Bush's Voodoo Budget Magic
$600b Deficit By 2009 & Over $1,100b By 2015
By Nouriel Roubini
Global Macroeconomic and Financial Policy Site
2-9-5
The dishonesty of the administration about budget deficits has reached
levels unheard of. These folks have absolutely no shame. Bush
presented today a budget that claims that he will achieve his goal of
reducing the deficit by half by 2008 (from a false 2004 baseline of
$521 billion rather than the actual 2004 deficit of $412b) and will
achieve a deficit of "only" $233b by 2009. Even better news, the
administration claims today: the "halving" of the deficit will be
reached by 2008, a year earlier than original 2009 target for it.
Who are these accounting scam artists trying to deceive? Do they think
everyone in America and around the world is a mathematically
challenged total idiot or an accounting moron?
The reality is, that based on realistic scenarios outlined last week
by the non-partisan Congressional Budget Office, the deficit by 2009
will be close to $600b (or 4.0% of GDP) rather than falling to $233b;
and the deficit will reach over $1,100b (or 5.5% of GDP) by 2015.
How do they create the false $233b deficit by 2009?
1. They assume spending cuts that are, by any historical and political
standard, impossible to achieve.
2. They assume revenue growth that is altogether wishful thinking and
false based on current trends. And they do not consider the long-run
costs of making all the Bush tax cuts permanent.
3. They do not count the ongoing costs of the continued defense and
homeland security spending and of future military and homeland
security build-ups.
4. They phase-in a budget busting social security privatization (that
will cost alone $4.5 trillion in the next 20 years) only starting in
2009.
This is worse than dishonesty; it is the most squalid manipulation of
budgets ever seen aimed at pretending to achieve a budget figure that
is utterly unrealistic and false in every possible dimension.
What would be a more realistic and honest scenario for the 2009 and
2015 budget deficits, given the administration tax goals and the
likely path of spending?
Realistic and sensible assumptions imply that the 2009 deficit will be
close to $600b (or 4.0% of GDP), even excluding social security
reform; and the deficit will reach over $1,100b (or about 5.5.% of
GDP) by 2015, including the effects of social security reform.
So, how do we get the difference between the administration lies and
the true figures?
First, note that the administration baseline assumes that all
discretionary spending - apart from military and domestic security -
will be frozen for the next five years. That is even more draconian
than the CBO baseline where total discretionary spending was assumed
to grow by the modest rate of inflation. Note that, since defense and
homeland security have grown much faster than inflation and have grown
and are likely to grow even faster than nominal GDP for the
foreseeable future, in the administration baseline the growth of
non-defense discretionary spending would be negative in real terms for
the next decades. How likely is it that such draconian spending cuts
in non-defense discretionary spending will be passed even by a
Republican Congress? Zero likelihood, as it would imply starving basic
public services, i.e. reducing them in real terms over time by amounts
never seen before.
Note that historically, discretionary spending has grown close to
nominal GDP (i.e. by a rate equal to the inflation rate plus real GDP
growth): that is why government spending remains constant over the
long run as a share of GDP. Discretionary spending growing even at the
CBO baseline of the rate of inflation - let alone the zero% growth in
the administration proposal - implies that, in the long run, such
spending will become 0% of GDP and that in the short and medium term
it will fall in real terms in ways that have never been seen in US
history.
Even assuming there is some pork fat in current discretionary
spending, the proposed cuts imply chopping fat, flesh, meat, vital
organs, bones and blood out of basic public services. And everyone,
including every Republican in Congress (down to the most hawkish ones)
knows that such draconian butchery - utter outright murder - of public
services will never ever happen. It is utterly pathetic and dishonest
posturing for the administration to even pretend that they will be
able to propose and pass such cuts or even a fraction of them.
A more realistic scenario is to assume that discretionary spending
will grow by the rate of nominal GDP, as it has historically. Even if
one were to want to be more conservative and believe that some
non-defense spending can be sharply reduced, a reasonable inference
would be that spending will grow faster than the inflation rate (the
CBO baseline) but less than nominal GDP. The difference between the
two extremes, inflation rate growth or nominal GDP growth is only
$106b in 2009, $359 by 2015 and $1,705 over the 2006-2015 decade.
Second, note that the official objective of the administration is to
make all the 2001-2003 tax cuts permanent, i.e. to cut permanently the
dividends tax, the capital gains tax, the estate tax and the income
tax rates. CBO gives a benchmark for the effects of such permanent tax
cuts; by 2015 their cost would be $422 billion for that year alone
including the additional debt service costs, $49b in 2009 (and $1,856b
cumulative for the 2006-2015 decade). Add to those costs, the cost of
fixing the AMT: $56 billion in 2009, $70b by 2015 and $503b over the
2006-2015 decade. Note also that the costs of making the tax cuts
permanent are already high until 2009 but they become massive from
2010 on when the expiring income tax cuts would become permanent. So,
the administration proposal, that already overestimates revenues until
2009, does not consider at all the post-2009 costs of making the tax
cuts permanent.
And the overestimation of revenues is another farce in the current
budget plan. The administration originally estimated that revenues
would grow by $200b in fiscal 2005 alone and that the deficit in 2005
would fall from $412b to about $350b. Then, we got news from CBO and
administration sources that revenue growth is slower than expected and
that the 2005 deficit will be, at $427b, even larger than the 2004
level. Then, instead of correcting the 2006-2009 revenue forecasts,
the administration put into its new budget revenue growth that does
not make any sense and that is altogether inconsistent, based on CBO
scenarios, with the effects of keeping the tax cuts and making them
permanent. What a pathetic arrogance and dishonesty! Who they think
they are fooling with their voodoo economics plus black magic supply
side revenues forecasts...these are not forecasts: they are worse then
black magic wishful delusional dreams...only a delirious mind could
make such far-fetched forecasts...
Third, add sensible assumptions about the costs of the wars in Iraq,
Afghanistan and other military spending. The budget announced by
administration does not include any of these costs. Even their 2006
budget showing a deficit falling from the high $427 in the current
$2005 to $390b in fiscal 2006 does not include any of the supplemental
costs for this defense spending next year, a supplemental that in 2005
alone was over $80b. And on top of this add sensible assumptions, as
the CBO does, about the "Continued Spending for the Global War on
Terrorism". That last item alone will cost - according to the CBO -
$59b in 2009, $57b in 2015 and $590b between now and 2015.
Fourth, consider the transition costs of Social Security privatization
based on the tentative proposal of the administration. Again, to
optically minimize the effects on the budget deficit of this proposal,
the administration decided to phase-in such privatization in 2009.
What a cheap shot: start privatization after Bush is out of power so
that the next Prez had to deal with the budget mess and bankruptcy
created by such privatization. Even using such a pathetic political
trick, the transition costs would be over $754b in the 2009-2015
period, about $1 trillion in the first decade and another $3.5
trillion in the second decade (plus more later, as you got to have all
the 55-plus aged folks to die before you see any savings in the very
long run). So, privatization would cost over $4.5 trillion in the
first two decade since its start. And by 2015, it annual cost would
already be over $150b. A sure path to the complete bankruptcy of the
US government in the next decade: no exaggeration as you can look at
Argentina for what a botched debt-financed social security
privatization brings.
So, now make the following realistic - not voodoo magic false -
assumptions about the budget: all the tax cuts are made permanent (as
strongly desired by Bush), the AMT is fixed (as planned by the
administration and as not doing so would sharply increase the tax
burden of an additional 30 million middle class households),
discretionary spending grows at the rate of nominal GDP and the extra
costs of national security and homeland security are fully counted in.
Then, using the most recent CBO figures one gets a budget deficit of
about $600b (or 4.0% of GDP) by 2009, well above the 2004 level of
$412 (3.5% of GDP), well above the fake administration target of $233b
(1.5% of GDP) for 2009. Moreover, using again these realistic
scenarios, by 2015 - counting the effects of the permanent tax cuts
and of the phase-in of Social Security privatization - you get an
explosive budget deficit of over $1,100b or 5.5% of GDP.
Then, if you do not like this realistic scenario make even the heroic
assumption that discretionary spending is sharply reduced and is
contained to grow well below the rate of nominal GDP (i.e. well below
the historical experience). So, assume that is grows somewhat above
the unrealistic CBO scenario of inflation-rate growth of discretionary
spending but below the rate of growth of nominal GDP: say,
discretionary spending grows exactly in between nominal GDP and
inflation rate. Note that even this scenario implies very sharp
reductions for non-defense/non-homeland security discretionary
spending, cuts that would be very difficult to achieve even in a
Republican congress; but let us royally assume that, by some miracle,
such spending controls are somehow achieved.
Then, under these most conservative assumptions about spending (the
most conservative assumption any honest analyst could make unless you
want to just shut down the government), the budget deficit would still
be $547b in 2009 (or 3.6% of GDP) and $921b (or 4.7% of GDP) by 2015.
So, expect deficits at most as low as $547b (and as high as $600b) by
2006 and deficits at most as low as $921b (and as high as $1,100b) by
2015. This is honest budget accounting...Instead, the 2009 figure of
$233b, shown by the administration today is a LIE, LIE, LIE, LIE, as
many lies as 233 billion of them...
They may think that they can fool everyone, the taxpayers, the
American people, the media, the bond markets, Wall Street and the
disappearing bond vigilantes, the world, the central bankers of the
world that have financed 90% of our budget deficits in the last four
years and who would have to finance 100% of these ballooning budget
deficits in the next decade. But they are only fooling themselves. No
one is so dumb and idiotic to believe half of the damned lies they
have been peddling in their budget. As a Bloomberg headline put it
today, in the most understated terms: "Bush Fiscal Projections
Questioned on Capitol Hill, Wall Street".
Or, as the headline of the sharp Andrews article in the New York Times
put it today: "Trim Deficit? Only if Bush Uses Magic"...Voodoo magic
indeed!
Put it less politiely, this is not a budget, it is a multi-trillion
dollar decade-long scam, a voodoo black magic to the power of two, the
biggest Ponzi game in the financial history of humanity that would
lead the US to certain bankruptcy by the next decade.
http://www.stern.nyu.edu/globalmacro/
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