Who's Fault is the Deficit?

By Mimikatz

The House just passed a $2.7 trillion budget resolution hours ago, and in what has become an annual charade, at the same time included a boost in the debt limit to $9.6 trillion, saving the members the ignominy of a separate vote on the issue just before the midterm elections.  The vote was 218-210.  The plan "assumes a federal deficit of $348 billion in fiscal 2007," but this feat is achieved by including the Social Security surplus to hide the real consequences of Congress' and the Bush Administration's policies.  The resolution leaves room for $226 billion in tax cuts over the next 5 years while cutting education and veterans' health care spending begining in 2008.

Although Speaker Dennis Hastert claimed that "With today's vote, House Republicans live up to our mandate with a budget resolution that maintains our national priorities of homeland and national security, while still using fiscal restraint,"  the reality is closer to the comments of John Spratt of South Carolina: "The budget resolution presents no plan and no prospect of ever balancing the budget."

Why?  A post at one of my favorite economists' sites,  Angry Bear, has a nifty graph and simple, easy-to-understand explanation showing that without the Bush tax cuts, the Iraq War and other increases in defense spending plus the Medicare Part D fiasco, we would have a large surplus.  By all means click through, but here's crux of the explanation:

If none of these deliberate changes to taxes and spending had happened – in other words, if tax laws had remained the same as they were in Clinton’s last year in office, discretionary spending had simply grown at the rate of inflation, Iraq had not been invaded, and entitlement programs had remained unchanged by new legislation – then the federal budget balance would have followed the top-most blue line instead of the bottom-most red line. Rather than a budget deficit of $494bn in 2005, the federal government would have run a surplus of $18bn. Rather than facing a future of massive and growing deficits as far as the eye can see, the US would be enjoying the prospect of being able pay down some of its national debt in preparation for the looming retirement costs of the baby boomers.

Not so different from Gore's "Saturday Night Live" skit, is it?

   

Comments

[bleh]

But surely none of this is surprising.

Who has benefited from the tax cuts and all the extra military-related spending? The Republican constituency: the wealthy, large corporations (especially military-industrial ones), and (new to the game) big pharma.

This is what Republicans do when they control the government. This is WHY they try to control the government: to funnel taxpayer money to their wealthy constituents.

I keep flashing on Michael Biehn in Terminator: "It's what they do. It's ALL they do!!"

[Mimikatz]

Of course it's not surprising. But people (particularly younger people) need to remind their less political friends what Republican rule is costing them. And the Dems, who have showed great discipline, for the most part, need to make it clear to voters that if elected, they will not continue this debacle but will return to the tax policies of the Clinton years that brought us such prosperity.

Furthermore, according to CNN, it is unlikely that the House and Senate will agree on a budget resolution, primarily because of their differences on tax policy. If there is no budget and we are back to continuing resolutions in the fall, it will further damage the rubber-stamp, do-nothing Congress' image.

[JohnLopresti]

There is a political reciprocity endemic in our system whereby, for example, just before Clinton's election Republicans had policies which retarded growth in housing; one of the first improvements in that sector after Clinton's administration got underway was improvement in housing outlook.

There was a serendipity to the internet boom's occurring in the Clinton years, but much of its excellence and durability rested on his permissive communications policies. But venture capitalism is a delicate field in Democratic Party administrations; call it demographic. Yet, Clinton's policies were only marginally more liberal than traditional Republican fare; he calibrated his positions to exceed what Republicans could proclaim as their own policy; a characteristic of his own political style.

When Bush-2 was elected communications policy headed for the cellar and profit-taking set in; stock markets crashed; thousands of startups folded; we know the tale. I attribute it principally to the Powell FCC, but there were other factors; ask Bernie Ebbers. I would put Kenny Lay here, but the energy profiteering only peripherally related to the communications debacle in Bush-2's first administration, playing off the expectations of the internet bubble years, and targetting the world's sixth largest economy, CA.

Looking at that year 2000, VC was tightening already, but the disastrous Republican policies wrote the epitaph for the VC bubble. Now eight years later innovation has retrenched, if that is not too much of an oxymoron, and research and development again are seeing incremental improvement, depending on what field you are in.

Summary: there is profit-taking, and there is a planned political aspect to policy-making that attempts to minimize the opposing party's success.

Furthermore, given the current hegemony of ideological cadres within the Republican party and the administration, there is a tendency to plan the economy over the long term.

To address the largest expenses, your opening article appears fairly justified, and your remarks appropriate. The war budget is a millstone. I was thinking about the extraordinary profits last quarter at the oilcos and wondering how much of a debt reduction there would be if windfall profits tax applied to such statistics as double and treble profits which the oilcos are reporting.

Not that I favor price reductions at the pump. My views are beyond liberal in that regard: if there is any resource for redesigning society it is the gross profit excess at the oil pump, applying it to R+D would be a good idea, rather than coopting senators to vote for ANWR drilling; and the planet will be better for it if we migrate to some other basis for our mobility and plastics chemistry than petroleum.

The pharmaceutical industry closely relates to many underlying forces here, viewed as applied chemistry research. It has been a strange backwater in Bush policy, which basically has viewed the sector from the vantage of trade and insurance liability, with an appended sentiment that the healthcare industry has a strong interested in pharmaceuticals.

As usual, Republicans are skimming upper class profits from all these parts of the economy, and designing its budgets as disingenuously as its publicity campaigns for its foreign policy or its unitary executive theory.

[ab initio]

Mimikatz, have you read John Williams who publishes at Shadowstats.com? He did an interview with Kate Welling who was previously an editor at Barron's and now publishes a report for institutional investors. I have excerpted below a small portion of the interview that deals with how the government reports its budget deficit numbers. The problem is an order of magnitude larger.

"How much difference does all this make, in dollars?
Well, if you look at 2005, the official deficit was reported at around
$319billion. Using generally accepted accounting principles, the 2005
Financial Report of the U.S. Government published by the U.S.
Treasury,showed a deficit of $760 billion. That’swithout considering
Social Security and Medicare. However,in the 2004 report’s manage-
ment discussion and analysis section, the Bush II Administration basi-
cally said, “Hey,guys, you’d better be aware of how these numbers
work.”Wherethe official federal deficit in 2004 was reported at about
$412billion, and the GAAP-based deficit was around $616billion, they
said that if you added in the net present value of the underfunding of
Social Security and Medicare, the one-year deficit in 2004 was $11.1
trillion. That’strillion, not billion. That amounted to almost 100% of
GDP at the time. Now,that $11 trillion included a one-time spike of
about $8 trillion, to account for what Congress and the President did in
setting up the Medicare drug benefit without funding it going forward.
But you can see that if you back out that one-time charge, that on a
GAAP basis, accounting for Social Security and Medicare, in 2003 the
deficit was around $3.7 trillion; in 2004 it was $3.4 trillion; and in 2005
it was $3.5 trillion. We’ve had three years in a row here where the GAAP
deficit has been basically $3.5 trillion. So the deficit and the total obliga-
tions of the federal government are increasing by roughlythe amount of
GDP every three years. In fact, the fiscal 2005 statement shows that
total federal obligations at the end September were$51 trillion; over
four times the level of GDP. It is unprecedented for a major country to
haveits actual obligations so far out of whack.
That’s some whopping credit card bill.
It’sbeyond control. Keep in mind that 2005’s $3.5 trillion GAAP deficit
is roughly 10times bigger than the “official” deficit. But that is the size
of the shortfall. Even if you wereto raise personal income taxes to 100%,
takeall of everyone’ssalaries, and put all those funds into a pot against
this deficit, you’d still havea deficit. (If you also threw in corporate
taxes, you actually might get it a little bit to the plus side.) But weare at a
point where wecannot cover the deficit by raising taxes. So what are we
doing? Weare loweringtaxes to try to stimulate the economy.People
are talking about new big spending programs going forward. Yet you’d
haveto cut back Social Security and Medicare drastically here, beyond
anything that I can imagine is politically feasible, to bring things into
balance. Of course, there is no way you can tax all of people’sincome.
And I think it’sa political impossibility to eliminate Social Security and
Medicare, or a goodly portion of it. But that is the political situation
we’refaced with right now."

[Mimikatz]

Ab initio: Yes, I read that article. I think that it isn't quite as dire, but sites like Angry Bear have done some runs on the level of taxes that would be needed to cover the Boomers' retirement, and it is pretty scary. We are clearly beyond the time where simply restoring the pre-Bush tax code would correct the imbalances. The damage is too deep, and has become self-reinforcing. The GOP keeps its head in the sand as if the economy were Iraq.

I really, really hate to say this, but sometimes I am really glad I am 63 and collecting SS and not 23 and just starting out. When I finished college and a year of grad school, a year at UC Berkeley cost about $100-200 in fees, maybe $50-100 in books, and you could share a place for $50 a month. I was debt free and teaching jobs were easy to find. (Well, that's one thing that hasn't changed that much). Things really seemed like they were going to turn around, and although 1968 still lay ahead of us, we really believed we had the ability to change things. I remember telling my senior government students in 1973 something I had just read--that 1972 might be the high water mark for wages for a long time. I had no idea at all it would turn out to be true.

[ab initio]

Mimikatz, glad you are in a good position. The problem is going to land on the lap of the next generation and those retiring in 20 years.

The contingent liabilities from social security to medicare and the pension guaranty and the debt service will have to come out of both increased debt and current income. If the Chinese, Japanese, Russians and the Saudis that finance us today have better uses for their cash the government will have to print more and more dollars to monetize the payment streams.

Unless the US economy rebounds with new innovative industries and increasing wages there may not be sufficient productive capacity to generate the necessary incomes at which point the dollar may no longer be the reserve currency. If that comes to pass we'll have to trade real goods and services.

[Mimikatz]

One of the most promising areas for new technology is alternative energy and energy conservation. There is so much we could do with another set of leaders.

[free patriot]

while still using fiscal restraint ???

you mean it could have been worse ???

well I guess we should thank them

fire up the transmitter to whatever planet this guy is on

[Paul Lyon]

``One of the most promising areas for new technology is alternative energy and energy conservation.''

Running a deficit to finance this might reasonably be construed as an investment, meaning that one would expect returns in the form of increased tax receipts later on that could well cover the expenditure with interest. The same might be said for expending the $2 trillion or so needed to repair, refurbish, and upgrade the country's infrastructure.

[John Casper]

Excellent point Paul Lyon. Presumably, we wouldn't "outsource" the work. Such investment would also reassure our creditors.
Great post Mimi, thanks. I loved the Angry Bear graph.

[oligopolist]

Of course, George Bush is working on behalf of the Global Network for Political Oligopoly, whose mission statement says: "GNPO's mission is to promote concentrating as much global wealth in the hands of as few of our members as possible. In addition to providing helpful tips to oligopolist-minded corporations, we focus particularly on helping political leaders pass oligopoly-friendly legislation." Massive budget deficits are simply a very efficient way to accelerate this process.