The Big Picture of our Federal Fiscal Problems

Rubik's Cube Français : Rubik's Cube Bahasa Me...

Rubik’s Cube Français (Photo credit: Wikipedia)

Typing the above title made me laugh.  The idea of me saying anything useful about the “big picture” in the space of an itty bitty post makes no sense at all.  On the other hand, it doesn’t feel worthwhile to keep tracking a congress which struggles to just keep the government funded on an almost month by month basis.

Common sense would suggest the issues of the sequester and whether to continue funding the federal government past March 27 shouldn’t be issues at all.  Solving those are the bare minimum while the real issues, the REALLY BIG fiscal  issues are not being touched upon.  It’s as if we are busy trying to agree on shoring up some levees while a tsunami is coming at us a few miles away, or in years, 10 or so.

Doug Elmendorf is the Director of the Congressional Budget (CBO) which acts as a kind of referee examining budget proposals developed by congress and the president and “scoring” them as to their actual cost.   I have come to realize this is a sophisticated guestimate at best since there are so many variables involved, but a good faith guestimate is better than nothing, I guess.

According to Elmendorf we are headed towards very rough waters in our fiscal future.  Last year the CBO chief said that even if congress could come together on various tax hikes and spending cuts offered by both sides – A REALLY BIG IF since they barely can agree to keep the government operating for a few months – they might cut around $250 billion annually from our growing yearly deficit (not touch the overall debt, mind you, but just stanch our full speed towards the iceberg field of insolvency dead ahead).

While that would be a plus, Elmendorf  envisions the need for $750 billion annually in tax hikes and/or spending cuts by 2022 to prevent out national debt from climbing to the point of being equal to about 90% of our GDP, a level which scares most economists.   To reiterate:  Under what seems a best case scenario, we still fall  $500 billion short annually of swinging this big ship of state away from a treacherous ice flow in the 2020s. (*1)

Of course, Elmendorf’s vision would be challenged by some on the left and the right, with economist Paul Krugman the poster boy on the left and, let’s say, Congressman Paul Ryan on the right. (*2)   However, if Elmendorf is close to being right, certainly those on the right who see a solution shaped by only cutting taxes and spending are particularly delusional.

Our ship of state seems to be heading directly towards a huge iceberg in 10 years, or so.  And both parties have their hands on the wheel trying to pull it left or right, which keeps us going straight forward towards, if not disaster, to an America that is no fun to imagine.

Considering the complexity of all this reminds me of Rubik’s Cube, a puzzle I tried unsuccessfully to solve as a young man.  This seems infinitely harder to solve, and so complex it is hard to know even where to begin.  But I’m willing to put in much more time.

There is something about the impossible that has always attracted me.

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(*1)   I drew the Elmendorf material from Red Ink, a book by WSJ economics editor David Wessel.   Short (162 pages) and easy to read, it provides a good ball park sense of our fiscal Rubik’s Cube.

(*2)  In case you haven’t bumped into him, Paul Krugman is a liberal, Noble laureate economist who probably has more influence than most in his trade because in addition to knowing his stuff he’s everywhere, through his column at the New York Times, frequent political chat show appearances, several books and a blog which he updates sometimes three times a day, which can be found in my Blogroll to the upper left.   He’s sharped tongued to say the least and argues that while the debt is important, we should forget about it right now and deal with unemployment and strengthening the economy first.    A stronger economy would generate more federal income and begin to reduce our yearly deficits.  Then we could work on cutting down spending.

Everyone knows Paul Ryan, who generally speaking, is the polar opposite of Paul Krugman.   He is all about reducing our annual deficits and later our debt.  He has just unveiled a 10 year plan to balance our budget which seems like a Tea Party fantasy.  For one thing, it assumes Obamacare will be abolished, which is definitely not going to happen over the next four years and quite likely never (though I do think it will be altered over time).   Krugman, though rough tongued to make an impression, seems to be arguing what he believes.   I don’t know what Ryan is up to.

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MARCH MADNESS: The Sequester and College Basketball

Let’s look at next month’s Calendar.

March 1st – this Friday: I can find no indication that some sort of deal will be reached by Friday , so the “sequester” figures to go into effect, which means the government will cut about $85 billion between now and Sept. 30, about half from defense and half from other discretionary programs.  This means that roughly 7% of these two areas (by my quick calculation) is projected to be cut over the next few months, with cuts ranging from about 5 to 9%.

Those would be substantial cuts, and the Obama administration, wanting to put pressure on the Republicans, has been playing that up with details of what will be cut and the public pain it might cause, like long lines at the airport.  But the question is how and when will these cuts take place.  Some might not take place at all and others be quickly reversed.  For starters by Sept 30, “the nonpartisan Congressional Budget Office predicts that agencies will reduce actual spending by only about $44 billion, with the remaining cuts carried over into future years.”

So, right there the $85 billion in immediate impact is nearly cut in half.

Also, there will be no immediate impact, or next to none.   The cuts will happen gradually giving Congress the opportunity to make various adjustments in the days ahead, such as refunding elements that have been cut, most likely starting with the military.  Many of the cuts will come in the form of layoffs, which won’t begin to happen until April or so, giving Congress at least a month of flex time to do some horse trading.

It could actually become interesting.

The question is:  Who can find the leverage to get the other side to do what?  Right now the Republicans seem content to let the cuts fall where they may and blame Obama for coming up with the sequestration idea to begin with in August of 2011, even though they voted for it and Boehner made it sound like a good idea at the time (to paraphrase him: I got 98% of what I wanted).  I don’t think it worth arguing the point, but it is my understanding the Obama team did come up with the idea, being that these budget cuts would become automatic if the two parties could not work out a more sensible solution by now.

Furthermore, my guess is that even back then the President could imagine things coming to this point given Congress’s habitual inability to come up with sensible solutions to anything.  So,  if re-elected, he would have the advantage now, and recent polls suggest he does.  However, to speculate some more, I believe he thought the Republicans would have to work out a deal with him in order to keep part of their traditional identity in tact:   a strong military first and foremost.

The stumbling block has been that the Republican Tea Party types are so fixated on cutting spending, they seem willing to cut it from anywhere, even the military.   Or course, hawks like John McCain aren’t on board with that, but the Republican Party is more splintered these days than an old park bench, a topic I will let lay for the moment.

So the sequestration cuts, at least the first tiny slices, figure to begin Friday.

There seems likely little immediate impact of this congressional dilly dallying unless Wall Street gets spooked by it all.  So far they’ve taken it in stride. Teetering-on-the-cliff politics has become old hat.

March 19 – Tuesday:  The NCAA Basketball Tourney begins, a form of madness that is much more fun, at least for me. This year seems particularly wide open as there is no one team that has proven dominant with the #1 ranking bouncing around like a volleyball. For those of you who do pools, give the St. Louis Billikens an extra gander and a  Google before counting them out.

March 27 – Wednesday:   Supposedly the federal government loses its authority to spend money, or perhaps it is March 31 (I’ve read both dates). That means the government shuts down as happened for 28 days when Bill Clinton was President.  This sounds drastic and, given the present Congress, just might prove to be.  Who knows?  But we have a few weeks to take a closer look at this next “cliff”. 

March 31 – Sunday: – Those not really interested in anything said so far might want to know that the  Major League Baseball season begins with the Texas Rangers vs. the Houston Astros.   It also might be the day the federal government shuts down, but I doubt it.

Dealing with Our Debt Dilemma: Austerity vs. Stimulus

Those paying attention cannot help but feel frustrated by the inability of our Congress and President to come up with a long term debt solution.   According to the Congressional Budgeting Office (CBO), “by 2023,…. the publicly held federal debt will reach almost $20 trillion, nearly double 2012’s $11.3 trillion.” That figures to  stifle our economy and leave a huge financial burden to our descendents.   The trend is not our friend  (*1).

Wipe our Debt

Wipe our Debt (Photo credit: Images_of_Money)

Of course, much of the political wrangling has to do with gaining or losing advantage for either party, but often lost in that are real differences in points of view.  The two parties can’t make a deal because they see the problem differently.  On the right are those who believe the debt is our biggest problem and must be tackled right now (*2), while on the left, the belief is we must first develop a more robust economy and then later tackle the debt using the increased federal income stemming from that economy.   Cutting now would cut too deeply into social programs.

It boils down to those who favor austerity now and those who favor more government stimulus now, even though it adds to the debt.   The latter do not deny the debt issue, but believe it is not our top priority, while boosting the economy and creating more jobs is.   The former, especially the Tea Party, would argue that the promise of tackling the debt down the line is a fairy tale.   Our federal government has grown under both parties, an addiction it can’t break, like a life long smoker.  It needs to stop cold turkey…..or cool turkey.

Of course, there are some who advocate a combination of raised taxes and cuts in spending, a middle ground as represented by the Simpson/Bowles plan which adds revenue and makes budget cuts.  But there are two big flies in that ointment.  The Democrats don’t want to talk about reducing entitlements and the Republicans don’t want to talk about raising taxes, even more so now that the Bush tax cuts have been erased for those making $400,000 or more.   Those cuts were supposed to be temporary, so Democrats think of them as tax restoration, not hikes, but to Republicans, they are tax hikes.

Months back when Simpson/Bowles was introduced into the House hardly anyone on either side voted for it (*3).   That would have meant in upcoming elections, they would have had to defend both raising taxes and cutting spending.   Better to leave sleeping dogs lie, not for the country, but better for individual congressmen and their parties.

The one thing most on both sides can agree upon is that too much austerity too quickly would throw us back into recession.  That’s why Congress keeps working out last minute stop-gap measures, the proverbial kicking the can down the road.  Can we cut deficits without killing the recovery? is the question, and happens to be the title of an editorial by economic journalist Robert Samuelson.    He gives  a good overview of this dilemma in the Washington Post linked here: 

Samuelson sums up the potential problems of not reducing our deficits.   According to the CBO, increased federal debt “poses three dangers. The first is the financial crisis: Lenders might flee from buying Treasury debt. Second, large government borrowing could crowd out private investment and jeopardize future gains in living standards. Finally, the high debt might limit government’s ability to borrow heavily if a new need arises — from war, an economic crisis or natural disaster.

The exit from this dilemma…. is to time deficit reduction with a strengthening private-sector recovery. As private spending improves, cuts in government spending or tax increases would threaten the economy less.”

Nice trick if we can pull it off.   But it is hard to imagine our present Congress pulling off anything that tricky, isn’t it?   If they could, we wouldn’t be facing another “sequester” deadline next month.   The idea of the “sequester” back in August, 2011 was that the threat of across the board cuts in our federal budget would force both parties to come to a more sensible compromise.  But, many months later, all it has forced them to do so far is to extend the deadline for those cuts to March 2.

I imagine the President will address this in his State of the Union speech this Tuesday, but it is guesswork as to what will actually happen between now and the March deadline.   Given recent history, I can’t imagine a real step forward taking place, unless “cutting the budget with an ax rather than a scalpel” (an oft used comparison) winds up being a step forward some how.    I don’t know where it would be a step to.   Perhaps after the cuts were made, Congress could agree on selectively restoring some funding.

On the other hand, putting off the deadline once again would make me recall the fairy tale of the boy who called wolf.   A deadline is supposed to mean something.  If this keeps up “deadline” will become a laugh line.

Whatever Congress winds up doing or not seems likely to add new meaning to the term March Madness.

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(*1)   Debt as a share of the economy would rise from 2012’s 73 percent of gross domestic product (GDP) to 77 percent in 2o23.  Though a bad trend, it may not seem as frightening as the other stat, unless one adds that debt/GDP ratio was 36 percent in 2007.  The hay day before the mortgage meltdown.

(*2)  The liberal economist Paul Krugman (note link on my Blogroll above) has argued that Republicans do not really care about the debt, that it has been a political ploy.  Certainly the last  Bush administration wasn’t concerned about the debt.   But other highly respected economists and business leaders think Krugman underestimates the dangers of our deepening debt.

(*3)  Paul Krugman has also argued Simpson/Bowles is a bad plan anyway, but perhaps even a “bad” plan is better than no plan at all, which is where we are.  Also, as I will elaborate upon later, whatever plan Krugman might like would not have a shot of getting through Congress, even though he is a brilliant economist who may be right.  I will return to this in a later post.