Federal Budget Deficit


When Steven Pearlstein of the Washington Post speaks, we are wise to listen.  His business commentary is distinctly non-partisan and filled with common sense observations about the state of our economic world.  His piece today in the Washington Post is another must-read.  It is entitled Keeping an open mind on solutions to the budget deficit.

From what I’ve read of it, I’m not a fan of the President’s budget.  In a time of crisis it attempts, at great cost, far too much social engineering under the guise of stimulus.  I have not, I must confess, waded through the document myself.  Thankfully, others have, such as the Washington Post’s Robert J. Samuelson.  In a piece today entitled Presidential Double Talk, Samuelson details the untruths and deceptions in the President’s “responsible” budget. 

It is worth reading.  While we can’t always trust an opposition party, whether it be Republican or Democrat, to give us straight information, given their desire to defeat the opposing party at all costs, there are certain independent, business-oriented journalists in which we can place a good deal of confidence.  I consider Mr. Samuelson to be one of these. 

It’s important that Americans begin to replace unthinking adulation of the President with respectful questioning of his programs and assertions.  This budget is a good place to start.  We need to encourage Congress to work to transform the budget into one that truly is the “responsible” budget the President promised us.     

We’re getting used to talking about money in the trillions of dollars.  How much is a trillion anyway?  Here’s an excerpt from Kathleen Parker’s column in today’s Washington Post (A Cool Look At Those Trillions) to give us some context:

Chris Martenson’s online “Crash Course” in economics explains a trillion this way: First, picture a million dollars as a four-inch stack of thousand-dollar bills. A comparable billion-dollar stack is 358 feet tall. A trillion-dollar stack of thousand-dollar bills stands 67.9 miles high.

It’s a bit mind-boggling and, indeed, a whole lot of money.  Yet Kathleen Parker’s column today and a superb column by Steven Pearlstein in Wednesday’s Post (Debt Doesn’t Have to Be A Burden) explain why, as large as trillions of dollars are, these sums aren’t as frightening as they might first seem.  Of course, we can’t go on doing this forever, but for now, they are probably necessary and manageable.  I recommend both articles.

Another worthwhile-read from last week if you have the time is Obama’s Ball and Chain by the New York Times’ Thomas L. Friedman.

Apologies for being ‘off the air’ late this last week, but the organization for which I work was meeting in Washington, DC and I was completely consumed by it.  Hopefully, this week will be back to normal. 

David Leonhardt in the New York Times today explains in his column that a tax increase is most definitely in our future, and it’s not necessarily a bad thing.  The piece is entitled The Upside of Paying More Taxes.

My view is that we can’t go on expecting more of government and paying the same amount of taxes.  While conservatives have made “no new taxes” their mantra for decades, they’ve spent unbelievable sums of money that we don’t have to fight the war in Iraq and pursue other of their funding priorities, creating massive budget deficits in the process.  Reality requires that we will have to raise taxes or expect less from our government.  We can’t have it both ways.  It will also require, of course, entitlement reform and great care as we undertake new endeavors. 

 

To his credit, the President held a fiscal responsibility summit yesterday at the White House.  The basic story can be found in a Washington Post story entitled Health Care Tops Fiscal Need List.  Dana Milbank in his Washington Post column today reports that it was sparsely attended. 

While not the serious effort it was perhaps first conceived as being, the 3 1/2 hour meeting was important.  It signalled that the President understands there’s a problem that needs to be addressed and it certainly helped to educate America about the problem.  The President is to be commended for the effort.

Defusing the ticking time bomb that is our entitlements crisis will be complicated.  It is the raison d’etre for the Peter G. Peterson foundation of which I’ve previously written.  They are doing important work bringing the crisis to the nation’s attention and keeping it on the radar screen.  They launched a new ad campaignyesterday featuring an iceberg.  On their website you can also sign a petition thanking President Obama for holding yesterday’s summit. 

The liberals are striking back, however.  In a column in yesterday’s Washington Post, Robert Kuttner of the American Prospect decries The Deficit Hawks’ Attack on Our Entitlements.  Forget about deficits he seems to say.  If we get our economy back on track we’ll be fine, and by the way, the country needs needs its entitlement programs just as they are.  “The attack on social insurance is really an ideological assault, dressed up as fiscal high-mindedness.”  Peter G. Peterson gets special critical mention.  

So, according to Mr. Kuttner, presenting the liberal case, the entire point of the Peter G. Peterson Foundation is to conduct an ideological assault on our country’s entitlements programs.  The fact is we have a serious problem in America.  It can’t be ignored.  It doesn’t mean gutting our social safety net, but it does mean mending it.  This was all enough of a concern to the former head of the General Accounting Office, David M. Walker, that he left GAO to head up the the Peter G. Peterson Foundation.  There’s an interesting piece on David M. Walker in today’s Washington Post, entitled Internal Gadfly Tries Other Side.  Somehow Mr. Walker doesn’t strike me as a right wing ideologue.  Does he you?

The week ahead promises to be a big one.  We will begin to see, if it is indeed possible, the Senate’s attempt to right the wrongs of the House stimulus bill.  I think it is possible, and indeed likely.  It will be challenging, however, and the reasons for finding some middle ground are extraordinarily strong. 

For a story from yesterday discussing the move toward a compromise in the Senate see Democrats Indicate Areas of of Compromise on Stimulus from yesterday’s New York Times. 

Yesterday’s papers also offered perspective on some of the deeper issues that are being addressed in this stimulus bill and they are deep indeed.  There are many of us, including many Republicans (the ones who think that a government-funded economic stimulus is even necessary), who think the stimulus should first and foremost be about stimulating a stalled U.S. economy.  There are others, in particular House Democrats, who want the stimulus to begin to address social issues they feel have been too long ignored.  “Some of what is going on might best be called a classic case of pent-up demand–demand by Democrats for the kinds of programs that they could never get passed during the Bush years.”  This quote is from a New York Times story that ran yesterday entitled A Stimulus Plan With Dual Goals: Reform and Recovery.  It is an excellent article that explains why this stimulus bill is so controversial, especially among Republicans.  What’s controversial is the bill’s attempt to do two things at once, stimulate the economy and begin to reform the system.

My strongly held view is that this bill needs to be about stimulus with only small doses of “reform”.  Yet I got a clearer picture of the philosophical debate being played out here in a column in yesterday’s Washington Post by former secretary of labor Robert B. Reich.  It’s entitled Once the Stimulus Kicks In, the Real Fight Begins.  Who knew that the fight that’s being waged here in the stimulus bill is one between “cyclists” and “structuralists” for control of U.S. economic policy.  In fact, Reich argues that this fight will only get bigger in the years head as attentions turn to entitlement reform.  I certainly had never thought of it in these terms.  I regard this as a must-read piece in helping one build an appreciation of the philosophical battle that’s being waged behind the scenes.  While I would classify myself fundamentally as a cyclist, it is very helpful to me to understand the structuralist argument.  While I don’t think America can ignore growing structural inequities, as it does almost uniformly under Republican-controlled government, I believe the battle for structural reform has to be subtle and limited, and it cannot supplant the reality of business cycles.  Hence my view that the overly ambitious structural reform measures contained in the House stimulus bill are inappropriate to the task at hand, which is stimulating the economy into growth.     

There was another piece in yesterday’s Washington Post that was very helpful to me in more fully appreciating the complexity of the task of writing a stimulus bill, particularly a stimulus bill that will actually accomplish its goals.  It is Amity Shlaes’ FDR Was a Great Leader, But His Economic Plan Isn’t One to Follow.  Obviously Ms. Shlaes is not a “structuralist”.  At the very least she has feet firmly planted in the “cyclist” camp.  As previously when I’ve read Ms. Shlaes, I am struck by her historically informed argument in favor of letting the private sector, not government, fuel economic growth.  She does not believe a stimulus bill along the lines of that being crafted will be useful.  Her formula would be to first strengthen government regulation of the markets and than to incentivize the private sector to grow.  Here’s an excerpt:

The Depression tells us that public works are probably less effective than improving the environment for entrepreneurs and new companies. The president has already put forward a big tax cut for lower earners. He might offer a commensurate one for higher earners. He might expand the tax advantages he is currently offering to companies — wider expensing of losses, for example — and make them permanent. A discussion that permits the word “trillion” might also include the possibility of bringing down U.S. corporate taxes, taxes on interest, dividend and capital gains — again, permanently. The cash that a relatively competitive United States draws from abroad will move the country forward faster than any stimulus.

So the Depression and the New Deal are both worth going back to, but for different reasons than many suspect. We may rely on the best of the New Deal, the matter-of-fact bravery our parents and grandparents showed then, to help us through today’s unexpected challenges. But we don’t have to repeat New Deal stimulus experiments, because we know that they didn’t work.

This all makes me think, again, that we are rushing into this stimulus too fast.  This needs to be much more carefully crafted to do more good than harm (the principal harm being a gigantic increase in the U.S. deficit).  As it is, I fear we’ll end up with an economically inconsequential mishmash that only manages to raise the deficit to staggering new heights and create along the way some new and ongoing entitlement programs.  This concern is compounded when one factors in that our country’s true deficit is much larger than that which is most often discussed.  (See George Will’s column yesterday entitled Congress Will Have the Buffet.) 

In closing, let me cite two additional columns, both from the Washington Post that reinforce my growing fear that this bill is deeply flawed and needs repair.  The first, published today, is Robert J. Samuelson’s Too Little Bang for the Bucks.  Here’s an excerpt:

The decision by Obama and Democratic congressional leaders to load the stimulus with so many partisan projects is politically shrewd and economically suspect. The president’s claims of bipartisanship were mostly a sham, as he skillfully maneuvered Republicans into a no-win position: Either support a Democratic program, or oppose it — and seem passive and uncaring.

But the result is that the stimulus, as an act of economic policy, is hobbled. A package so large can be defended only because the economy is so weak — and seems to be getting weaker by the moment. The central purpose is simple: halt downward momentum. Perhaps some of the out-year spending might ultimately prove useful. But the immediate need is for the stimulus package to stimulate — now. It needs to be front-loaded; it isn’t.

The second column is David Broder’s piece yesterday in the Washington Post entitled The Votes Obama Truly Needs.  This is another must-read.  Broder hits the nail squarely on the head and echoes my call to slow this train down in order to make certain delivery of the desired product.  He also argues, correctly, that the relevancy and success of the Obama presidency is at stake.  Failure to get a bipartisan majority on the stimulus bill will set a precedent that will be hard to break.  Here’s an excerpt:

This bill, so much larger than ordinary legislation, even the wartime defense appropriations, is almost certain to be the biggest, if not the last, weapon the government employs to halt the sickening economic slide that has gripped the country in the past five months. So much is uncertain, and so much is riding on it, that it’s worth taking time to get it right.

Professional economists from both the right and left have raised questions that are anything but frivolous about its design. Martin Feldstein, a top Reagan adviser, has questioned the efficacy of the current menu of tax cuts and spending proposals to generate consumer demand and produce jobs. Alice Rivlin, who played a similar role for Bill Clinton, has called for a sharper focus on short-term job growth as distinguished from slow-acting steps for energy independence or health-care quality. Even the Congressional Budget Office has challenged how quickly this massive infusion of dollars will be felt in family budgets and the marketplace.

Beyond these policy challenges, there are political considerations that make it really important for Obama to take the time to negotiate for more than token Republican support in the Senate.

Nothing was more central to his victory last fall than his claim that he could break the partisan gridlock in Washington. He wants to be like Ronald Reagan, steering his first economic measures through a Democratic House in 1981, not Bill Clinton, passing his first budget in 1993 without a single Republican vote.

The first way leads to long-term success; the second foretells the early loss of control.

Yes, this will be a very important week in Washington.  There is a lot at stake.

Some of us are natural Democrats and some of us are natural Republicans. Some of us are neither.  I suggest that a natural Democrat or Republican is someone who is almost always in total agreement with the party and with all of its various alliances; it is someone who could sign the party’s platform every four years as a statement of personal belief.  I’ve never been that person.  There will always be a number of things with which I would disagree.  More importantly there are affiliations with which I could never agree.  In my case I am offended by the all-to-close relationship between the Republican Party and the Christian right.  I am likewise alienated by the seemingly borderless relationship between organized labor and the Democratic Party.  Sorry, but I like to think for myself.  If being a member of one of our parties means I have to check my views at the door, perhaps “Independent” is destined to be my permanent affiliation.

Echoing the point with which I began, for some people there’s no conflict at all.  They are perfectly comfortable as Democrats swearing fidelity to organized labor or as Republicans attempting to legislate morality.   Have at it folks, I’m glad you’re happy.  I suspect there are also others who might not necessarily agree with certain positions or affiliations but that nonetheless have decided to accept the bad with the good as a political necessity.  The same holds true for anyone elected to the U.S. House of Representatives or U.S. Senate.  If you don’t affiliate with one party or the other, you are nobody: you don’t get committee assignments, you don’t get earmarks, you don’t get squat.  Thus, were a true independent to have been elected a few weeks ago, he/she would have to choose between Nancy Pelosi or John Boehner for Speaker.  What a horrible choice.

This leads me to my real point today.  We have a nominee for Interior Secretary, Senator Ken Salazar of Colorado, who is a supposed centrist.  So far, so good.  But how centrist can you really be when a major tenet of your party is “environmentalism” and a very major constituency is the the environmental community.  It has been my experience that it is a rare Democrat that can say “no” to environmental groups.  Indeed, it is a rare Northeast Republican who can say “no” to environmental groups.  These groups have got too many supporters in too many Congressional districts who’ve been brainwashed into thinking that what’s right for the environment is what these groups pronounce is what’s right for the environment.  It is all but impossible for a Democrat or Northeast Republican to be able to say “no” to them.  They would be taking a big political risk to do so. 

So now we have Senator Salazar nominated to the position of Interior Secretary.  For more information on Senator Salazara and this appointment, read the Washington Post story today entitled Obama to Name Salazar As Secretary of Interior.  First, don’t get me wrong, this is an outstanding appointment, especially if one considers some of the other candidates that had been discussed.  Congressman Grijalva would have been a disaster.  With Senator Salazar we have someone, as I believe we would have had with John Berry, who will make a sincere effort to balance interests in administering an agency with one of the most difficult mandates of any in government.  He is someone, unlike Grijalva, who will say “no” to environmental groups.  My concern is it won’t be often enough.  It won’t be often enough because as a Democrat Salazar simply won’t have the option of saying “no” as often as he should.  He’ll say “yes, but” or “no, but” a lot.  Everything will be a compromise.

What will get shortchanged in this the country’s energy policy.  It’s my view that there is no other agency of the United States Government that has more influence on this country’s energy policy or, energy prices, than the Interior Department.  This is because it controls so much public land, onshore and offshore, upon which so much of this country’s natural resources reside.  The department’s decisions therefore have a huge impact on the country’s ability to produce its own oil and natural gas.  Environmental groups like to paint the choice that has to be made as between “appeasing oil and natural gas production company interests” vs. “protecting wildlife and the environment”.  That’s not it at all though.  Oil and gas interests are but vehicles for a much larger and more important public interest.  That is the country’s interest in securing a domestic oil and natural gas supply that reduces our dependence on oil produced in other parts of the globe.  For both national security and economic reasons the U.S. can no longer afford, not that it ever could, to import the quantities of oil that we are presently importing.  We just can’t do it any longer.  Thus, the real debate is between “the country’s need for producing oil and natural gas domestically” vs. “protecting wildlife and the environment”.  The line is fuzzier.  It is even fuzzier if you factor in issues such as the environemental risk taken every day as mega-tankers traverse the world’s oceans with cargo that at any moment could result in an environmental disaster of proportions heretofore not experienced, or the lack of environmental safeguards for oil and natural gas drilling in many parts of the world that are standard practice in the United States.  It’s fuzzier too when one considers the economic ramifications of $350-700 billion (depending upon the price of oil) leaving the country every year to pay for this imported oil.  Every decision Interior makes should be made as if there’s an representative from the National Security Council or the Treasury Department in the room as well to make sure those interests are adequately represented.

People will argue that I’m forgetting climate change in this debate.  I’m not.  It is all too real and has to be addressed.  It would be best addressed through a carbon tax that starts to put a premium on the burning of fossil fuels.  (A less transparent and much more complicated alternative to a carbon tax would be institution of a cap-and-trade system to limit carbon emissions into the atmosphere).  Applied to my argument above that we should be producing more oil and natural gas domestically and importing less oil from abroad, a carbon tax would mean that we would begin to discourage the overall use of oil and natural gas and concomitantly increase the overall use of alternative fuels (such as wind and solar).  The place not to engage in the battle between “oil and natural gas” vs. “alternative fuels” is in the field through denying access to public lands for oil and natural gas development.  That battle should be fought with tax policy at a macroeconomic level.  Fighting the battle locally, as environmental groups so like to do, only means, all things being equal, that the country will have to import more oil.  Every barrel of oil not produced in America is a barrel that will have to be imported.   

I want to also close with this observation.  The wildlife and conservation impacts of oil and natural gas development are widely overestimated by most people.  This is because people think of oil and gas development as requiring a far bigger footprint than it does or as a permanent alteration of an often pristine landscape.  It isn’t.  It is but a 20-30 year endeavor on relatively small locations, spread over a large territory and at the end of which remediation is mandated that will return the land to its natural state.  Furthermore, the footprint for oil and gas activity is minute compared to the solar and wind footprint, which are going to be far longer in duration than the 20-30 years for oil and natural gas.   Done correctly there is also no water impact, surface or subsurface, of oil and natural gas production.  Likewise claims about wildlife impacts of oil and natural development are frequently exaggerated.  Technology that limits the footprint of oil and natural gas production by use of directionally drilled wells lessens further all of the negative environmental impacts of oil and natural gas development.

So my bottom line is that Senator Salazar is a great choice.  My best wishes are with him as he takes on one of the toughest jobs in Washington, a job that is tougher for a Democrat centrist who is going to have to say “no” to a critical constituency more often than not if he’s going to do the job demanded of him.