Wednesday, February 16, 2011

Deficit Sleight of Hand

  President Obama’s new budget calls for 3.73 TRILLION dollars in spending this year with a deficit of 1.65 TRILLION dollars. He says his budget will reduce the deficit by 1.1 TRILLION dollars over the next decade. This is some nice double speak, since there is no budget surplus planned just less borrowing from the government. By my math, spending 3.73 TRILLION dollars and have a 1.65 TRILLION dollar deficit means the government is borrowing 44 cents for every dollar they are spending. The Republican Congress will pare the budget in order to attempt back up the promises they made to cut 100 BILLION dollars in order to get control of the House of Representatives in last November’s election. Cutting 100 BILLION dollars from the budget will mean a deficit of ONLY 1.55 TRILLION DOLLARS and we will only be borrowing 41 cents for every dollar we spend. I’m glad the House Republicans will be cutting spending by 100 BILLION dollars, but it just seems like a drop in the bucket to me. And when you read the fine print, the drop just got smaller, since the goal is really a seasonally adjusted 61 BILLION dollars. It reminds me a little of the fellow I saw at the gas station this morning. He bought 2 donuts, 2 Sausage and Egg sandwiches, a slice of breakfast pizza, used his refill cup to save 50 cents on his diet soda (he was watching his weight) and paid for it with a credit card.

  Historically, the government makes up the deficit through inflation creating increased tax revenue. If I knew I was going to get double my pay next year, but prices were also going to be doubled, I would be well advised to borrow against next year’s pay, buy the things I need today, and pay it off with next year’s inflated income. The government will cut Social Security spending by not giving Cost of Living Adjustments (COLA)
like they have the last 2 years while prices go up. Inflation is almost zero, according to the COLA calculations. If you’ve bought gas or groceries regularly during the last 6 months, I expect you know that prices have gone up. But the official Consumer Price Index (CPI) says inflation and prices have barely moved. Maybe I’d agree if I was buying a house every year instead of gas and groceries every week. Of course, these are the same people who tell us the unemployment rate has gone down because people have given up looking for jobs don’t count as unemployed anymore. By that twisted logic, unemployment could be eliminated by laying everyone off and making it illegal to look for a job.

  At a recent chess tournament the other chess dads and I were discussing the budget. Someone made the comment that the current deficit was proof positive that Keynesian economics doesn’t work. I said it was only proof that Keynesian economics can’t work with partisan politicians. Keynes was a proponent of deficit spending to stimulate economic demand during recessions and politicians of every party have no problem with that part (even when there's not a recession). The other side of the ‘Keynesian coin’ is that when the deficit spending has done its job and the economy is expanding without government help, it is time to put a brake on the economy by taking the money out of the system to not only replace the monies spent during the recession but to also keep excess demand from outstripping supply and creating inflation. This is the part politicians of all parties can’t seem to figure out. President Obama is going to plan for a 500 BILLION dollar deficit by the year 2021 and says he is slashing the deficit by 1.1 TRILLION Dollars. In 2001 President Bush used the budget surplus to justify a big tax cut, but then 9-11 happened and the country was at war. Instead of asking Americans to forego their tax cuts in order to pay for fighting terrorists, Bush resorted to deficit spending, borrowing the money to fight terrorism AND still giving everyone a tax cut. In the 60’s spending on the Vietnam War and the social programs of the ‘Great Society’ was called ‘guns and butter’. In any era it is called not having the stomach to make a tough decision.

  There are only 2 ways to balance the government’s budget, tax more or spend less. But since politicians can only get elected by promising one or the other, but cannot get re-elected by doing either, they are in a tough spot. For example, after a months-long struggle, Congress today voted to
cancel funding for an engine for a military jet that would have cost 3 billion dollars over the next few years. When you are looking at a 3.73 trillion dollar budget, 3 billion (only half a billion this year) in savings is more like a grain of sand than a drop in the bucket. The President and the military didn’t want to spend the money to produce the engine, but many congressmen want to see it in production and the leader of the pack for spending money to produce an fighter jet engine that the military doesn’t want is none other than House Speaker Jim Boehner of Ohio. Why? Because Ohio is where the bulk of the jobs created by making this engine are located! This is probably not Boehner meant when his website posted that “Boehner Calls on President Obama to Start Cutting Spending Now”. And if too much more job-creating spending gets cut from his district, he’ll really have something to cry about unless the next Congress extends his unemployment benefits. If it is this hard to cancel spending for a piece of military equipment that even the military doesn’t want, how is the government going to cut Medicare, Social Security, welfare, or raise taxes to close the deficit?

  Despite all this, I don’t find myself especially worried by the current deficit situation and remain pretty optimistic. Like so many things, I feel it not worth the time I could spend worrying about it and I believe it will all work itself out in the end. One thing I do know is that I NEVER know. In 1972, after Richard Nixon won re-election to the presidency in a landslide, what kind of odds would you have gotten that he would be out of a job just 2 years later? In 1979 and 1980, the government was running the biggest deficit ever up to that point AND the price of gas doubled overnight AND you had to wait hours in line just to fill up your tank AND inflation was at 18% AND unemployment was at 18% AND the Russians had just invaded Afghanistan AND every night on the news we were treated to watching American citizens held hostage in the embassy in Iran, but less than 10 years later the Berlin Wall had fallen, the Soviet Union had collapsed, and America was being called the last superpower. In 1993 when the country was in a recession and the government was running the biggest deficits ever, who would have thought 5 years later the government would be running a surplus? And who would have thought that 5 years after that, we would be running record deficits again and the president would be the son of the man who was booted out of office just 8 years prior? It wouldn’t surprise me if the government was running surpluses by 2016, but I would be shocked if one of George W. Bush’s kids was president.

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