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 Richmans' Trade and Taxes Blog

Fiscal Timidity
Jesse Richman, 5/16/2011

Gross public debt is spiking higher, and currently stands at levels not seen since the early 1950s as a percentage of GDP.  The budget process in Congress no longer produces budgets that are even close to balance.  Competing interests are not forced to struggle over a fixed federal pie.  Instead, the pie has been extended through borrowing.  Tax cuts on the one hand, and continuing spending increases on the other have eroded the fiscal situation. 

In the last year or two there has been increased attention paid to the budget deficit.  However, most of the plans that have been proposed so far are remarkably  weak.  Debt reduction is not in the plans.  Not in the Ryan plan, not in the Bipartisan Deficit Reduction Commission plan, not in the President’s plan.  The graph below shows projected debt held by the “public” (by which is meant both ordinary citizens and foreign central banks) under the Ryan plan over the next ten years as projected by Ryan's plan itself.  Note that the line increases pretty steadily throughout the ten years.   Thus, even with all of the smoke, mirrors, and optimistic assumptions in this and all deficit reduction plans, it clearly does next to nothing to tackle the debt, except to the extent that inflation and economic growth may reduce its weight.

Most of the other plans are in the same ersatz debt reduction league.  A recent analysis by the CFRB finds that the House budget shaves only $1290 billion in savings from the ten year budget as it would be if current law remained unchanged.  The fiscal commission is marginally better at $1420 billion.  The president’s framework is decidedly worse at -$250 billion relative to leaving current laws unchanged.   But as the graph shows,  the increase in debt held by the public that is projected for the next ten years is much, much, much larger than 1.3 or 1.4 trillion dollars.  Cuts on the order of four trillion relative to current law are needed.  The Ryan budget does not deliver.

Even maintaining current law entails some substantial sacrifices.  Government payments to doctors are scheduled for a major trim.  Most of the tax cuts enacted by George W. Bush are set to expire.   The Alternative Minimum Tax will hit more tax payers.  But on top of this, additional cuts and/or tax increases are needed if the debt is to be reduced.  Instead of being honest with the American people, or draconian in their cuts, the plans are exercises in wishful thinking.   

The only plan on the budgetary agenda that actually purports to balance the budget by 2021 is the “People’s Budget” proposed by the Congressional Progressive Caucus.  This plan includes a variety of proposals that are unlikely to work (e.g. taxing the foreign income of U.S. corporations) but at least it makes an effort to achieve a balanced budget.   All of which leads one to wonder whether the Tea Party, and the Republicans who rode it to House majorities, is actually fiscally conservative at all.