Tuesday, December 7, 2010

The Balanced Federal Budget: Easy Come, Easy Go

If you keep up with the news, you might remember something about balancing the federal budget. Like maybe some commission chaired by a couple of old guys made a proposal for the government to stop borrowing so much g.d. money. But that austerity stuff is so last week. Economic stimulus has come back into vogue, and the smart set in Washington is doing the supply side shuffle. President Obama has been accused of being Keynesian. But he offloaded his outdated economic advisers and has apparently gone Reaganesque. His deal with Congressional Republicans for a two-year extension of the Bush II tax cuts, a one-year 2% cut in Social Security taxes, plus an extension of unemployment benefits for another 13 months, guarantees that the federal deficit will yaw wide or wider. A mild version of the federal estate tax (35% with a $5 million exemption) is supposed to be reinstated. But the parameters of this tax are designed to raise less money than the increase in the deficit this deal will foster.

The Democrats in Congress, who seemed to have dallied with the notion that they and the President belonged to the same party, are ripsh . . . well, very upset, about being excluded from the President's back door negotiations with Republicans. That, evidently, is the price those frumpy Dems pay for not being au courant. Wanting to have the pre-Bush tax brackets apply to people who made $250,000 plus, or, heck, even just those at $1 million or more, makes the Dems strangely look prudent. Oh well, federal debt securities really are soignee, if you look at them the right way.

The concept of this deal as economic stimulus produces cognitive dissonance. Since the deal would continue the status quo (the Bush tax cuts being currently effective and unemployment benefits having continued through November), and add only a 2% Social Security tax cut while reimposing an estate tax, the new deal (small caps intended) doesn't change much. And the government can't cut spending, can it? Because spending cuts would reduce stimulus, and stimulus is now all the rage.

Sure, the President and Republicans would say that they are serious about deficit reduction and the current deficits are just a temporary measure while the economy is swooning. But, in Washington, temporary measures that benefit important constituencies tend to have long life spans. Federal agricultural price subsidies, to take an example, were a temporary measure instituted when Franklin Delano Roosevelt was jauntily waving his cigarette holder. They still live on like welfare queens that never have a health problem.

If you listen closely, you might hear a little mouse in the corner of the Oval Office clearing its throat and muttering something about voodoo economics. Somehow, one gets the sense that somewhere, someone has made a doll called American prosperity and has a pin posed over it. The new supply side economics aren't like the Laffer yucks of yore. We now have a Federal Reserve that never saw an interest rate it didn't want to bash down (although that's turned into a game of whack-a-mole with today's rising rates). Plus a federal government that never misses a chance to borrow. The Fed is, more or less, monetizing the federal debt (i.e., printing money to buy federal debt, which brings a risk of inflation), although it would vehemently deny doing so. Having the First National Bank of Accommodation fund the giddiest of big spenders may well be a formula for disaster. And depression. The bond market dropped today. Stocks bought into the hype for most of the trading day, but sobered up as the market closed.

Tea Partiers and other pro-Republican voters from the mid-term elections might be fighting a touch of queasiness in their tummies. There isn't much in this deal for them. Ambitious Democrats are surely making preliminary estimates of their chances in the 2012 presidential primaries, and might be quietly chatting with a fund raiser or two. The President and the Republicans are trying to pitch their proposal as bipartisanship. But, in truth, it's just an old-fashioned political deal, like the kind made in the smoke-filled back rooms of yesteryear, done more to avoid problems (like reinstatement of the higher pre-Bush tax rates) than to accomplish anything. And like so many back room deals, it may ultimately create more problems than it solves.

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