StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Yes GOP...There Are Indeed Baselines Outside Of Washington (Caution: Very Wonky)

04 Sep 2011
Posted by Stan Collender

The first time I had a knockdown argument with anyone about budget baselines -- a subject that virtually defines what it means to be a budget wonk and should never be a cause for yelling -- was about 15 years ago when I was doing a briefing for the newly elected members of Congress at the Kennedy School of Government at Harvard.  I was just explaining several basic budget concepts when former Senator Alan Simpson (R-WY) and Representative Mark Kirk (R-IL) repeatedly interrupted me to say how baselines were how congressional Democrats got their way on spending.  They both insisted that baselines were only something that existed inside the beltway and, according to Kirk, only in Washington could baselines be used to make a spending increase look like a cut.

Except that they're both completely wrong.

As I first explained patiently and then with increasing exasperation because of Simpson's and Kirk's refusal to listen to facts, baselines are so commonplace outside of Washington that the average person doesn't even realize he or she is using them.  Contrary to what they wanted the new members to believe, baselines not used exclusively by federal budgeteers and are used -- or rather misused -- by both Republicans and Democrats with equal zeal and dishonestly.

They are also used with similar deceit by corporate America, athletes, students, workers, and just about everyone else who has ever counted something.

For example, the airlines reported that more than 10,000 flights were canceled because of Hurricane Irene and that they were going to lose significant revenue because of those cancellations.

But the calculation of how much the airlines actually lost depends on the baseline being used.  The maximum loss would come from the assumption that each of the 10,000 canceled flights would have flown had it not been for Irene and that none would have been canceled for any other reason like mechanical issues or other weather problems. 

But each airline knows how many flights on average are canceled each day.  Therefore, the correct way to calculate the lost revenue is to compare the flights that were canceled to this more realistic baseline rather than a hypothetical amount that assumes all flights would have left as scheduled.

But that's not all.  A completely accurate baseline requires that you know how many of the passengers on the canceled flights rebooked their trips at a later date on the same airline because that would mean that that revenue wasn't lost at all; it was just attributable to a different flight that would then be more profitable (or have smaller losses) than otherwise would have been the case.  A correct assessment requires that both factors be taken into account.

It also requires that the airline take into account the average fare of the ticket.  Some of the tickets for passengers who decided not to travel at all may have been sold at a higher fare to those who ultimately bought them.

So how much revenue did the airlines lose because of Irene-related canceled flights?  The answer depends on which baseline is being used.  If an airline wants to make the loss look as big as possible for some reason (It might be trying to justify getting some help from the government or trying to arm itself with additional ammunition for upcoming labor negotiations), it uses the baseline that assumes all flight would have flown had it not been for the hurricane and none of the passengers rebooked on later flights.  If it wants to show the smallest possible loss (to make Wall Street less anxious, for example), it uses the baseline that incorporates the already-assumed average canceled flights and rebooked passengers.

What's frustrating to most people is that both numbers can be completely different but also correct.  It also depends on which baseline is being used and, therefore, what question is being answered. 

A second example is what happens when you play golf.

"Par" is a baseline.  It's nothing more than an expectation of how many strokes it should take to play each hole...and it's almost exactly like some of the baselines used in federal budgeting.  If it takes you three strokes to get the ball in the hole on a par four, you're said to have lost one to par, that is, you're "-1."  Somehow, even though you have three more strokes than you had at the end of the previous hole, you tell yourself that you have one less.

Do you have three more or one less?  The answer is both; it just depends on which baseline you're using and which question you want to answer.  You have three more if you want to determine the total number of strokes you've taken; you have one less if you want to determine how you did relative to what the course says it should take you to go get your ball in the hole.

And just like the airline example, there are plenty of other possible baselines in golf.  Instead of par you could be using a personal baseline of how well you've done in the past.  Having an 85 on this round might be 13 over par, but it also could be 13 less than the best you've ever shot on this course before.

So are you plus or minus 13?  The answer is both.  If you're the golfer you're always likely to use the baseline that lets you says it's 13 less.  But if you're not the golfer, the alternative baseline of 13 more may be the most meaningful...or easily meaningful...way of understanding what the score means.

Why raise this all now? 

First, because the reporting of the meaning of the Hurricane-Irene flight cancelations was, as usual when baselines are involved, less than complete.

Second, because when Congress returns to Washington on Tuesday and the budget is back in the headlines, baseline questions will dominate much of the discussion.

For example:

1.  The Special Select Joint Committee on Deficit Reduction -- the so-called super committee -- is charged with coming up with up to $1.5 trillion in deficit reductions.  The question, however, will be "$1.5 trillion compared to what?"  Even though the Budget Control Act -- the law that established the super committee provides the baseline that is supposed to be used -- It's not at all clear that everyone will use the same baseline when they talk about what is being considered.  In fact, they almost certainly won't.

2.  Fiscal 2012 will be only three weeks or so away when Congress returns and some type of appropriation will be needed by October 1 or the federal government will shut down.  But if the tea partiers in the House and Senate demand additional changes from what was assumed in the Budget Control Act, will they be measuring the reductions from what the president proposed, from what was actually spent in 2011, or from what was assumed in the BCA?  Using the president's budget as the baseline will make any additional cuts look the largest; using the BCA baseline will make them look the smallest so the chances are that all of these baselines and a few more may be used at the same time.

3.  There will be increasing talk about extending the tax cuts set to expire December 31, 2012.  The question will be whether an extension would be a tax cut or whether allowing current law to expire would be a tax increase.  Like the golf example, the answer will depend on which baseline is being used and whether you're the one paying the taxes.

Nice

It's really not all that wonky because you did good job of explaining the concept.


Double Nice

Completely agree with the comment above.


I Am SHOCKED, SHOCKED to Hear This!!!

"I was just explaining several basic budget concepts when former Senator Alan Simpson (R-WY) and Representative Mark Kirk (R-IL) repeatedly interrupted me to say how baselines were how congressional Democrats got their way on spending. They both insisted that baselines were only something that existed inside the beltway and, according to Kirk, only in Washington could baselines be used to make a spending increase look like a cut. Except that they're both completely wrong."

Didn't Pres. Obama appoint Simpson to head the National Commission on Fiscal Responsibility and Reform? How is it possible that a nincompoop like Simpson could be appointed to anything?

Didn't Mark Kirk graduate from the London School of Economics? Don't they teach basic accounting there?

Oh wait, these guys are RepubliCons so no explanation needed.


Sadly, I believe that these

Sadly, I believe that these appointments are done to appease members of the opposition by putting members on that are believed to be representatives of the ideology of the opposition, not because they might be smart. So, expect nothing to get done.

I would have rather seen people with good experience, even if not in Congress. David Stockman? Bruce Bartlett? Hell, even Governor Mitch Daniels. Give us SOMEONE who at least admits that their party's economic religion should be saved for campaigns, not committees


The sadde fact is that this

The sadde fact is that this kind of extremely basic mathematical literacy really is considered "wonky" in this country. Forget about baselines. The overwhelmingly vast majority of US citizens don't even know what "federal budget deficit" and "federal government debt" mean from arithmetical standpoint. Rather, these terms are understood to denote moral and emotional entities, which the Republican Party very effectively exploits to induce vast numbers of people to believe flat-out lies.


All that and more....

Agreed re above - It's always been nasty and with the Tea Partiers and the do nothing pre legislation (let's figure out a way to leave town on town for July recess!). Honestly, Obabma should have called off the recess and Martha's Vineyard and said we all need to stay in town and get some work done. Mohammed El-Erian has a piece on PIMCO's website that we're in for a nasty ride indeed - think the Europeans are ahead of us because their politcians are a lot more realistic and I would guess actually care, compared to our multi-variate looneytunes.

Now, a knock down [dare we say drag out] budget wonkery battle between you and the two Congressmen would be quite something to see. Excellent use/viusals from consmer media as par for the course.


Simpson's and Kirk's comments

Simpson's and Kirk's comments have nothing to do with economics. It's just petty politics. Their intellect and education qualify them for their jobs, but their egos, arrogance, and narrow-minded political beliefs mean they should be sent to Iraq to slaughter civilians and hopefully get IED'd.




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