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The Budget Mess: A Crisis in Legitimacy

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Reality has finally caught up with the ruling elite, and its members inside and outside of government are in a panic. They have freely spent the taxpayers’ money for generations, building a corporatist warfare-welfare state, and when that wasn’t enough to finance their projects, they borrowed just as freely. For a long while it paid off handsomely in power and wealth, but now even they realize things can’t go on as they have for so long.

This fiscal year the government will spend $3.8 trillion, more than 40 percent of which will be borrowed. In the last full year before the current administration came to power, outlays were just under $3 trillion. Earlier this year, the Office of Management and Budget estimated that in 2016 spending will rise to $4.5 trillion. Red ink abounds. The FY2008 deficit stood at less than half a trillion dollars — an astounding amount in its day — then hit a record $1.88 trillion in 2009. According to administration estimates, the deficit won’t fall below a trillion dollars until 2013, then it will begin rising again in 2016.

Bear in mind that deficit projections depend on assumptions about future economic growth and therefore future revenues and expenditures. The state of the economy influences how much money the state collects in taxes and how much it spends. At a time when people are clamoring for the deficit to be shrunk, officials have an incentive to be unrealistically optimistic in their projections in order to mollify the public. The costs of erring on the rosy side are low: they are not likely to be held accountable several years later when their predictions don’t come true, because it will be all too easy to blame “unforeseeable” circumstances.

It should also be noted that budget discussions overflow with opportunities for creative accounting, or, more bluntly, deceit. The most recent example is the supposed $38 billion budget cut for FY2011. Although that figure, a tiny percentage of federal outlays, was only about half of what House Republicans said they wanted, it turns out that the compromise between the House leadership and the White House was, in the Washington Post’s words, “accounting alchemy.” The Post reported,

A federal budget compromise that was hailed as historic for proposing to cut about $38 billion would reduce federal spending by only $352 million this fiscal year, less than 1 percent of the bill’s advertised amount, according to the Congressional Budget Office…. The findings from the budget office warned that the deal may never come close to delivering on its promises. The analysts found that $13 billion to $18 billion of the cuts involve money that existed only on paper and was unlikely to be tapped in the next decade.

“The problem — in the murky mathematics of the federal budget — is that not all ‘spending’ is really spending,” the Post added. “In fact, when ‘emergency’ money for military action is factored in, the overall spending for this fiscal year may actually increase, by more than $3 billion.”

In Orwellian Washington a cut can really be an increase.

Many of the alleged cuts were actually the canceling of agency spending authority that wasn’t being used. “A Washington Post analysis of the 459-page budget revealed at least 98 cases in which Congress took back unused IOUs and called it a cut,” the paper reported.

That’s government accounting for you — smoke and mirrors, in Jimmy Breslin’s memorable phrase.

The effects of deficit spending

All this deficit spending has had a deep structural effect on America’s political economy. In mid April the national debt was $14.3 trillion, about 98 percent of GDP. Of that, about 68 percent — 67 percent of GDP — is held by people or entities outside the U.S. government; 47 percent is held by foreigners (32 percent of total debt). China holds $1.1 trillion. Last year the administration’s Mid-Session Budget Review projected the debt would hit 100 percent of GDP by 2012, and a doubling of the debt by 2020, exceeding 100 percent of GDP for the rest of the decade. (The debt figure does not include all the government’s liabilities, such as the obligations of Fannie Mae and Freddie Mac or the unfunded liabilities of Social Security and Medicare.)

To see the yearly budget impact of this, note that in 2010 the U.S. government paid more than $400 billion in interest, a little less than the Medicare budget. It was the fourth-largest budget item. (About half was paid to the public.) This year the government is on track to exceed that amount. It is estimated that in 2019 the government will pay $700 billion in interest. Obviously, those figures are all subject to changes in the interest rate.

Obama’s 2012 budget is slightly smaller than his last budgets, because previous budgets contained extraordinarily large items, such as his so-called stimulus bill and his health-care “reform.”

Also, war-related spending is assumed to diminish — although we’ll see. The Libyan intervention cost more than $600 million as of April 4 — and it was just starting. Nevertheless, projections have outlays exceeding 25 percent of GDP before settling in the range of 22-23 percent of GDP. That’s higher than most of the period 1947–2008 (there were exceptions in the 1980s). Over ten years, so-called mandatory spending would increase $1.3 trillion, while so-called discretionary spending would fall $1.45 trillion relative to “baseline projections.” Here’s what the Congressional Budget Office said about Obama’s 2012 budget plan:

If the President’s proposals were enacted, the federal government would record deficits of $1.4 trillion in 2011 and $1.2 trillion in 2012. Those deficits would amount to 9.5 percent and 7.4 percent of gross domestic product (GDP), respectively. (By comparison, the deficit in 2010 totaled 8.9 percent of GDP.) Those deficits would exceed the ones projected to occur under current law, by $26 billion and $83 billion, respectively.

The deficit under the President’s proposals would fall to 4.1 percent of GDP by 2015 but would generally rise thereafter. Compared with CBO’s current-law baseline projections, deficits under the proposals would be about 0.5 percentage points of GDP higher in 2012, 1.3 percentage points higher in 2013, and 1 to 2 percentage points higher thereafter. By 2021, the deficit would reach 4.9 percent of GDP, compared with 3.1 percent under CBO’s baseline projections. Over the 2012–2021 period, deficits under the President’s budget would total $9.5 trillion, compared with $6.7 trillion under those baseline projections.

Obama’s profligate spending should not lead us to think he succeeded a budget hawk in office. On the contrary, the eight years of George W. Bush saw outlays go from $1.9 trillion to nearly $3 trillion. There was a budget surplus of $128 billion when he came into office. By 2009 the surplus had turned into a deficit of nearly $1.5 trillion. The national debt stood at $5.7 trillion when Bush first took the oath of office. When he left Washington, the debt was $10.7 trillion.

Unsustainable policies

But let’s not get lost in these numbers. Virtually everyone agrees that the current situation is unsustainable. It’s easy to see why the ruling elite think so, and it has nothing to do with new-found compassion for the long-suffering taxpayers or the consumers who will suffer if the price inflation resulting from the Federal Reserve’s monetary expansion kicks in. The elite are concerned that if some control is not achieved over the spending, by 2025 all revenues collected by the national government will be swallowed up by the three pillars of the welfare state — Medicare, Medicaid, Social Security — and interest on the debt. Today all so-called entitlements combined account for more than half the budget. Add interest and it’s up to two-thirds. With the baby boomers beginning to retire and going on Social Security and Medicare, and with Medicaid set to expand under Obamacare, an explosion in outlays is just up the road. Medicare alone has unfunded liabilities of $37 trillion over the next 75 years. Social Security’s hole is shallower but given the demographics, the problem is clear — the worker-retiree ratio is heading towards 2 to 1 in 2040. (It was more than 16 to 1 in 1950.)

But if all revenues go to those programs and interest, how will the politicians do all the other things they like doing: subsidizing pet projects (many of which are carried on by well-connected businesses); policing the globe for political and economic reasons, which often means fighting overt and covert wars and channeling billions to the military-industrial complex; engineering a national education policy; running the infrastructure (more money for corporate cronies); and generally centralizing power in Washington, D.C.?

Obviously, the ruling elite cannot let that happen. Yet to attempt to maintain spending on all those things, federal outlays would have to exceed half the GDP, perhaps up to three-quarters of all the wealth produced by the American people. Tax rates designed to raise that amount could ignite a tax revolt and further erode the legitimacy of the corporatist warfare-welfare state. Investors might be too nervous to lend, at least at low interest rates.

As the politicians and their patrons must see it, the corporatist warfare-welfare state faces a double crisis. The first is fiscal. Unless they do something soon, they won’t have the money to maintain the gravy train. Discipline will be imposed on them from outside. The other looming crisis is a crisis in legitimacy. People are catching on that the politicians have used the borrowing power to hide the cost of government, imposing heavy burdens on future generations. If the ruling elite doesn’t at least appear to fix things they could have trouble at the polls.

Hence, House Budget Chairman Paul Ryan’s “Path to Prosperity,” which has been endorsed by the Republican-controlled House of Representatives, and Obama’s expression of support for modest budget cutting. But both approaches, whatever their differences in detail and style, have one overriding feature in common: they aim at preserving the corporatist warfare-welfare state. Neither represents a rethinking of the role the U.S. government has played in any of its spheres, domestic or foreign, for generations. Both embrace the long-held view that a government-business partnership is indispensable to a smooth-running economy, that the welfare state is important in maintaining public legitimacy and in ameliorating the anti-competitive effects of corporatism, and that global military hegemony is indispensable for self-serving political and economic interests. In other words, neither side wishes to see a truly free market.

This article originally appeared in the July 2011 edition of Freedom Daily. Subscribe to the print or email version of Freedom Daily.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.