Monday, March 18, 2013

“A Tale of Two Budgets”

Sydney M. Williams

Thought of the Day
“A Tale of Two Budgets”
March 18, 2013

What divides the country so sharply can be seen in the differences between the House budget and that from the Senate. It should be understood, however, that both sides have the same goals – the welfare of the nation and the people who populate it. A civil society demands that we respect our differences, while celebrating our commonalities. It is the means, not the ends that divide us. Democrats believe that the State should play a more important role than do Republicans. The latter favor individual responsibility and a stronger role for states. Democrats complain that Republicans are heartless, with no feelings for the poor, sick and elderly. Republicans claim that Democrats are foolish wastrels with no regard for costs.

Both are wrong. Individual success is common to both groups, and – Democrat or Republican – we all know what we did and who helped in reaching our personal goals. Illness knows no Party; thus we all care about healthcare. We all have parents and many of us have children, so concern about the past and the future is a universal trait. Worry about cost is not unique to Republicans. In our homes and businesses, we are all conscious of dollars expended and returns gained.

But the divide is deep. As part of his “charm offensive,” Mr. Obama visited Capital Hill last week. He made it clear that deficits were not his priority. His message: government spending is integral to spur economic growth. In an interview last week with George Stephanopoulos on ABC, the President admitted he wasn’t going to balance the budget – that wasn’t his goal. But, he sounded like a guest at the Mad Hatter’s Tea Party when he added: “We don’t have an immediate crisis in terms of debt. In fact, for the next ten years, it’s going to be in a sustainable place.”

His words seem absurd. A column in last Thursday’s Wall Street Journal by George Melloan, author of The Great Money Binge, made clear the magnitude of the debt crisis. He illustrated the obligations of taxpayers in terms of future insurance and entitlements. Fannie and Freddie, which we as taxpayers own, originated 90% of the $1.3 trillion in mortgages underwritten last year. Any defaults become ours. Student loans, which were subsumed by the government (us), in 2010, exceed $1 trillion and delinquencies are increasing. It is us, as taxpayers, who guarantee the FDIC and the Pension Benefit Guaranty Corp. Because of Dodd-Frank, we taxpayers are now implicitly guarantying all banks deemed too big to fail. (In her Sunday New York Times column, Gretchen Morgenson wrote impishly but accurately, pertaining to the huge losses incurred by J.P Morgan, that banks are not only too big to fail, “they are too big to regulate and apparently too big to manage.”) In his Journal op-ed, Mr. Melloan noted, “…the government is now insuring a large chunk of our $16 trillion economy.” And, of course, future entitlements – Medicare, Medicaid and Social Security – are our responsibility as well. No matter how calculated, debt is not sustainable.

In our politically charged environment, with politicians ducking behind meaningless words and phrases, and dividing the populace into “haves” and “have-nots,” we should never lose sight of the fact that obligations of government are not those of some anonymous, amorphous institution; they are and always will be obligations of taxpayers. A problem with the growing percentage of people who pay no federal income tax is that they have no skin in the game; therefore no self interest in rolling back expenditures. A divided nation becomes more divided.

Economic growth is the best answer. That fact is acknowledged by both those on the Left, as well as the Right. The difference is that Democrats look to government to stimulate growth, while Republicans argue that real economic growth stems from the private sector. With the public on the sidelines, it is unsurprising that an absence of conviction as to which proposals will prevail has sent consumer confidence tumbling and has kept corporate cash stashed overseas. Serving as a restraint on new corporate investments have been increased environment regulations along with new rules and regulations associated with the Affordable Care Act. Consequently, business confidence is low; that means less investment and less hiring.

Last Thursday’s New York Times provided a table comparing the dueling budgets, both of which profess to have values and priorities on their side. The Senate plan projects deficits of $5.2 trillion over the next ten years. The House plan suggests $1.2 trillion over the same time. Keep in mind, both are likely to prove optimistic on that score. Both plans assume reductions in interest expense, as both plans assume annual deficits will decline from current levels. Neither plan makes the more likely assumption that interest rates will likely rise over that ten year period, rendering any saving to be bogus. Both plans assume reductions in healthcare spending, which seem highly unlikely unless we go to some sort of a patient-centric system. Democrats cut $240 billion from defense over the ten years, which has to assume that tensions in the Middle East, North Korea or the East China Sea do not intensify. Both sides assume that $1 trillion in current spending on wars and emergency aid will not continue. Republicans garner most of their savings from repeal of Obamacare, and changes to Medicare and Medicaid. The former (Medicare) would become subject to means testing and would evolve into a voucher system. The latter (Medicaid) would become a system of block grants to the states, so that they might administer them. The Democrat plan assumes an increase in taxes derived by closing loopholes “that benefit corporations and the wealthy.” Republicans keep the tax increase of last December, but no more.

Despite what we read in the papers and see on TV and the internet, neither budget is austere in the way that you and I would define the term. Both the Republican and Democrat budgets have government growing in size relative to GDP. Personally, I believe that fact demands a great deal more debate. The Democrat’s budget, as offered by Senator Patty Murray, has government spending expanding at a 5% annual rate. The Republican budget, as proposed by Representative Paul Ryan, has government growing at 3.5 percent. GDP has grown at a little under 2% since the recovery began four years ago. If we assume GDP accelerates to 3% over the next ten years, $16.1 trillion becomes $21.6 trillion. $3.8 trillion in government expenditures in fiscal 2013 (24% of GDP) becomes $6.2 trillion in ten years under Democrats (29% of GDP) and $5.4 trillion (25% of GDP) under the Republican plan. Both proposals, in my opinion, have government growing unhealthily bigger.

Neither plan will pass as proposed. Generally speaking, plans such as these tend to underestimate future expenses and overestimate revenues. The Congressional Budget Office (CBO) that scores such proposals uses static accounting, which does not allow for changes in human behavior. In simplest terms, Democrats prefer a strong central government that provides more, increasing dependency and decreasing personal responsibility. Republicans prefer smaller, federalist-style government, with decreasing dependency while emphasizing personal responsibility.

The two big questions should be: Which plan does the most to promote economic growth? And, second, which (if either) does the most to restore our supremacy in myriad fields from education to starting a business – areas in which we have dropped in global rankings. Over the past decade we have lost competitive ground in too many categories. In the most recent PISA rankings, our high school students’ ranked 14th in reading, 17th in science and 25th in math. Our businesses are equally uncompetitive. According to the World Bank, we are 6th in terms of protecting investors and 22nd in trading across borders. We need to reverse that trend. For the past decade, economic growth in the U.S has been below normal. Congress should not impede corporate growth. It must nurture it. That will demand modernizing immigration and becoming more energy self-sufficient. There is no reason both can’t be accomplished. We should welcome immigrants, especially those who are college educated. The United States has the potential to become the world’s largest energy producer, which should lead to becoming the premier manufacturing country in the world. But that will require reducing corporate taxes, streamlining the tax code and, most importantly, easing regulatory pressures. A restoration of growth, to above 3.5% over a sustained period, will do more to minimize the fiscal mess in which we find ourselves than the adoption of either budget proposal. In my opinion, and with economic growth as the goal, the Republican plan, while still growing government too rapidly, will produce far better results than that of Ms. Murray and her Democrat colleagues in the Senate.

In his Thursday column in the Wall Street Journal, Daniel Henninger quoted the Harvard economist. Alberto Alesina. As a European, Mr. Alesina has studied the “benevolent postwar spending programs” of his native continent He found that [government] spending cuts have been associated with mild and short-lived recessions, while tax increases have been affiliated with prolonged and deep recessions. “The path back to stronger growth,” argues Mr. Alesina, “is a combination of significant, permanent cuts in public spending and relatively small tax increases, if any.” Listen up, Congress and White House!

In 2008, amidst recession and credit crisis, then Senator Obama railed against President Bush’s federal debt of $9 trillion, an amount “equal to $30,000 for every man, woman and child,” he said. In the four subsequent years, that debt has increased to $16 trillion, or $50,000 for every man, woman and child. And now he wants more. The Democrat’s budget would add another $5 trillion to the debt, meaning that a family of four would e responsible for a quarter million dollars of federal debt. That, obviously, would be in addition to any mortgage, student loans, auto loans or credit card bills they might have. The situation becomes untenable.

While I prefer less spending to more when it comes to government, both budgets appear deceptively optimistic in terms of deficit reductions. When the rate of federal spending exceeds growth in GDP, it is axiomatic that deficits, in the absence of tax increases, will increase, not shrink. And tax increases will impede economic growth, in a vicious, self-sustaining downward spiral. Real budget reform entails matching expenditures to revenues today, not in ten or twenty years. Neither proposal does that. Nevertheless, of the two options available, which path better serves the long term interests of the people? I believe the Republican’s. I don’t question the motives of either Party. But as for those on the Left, I do question their common sense.

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