The Wages of Hypocrisy

02/20/2012 11:20 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

The federal budget deficit is a byproduct of the Bush tax cuts and rising spending on popular programs. But it’s so much easier to pretend otherwise, writes MoneyShow senior editor Igor Greenwald.

You know how broke the US is? So broke that one modern-day Jeremiah wishes American women did less whining about contraceptives coverage and more breeding to crank out future taxpayers.

We’re so broke some of our most famous pundits despair of analysis and attempt to take their frustrations out on melons.

So broke people are trying to convert the federal budget’s many zeroes into smaller, more easily comprehensible numbers, and then passing the result on Facebook like a grail. Perhaps you’ve seen this:

The budget explained simple English…now, remove 8 zeros and pretend it’s a household budget:
Annual family income: $21,000
Money the family spent: $38,000
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
…Stop the insanity now. Vote them out and demand a balanced budget.

This seems to date back from last April, and is exactly the sort of reasoning that produced the debt-ceiling fiasco, followed by a close brush with a recession and a bear market.

The fatal flaw of the analogy is that a family can sharply cut its spending and yet hope to maintain its income courtesy of other families that wish to spend. But when the national “family” slashes spending deeply, public revenue and private incomes also inevitably shrink: just ask Greece, or Britain.

No matter: Americans of all stripes are viscerally uncomfortable with endless trillion-dollar deficits and fast-growing national debt. I saw the “family budget” meme reposted by a progressive friend who was dismissive of the Tea Party when it was noted as the source of the material. And yet, “reining in spending a bit would be awfully nice,” she added.

Sticker shock is everywhere these days, it seems, from populist cartoons to the earnest commentary of Steven Rattner and Michael Kinsley.

Federal Reserve Chairman Ben Bernanke has also harped on the long-term threat posed by excessive deficits, warning in congressional testimony this month that “without corrective action, our fiscal trajectory will move the nation ever closer” to a debt crisis.

Distaste for the budget deficit is the biggest drag on President Obama’s popularity, with 68% of those polled by Gallup disapproving of his handling of the matter, including 38% of Democrats. (Though it’s worth noting that those numbers, like the others for Obama, have improved since fall, alongside the economy.)

And no wonder everyone is upset. Americans polled by Gallup also estimate that the federal government wastes a ludicrous 51% of every dollar it collects, a curious delusion given that most of the money verifiably get spent on mandated benefits, bullets, bombs, and other legitimate expenses. In the middle of Ronald Reagan’s presidency, we thought Uncle Sam was wasting as little as 38 cents of every dollar taken in.

Naturally, that mean most of us are for cutting spending in the abstract. In the abstract, 50% of those polled by Gallup last summer wanted the deficit reduced only or mostly via spending cuts, vs. the 32% who favored an equal mix of spending cuts and tax hikes.

Things look different, of course, when you bring up slashing Medicare for Grandma. Most Americans oppose “significant changes” in the government’s insurance program for seniors or Social Security to shrink the budget gap.

A narrower majority of Americans reject cuts in the military budget, another major spending category. That leaves most backing cuts in “discretionary” spending, which are popular only because most people don’t think of air traffic control or meat inspections as discretionary.

Fortunately, the numbers don’t lie: the budget is in the predicament it’s in because a decade ago, Congress voted and President Bush signed two batches of completely unaffordable tax cuts.

Want to rant about the Obama budget deficits? Go ahead. Just know that if the Bush tax cuts are allowed to expire in December after the current two-year extension, the federal budget deficit will shrink to a routine 2% of GDP within two years and barely 1% of GDP in five years’ time, according to the nonpartisan Congressional Budget Office.

Of course, the economy would face-plant under the abruptly increased tax burden, almost all of it placed on wage earners. We’ve grown to rely on spending money we don’t have. And after failing to kick this addiction when times were good, most of us are unwilling to pick this hard time to go cold turkey.

So the choice is to extend those tax cuts and accept large deficits as far as the eye can see, or not extend them and watch the recovery implode. It wasn’t supposed to be like this.

Here’s how it was supposed to be, 11 years ago: “Under President Bush's plan, an average family of four's inflation-adjusted disposable income would increase by $4,544 in fiscal year 2011, and the national debt would effectively be paid off by FY 2010.”

This from an alleged analysis of “The Economic Impact of President Bush’s Tax Relief Plan” that the perpetrators at the Heritage Foundation have as yet failed to pull off the Internet.

It didn’t quite work out like that, of course, but one of the co-authors got to spend much of the subsequent Bush presidency in a cushy government job. I nominate his salary and perks as taxpayer money most certainly wasted.

So, to review, the deficit is huge for no reason more mysterious than the fact that government now spends much more than it used to on the military, homeland security, and—most damagingly—health care. And even those heavy costs could have been born prudently if we hadn’t voted ourselves a huge and hugely unaffordable tax cut that was promptly spent on bigger houses, larger SUVs, and entertainment.

Now that till is almost bare, and the bills are due. And one of the guys who was predicting that the national debt would be paid off two years ago thanks to the magical dynamism of the Bush tax cuts is analyzing still, proposing to raise the retirement age and cut benefits to pay for the tax cuts that were once going to pay for themselves.

There are obvious budget remedies we could and should try short of blowing off our creditors or taxing the economy into oblivion.

  • We could attempt to curb unreasonable health-care costs by severing the link between employment and health insurance, and mandating price transparency to an industry that goes to great length to deny consumers real choice over the health-care services they buy.
  • We could force allies like South Korea who devote much less of their GDP to defense to bear more of the cost of shielding them from hostile neighbors.
  • We could make sure corporations pay their fair share of the costs, instead of rewarding them with breaks that have driven corporate taxes as a percentage of GDP to longtime lows.

Or we could continue to pretend that this is all the fault of an avaricious and wasteful government. I think I know how this is going to go.

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