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The Budget First Look

Well now we have the actual document, and as predicted it is stunningly bogus and shamelessly harmful to the nation’s poor. It fails the tests of honesty, fairness, and responsibility. In short it is awful. Let me explain why:

In terms of honesty: President Bush leaves out any funding for his wars as if they can be paid magically from some other place than the U.S.Treasury. He advocates extending the Alternative Minimum Tax, but then … whoops! … leaves the budget impact out. Just for the record AMT ‘relief’ will cost $914 billion over the next ten years. I realize that for some folks that’s small change, but I happen to think it’s a big enough number to include in what is supposed to be a budget. Then there’s the small matter of the time horizon for the budget. Now here’s where Bush hopes your eyes glaze over, after all who really cares about 2012 and beyond? Well the problem is that out there is where all the really big damage is done. Bush claims to cut the deficit in half over five years, which his budget appears to do if you ignore the cost of the aforementioned stuff he leaves out. Trouble is that starting in year six, i.e. 2012, the deficit begins to blossom like the proverbial buds in May. It thereafter stretches and expands as far as the eye can see. Which is not very far unless you are good at numbers, because for the first time ever the budget omits the traditional section devoted to analysing the impact of the policies recommended along with the budget. Bush is scarily brazen about his ability to deceive and draw attention away from the damage his policies do to regular people. This time, however, even he appears to be shocked at his own gall, so he leaves out any accounting for his policies. In short, the budget reeks of deception.

In terms of fairness: there is no need to guess here. This is a classic Republican budget. There are plenty of domestic program cuts to go around. Enough for all the usual targets of Republican ire to take a hit: large cuts are aimed at education, environmental programs, low income assistance programs, children, elderly and disabled support programs, and medical research in the fields of cancer and heart disease. Examples of some of Bush’s bigger cuts: low-income housing subsidies [cut 26%]; housing support for disabled low-income people [cut 50%]; and community policing support [cut 79%]. All of these programs fall in the category called “Domestic Discretionary Spending” which is often cited by Republicans as being out of control: in fact it has fallen from 3.4% of GDP in 2001 to 3.1% in 2006. These cuts will squeeze it even more. Beyond this anti-social cutting, Bush also takes aim at various entitlement programs: Medicare loses $36 billion over the next ten years; and Medicaid loses $13.8 billion. He even stoops so low as to eliminate the $255 lump sum payment that Social Security pays out to survivors in the event of a death of a beneficiary. In total the cuts to Social Security are tiny, they add up to only $2.2 billion over five years. The real problem is that these cuts, all of which aim squarely at the poor or lower middle class do not end up reducing the deficit at all. Why? Because Bush wants to continue with his dreadful tax cuts the majority of which benefit the richest 1% of Americans. The effect of those tax cuts is to increase the deficit by $192 billion over the next five years: so all that sacrifice by the poor is ovewrwhelmed by the greed of the rich. In no way is this budget remotely fair.

So is it fiscally responsible? Do you have to ask? This budget proposal continues the reckless precedent that Bush and his Republican supporters have pursued since 2001. It signals Bush’s intention to rack up more and more debt, thereby shifting the cost of current budget expenses onto future generations. He completely refuses to implement any shred of responsibility in his fiscal policy, and totally abrogates any ownership of the mess he is making. So much for the “ownership society”! Practically every time he puts pen to paper the future genrations of Americans are saddled with more debt. Take for instance his Health Savings account proposals. The Congressional Research Service has calculated that once these savings accounts are fully operational they will cut Federal revenues by approximately $400 billion every ten years. Not only this but they benefit the rich most: because they are a tax break, those who pay the highest rates of tax will get a proportionately bigger saving; plus the proposed account limit of $10,500 per year is obviously skewed toward the rich. Just how many poor people will be able to set aside that $10,500? This is just one example of the kind of policy proposal that Bush piles up without regard for their fiscal consequence. There is no way that these deficits can be tolerated for decade after decade without ultimately undermining the fiscal health of the country. The budget is utterly irresponsible.

Bush’s policies assume an endless willingness on the part of the rest of the world to subsidize the American way of life. That support is not altruistic, it is founded on the fiscal strength that investors perceive in the American economy. Endless deficit spending undermines that perception. Still, as this budget indicates, Bush thinks he can somehow defy the laws of economics. History is littered with nations that have thought similarly. None is currently a world power. That coming denouement will be the true measure of the Bush/Repblican legacy, and this budget, because it fails the honesty, fairness, and reponsbility tests will stand as a fitting example of his callous disregard for the welfare of his fellow citizens as he tipped their nation into decline.

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Bush’s Bogus Budget and Tax Cuts

President Bush has now submitted his annual budget proposal to Congress. As usual it is full of rhetoric rather than economic analysis; and, also as usual, it doesn’t mean much. All Presidents present budgets and all Congresses alter them out of sight. This is even when the President is in the same party in control over on Capitol Hill. So the fact that Bush wants to make his tax cuts permanent and to cut Medicare funding should not unduly vex us yet. The House and Senate Republicans, especially those up for re-election, will probably want to blunt the anti-social nature of Bush’s agenda. Plus, as you all well know, Bush regularly leaves out of the budget any ongoing costs for his wars. He just announced last week that he will ask for an additional $120 billion to continue to prosecute those wars. So for all these reasons the budget he just published is bogus. It’s not worth the paper it’s written on!

So let’s just focus on those tax cuts Bush wants to make permanent, and why that’s a really bad idea. The Center on Budget and Policy Priorities has issued an excellent analysis on the impact of such permanence. You can find it here: Extending Expiring Tax Cuts and AMT Relief Would Cost $3.3 Trillion Through 2016, 2/6/06 Some immediate thoughts leap out at me when I read this report.

First: the tax cuts for the top 1% of earners, those with incomes of over $1 million a year, is more than the entire amount the Federal government spends on education. In other words restoring those taxes would double, hypothetically, the Department of Education’s budget. More to the point, the cost of the tax cuts is more than the combined budgets of the following government departments: agriculture, labor, education, veterans affairs, transportation, HUD, justice, state, interior, EPA, and energy. We are now financing all those departments with debt rather than tax revenues.

Second: the debt needed to finance the tax cuts will generate an additional $486 billion in interest payments over the next ten years. This, of copurse, is adding to the debt that needs to be financed!

Third: the cost of the tax cuts will accumulate to approximately $6.5 trillion [yes, TRILLION] over the next ten years.

Fourth: the tax cuts have failed as economic policy. The recovery from the last recession has been poor compared with prior experience. Bush claims that the tax cuts were the stimulus for growth. There is no evidence to support that claim. In fact, had his claim been true, then given the enormity of the tax cuts the economy should have just gone through an abnormally strong growth period instead of an anemic one. Then there is the knotty problem of the recovery in the 1990’s when we experienced strong growth coming out of a recession at a time when taxes had been raised. In Bush’s world the raising of taxes should have hampered growth. They obviously didn’t. Lastly, all the evidence suggests that tax cuts financed by borrowing, as the Bush cuts have been, reduce, not increase, future economic wealth because they crowd out investment. This means tyhat the Bush tax cuts will have the effect of reducing national income over the next ten years, just at the time we have to finance them.

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The Budget Stupid

Many of you are various states of disbelief or anger about the state of the union [as opposed to The State of the Union speech which was also a source of angst!]. So I thought I should give a few comments about where we actually are, as compared to where Bush says we are. So here goes:

We are not heading into 2006 with a “full head of steam”. Sorry George that’s not correct. The economy has been growing for a few years now so we have a good idea of what it looks like. It is underperforming when compared with past growth periods in the following categories: growth in GDP, personal consumption, private domestic investment, net worth, income from wages or salaries, and employment. Only corporate profits have been above average. While the pace of job creation has picked up somewhat in recent months is is abysmal by post-World War II standards. This is not a very good scorecard for the administration. Only if you derive your income from capital can this economy be described as ‘good’. Everyone else is getting progressively more and more squeezed, and the pooorest are getting left behind completely.

This dismal performance has come at great cost: the collapse of the Fedral Budget. The tax cuts clearly did nothing to stimulate growth, but they surely punched a hole right through government revenues. As a result we now have a growing deficit that looms as a major imbalance and potential trouble spot for the future. Let’s be clear: the tax cuts did not create sufficient growth to offset themselves. That they did is the tired old supply side argument that Bush and his minions roll out to defend them. A look at the budget is all that’s needed to refute that claim: Federal revenues have been hammered and in 2004 were lower as a share of GDP [at 17.5%] than at any time since 1959. That they recovered in 2005 is not a surprise either: there were a number of one time revenue sources, mainly in corporate taxes, that produced what Bush refers to as the “revenue recovery”. They are not repeatable. So the projection of a rising trajectory from a low in 2004, through an increase in 2005 toward more revenue growth beyond 2006 cannot be made. Besides which Greg Mankiw, until recently Bush’s economic advisor, has said: that there is “no credible evidence that tax revenues … rise in the face of lower taxes”.

Why is the deficit a problem? Because to the extent that the government borrows to pay its bills it “crowds out” other borrowers who might have otherwise been able to borrow and put the money to better use [they cannot get the funds because the U.S. Treasury has better credit rating and therefore gets first crack at the money markets]. A second problem is that the continuing run up in debt exposes the U.S to an interest rate risk. Right now the payment of interest on debt is a moderate, but growing, part of the Federal Budget. As debt payments continue to grow they will begin to take money from other programs that the government might like to spend on. This conflict will accelerate if interest rates rise: rates have been very low for the duration of the entire Bush regime and so have not yet become an issue. If investors begin to feel that the deficit is permanent or out of control they might start to look elsewhere for investment opportunities hence causing U.S. rates to rise. This is because the U.S. will have to pay higher rates to keep them investing here as opposed to elsehwere and to compensate for the riskier state of the U.S Treasury. We should not forget that not all the debt is bought by foreign investors: a large majority of the total is owned by American investors, so if rates rise the values of their existing portfolios will drop and may damage other parts of the economy as a result.

Finally I want to point out that the Federal Deficit is bulging not because domestic spending is out of control, but because, as I just said, revenues collapsed. In any case, the real run up in spending has been on security: either in the miltary or homeland security budgets. When expressed in raw dollars the increase in spending since 2001 has been 18% for domestic programs and 58% for security. But when these figures are adjusted for inflation and population growth, as they should be for accurate analysis, we find that domestic programs had zero growth while security rose 34%. In other words, for all the panic about run away entitlement programs they have not contributed to the budget problem at all: we have a security spending problem, not an entitlementy spending problem. Now I admit that entitlements are poised to take off and need careful debate about their budget impact, but right now they are not the issue that Republican lawmakers are trying to make them into.

So as we head deeper into 2006 here is the overview: Consumer spending, because wage and salary growth has been poor, has been supported by debt — consumers have borrowed to buy things. This borrowing has been contingent on low interest rates and booming house prices, two things that are already going away. So consumption may well weaken. If it does, the weakness we saw in the fourth quarter of 2005 will continue into 2006. Energy prices are likely to stay higher than the last few years and will therefore be a drag on spending. Corporate profits and investment will start to fade as they always do in the latter parts of a business cycle. The trade deficit will be trimmed by slackening demand, but not by increasing domestic production. This all makes the Federal Deficit more important: if it stays higher it stimulates the economy, but if it shrinks it acts as a drag. And this is the conundrum Bush has created: by slashing revenues in a series of inefficient tax cuts he gave up the chance to stimulate the economy in 2006 or 2007 just when he might want to. In other words he sacrificed his flexibility in the future for what has turned out to be a very poor return over the past three years. He added rather than reduced risk in the economy.

The odds are that there is enough strength to stave off a recession, but I doubt that the year will be strong. And the risks are increasing, not decreasing.

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Budget Cuts Hit the Poor

What a surprise! Congress has now passed a package of budget cuts which it claims will help rein in domestic spending. Naturally it has all sorts of implications for the most needy members of our society. All of those implications are bad. Here though is a different take on the legislation. Because the bill includes a requirement that someone has to present a passport or birth certificate in order to get the benefits it has consequences beyond those intended. The intention, and the budget savings announced, is to stop use of Medicaid by illegal aliens or others who not entitled to receive the benefit. But, as the research here shows: Survey Indicates Budget Reconciliation Bill Jeopardizes Medicaid Coverage for 3 to 5 Million U.S. Citizens, 1/26/06 there are plenty of bona fide Americans who will also get their benefits cut becasue they do not have identification. And guess what? Those affected most are in the poor minority group of society.

Well done Congress! Another bash at the poor so we can save those rich people tax cuts!

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State of the Union

Last night’s State of the Union address has to fall into the category of unadulterated hogwash. The President had so little to say that he barely bothered to cover up his re-use of tired old snippets from both his own and other people’s past speeeches. For those of you who really feel a need to read some of what he said, the New York Times has an transcript here: Annotated State of the Union Address

The overwhelming message in the speech is that Bush has learned nothing, will apologise for nothing, and will deliver nothing. His comment on energy is the lead item in this morning’s newspapers. Why? His plans are vaporous. They completely lack urgency or concreteness, and can hardly be genuine because his whole administration has been previously been all about helping the oil industry. Bush going ‘green’ even for security reasons is an obvious sham.

His call for a less harsh political landscape sounds so hollow that one can only laugh: this is from a person who revels in viscious hardball tactics against anyone who gets in the way.

His tax cutting appears to continue unabated, despite the bulging Federal deficit. The only concession he makes to fiscal rectitude is to cut yet more services to the poor: a paltry $15 billion at that. His is the most irresponsible administration in history, and he preaches fiscal restraint? My eyes and ears may be failing, but so mush as to fall for that one!

Then, of course, is his foreign policy. It lays in ruins and yet he meanders on about facing down evil and terror. Iraq is a mess. Iran … well the list goes on. Bush has done massive damage to the American ability to build effective international partnerships, and he’s the one to lecture us anbout isolation. His policies isolated us!

Absloutely nothing of substance will come from this speech. Bush, who only a year ago was boasting about his political capital, has been reduced to a scarcely relevant onlooker as the political parties continue the culture wars that the far right unleashed on us.

There’s a lesson here for all future presidents: being competent counts. Bush isn’t, so he doesn’t.

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