June 21, 2010

Bait & Switch: Raising the National Deficit by Stealth

by Hal Gershowitz

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Like a relentlessly advancing cancer, the news about the US fiscal deficit and the accumulated debt, which is its result, keeps getting worse.  Every week the press discloses some supposedly “new” information about either the federal budget, economic failure, projections of economic growth, the effects of the so-called “doc fix” (about which we have written several times), the sorry fiscal condition of state and municipal finances, or some further jobs stimulus proposal, all of which pile more costs on this nation that, if it were a private business, would be considered broke.

Before looking at the most recent spate of deficit and debt related news, let us start with the CBO’s updated March 2010 report which estimated that the cumulative effects of the Administration’s budget proposals would add $9.7 trillion to our current deficit of $14 trillion (an amount equal to approximately ninety percent of our annual GDP and clearly approaching the danger zone).  This amount does not include any spending for enacting climate legislation or the effect of rising interest rates to service our debt or spending for contingencies from unplanned events which will inevitably occur.  Moreover, it projects economic growth every year at four percent when we have had only two quarters of growth at four percent or higher in the past five years and, at least since 1982, have never had four consecutive years of growth as high as four percent per annum.  That overly optimistic CBO assumption if not realized will raise the deficit and the accumulated debt, perhaps by trillions of dollars.

In recent days we see once again the fantasy of the most recent budget the president presented.  After just a few months it is outdated.  Mr. Obama has just asked Congress for an additional $50 billion in aid to state governments.  It is uncontested that state and local governments are in terrible fiscal condition and, of course, they can’t print money to inflate away their accumulated debts.  Cumulative state shortfalls in 2009 and 2010 alone are approximately $310 billion and projections for 2011 and 2012 combined are for an additional $300 billion.  State governments have in the past few years either borrowed with abandon or resorted to accounting gimmickry to approach balancing their budgets.  They have consistently looked for new sources of tax revenue or raised taxes on existing sources, making a reality of Ronald Reagan’s statement about government: “if it moves, tax it.”

The figures are appalling.  California alone projects a $9 billion shortfall in 2011 but when the unsolved 2010 budget gap is added in, the total shortfall would be $19.1 billion (22.6 percent of the one year budget).  This hall of shame also includes Illinois where the shortfall projected for 2011 is a whopping 30.1 percent of the budget, New Jersey at 37.4 percent, Maine at 32.1 percent, Michigan at 26.4 percent, Vermont at 31.1 percent and Wisconsin at 25.3 percent.

How did we get to this state (no pun intended) where services now need to be drastically cut, employees laid off, contracts cancelled and previously negotiated benefit packages renegotiated?  Simple.  Politicians love to promise and spend and at the state and local level, unions have organized state employees and have demanded pay and benefit packages way beyond what is paid for like work in the private sector.  With union representatives sitting on pension boards or having its employee members negotiating on behalf of government, the unions are, in effect, on both sides of the table.  These devastating numbers are even more stark and depressing when we consider that over the past two years the federal government has provided $140 billion in state budgetary assistance…approximately thirty to forty percent of state shortfalls.  The effect of this assistance seems only to have postponed the day of reckoning and allowed states to increase hiring and avoid necessary fiscal discipline.  Since 2007 public payrolls have increased while the private sector went through the worst downturn since the Great Depression with unemployment, even with a nascent and fragile economic recovery underway, still hovering just below ten percent.

After that depressing digression, let us return to the president’s proposal for a new $50 billion aid package for the states.  The president has written Congressional leaders to say that the package is essential to avoid “massive layoffs of teachers, police and firefighters.”  As reported in the Washington Post the president calls this a request for “targeted investments.”  The president also wants to extend unemployment benefits which raises the cost of his package to $80 billion.  And while no one wants to be heartless to the jobless who are in great economic distress, these benefits have been extended several times already and cannot (nor should not) be extended indefinitely.

Wasn’t this all known in the White House when the president first sent his budget to Congress?  Why did this request dribble out later packaged as it always is in a wrapper of being necessary to avoid layoffs affecting our children or the public’s safety.  What about the swollen bureaucracies of other state agencies?  Why doesn’t the president mention the incredible cradle to grave benefit packages that allow some workers to retire at age 50 at high percentages of their final year’s salary, with health benefits for the rest of their lives.  Doesn’t this answer become more and more apparent with every additional request for money?  It is because that is the kind of America Mr. Obama wants…. an America that takes more and more resources out of the productive growth producing private sector and pays it over to the non-productive public sector.  Even France, the poster child for excessive public spending, seems to be getting the message that this kind of model doesn’t work but Mr. Obama is imposing, in step by step increments, France’s failed statist approach on the unwitting taxpayers of the United States.

We might also note, as we did in some detail in earlier essays, that the functions the federal government has been funding to defray these state costs have been, since the founding of our republic, the responsibility of the several states.  This raises the obvious question of why the citizens of those states who have lived within their means should have their federal tax dollars used to pay for the unbridled profligacy to which the spendthrift states listed above have obligated their own taxpayers.

The other bit of recent bad budget news which the president recently announced was the so-called doc fix to reverse the 21 percent pay cut scheduled to take place for doctors who treat Medicare patients.  Surprise, surprise.  This fix, as Mr. Obama noted, has passed Congress every year since 2003.  However, he is now complaining that Republicans are using budget austerity (demanding commensurate cuts in spending elsewhere in the bloated federal budget)  as an excuse to prevent a long-term solution to this problem.  How he dissembles.

Just a few short months ago the doc fix was part of the president’s healthcare reform legislation but Congressional leaders removed it from the bill so the CBO could certify that the legislation was revenue neutral and did not “add one dime to the deficit” as the president intoned daily.  So in a most disingenuous piece of fiscal trickery Speaker Pelosi and Majority Leader Reid separated the doc fix from the overall healthcare reform legislation and put it in a separate bill, claiming it was a totally separate issue.  Voila; the CBO could now certify the ten-year cost of the healthcare legislation as not increasing the deficit but the very same costs are now to be incurred in a separate law.  So there we have it; the costs of the annual fix which, if included in the healthcare reform bill, might have prevented its passage, is later acknowledged to cause an increase in the deficit by the same amount. This Pelosi-Reid grand-scale shell game, to which the President acquiesced, fooled no one except, seemingly, the CBO, which actually did know under which shell “the fix” was in. Yes, of course, the CBO knew, the White House knew, the Congressional Democrats knew, the compliant main-stream press knew, we knew (and loudly complained at the time), and now everyone knows.  How stupid do these politicians think the American people are?

Make no mistake about it; all of this is not an accident.  Every incremental piece of legislation involving further federal spending is designed to disguise the further centralization of power in Washington.  The inescapable conclusion is that the strategy of Mr. Obama and the Democratic left which holds majority power in Congress is to irreversibly and fundamentally change America by putting in place policies, programs and funding mechanisms that will be difficult, if not impossible, to reverse without devastating costs to the ties that bind us as a nation, and which raise the possibility of terrible social upheaval.

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5 responses to “Bait & Switch: Raising the National Deficit by Stealth”

  1. Peter Solomon says:

    Once again, excellent analysis and conclusion(s).

  2. Fred Mayer says:

    Our society can be categorized by the letters A B C.
    A’s are the people that can not take care of themselves, i.e. the children. the sick, the aged, etc.
    B’s are the workers and all those that generate income and taxes.
    C’s are the politions, government employees,and all those depending on government payrols.
    Now the goal of the A’s and C’s is to extract as much wealth as possible from the B’s
    Soon there will not be any more B’s left.
    Economics 101

  3. Isaac says:

    The unfortunate reaitly is that there are still a number of people out there with a 30 second attention span … all they need to see is the headline “CBO Confirms Health Care Bill Deficit Neutral” and they move on to the next topicIf you want to see this thing defeated as much as I do the time has never been more right for increased pressure on your Congressional representatives

  4. Shoot, so that’s that one supposes.

  5. Haha, shouldn’t you be charging for that kind of knowledge?!

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