There is much being written and said about the President’s new budget for 2012. So much is being communicated that it is impossible for most of us to digest it all. In fact, confusion might be the intended strategy – so I have tried to boil it all down to a couple of main points. But let’s start with a silly Davidson story about a bull in a china shop.
“Sir, there is a huge mean bull wrecking your china shop”. The owner replied, “I don’t see a huge mean bull wrecking my China shop.” The man protested, “But look around you at the devastation – broken pottery and glass everywhere. Look at that big hairy animal in the middle of the shop.”
The discussion went on… The manager first said the breakage was not so bad and that he had a good insurance policy. He went on to explain that his shop was in a rough neighborhood and he had reported the problem to the police who would search around the neighborhood looking for culprits. He pointed out that even if there was a bull in his shop, that there was really little he could do. While some people might want him to shoot the bull, he would never resort to such violence. And, of course, trying to coax the animal away might lead to it running down the street and injuring other people. The manager decided to move some of his valuables out of the shop. Give me a little credit for not bringing in bull-c___.
Point one is that even though a bull might be staring him in the face, Obama prefers to pretend like it isn’t there. While he might not believe in American Exceptionality he seems to believe that we can be exempt from the laws of economic gravity that weigh on every other country. If there is one salient and imposing truth about our economy it is that we had a huge and supposedly temporary surge in government spending during the last few years. If temporary changes in the government budget were legislated to counter a decline in private demand that was associated with a recession, then it seems that seven quarters after the end of the recession we would be focused on removing the stimulus. Of course, there is a legitimate debate about how quickly to remove it and I am not against a gradual removal. But I do believe policy credibility is important right now and a slow removal would require two things: (1) a strong statement about its importance and (2) a legislated multi-year process.
There was no sense of urgency in the discussions of the budget for 2012. Yet this budget or anything like it puts the nation in harm’s way because it ignores what we have known for decades – that we spend too much and save too little. What does it take for our government to face up to reality – especially when other countries are getting the message and doing something about their own financial situations? Jeopardy is a very popular game but the word jeopardy is one I used many times with my kids. You place yourself in jeopardy whenever you make a decision that increases the risk of something bad happening to you. If you drive too fast you get places quicker. It might even be fun and exciting. But driving too fast places you in jeopardy since you might get an expensive citation or worst, you might injure someone.
Government spending and deficits make it possible for a nation’s people to have more now without paying for it now. But it comes at a cost – a future cost. If government deficits lead to critically large amounts of debt for a nation then the nation puts itself in jeopardy. At the moment all might seem well but all it takes is a negative blow to the solar plexus and the country could get doubled over in pain. It seems to me that the experience of the last recession should have been instructive. But apparently it wasn’t informative since we HAVE A MUCH LARGER DEBT BURDEN NOW and we pretend that having deficits of more than a trillion dollars in the coming years are okay. Even worse, while the current budget envisions the debt to GDP ratio slowing, it admits that any remediation is temporary and that it will resume its upward climb because of issues with Medicare and Social Security.
Clearly, then, this budget for 2012 offers no way out of jeopardy since it does nothing to provide a strong statement and action plan for improving the nation’s debt burden. It will be no black swan the next time a sudden macroeconomic shock negatively impacts Main Street or Wall Street or both. If you thought the recent recession was bad, just wait until the bond vigilantes suck their formidable assets out of US markets because we were the last kid on the block to learn from the last recession.
Some would have you think there is a tradeoff or a distributional issue involved with attempts to solve the national debt problem. For example, the President’s plan has two disgusting features. First, it points its spending axe at programs aimed at those with low incomes. I am sure he knows that these aspects will never be legislated in a split government. He’s already heard a few explicative deletives from his friends on the left about the cruelty of his proposals. Second, he also plans higher taxes on those with incomes above $250,000. After compromising on this issue last year he tries it again because it looks good to his constituents to go after the rich. Of course, this will not be passed this year in a split government. Much of what he has proposed, therefore, is disingenuous. Worse, it pits the poor against the rich. Yet today there is no real tradeoff. The poor and the rich will do better when the economy improves. It won’t improve until we recognize the bull in the china shop – until we seriously try to fix our real and looming debt burden.
Finally, he continues his theme from the State of the Union Address of proposing more spending on infrastructure and other competition-enhancing measures. It is true that our nation needs to be more competitive in the future. But risking our money on dubious government supported boondoggles rife with crony capitalism and corruption is not the right way to do this. I cannot remember a time in my life when there was more incentive for engineers and scientists and other entrepreneurs to be sequestered in their garages late at night trying to find solutions to so many pressing health, energy, and various high tech issues. The rewards for their successes are infinite compared to the extra pittances the government can hand them. If we do want to very carefully find new ways to support them with better infrastructure we should do it within the confines of a strong national financial and economic plan. These entrepreneurs don’t need handouts. They need a stable financial system with a large pool of saving that comes from both domestic and foreign sources. A bull in the middle of the china shop will do nothing to help American be more competitive. But it will generate a lot of c___ if we continue to ignore it.
Conventional wisdom is that Obama's budget is just a starting point for the debate over what the govt will wind up spending. Clearly the high speed train will be one of the first things to get axed.
ReplyDeleteBy now every one is aware of the famous quotation "everyone is entitled to their own opinion, but not their own facts". But this does not seem true for the budget. This seems to be the result of the govt not using "generally accepted accounting principles"; but instead using multiple accounting methods in order to get the answers various interest groups want.
Obama claimed to be cutting the deficit by using neat tricks like not counting interest on debt and very optimistic assumptions about interest rates, growth, employment, and increasing costs of materials (it is true he does use optimistic assumptions about how labor costs will increase, something that may not happen).
Until we start using realistic data and assumptions I doubt there will be any real reduction of the deficit.
Tom,
ReplyDeleteI agree. You mention another aspect of the problem. The problem is that there are SO MANY issues. To me the key issue is that Obama seems to think debt is not an emergency. None of the other stuff matters much if he won't admit a bull in the china store.
Larry
First of all let us remember the candidate Obama's promise: to fundamentally change America. In other words, we're going to remodel the country as we know it. I've watched enough of "Holmes on Homes" to know that when you remodel something, you first have to tear it down. What better way to begin deconstruction than through the budget process. If,heaven forbid, this budget proposal made it all the way through Congress and became law, it would be one of the last three nails in the coffin for the good old US of A. Can a country go bankrupt? The concept is too ugly to even imagine. It would most assuredly require a complete "rebuilding" of the country beginning with the Constitution. "You're just one of those conspiracy kooks," you say. I'm not! I really did see a black helicopter land in my backyard last week! Now look what you've done! The NAACP is on the phone saying that I've disparaged black helicopters.
ReplyDeleteThe O Man's proposed budget is also a "throwing down of the gauntlet"....that's "gauntlet" not "goblet," Larry.....before the congressional budget hawks. "Go ahead and make those drastic cuts and just see what happens at the polls in two years." Who do you think will blink first?
The major drivers of our debt, social security and medicare/medicaid, are on autopilot. They increase every year without any action from Congress or the White House. They're just constants (although their values do change but constantly) in the budget equation. Until we are seriously willing to grapple with those items, defunding all of the NPRs, Planned Parenthoods, National Endowments for Whatever, farm subsidies, etc will be like spitting in the ocean.....Oops! Now the EPA is knocking at my door!
The China shop owner knows exactly what the bull is doing. In fact, he's using a goad to make it run harder.
Crash,
ReplyDeleteInteresting. I think I had the same discussion with my son last night -- though he comes from a very different vantage point. But the way I see it, we are missing the constituency for a politically reasonable solution. My big point about the elephant is that if we had large increases in the deficit because of trying to stabilize the recession, then we could now (soon) reverse those big changes and go back to where we were before the recession. That would be a good start. But the problem is that one side loves the idea of making a larger government permanent. The other extreme sees this as an opportunity to scale government back to the dark ages. I cannot identify with these extremes. If we could just go back to 2007 government size PLUS make some small adjustments to SSN and Medicare, the elephant would be pussy cat. Meow.
One complaint about Obama's budget is it assumes 2010 levels of spending are normal, ignoring the fact that there were huge increases in both 2009 and 2010 spending. I do like going back to 2007 levels, or even 2008 levels before things like bailouts, stimulus, and other increases happened.
ReplyDeleteAnother thing to consider is that the current UE level not only means UI payments are larger than normal, but SS contributions are lower than normal. High UE rates are bad on so many levels, I saw a talking head claim reducing UE to ~5% would cut the yearly deficit in half; not sure if that is true but it sure would help.
While raising retirement age a couple of years in the distant future would help down the line and some Medicare adjustments would help it is interesting to note that Medicaid spending is up around 36% while Medicare is up around 15% since 2008.
But as I pointed out in an earlier post the interest on the debt not only gets larger as the debt gets larger; the interest rate is also likely to increase as well.
I was sad to see Obama ignore interest payments in his proposed budget; not to mention using unrealistic numbers for things like growth. I did do a little automated accounting as a work study programmer grad student. I was always amazed when my boss (CPA and MBA) came up with neat ways to switch things from bucket to bucket to get the numbers she wanted in the right place. This was around the time Bobby first came to FSU and she came up with a neat way to pay the state troopers who stood around him at the games when I showed her which bucket the money was coming from.
It is one thing to shift a few dollars to support a successful football program. It is a whole different thing to hide huge spending programs in the federal budget. How do you know if it is an elephant of pussy cat if the CPA doing the accounting is really a Corrupt Price Adjuster?
What? Where'd the elephant come from? I thought we were talking about Brahma bull in a Ming vase shop.
ReplyDeleteMiddle-of-the-roading is not going to work. We need some real guts if we're to regain our glory, and we don't have to go back to the Dark Ages to do it. Yuck! They had black plague and awful stuff like that back then. I'm thinking more like pre-War of Northern Aggression times.
Tom, Luckily the information is public and there are enough experts around that it is difficult to hide information or distort it. This is the day of the Internet! The real problem is when voters tell the politicians they are okay with ignoring real debt problems. Obama thinks that voters would rather protect government programs than deal with an unstable debt. I hope he is wrong.
ReplyDeleteCrash,
ReplyDeleteI do mix my metaphors now and then. It is good you are a careful reader.Keep 'em coming!
Crash,
ReplyDeleteI thought "The War of Northern Aggression" had its name changed to "The Late Unpleasantness".
Tom,
ReplyDeleteThat's the PC term for the event; however, we here in Atlanta......well, we who aren't emigres from the heartless North.....still see it as the unprovoked invasion that it was. We never asked Abe to send those troops to Fort Sumter. If we hadn't lost Stonewall, we might just be laughing at all of this economic mess........because we'd be a third-world country like Zimbabwe, probably.