How bad have our budget woes become? The Congressional Budget Office announced earlier this week that the US will incur its fourth straight trillion-dollar-plus annual budget deficit … and the media treated it as good news. The Newsday headline read, “Budget deficit to dip to $1.1T, CBO says.” The Washington Post informed readers that the 2012 deficit would be the “smallest since ’09.”
It’s tempting to say that I can remember a time when a $500 billion budget deficit was greeted with shock, anger, and criticism, but it’s not saying much. My nine-year-old granddaughter can remember that time, too.
That does not mean that the CBO report had nothing but bad news. The report does project that annual budget deficits will “decline markedly” in the next ten years after this budget cycle, to as little as $200 billion a year and 1.5 percent of GDP, both very manageable levels of deficit spending. How will this miracle occur? According to current law, which is the only guide that the CBO can use, the Bush-era tax rates will expire across the board, and the Alternative Minimum Tax will not be restrained from reaching far into the middle class. The latter change will increase the number of American households subject to the AMT from four million in tax year 2011 to thirty million in tax year 2012. If readers can imagine any Congress subjecting middle-class voters to that kind of a tax shock in a single year, then this will sound like very good news indeed. Otherwise, this is an exercise in irony.
That gives one measure of just how seriously Washington takes deficit control. Here’s another: the automatic cuts passed in last year’s Budget Control Act would only deduct $105 billion from the deficit in 2015, while keeping the AMT and rate changes would add $395 billion to the federal government’s coffers. By 2020, the BCA’s budget cuts only reduce the annual deficit by $137 billion, while the extra taxes add $685 billion to the kitty. However, if Congress indexes the AMT as expected and extends the 2001/3 tax rates, the deficit picture looks bleak indeed. It would get only as low as $664 billion in 2015 before nearing a trillion dollars again in 2020, and exceeding it by 2022, even with the minimal cuts in place.
The Obama administration does not take spending reductions seriously, as shown by four successive trillion-dollar annual budget deficits.
What happens to the economy if Congress allows these massive tax increases to take place? The CBO expects the economy to grow at a 2.0 percent rate in 2012, about the same stagnation rate we have seen for the past two years. In 2013, though, with the capital sucked out of the market, the economy will slow even further to 1.1 percent, and for the economy to remain below its potential – until 2018. Taxpayers and investors will lose ground on taxes and economic opportunity while Washington does nothing to curb spending – the real driver of these deficits.
Clearly, the Obama administration does not take spending reductions seriously, as shown by four successive trillion-dollar annual budget deficits and the CBO projections based on their policy. Republicans have the Bush years to live down, but those were not nearly as profligate as what followed. The presidential aspirants have made “real spending cuts” a priority, but who can we take seriously?
Ron Paul has offered the clearest, most specific goals in cost reduction, pledging to cut one trillion dollars from the first year’s budget, which would all but eliminate the deficit. Paul has explained in general terms how to get there – through the elimination of five Cabinet-level organizations and a severe shift in monetary and national-security policy, although as I wrote for The Fiscal Times when Paul released his plan, there was precious little explanation of how he would accomplish those tasks.
An even better question would be how Paul would get such a plan through Congress. He has been in and out of the House over a four-decade span, but he has only had a handful of his bills come up for a vote and only one pass during that time. There is no reason to suspect from that history that Paul could manage the passage of anything as controversial and painful as what he proposes even in its current conceptual form, making him the wrong man for arguably the right plan, or at least the right approach.
Newt Gingrich and Rick Santorum both have long experience in Congress and in getting controversial bills passed. Santorum authored the partial-birth abortion ban that took several tries before a President finally signed it into law, and he authored the bill that allowed health savings accounts to exist tax-free, in what should be the path for true health-care reform. Gingrich was Speaker during the period that arguably produced the last balanced federal budgets through flat spending, although the last year the federal government spent less in 2010 dollars than the previous year was actually FY1993, according to the Heritage Foundation.
Gingrich has also proposed bold initiatives to establish a moon base by 2020, which would add hundreds of billions in spending.
However, while talking about the need for spending reductions, Gingrich has also proposed bold initiatives to establish a moon base by 2020, which would add hundreds of billions in spending. Santorum talks more about tax policy to boost manufacturing, a worthy goal but one not as focused on spending reductions, nor does Santorum have the kind of budget management experience of Gingrich.
Mitt Romney, on the other hand, has stuck to spending reductions. He argues that he balanced four budgets in Massachusetts as governor, which is true, but states generally don’t have the option of running deficits, either. Budgets increased under Romney, but so did economic growth -- and he also had to deal with a legislature under Democratic control. Even with that, the “Rainy Day Fund” had over $2 billion in surplus when he left office.
Furthermore, his private-equity experience and success was based on transforming bloated and costly organizations into leaner, more efficient and productive companies, a skill that doesn’t entirely translate to the public sector but certainly would help. The purported ruthlessness of his decisions may come under fire in the election, but it’s precisely that kind of tough decision-making that will be required in the next four years to get the deficits under control, and Romney also has a track record of working with his political opponents to get it done.
Conservatives have a trust issue with Romney, based on his track record on other issues as governor, and that will inform their evaluation of his ability to perform in this area. If conservatives decide they can trust Romney to stick to the spending-reduction agenda, he might be the best possible choice of the candidates still left in the race – including Barack Obama.