Tuesday, August 2, 2011

The Budget Battle is Over: The good news is we're not going bankrupt tomorrow, the bad news is, we're still going bankrupt




So, today the Senate passed bi-partisan legislation to lift the debt ceiling by $2 trillion or so averting the risk of an instantaneous default. The bill had $1 trillion of discretionary cuts over the next ten years and empowered a panel to suggest an additional $1.6 trillion by year end otherwise severe cuts in other discretionary programs as well as defense would be automatically triggered for 2013. For a total theoretical savings over the next ten years of $2.6 trillion. Woo hoo!

Alas, the markets did allow either side any time for chest pumping about all they have achieved or finger pointing at the nefarious people across the aisle who had made all this “compromise” necessary in the first place. No, the ink was barely dry on the bill and the champagne was barely wet on the tongue before all hell began to break loose in the markets. It began with more negative economic data but really got serious when Fitch and Moodys put the US on negative watch AFTER the bill had passed.

This must be somewhat bewildering to Progressives because they've been told that it was simply the Republican brinkmanship that was the reason for the potential downgrade. As Obama memorably said: “for the first time ever, we could lose our country’s Triple A credit rating.  Not because we didn’t have the capacity to pay our bills – we do – but because we didn’t have a Triple A political system to match it.” And now those dastardly ratings agencies are saying just the opposite. That there is no way the US can pay its bills if things continue as they have. This must be frustrating, and I want to help. In recent days I've written some articles attacking the delusions of the Tea Party, notably the idea that US sovereign default is not unprecedented or that such a default would not constitute a major disaster. Well, now I'm going to provide the same public service for those on the left and try to debunk some of the false impressions under which Progressives have been laboring in a series of posts.

Before I do that however I want to take a moment to address some issues of terminology and reference. Throughout the debate when people have described cuts, or deficits or revenues those numbers are aggregated over the next ten years. The deficit they seek to address is that contained in the CBO Baseline Outlook for 2011-2021. This is a trick of terminology to make things sound a lot bigger than they are, $1 trillion in cuts sounds like a lot but it's really just $100 billion a year for ten years and the government is borrowing $1.6 trillion this year alone. If you crack open that report you'll see that under the baseline scenario the government will borrow an additional $9.2 trillion over the next ten years. It is also important to note that the underlying economic assumptions are somewhat optimistic. They assume that the US economy grows 3.1% this year, 2.8% next year, then at 3.4% until 2016 and at 2.4% from 2016 to 2021 this growth is constant with no recessions. Given that the actual data coming out show that the GDP is growing much more slowly in 2011 (1%,) it is likely that many of the revenue estimates will turn out to be on the high side with correspondingly higher deficit numbers.

So, todays common Progressive misperception is:

The main reason we are even in this position is the Bush administration. If we just roll back the Bush Tax Cuts and end the wars in Afghanistan and Iraq the problem is solved.

You may have seen your progressive friends posting these charts from The Atlantic and The New York Times up on the internet which purport to show that the deficit is the result of the policies of the Bush administration. The New York Times chart shows that at the end of the Clinton administration budget surpluses were projected as far as the eye could see until the wicked Bush Administration took over and began deficit spending like there was no tomorrow. Then President Obama takes over having inherited this fiasco he adds merely a trickle to the flood of red ink.

To begin with the NYT chart is internally inconsistent, on one slide Obama is responsible for $187 billion of additional spending, on the next it's over a trillion. Interestingly she forgives Obama's shortfall in revenue due to the recession but does not recall that Bush also came into office in the middle of a recession caused by the collapse of an asset bubble and instead assigns all revenue shortfalls to the pernicious Bush tax cuts. She then makes the argument that by far the largest contributor to the deficit is the Bush Tax cuts and that if they were repealed we're on a trajectory to sustainability. I wonder what the CBO has to say about that, stay with me, friend reader.

In the Atlantic, James Fallows makes more or less the same point. He goes to great lengths to say he's not interested in being partisan and then like the NYT lays all the blame at the foot of the Bush Administration, its wars and its tax cuts. Fallows also projects forward the surpluses of the Clinton era. He also assigns all the responsibility revenue shortfall to the tax cuts rather than the combination of tax cuts and decreased tax revenue during the 2001-2002 recession. Obama can claim a weak economy Bush, no dice. I do however appreciate Fallows' citation as “an analysis based on CBO data.” Rather than use the CBO data directly he manipulates it to make his point reclassing some of the revenue shortfall as tax reductions in order to magnify the effect of the tax cuts for Bush while he magnifies the effect of the recession for Obama. (Of course there is also this chart which is totally nonsensical, he has the Obama stimulus package ending in 2013 but the recession goes on to 2019, not to mention the wars.)

I only wish that these estimable journalists had kept at the CBO data coalface once they were done assigning the blame for the current predicament to the Bush administration. The CBO is a veritable cornucopia of interesting data including projections as to what the deficit will be. In fact, as mentioned these are the very projections referred to by both sides throughout the debate. Let's just have a closer look in here... wait what's this? The CBO projects revenues to go from $2.228 trillion in 2011 to $3.442 trillion in 2014? How can that be, an increase of 55%? GDP is only growing at 3% during that time, where is all that revenue coming from? Oh, wait a minute, the CBO baseline INCLUDES ALL CURRENT LEGISLATION. Thus it assumes the Bush tax cuts expire, and for that matter, the Wars in Iraq and Afghanistan end on schedule. But wait a minute, even with the expiration of the Bush tax cuts and the end of the wars the government still winds up $9 trillion deeper in debt at the end of it?

Yes it does. As it turns out, the press has done a disservice to the debate by attempting to show that the Bush tax cuts are responsible for the deficit problems that the Tea Party Republicans are trying to solve. The Bush administration is guilty of a great many fiscal sins, and doubtless the current debt would be lower had be been more fiscally conservative, but even after all his policies are withdrawn we still have to borrow $9.2 trillion over the next ten years to fund the government. Sorry Progressives, the problem is in the future, not the past, and because we are reluctant to face it, we are being punished by the rating agencies.

Tomorrow: The Keynesian Endpoint

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