Thursday, February 09, 2006

The good news and the bad news about the budget deficit.

First the good news: The projected increase in the budget deficit this year, to $400+ billion from $319 billion last year, doesn't matter.

Also, the cost of the Bush tax cuts ... of the Iraq war ... of the all those earmarks Congress doles out for its own benefit that the pork busters are so upset about ... they don't matter. The cost of cleaning up Katrina, and fighting in Iraq, and bailing out collapsing pension plans through the PBGC -- of all the items currently on the political agenda for rest of decade, taken all together, they don't matter. So don't worry about them!

So says Douglas Holtz-Eakin, the departing head of the Congressional Budget Office (in the WSJ)...

"I think this is self-evident," says Mr. Holtz-Eakin, chuckling. "... I wake up every morning saying it doesn't matter what happens in the next five years, and people say I am really weird."
Now the bad news: The reason why they all don't matter is that their cost is trivially small compared to the that of the mountain-sized avalanche of retirement entitlements that's heading to hit us around 15 years from now...

Holtz-Eakin again:

"The thing that I found most amazing is everybody thought the war in Iraq was a much bigger expenditure than the [Medicare] drug benefit. How could you possibly believe that? The war in Iraq, $6 billion to $7 billion a month, maybe $70 billion, $75 billion, a year, something like that. And the drug benefit is forever."
The accrued cost of the Medicare drug benefit is $8 trillion (with a "t") so far, after only two years, says the Treasury. The Iraq war, at $7 billion a month, would have to last almost 100 years to match this two-year cost of the drug benefit -- which is only a small part of Medicare.

A little more perspective: The cost of the Bush tax cuts in 2006 will be about $250 billion (according to enemies of the tax cuts, who give them little credit for spurring the economy and thus reducing their own cost, such as the Citizens for Tax Justice (.pdf)).

Meanwhile, the Treasury says the annual deficit is actually more than $3 trillion when computed on an accrual basis to include the current-value cost of unfunded accruing promises to retirees. Now "more than $3 trillion" is more than 12 times greater than $250 billion -- so the tax cuts account for about 8% of the actual debt the government is running up, worst case. They just don't matter that much in the overall fiscal situation.

Those who find this hard to believe can take a look at GAO's year 2000 budget projections. These (.pdf) were made pre-Bush, pre-9/11, pre-recession, counting zero tax cuts and assuming the boom economy and budget surpluses would last for years to come. The conclusion: The 75-year projection is cut off a little more than half-way through as the government collapses under the weight of annual deficits that reach 20% of GDP -- more than the size of the entire government today -- and are rocketing straight up, driven by costs of Social Security and Medicare that have reached 20% of GDP and rising. Hey, the economy and government collapse without Bush -- how much harm can he have done? ;-)

Not that Bush hasn't committed fiscal sin: his drug benefit's annual accruing cost is now over $560 billion -- more than twice the cost of his tax cuts -- says the Treasury. Who knows that?

The most recent Analytical Perspectives on the Budget gives the current value of the unfunded liability for Social Security as being $12.8 trillion, and for Medicare as "a staggering $68.4 trillion". Who knows that?

Almost nobody knows it. But why? Nothing is a secret -- it's all well published.

The first answer is that the politicians of both parties can agree on one thing -- they sure aren't going to talk about it. "The political system doesn't reward painful choices", as Holtz-Eakin notes. So the Republicans sure aren't going to mention that the tax cuts they all want will only increase a $3 trillion deficit, while the Democrats are hardly going to mention that the entitlements they use as the foundation of their party are on course to bankrupting the country. But politicians ... you never expect the truth from them.

The major fault here is that free press is silent about the silence of the politicians -- and is indeed itself constantly exorcised over trivialities of the budget process while being blind to the big picture. Or perhaps, since the press like any business provides pretty much what its customers want, it is just human nature for us all to be distracted by minutia until an avalanche hits. Either way, the average person is simply never told, and so doesn't know.

Take for example a recent post by the esteemed Jane Galt, endorsing an article in The Economist damning the Bush budgets in 1,100 words for such grave sins as...

a 2006 deficit projection [of] $423 billion, or 3.2% of America’s GDP.
... which actually is rather reasonable by historical standards. In fact, a 3.2%-of-GDP deficit would be the median for the last quarter century, 13th largest of the last 25 years. Moreover, deficits equal to a percentage of GDP smaller than the GDP growth rate can easily be sustained forever. So what's to be so upset about there?

... and also ...
for all their rhetoric, so far the Republicans have barely touched domestic discretionary spending
... just as if savings from cuts in discretionary spending could ever possibly amount to a significant portion of GDP.

Yet in 1,100 words there is not one of a $68.4 trillion liability for Medicare, or of a $3 trillion+ annual accrual basis deficit today (though that is more than seven times larger than $423 deficit that is lamented).

Oh, well ... everybody's going to find out about all this around 15 years from now, the hard way.

Until then remember this: the only thing that seriously matters for the budget is entitlements, and "entitlements" is spelled M-E-D-I-C-A-R-E, which amounts to about 80% of them.