Federal Budget Woes

Everyone, it seems, is now alert to the state of the federal budget. Apparently we are drowning in a sea of red ink, and, according to some, the deficit presages the decline of American influence and power.

I don’t see it that way. Our decline, if there is any, has a very different source.

• We have had awful fiscal policies for years. Our problem is not new it has been ongoing. Why the sudden conversion to fiscal rectitude? One word: politics. The root of our current deficit, the part that is really difficult to fix and even more difficult to discuss, is the revenue shortage created by the tax cuts of 2001 and 2003. Scream all you like, object all you want, but facts are facts. This morning’s New York Times talks about decades of ‘red ink’ as if we haven’t already just lived through one. The deficit yawned wide way back after those tax cuts and hasn’t closed since. This is not a new problem.
• Has our ‘power and influence’ declined since those tax cuts? Not much. And, if it has, that decline was more due to our policy of going it alone rather than being multi-lateral. Our foreign policy and our behavior has more to do with whether we maintain influence than our budget.
• Having said that, the budget matters. But it matters more domestically. A major budget problem such as ours constrains domestic policy options far more than foreign policy options. It creates a cramped space within which we feel as if we can no longer afford certain programs. It makes us question the advisability of things that, were the budget balanced, we would never discuss.
• There is also a myth about our dependence on the Chinese. It is a myth. Why? Because they cannot offload their investments here without taking a huge loss. They don’t want to do that. It is their interest that we keep our currency and economy strong. They need us as much as we need them.
• Besides, there has been a huge plunge in private sector borrowing in the US. All that has happened recently is that the government has been borrowing instead of the private sector: the marginal amount of foreign investment has not sky rocketed the way in which we are led to believe by the hysterical media. The largest investor in America remains America itself. That is you and I through our retirement plans. We are lending to ourselves.
• The current crisis has blown the ratio of national debt to GDP all the way up to over 70%. That’s high, but not catastrophic. We can manage it easily within our budget, as long as we curtail and reduce the deficit in the medium term.
• But not the short term. We simply must avoid drastic short term action while the economy is still fragile. Let’s be honest and admit we are still on life support: the stimulus and an inventory adjustment are all that stood between us and a depression last year. Now is not the time to cut government spending. Actually, now is still the time to increase it.
• Lastly: let’s not get hyper-ventilated over the size of the federal budget. Media types keep throwing around huge numbers in a vacuum. The American economy is vast. It represents about 20% of the entire world economy. We create about $ 14 trillion a year. A deficit of a billion or two is big but cannot overwhelm the entire US economy. The trick is to contain it and stop it running out of control.

My take on all these doom laden stories and media conversations is somewhat different.

Yes we have a budget problem. It is a long term issue and has been one for decades.

Yes we need to control it and reduce it. That has to be done with the minimum of disruption to our current recovery from crisis.

That means spending cuts in the medium term and tax increases as well. In particular it means allowing the 2001 and 2003 tax cuts to expire and go away. But it also means getting control of the two fastest growing sectors of our budget: defense and health care. To do that we need a calm and sensible discussion about our policy options and the choices we need to make.

We do not need invective and hysteria. Nor do we need to panic or to misrepresent the facts.

This morning I was unfortunate enough to watch a few minutes of a CNN ‘analyst’ talk about the stimulus effect on New Hampshire – apparently Obama is en route there. I was appalled at the complete distortion of the facts being discussed. At one point a graphic was put up on screen showing the rates of unemployment for the past three years, unemployment in New Hampshire has doubled in that time from around 3.5% to just over 7.0%. This fact was presented as support for the argument that the stimulus had failed. Nothing could be further from the truth. The relevant discussion is what would unemployment have been without the stimulus? Nowhere was that mentioned. The presumption that the 2007 rate of 3.5% would have remained is obviously preposterous. And, yes, despite the stimulus unemployment rates have risen rapidly. The point being that they would be much higher without the stimulus.

At another point the CNN ‘analyst’ spoke about a $2 million school project having created only two new jobs – both teachers. The inference being that each job ‘cost’ $1 million. This is simply to misunderstand the entire project. Building a school and hiring two new teachers is a very small part of the story: what about the construction crew? What about the construction company’s profits? What about the small business owner who survived a tough winter with a new project? What about all the local vendors who sold products to the construction crew? How about all the suppliers of chairs etc? The central premise of a stimulus is that it has multiple effects throughout the entire economy. In fact those knock on’ effects are far more important than the simple result of the project itself. This is basic economics, not sophisticated reasoning. Yet it eluded our expert ‘analyst’. The public was sold short and left not uninformed, but misinformed.

Shoddy and wafer thin analysis is doing more damage to our country than I care to imagine. If our voters cannot get access to proper analysis – thinking that is more than skimpy – how can we enter the debate that we need to have about priorities and choices?

No.

It is not the budget that will undermine American power and influence. It is the nation’s apparent inability to think clearly and articulately about big issues.It is the country’s elite that is the problem: the media and the communicators; the politicians and the business people; and the academics. The country is being under-served by the very cohort upon which it relies for leadership and direction.

Our inability to confront bad fiscal policy and to discuss change is symptomatic of a deeper cause of decline: our political system is antiquated and our leadership fractured and shallow.

Our problem is definitely not the budget because we can fix that if we want to.