The Budget Charade

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On April 10 President Obama submitted his fiscal 2014 budget to Congress. Sixty-five days late and 2,400 pages long, it calls for $3.77 trillion in spending, with a projected deficit of $744 billion. It turns off the automatic budget cuts imposed by sequestration, and thus increases federal spending by some $160 billion over fiscal 2013. Its projections assume that over $5 trillion will be added to the national debt during the next ten years.

One never quite gets used to these figures; they boggle the mind. Only 50 years ago the federal government’s annual budget was under $100 billion (about $700 billion in today’s money), and deficits were small. Then the irresponsible policies of Lyndon Johnson (guns and butter: massive domestic spending increases and a major war fought without raising taxes) and Richard Nixon (fiat money replacing gold) began America’s descent into virtual bankruptcy. Johnson opened the floodgates of deficit spending. Nixon launched the lamentable decline of the once almighty dollar.

Deficit spending and fiat money have a symbiotic relationship; they march together on the path to fiscal doom. The policies of every succeeding president have only made these problems worse. Needless to say, Congress has been equally irresponsible, whether under Democrat or Republican leadership. It is the votes of Congress, after all, that transform bad economics into law.

Only 50 years ago the federal government’s annual budget was under $100 billion (about $700 billion in today’s money), and deficits were small.

The president’s budget proposals were preceded by those of the Senate and the House. In late March the Democrat-controlled Senate passed a budget that increases taxes by almost $1 trillion over ten years, while still adding over $5 trillion to the national debt. “The only good news is that the fiscal path the Democrats laid out in their budget resolution won’t become law,” said Senate Republican leader Mitch McConnell. That’s true, but on the other hand I can’t see the Congress passing a budget that will be much of an improvement over the Democrats’ plan. Certainly the Republican-led House provided nothing but faux leadership on the issue.

The Republicans in the House unveiled their budget a few days before the Senate acted. House Budget Committee chairman Paul Ryan produced a plan based on political impossibilities. It repeals Obamacare. It turns Medicare into a voucher program. Neither of these ideas has the slightest chance of becoming law anytime soon, and Ryan knows it. Ryan’s budget reduces the top tax rate from 35 to 25%, eliminates the alternative minimum tax, and repeals the tax increases contained in Obamacare, yet assumes that revenues will remain level. It says nothing about which loopholes it will close and which deductions it will eliminate to make the revenue projection real. In other words, it is a through-and-through political document, and not a serious plan designed to bring spending and deficits under control. Even if its fantastical proposals were enacted, it would still require ten years to bring the budget into balance.

Given the Great Recession, it is practically impossible to balance the budget in ten years’ time — the risk of sending the economy into a tailspin of 1930s proportions is just too great. But no officeholder has put forward a serious proposal to balance the budget on any timetable. The one attempt to do so, flawed though it may be, is the plan offered in 2010 by the Simpson-Bowles commission. Unfortunately, the politicians, led by the president (Obama) who created the commission, have done nothing to implement its recommendations. Simpson-Bowles allows 40 years to get to a balanced budget. Yet no politician will touch it, beyond giving it mild and passing praise. The “sacrifices” it entails are apparently too great for politicians to contemplate.

In his budget Obama proposed a change in the way in which cost-of-living increases for Social Security recipients are figured. This small, helpful step saves a few billion a year, but does not address the root problem, which is demographic. And while Obama claims he will cut $400 billion from Medicare over ten years, the savings are supposed to be found by cutting payments to providers, a sure recipe for reducing the number of doctors who will take Medicare patients. In any case, if this is all the Democrats are prepared to do on entitlement reform (and the left wing of the party is up in arms about even these small changes), then surely insolvency (for Medicare at least) is inevitable.

We have a spending problem. It’s a problem that cannot be resolved by simply raising taxes. Both the welfare and the warfare state require drastic reform, as does the tax code. And generational oppression — the old sucking up resources at the expense of the young — must be curbed. Yet where is the political will or wisdom to accomplish these necessary things? It is utterly lacking. What then does the future hold?

I predict that the idea of inflating our way out of debt will at some point take hold in political, academic, and media circles. Such a course would deal a death blow to the dollar, and leave wage earners, savers, and other responsible people even worse off than they are now. But it might get the politicians off the hook, at least temporarily. The pols will blame anyone and everyone but themselves for the inflation they have created, and retire on indexed pensions while the rest of us eat grass.

We seem set on this course already. In the 1980s Federal Reserve chairman Paul Volcker killed the inflationary dragon that had plagued the world economy for a decade and more. It has until now stayed dead; indeed, deflation is the worry of the moment. But in the wake of the Great Recession, central bankers, egged on by politicians, have been printing money like crazy. With the Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England all engaged in “quantitative easing,” the return of the dragon looks inevitable at some point. A world awash in fiat money must suffer inflation eventually.

Where is the political will or wisdom to accomplish these necessary things? It is utterly lacking.

Central bankers believe that they will know when to turn off the printing presses. They envision themselves acting at just the right moment to prevent the outbreak of serious inflation. This seems about as likely as an investor timing the market correctly — that is, the chance of getting it right appears very small. The question of timing aside, turning off the presses is certain to cause a crash in the bond market and a rise in interest rates, with dire consequences not just for the arbitrageurs, but for the world economy. History provides little comfort for those who believe in the capacity of central bankers to prevent economic catastrophe. Volcker may have saved the world economy back in the early ’80s, but he stands almost alone. The behavior of central bankers today reminds one of Alan Greenspan’s abysmal performance during his last decade as Fed chairman. One may even be justified in comparing the central bankers of today to John Law.

A bargain (grand or otherwise) between Democrats and Republicans over the federal budget is unlikely to do more than put off the day of reckoning. The necessary, thoroughgoing reforms are so politically unpalatable that they will almost certainly never be enacted. The budget process in Washington is a charade. And so I ask myself, can I learn to like the taste of grass?




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Comments

Stevecsd

We need to explain to the economically illiterate that there are only 3 ways to pay off the currently $15 trillion debt:

1. Pay it off (snowball's chance in hell)
2. Repudiate it/ declare bankruptcy (possible)
3. Inflate it away (the politician's solution)

I caught your reference to John Law. I came across info on him in the PBS series Ascent of Money.
http://video.pbs.org/program/ascent-of-money/

Excellent series.
For people that don't know John Law's story, it is a fascinating case. The original stock market bubble & bust,using fiat paper currency. It took the government of France down with it in the early 1700's.

Jon Harrison

I would've thought all Liberty readers would be familiar with the story of John Law. There's a pretty good popular account, "Millionaire" by Janet Gleeson (S&S, 1999).

Doug Casey has an interesting video at Yahoo Finance, "Obama's Budget is a Ridiculous Charade" which readers might want to check out as well.

Lori Heine

A very insightful essay. I'm afraid that the warfare state will seize on the chaos at the Boston Marathon as an excuse to ramp up fear to an even higher notch. Which means that it will also look for ways to take away more of our freedoms -- and demand more of our money.

Perhaps a sort of fear-fatigue will set in with the public. Maybe we'll simply reach a point where our fear-button doesn't work anymore. As becoming terrified only plays into the hands of the terrorists (hence their name), this would be a good thing. But I don't hold out much hope of it.

Jon Harrison

Thank you, Lori. I'm watching Boston closely, party because it's my home town, and partly for the reasons you mention. I have a feeling (though I may be wrong) that this attack will be taken somewhat in stride, and will not entail a major ramping up of the security state. I think most people feel we've already given up enough of our freedom (and money) responding to terrorism. Had the authorities simply continued sweeping with sniffer dogs until all the runners were in, this would have been another plot foiled, instead of the tragedy we saw Monday. One successful attack on this scale every 10 or 12 yeards doesn't justify further restrictions on everyday life, in my opinion.

I will be interested to see if Boston was a jihadi event, another Timothy McVeigh protesting gun laws, taxes, etc., or something else entirely.

Johnimo

The Ryan budget may be based on political impossibilities, but to accept that is simply to accept that responsible, sensible, limited government is based on political impossibilities. Ryan's budget is a plan to return the US to economic health and a more limited government, a very idealistic plan. Of course it has no chance of passing, but that is the duty and meaning of a responsible loyal opposition: point out to the socialists what needs to be done.

It's our fate to fight a rearguard action, to delay, block, and frustrate their efforts to take us to the helpless state in which Britain found itself before Thatcher came along to explain to the people of the UK the necessity of freedom. The likes of Thatcher don't come along very often. 'Til then .... it's the slow malingering malaise of this government, at the end of a road down which we've kicked the can for eighty years.

Jon Harrison

As I see it, Ryan put forward a through-and-through political document -- rallying the base (and the corporate contributors), as it were. Of course Ryan would love to see his ideas become law, but he knows there's absolutely no chance of that happening. In practical terms, his budget is a nullity.

Politics is the art of the possible. Putting out impossible to achieve blueprints is a cynical exercise, rather than an idealistic one, in my view.

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