Fun With the Budget?

"All pronouncements about what 'the American people' want on the budget need to be seriously doubted." — Opinion by Stan Collender, federal budget expert, in a recent column.
"The boom, not the slump, is the right time for austerity at the Treasury." — John Maynard Keynes (Famed economist, Collected Writings)

I was going to entitle this latest missive, "You Don't Know Jack About Budgets," but thought the better of it. What I've got to relate is necessarily a bit complicated, and much of it will be done swimming upstream against the deluge of media misinformation on the topic.

Presently our never-ending federal "budget battle" is slowly creeping along like some recurring episode of "Bad Theatre," and the looming specter of the government shut down being threatened by the radical Republicans for months seems to be on hold for the moment. So it's a good time to review some of the lesser known facts, figures and issues here.

The basic fiscal picture over the next decade is well known, but rarely spoken of: The medium-term deficit over the next 10 years is almost entirely a legacy of the Bush profligacy and disastrous economic policies which led to the Great Recession.

Bill Clinton balanced the budget and then ran a $236 billion surplus before the Bush tax cuts, but we now have run deficits for the past nine years. The 10-year projected deficit is almost entirely explained by the economic downturn, the Bush tax cuts and the previously "off the books" wars in Afghanistan and Iraq. The feckless Bush tax cuts and the wars made up $500 billion of the 2009 deficit and will create $6 trillion in deficits and debt service over the next decade.

So want to know a deep dark secret about the Obama administration that everyone in the media now seems to be wanting to attack on the issue of the deficit being "out of control?"

Well they've already reduced the deficit. Something George W. Bush was unable to do in the eight years of his presidency. Amazing, and just in the first years of the Obama presidency. 

Want another one? We're not broke. And despite the recurring games of chicken the GOP loves to play with the budget and the debt ceiling whenever they're controlling Congress, the U.S. has never in it's long history defaulted on it's debt. Not for any reason. Neither war nor depressions were enough to cause such a catastrophe in all our history, which is one reason the full faith and credit of the U.S. of A has been a world standard of fiscal integrity and strength for well more than 200 years.

This has been true going back to the founders when Alexander Hamilton, our first Treasury secretary, invented and conceived of a manageable federal debt as a strategic instrument of national policy planning. (More essential history of our national debt can be found here via economist L. Randall Wray).

Again, to threaten such an abomination as defaulting on our debt to force unpopular partisan political goals is not only counterproductive in world markets, it's tantamount to economic treason when done so blithely and frequently as the radical Republicans are wont to do.

Bloomberg Business News also agrees we are definitely not broke, with a recent story reminding us that, "The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007. Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so."

Similarly, the former chief economist for the IMF, Simon Johnson, writes recently, "The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. We are still seen as a safe haven."

Further the co-author of the important expose of 13 Bankers also notes, "The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-2008. The ensuing recession and associated loss of tax revenue will end up increasing our government debt, as a percentage of gross domestic product by around 40 percent. Very little of this debt increase was due to the fiscal stimulus; mostly it was caused by lower tax revenue, because of the slump in output and employment."

Still these larger issues remain very abstract concepts for most folks. Most people care far more about jobs and the lack of good jobs in their communities.

Nationally — even though the unemployment number is finally under 9 percent here in Georgia — it climbed to another record high at 10.4 percent. Locally, of course, it's worse still. That's where most of the real concern lies, as it should. That and the rising cost of gas and food give some real teeth to the economic pressures being felt by families everywhere.

With chronic unemployment this stubbornly high, it's too early to risk the recovery by overly dramatic efforts at fiscal contractions, especially with a possible "oil crisis" throwing ever more Arab sand into our economic gears. 

Much of our current predicament comes about due to the Great Recession, begun in 2007, and the shortfall in tax revenues associated with same, which is responsible for about 61 percent of the deficit last year. The slow recovery from this massive economic shock also involves the lingering high unemployment crisis.

Unemployed people pay less taxes, buy less things and thus further depress demand for goods and services. The economy can not adequately recover without some increased demand, and sadly severely cutting government funding and jobs on the state and local level actually will worsen the situation and not help matters. It just adds to the short term problems and pain and makes it that much harder to climb out of the hole we're in. Another 30,000 state and local jobs were cut in February, with no end in sight. 

The sad fact is that governments at all levels are not doing enough to help the situation, and with a mindless approach to budget cutting could certainly make the situation worse. This unfortunate truth putting the economic recovery at risk has been highlighted by many economists recently.

The very cavalier response of House Speaker John Boehner upon hearing that his GOP budget plan slashing $61 billion from this year's budget would throw perhaps 200,000 federal public sector workers from their jobs was "so be it."

What would his response be at the latest estimates of such drastic cuts causing upwards of 700,000 jobs lost by Mark Zandi, John McCain's previous economic advisor, and now Moody Analytics chief economist? 

Fed Chief Ben S. Bernanke, when asked the same question of the job-destroying potential of the GOP Congress' plan, averred that perhaps only "several hundred thousand" might be lost. Such job destruction is not only unneeded and unnecessary, it's also wildly unpopular with nearly everyone, but especially many economists.

Reagan-era budget maven Bruce Bartlett had this to say about his heedless former GOP brethren: "Enacting large budget cuts in the current fiscal year when it’s almost half over is very foolish. Congress can’t cut spending that has already been spent, so it must cut very heavily from a small spending base to achieve meaningful savings."

Both Bartlett and his fellow columnist and long-time budget observer Stan Collender say be prepared for the coming government shut down.  

Conservatives are fond of shouting "what about the grandkids, they'll be paying for all this debt!" But they're paying for all this now, here in Georgia with less investments in their future, with Pre-K cuts, educational cut backs, fewer and less useful HOPE scholarships, larger class sizes, and fewer social and health services. Suffer the children indeed.

The best estimates are that the last government shut down, also forced upon us by an older generation of radical Republicans in 1995-1996 for 21 days, cost upwards of $1.25 to 2 billion dollars. I'm betting that a majority of the GOP House will think that's a cheap price to pay to get their own way, and the continuing trend of never compromising until you've destroyed the government and economy you were charged with running will continue. It's an unbroken record, after all.