO data. I also estimate the extra federal interest costs of these assumptions.

Newly released data show that federal employee wages and benefits continue a rapid ascent above and beyond private sector pay levels. The data was released last week by the Bureau of Economic Analysis. (See tables 6.2, 6.3, 6.5, and 6.6).

The new data show that the 1.8 million federal civilian workers earned an average wage of $77,143 in 2007, which is 61 percent higher than the $48,035 average in the U.S. private sector. That 61 percent pay advantage has increased from a 34 percent advantage in 2000.

Looking at total compensation (wages plus benefits), federal workers earned an average $116,450 in 2007, which is more than double the $57,615 private sector average. The federal compensation advantage increased from 68 percent in 2000 to 102 percent today. Federal workers not only earn much more than private sector workers, their earnings advantage is getting more pronounced every year.

Federal compensation rose quickly during the 1990s, but even faster during the 2000s. I call this the “Bush Bounce” because it appears that the Bush administration has caved into federal union demands for expanded pay year after year. Between 2000 and 2007, average federal compensation increased at an annual average rate of 6.3 percent, which compares to the private sector increase of 3.5 percent. During the 1990s, average federal worker compensation increased at an average rate of 5.1 percent. The charts below illustate the “blast off” in federal wages and compensation. 

After you’ve watched federal policymaking for a number of years, you realize that the actual effectiveness of federal programs has absolutely no bearing on their survival or level of funding. That’s because the purpose of federal programs is not to solve problems, but to provide a menu of levers that politicians can pull to appeal to certain types of voters.  

We see this at play in the 2008 election with “clean coal,” which has attracted the attention of both candidates. Obama wants to “significantly increase the resources devoted to the commercialization and deployment of low-carbon coal technologies.” Meanwhile, McCain has pledged to spend $2 billion a year on clean coal technology if elected.

Since these pledges make for good bullet points in speeches, the campaigns don’t really care about the actual track record of federal subsidies to clean coal. But after the election, the next president should hesitate to increase such corporate welfare. Here is what I noted in Downsizing the Federal Government:

Paul Gigot has an outstanding piece on Fannie Mae and Freddie Mac today in the WSJ. “The abiding lesson here is what happens when you combine private profit with government power.” Exactly.

Here’s what I said about the twin-headed hydra in my 2005 Downsizing the Federal Government:

In a new campaign document, John McCain detailed some of his economic proposals today. The promise that caught my eye is a pledge to balance the federal budget by 2013. That is curious promise for him to make.

The Joint Committee on Taxation projects that federal revenues in fiscal 2013 — with the extension of the current tax cuts and AMT relief — will be 17.6 percent of GDP.

This year federal spending will come in at about 20.6 percent of GDP. That means that in four years a President McCain would cut spending worth about 3 percent of GDP, or about $427 billion annually in today’s dollars.

That would be fabulous, and Mr. McCain can read my Downsizing plan to find out exactly where to cut. Indeed, he might have already read it (see the picture). However, today’s plan from McCain includes few specifics on discretionary spending cuts, and his (laudatory) entitlement reforms would probably not generate major savings in just the first four years.

Here’s where fiscal conservatives get nervous about Mr. McCain’s intentions. In the same campaign document. McCain repeatedly lauds bipartisan efforts to fix the budget. Thus, if elected, would he actually fight for $427 billion in federal spending cuts? Or would he just trim some minor waste and earmarks, and make up the vast bulk of the budget gap with tax increases in the name of bipartisanship?

An irony of modern presidential campaigns is that they bring on board top tier economic advisors, but that doesn’t stop them from injecting economic nonsense into candidate speeches.  

Candidate Obama just added some skilled economists, but that didn’t prevent him from making ridiculous claims about recent economic policies in a speech yesterday. Take one Obama statement: “our president sacrificed investments in health care, and education, and energy and infrastructure on the altar of tax breaks for big corporations and wealthy CEOs.” Obama is wrong on every point in this remark.

Here are the facts from the federal budget looking at Bush’s first 7 years in office (FY2001 to FY2008):

Recently I blogged about the federal government investigating businesses for keeping the price of milk too high, even though the government’s own policies push up milk prices.

America’s supposed hunger epidemic is catching up to crocodiles in the sewers as the most popular urban legend. The difference is that the hunger epidemic is being promoted by the nation’s major media.

Federal cost-cutting should be a central focus of the next president. One effort that should be bipartisan is overhauling the government’s out-of-control procurement system. Federal contractors routinely get away with outrageous cost overruns at taxpayer expense. From today’s Wall Street Journal:

News of the intellectual demise of the Republican Party comes almost daily. In its coverage of the bipartisan vote in favor of the farm bill (which overrode a well-deserved Bush veto) the Washington Post included this reaction: