Last month, we discussed how beneath the surface, things may be actually worse than they appear. (Sometimes, There is No Pony). Not just from a consumer or macro-economic view, but specifically, as it relates to the Federal Budget Deficit.
In particular, we noted that:
The Federal Deficit, already booming thanks to the unencumbered profligacy of single party rule, now looks to soar above half a trillion dollars for 2005; And the budget for 2006 is widely expected to be even worse.
The War in Iraq, and all the costs associated thereto, has not gone away. Our March 2003 prediction for a final tab of a trillion dollars is looking increasingly prescient. Katrina may have blown War coverage off the front pages, but the financial burdens of this endeavor still remains a heavy one.
(Speaking of which) Off Balance Sheet funding: Since we’re discussing these, let me remind you that a significant chunk of Federal spending is so far “Off Balance Sheet” that it would make the CFO of Enron blush. Its not just the war in Iraq funded via special legislation; The other major expense is FEMA. This “Emergency” spending on an ad hoc basis makes the deficit appear smaller than it really is.
The Sunday NYT picks up on the same theme today. In an article titled "Emergency Spending as a Way of Life," it discusses the way Emergency Funding is being abused to make the Deficit appear smaller, even as it gets increasingly larger.
Here’s the Ubiq-cerpt:™
"The problem facing Mr. Bush and the Republican-controlled Congress is not the cost of Katrina itself. The problem is that, even before Katrina, Congress and the White House had lost their grip on the budget.
In the last few years, huge chunks of the federal budget have been channeled through emergency supplemental bills. Part of that money was for natural disasters, but a much bigger part of it was for the wars in Iraq and Afghanistan and counterterrorism efforts from Uzbekistan to Africa. The budget is also packed with fiscal time bombs – Medicare prescription benefits, tax cuts and health care costs for veterans – that are set to explode in the next few years.
In theory, emergency spending bills are for one-time, unforeseeable calamities. In practice, Mr. Bush has financed the entire war in Iraq, as well as the war in Afghanistan, with emergency supplemental requests that totaled $248 billion over the last three years. With no sign yet of a troop reduction in Iraq, the costs are likely to exceed $80 billion in 2006.
Emergency spending on natural disasters has shot up as well. Though no one would have budgeted for a calamity like Katrina, many budget experts have long called for a "rainy day fund" to cover at least some of the calamities that will occur. . .
Permanently extending all of Mr. Bush’s tax cuts from 2001 and 2003, a top Republican goal, would cost about $1.4 trillion over the next 10 years, plus interest.
On top of that is the cost of fixing the alternative minimum tax, which was intended to prevent rich people from taking too much advantage of tax deductions. Because the alternative tax is not adjusted for inflation, it ensnares millions of additional families every year.
Mr. Bush had said he would deal with the problem this year through a sweeping overhaul of the tax code. But tax reform has been delayed until at least next year, and many Republican lawmakers simply want to abolish the alternative minimum tax without making up for lost revenue.
That would cost about $30 billion just for next year and as much as $1 trillion over the next 10 years, according to estimates by the nonpartisan Joint Committee on Taxation."
"The problem facing Mr. Bush and the Republican-controlled Congress is not the cost of Katrina itself. The problem is that, even before Katrina, Congress and the White House had lost their grip on the budget.There you have it — funding by off-balance sheet methods.
Who wants to guess when the Federal Budget will again be throwing off a surplus?
I’ll start: 2018.
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Source:
Emergency Spending as a Way of Life
EDMUND L. ANDREWS
NYT, October 2, 2005
http://www.nytimes.com/2005/10/02/business/02view.html
I read the march 2003 overview. It was interesting. Thanks for sharing.
I might quibble or want to know more about the following:
1) Law of unintended consequences- the U.S. may have more or less responded the way Osama Bin Laden anticipated or expected.
2) Geography of Iraq- i do not see this as an advantage. It is deep in potentially unfriendly terroritory, and surrounded on all sides by potentially difficult situations. The U.S. in Iraq could have multiple fronts very quickly. Putting a large number of U.S. troops in Iraq is risky. Given this, large U.S. expenditures on military may be necessary. We already saw recently during Katrina that there may be a shortage of stuff like communication equipment, night vision goggles, and other stuff domestically in U.S. The useful life of a lot of equipment is 3-7 years. The U.S. needs to keep maintaining and enhancing equipment.
In the last year, the History Channel had interesting documentary on Russia siege of Germany at end of WWII. Stalin had two generals in his army that were in charge of capturing Germany. These two Russian Generals competed with each other to get to Berlin first (perhaps necessity required Stalin to discover competition and individualism more than normally sanctioned by communism. After WWII, the “winning” general was deployed to some job that ensured he would be no threat to Stalin’s leadership). Anyway, the “winning” general said one of the keys to getting to Berlin first, and “winning”, was having more of everything: more guns, more men, more everything. Russian guns (evolved into AK47) were technologically simpler and per my fuzzy recollection perhaps not superior in performance to German guns. However, one could produce lots of the Russian guns very quickly; if the guns broke or had problems in the field, they were easy to fix. This helped Russians in protracted campaigns in difficult conditions. Takeaway for U.S.: we need simple equipment that is easy for regular people to maintain at decentralized points in the U.S. and abroad, in addition to technologically-advanced stuff that enhances productivity. We need a lot of it. By stuff, I am not necessarily talking about guns.
Notice that more of the middle clas is getting caught up in the AMT [cough-tax increase] while the wealthiest earners are seeing Congress borrow to protect their tax cuts? Now fixing the AMT will be called “too expensive in a time of budget shortfalls” and raising any kind of tax that affects the wealthy will be “bad for growth.” Yet the same people who tell us this always make sure to mention that a huge rise in energy costs that hits the middle and lower classes won’t hurt growth.
deficit ex-deficit, its the in thing
The wealthy pay their taxes, its just in the form of political contributions. Works out cheaper that way.
The next surplus *could* come faster than we think, but we will have to make significant advancements in technology. The Internet essentially created more efficient allocation of resources and more efficient markets on an exponential scale. A nationwide infrastructure initiative — in which we try to connect every family in America to broadband, create ubiquitous WiFi in every major city, and develop a ubiquitous mobile phone network across the country — would go a long way toward creating another exponential shift in efficiency. But I don’t have my hopes up too high because we can’t even maintain the old 20th century infrastructure we have given the current anti-government sentiment that has a stranglehold on Washington. I wonder if we’d still be waiting for regular land-line phone sevrice in out-of-the-way places in America if we left all that infrastruture building to the chaos of the private market?
Enron Nation
The Big Picture points out that the Federal Government is paying for disaster relief using off balance sheet spending:
Off Balance Sheet funding: Since were discussing these, let me remind you that a significant chunk of Federal spending is so …
The country was first put back on the road to fiscal responsiblity in the 90s when the tax rate was brought up to a level that resembled something reasonable. The Democrats were punished at the polls for doing it. (Remember the Republican chant of “Bye-bye, Marjorie! Bye-bye, Marjorie!”?)
Since 2000, fiscal conservatism has been AWOL (kinda’ like GW). Since there are virtually no adults in power in the Republican Party, and the Democrats will surely remember the lessons learned at the hands of the voters in the 90s, your 2018 projection (around when the Soc Sec s*** hits the fan) is probably quite optimistic.
Most people will complain about deficit spending, but they will vote against anybody who impacts their wallet or pet cause. I for one will vote against anybody at any level of gov’t that now on tax cuts without an obvious surplus in sight.
Hi, my name is Goldman Sachs. I am one of the world’s largest investment banks. I’m also the largest campaign donor to Hillary Clinton, Mitt Romney, and Barack Obama. But, Boy am I having a rough time of things! I could sure use a bailout for my latest pyramid scheme, which is basically a giant mortgage bubble. I’m lucky I can use Enron accounting, because my balance sheet looks like a time bomb!
Not this is anything new. In 1929, I launched the Goldman Sachs Trading Corp., a closed-end mutual fund with characteristics similar to that of a Ponzi Scheme. The fund failed as a result of the Stock Market Crash of 1929, hurting my reputation for several years afterward.
But of course, “oops I did it again!”
Now of course, all my credit default swaps are exploding in my face! My balance sheet is trash! It won’t be long before the wheels come off this soapbox racer!
Aw shucks, thanks Ben Bernanke, I knew you’d come through with a bailout.
Love,
Goldman Sachs
http://ronpaul2008.com
http://teaparty07.com