The Fiscal Mess We’re In

Prepare yourself for a shock: I agree with a New York Times editorial.

Congressional Republicans have opened a new front in the deficit wars. In addition to demanding trillions of dollars in spending cuts in exchange for raising the nation's debt limit, they are now vowing not to act without first holding votes in each chamber on a balanced budget amendment to the Constitution.

The Times thinks that the Balanced Budget Amendment is a very bad idea and the Times is right. Writing policy into the Constitution is like changing the rules of baseball so the Cubs will win the series. Congress is a deliberative body and it is damn well going to have to deliberate its way out of the current fiscal mess.

Unfortunately, the Times is in favor of the mess and wants to be certain that it isn't fixed.

What could be more prudent than balancing the books every year? In fact, forcibly balancing the federal budget each year would be like telling families they cannot take out a mortgage or a car loan, or do any other borrowing, no matter how sensible the purchase or how creditworthy they may be.

Right. The power to borrow is one of the great financial powers granted to Congress under the Constitution. Congress needs to be able to respond to circumstances. The analogy works both ways, however. Families have to make sure that their budgets balance over the long run. If they are encouraged, say, by Fannie Mae or Barney Frank to borrow more than their house is worth, that leads to heartbreak and hardship.

The push for a balanced budget amendment is a result of a loss of confidence in Congress. A lot of Americans (and not just the Koch brothers) do not believe that Congress is capable of acting responsibly. They are not being unreasonable. Here is a chart from the Congressional Budget Office.

The "extended-baseline scenario" projects the level of public debt twenty five years into the future based on current law. That includes the expiration of current tax cuts and assumes that all the devices written into current laws in order to make those laws look less expensive will be maintained. The CBO summary isn't written as if the authors think this is realistic.

What is alarming is how alarming the rosy scenario is. It assumes the following:

Revenues would reach 23 percent of GDP by 2035—much higher than has typically been seen in recent decades—and would grow to larger percentages thereafter. At the same time, under this scenario, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II.

So, this scenario works if revenues take an unusually large slice of GDP and the major social programs plus interest payments on the debt squeeze all other federal spending to pre-WWII levels. Even then public

debt would increase slowly from its already high levels relative to GDP, as would the required interest payments on that debt. Federal debt held by the public would grow from an estimated 69 percent of GDP this year to 84 percent by 2035 (see Summary Figure 1). With both debt and interest rates rising over time, interest payments, which absorb federal resources that could otherwise be used to pay for government services, would climb to 4 percent of GDP (or one-sixth of federal revenues) by 2035, compared with about 1 percent now.

Federal debt, already historically high, would continue to slowly rise into the foreseeable future. It is very doubtful that this budgetary future is sustainable. I think it also relies on a lot of dubious assumptions. Will the interest rates that foreign investors offer remain low? Will an increase in federal revenues not depress the economic growth on which those revenues depend? But bear in mind: this is the optimistic scenario.

The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period.

The CBO doesn't really think that Congress is going to exercise the discipline required to make the dismal but preferable scenario happen. See the blue dotted line above. Beyond here be dragons.

This isn't rocket science. We are going to have to raise federal taxes. We are also going to have to reduce the cost of the major entitlement programs. Republicans are resolutely opposed to the former because they do not believe that Democrats will ever agree to the latter. They have good reason to be doubtful.

If you don't like the balanced budget amendment, figure out how to balance the budget. If you don't like the Ryan plan, figure out how to bring entitlement spending under control. If you don't want tax increases, get over it. Any rational solution is going to be worse than the Ryan plan, more tax heavy than Republicans want to swallow, and offensive to the New York Times. Welcome to the future.

Comments

[Jimi]

Ken,

Nice Post! Americans are in for a rude awakening, and a change in the standard of living will occur that this country has not experienced since the Depression and WWII.

Of course, it will not happend over night. All the baby boomers did a nice number on their kids and grandkids, they all might want avoid the entire topic once Gen X, Y, Z reach the age to figure what is going to happend to them.

[larry kurtz]

It's the President's ball and the earth haters will go down in flames: http://www.kcrw.com/news/programs/tp/tp110706political_brinksmans

[Donald Pay]

The balanced budget amendment is (1) never going to happen and (2) extremely bad policy. It's one of those gimmicks the Republican love, because they know it sounds "responsible," and it is impossible to implement. The same people who are clambering for this "solution" have their hands in the till for multi-million dollar government projects in their districts, and did away with pay-go, which actually did result in Congress dealing responsibly with the budget during the Clinton years. If Republicans in Congress want to prove they are responsible, raise revenue. Democrats are cutting. The problem is clear---Republicans can't say no to the banksters, Wall Street cheats and mega-corporate elite.

[Stan Gibilisco]

Yesterday (Wednesday), Larry Kudlow had an excellent anaylsis on his "Kudlow Report" explaining why government spending keeps increasing over time.

Fundamentally, I have to agree with Donald here, at least insofar as his statement goes concerning "banksters, Wall Street and the mega-corporate elite." The Republicans need a new paradigm, one that returns to the original principles inherent in administering a republic. Maybe then, the Republican Party can gain some real traction. As things stand now, I think they're losing steam and are setting themselves up to get burned in the 2012 election.

I think that we Americans are losing trust in our large institutions, both private and public. It's one thing to mistrust a used-car salesperson; it's another thing to mistrust your broker or your bank or your homeowner's insurance company. And it's still another thing to mistrust your government, to the extent that you believe that Social Security, Medicare, or the FDIC will fail to remain solventl leaving each and every hapless individual adrift (but still taking their tax dollars, of course, rendering the government nothing more than a huge extortionist). When people no longer have confidence in any of their large institutions, and in fact believe that those instutitions are all phony at best and dishonest at worst, the seeds are in the soil for radical reform.

Long live the Libertarian Party, dammit!

[Bill Fleming]

Still haven't heard if KB thinks Ron Paul's idea of canceling our $1.6 trillion debt to ourselves is a good one or not. And if not, why not.

Instead of running these same old doom and glom charts all the time, I wish he's start telling his GOP Henny Penny pals to calm down, take a few deep breaths, and come sit down at the table and figure things out.

Or, short of that, at least get out of the way and let the adults who DO know how to get a grip on their emotions handle it. ;^)

[Jimi]

Donald,

"If Republicans in Congress want to prove they are responsible, raise revenue. Democrats are cutting."

First of all...Republicans in Congress balanced the budget. Clinton and the Democrats fought it every step of the way.

Second, You raise revenue in the long term by growing the economy. Raising taxes will not do that, it will only provide a small bump in the first year or two, and you can't raise taxes high enough to solve the problem, and you are more likely to cause greater damage in the long term....therefore it is a B.S. policy.

Third, Democrats are not willing to cut the size of government, and deal with entitlements so the so called "cutting" is nothing more than political theater.

[Jimi]

Bill,

"least get out of the way and let the adults"

Democrats had Super Majorities in the House and Senate and control of the Executive Branch for two years, and control of the House and Senate for four years ....the result was disasterous....who are these "adults" you are refering to?

[P. Chirry]

I'm not so sure about the NYT analogy comparing a balanced budget amendment to "telling families they cannot take out a mortgage or a car loan." There's a key difference. The potential revenue of a family is _limited_ by the amount it is able to produce; a man only earns so high a paycheck per month. So if a family wants more money now, the only way for them to get it is to promise to pay more money in the future. So there's a good reason for them to take out loans.

The potential revenue of government, in contrast, is virtually _unlimited_. If the government wants more money now, all they have to do is raise taxes (so long as taxes aren't nearing 100% of GDP). So there isn't really a good reason for them to take out loans, like there is for families. It's not true as you imply, Dr. Blanchard, that congress needs to be able to borrow in order to "respond to circumstances." If the circumstances really call for an increase in spending, congress

Then why do they do it? It's because voters are only willing to tolerate a certain level of taxation. Politicians are afraid to raise taxes above that level, for fear of being voted out. And so they deficit spend as a method of getting around the will of the voters. It's less convincing when congress says "Ok voterz give us ur $$$$ now soz we can spend it on gr8 projex like cash4clunkerz and Obamacare" than it is when congress says "OMGZ VOTERZ YOU NEED 2 GIVE US UR MONEYS NOW ORZ ELSE WE DEFAULT ON DEBT AND EC0N0MY GOEZ DOOM DOOM DOOM!!!!11!!11"

Indeed, even an outspoken conservative such as yourself, Dr. Blanchard, who I gather isn't normally any friend of higher government spending and taxes is more or less in this way tricked into supporting them and telling the rest of us to "get over it."

So perhaps reconsider your position on the balanced budget amendment. It would prevent congress from levying taxes on the American public higher than what they otherwise would be willing to endure. It is less like "changing the rules of baseball so the Cubs will win the series," than changing the rules of government so that the taxpayers will win the series. Which I don't really see a problem with.

[Bill Fleming]

Jimi, wasn't I clear? People who are not driven 100% by their emotions.
I've been watching your posts and suspect that perhaps you may not qualify.

[Dave]

% debt increase by president... 8 years under Ronnie +186%, 4 under HW +54%, 8 under Bill +41%, 8 under W +72%, so far under BHO 23%... Can you spot the BIG spenders who put all this debt on the backs of our children and grandchildren?

http://www.gpo.gov/fdsys/pkg/BUDGET-2008-TAB/pdf/BUDGET-2008-TAB-9-1.pdf

And now the "adults" want to return to debt levels not seen since the Carter administration... What does that tell you?

[Violet]

It looks like you need to take a political sccinee class. The debt ceiling is the issue at hand, but there are more differences than that.Find out where you stand in the political spectrum and make your decision from there. I wouldn't like to influence you in any way, but I would say that if it was up to me, I would not raise the debt ceiling. Think about it, would you raise the credit limit of your college student's credit card after overusing it? Do credit card companies give you the ability to raise your own credit limit? Whether Democrat or Republican, politicians have been spending our money irresponsibly; hence, the constant raising of the debt ceiling. We should not allow the irresponsible spending in Washington.References : Me