The Federal Budget

Lost within the election buzz, and hidden behind Sarah Palin’s persistent lying, is the latest news from The Congressional Budget Office on the federal budget. I suppose that’s good news for John McCain because the news is not so rosy.

The Federal deficit is projected to rise to $407 billion this year from last year’s$161 billion. In large part that increase is due to the stimulus earlier this year. You may see this figure tossed around in the press. I should caution you however: this is the unified budget figure which includes the surplus on the Social Security fund. The actual deficit for ongoing government activities was $342 billion in 2007 and is expected to be $592 billion in 2008. The CBO likes to show the deficit as a percentage of the economy [GDP] and those percentages are: 1.2% for 2007 and 2.9% for 2008. All in all not a pretty picture although the deficit as a percentage of GDP is significantly less than the disastrous performance under Reagan when we reached just around 6>0% in 1983.

Deficits are the norm throughout the period the CBO forecasts, although their ‘baseline’ forecast shows considerable improvement because they expect the Bush tax cuts to be allowed to expire. Since I don’t believe that politicians of either party will allow all the cuts to expire, and given the various agendas for spending being put forward by Obama, I think it’s reasonable to forecast that the federal deficit will expand back into the 5.0% – 5.5% of GDP range over the next few years.

Such is the Bush legacy.

The really scary numbers the CBO puts out, though, are those for housing. The drop in home prices is staggering and surely will continue to act a s a drag on the economy for quite a while. The drag is shown in the very slow GDP growth the CBO is predicting: 1.5% for 2008 and 1.1% in 2009. I find these numbers to be a little too strong for two reasons: first I think the CBO underestimates inflation. Faster inflation will reduce those numbers slightly. Second, I think interest rates will rise more than the CBO does. This weekend’s nationalization of Fannie Mae and Freddie Mac has shored up the housing market, but I think its primary goal was to stave off foreign investor selling of American assets which would have sent the dollar down and forced rates up. While nationalization will work near term, I still feel that foreign holdings of dollar assets will be under pressure and that, subsequently, rates will rise more than the CBO predicts. Either way the outlook for the economy is mediocre at best.

The incoming president will therefore be entering on a low note. None of the usual indicators of economic health will give room for optimism well through 2009 and possibly into 2010. So the political agenda seems set for a more reactionary period than a transformative period.

I have always held that Bush’s goal was to cripple the federal government’s ability to expand into new areas of expense such as healthcare. He deliberately reduced federal revenues by slashing taxes and yet introduced no cost reductions. On the contrary, his tenure has seen federal spending rise steadily [as a percentage of GDP] whereas revenues fell sharply. The promised offset to the cut in taxes, the vaunted increase in revenues generated by the higher incomes supposedly created by the lower tax burden, naturally never showed up. They didn’t when Reagan tried the same trick either. A cut in taxes has never been offset by growth in revenues in the way the Republicans argue. Yet the public keeps buying the snake oil.

Bad fiscal management is bad fiscal management. There is no way of hiding it. We have just lived through the worst economic expansion since 1945: anemic job creation, stagnant wages, growing income inequality, soaring home prices, and a falling dollar. The only factor to show real prosperity during the Bush years was corporate profits. Go figure!

Why the economy is nor driving the voters to a massive rejection of the Republicans I don’t know. The economy we live in now is largely a Republican creation … at least from a fiscal and monetary policy stand point. McCain self-avowedly knows nothing about economics. This is not a time to plunge into an elongation of the Bush era. The figures, the facts, support the need for change. It’s a matter of national security.