July 12, 2011

Further reflections on the budget morass

(Click on graph to open in separate window.) I found yesterday's exercise in going through the fine-grained detail of the budget negotiations somewhat head-clearing, and, after all, isn't it the duty of an American to apprise himself of the actual data as an act of informed citizenship? So much of the daily blather I read and hear about the debt ceiling impasse seems political and "qualitative." Liberal Keynesians such as Paul Krugman and Brad DeLong urge, without doing the basic number-crunching for us, that the government simply borrow and spend more in order to "spur a recovery." For them it's all so obvious. At the other extreme we have the Congressional Tea Party Caucus taking blood oaths and signing mutual suicide pacts assuring that no member will ever vote to raise the debt ceiling.

The above graph is from the research facilities of the St. Louis Federal Reserve Bank (FRED), which maintains all kinds of basic data on the U.S. economy. It's not as if you can't look this stuff up and see for yourself; it's all there. The above graph, of course, misleads by extending the "receipts" figure into years beyond the current fiscal year ending on September 30, and implies that tax revenue will approach $2.4 trillion. The government and its agencies just can't help themselves. Their sinecures depend on sunny optimism. But leaving aside the projection into the unknown, you can see where we've been with a great deal of accuracy.

The graph tells you that the United States has never, in its history, received more than about $2.7 trillion in revenue from all sources, and of course even this number is infected with the usual "on budget/off budget" malarkey, the contribution from phantom trust funds, and the rest. It's not a "quiet" number; it's noisy, as usual. However, let's call it close enough for government work. The maximum number earned in the best of times, in other words, is about $1 trillion less than current federal expenditures.

The surge in income during the early years of the Bush Administration was attributable, obviously, to the housing bubble. The temporary wealth effect of the housing boom pumped a lot of additional money into the American economy. This has been quantified in other studies, and we know that at the peak of the boom (around 2005 or so), as much as $800 billion in additional spending was made possible through the phenomenon of house-as-ATM. This was more money (as direct spending, as opposed to tax breaks) than the federal stimulus program known as ARRA, and it was happening on a yearly basis. Further, the bubble bolstered construction employment and jobs in the financial end of real estate.

That's all over and done with. The dragging effects of the huge debts remain, but the stimulative effects are gone. With high unemployment, falling wages and working hours, a stagnant labor participation rate, and unconscionable skewing of wealth toward the wealthier strata (resulting in the lower half of the American population paying no income tax at all, while the upper 10% pay more than half), the prospects for increased federal government revenue in the near term are very dismal indeed, despite that hopeful little tail upward at the end of the FRED graph (it should really be extended horizontally to take into effect the decrease in FICA taxes which our government, in its moronic way, granted the citizenry at the end of last year in an effort to buy our love).

There are no bubbles on the horizon, not the tech and dot.com boom of the Clinton years nor the housing bubble of the Bush years. No gimmicks, in other words. Congress, meanwhile, as a wholly-owned subsidiary of Big Business, is not going to increase taxes on higher-strata earners, not even to the Clinton-era level of 39.6% as the top marginal rate. It would not solve the problems the U.S. government faces even if Congress took such a measure. Defense could be radically cut, but this entails the problems of "military Keynesianism;" war is a big industry in this country, a major employer, and one of our principal exports. Bombs, planes, missiles, armored vehicles, firearms - we make 'em all, and we sell them all over the world. Defense is the most vested of vested interests. Still, defense will have to be cut substantially, but even cutting it in half does not solve the problems of a $1.5 trillion annual deficit. It won't happen this year, of course; finances will have to get much worse before Congress gets that desperate.

My surmise is that Congress will, in fact, raise the debt ceiling and resume borrowing large sums of money to keep the game going. I base this idea on the simple formula of C. Wright Mills, that those in power always make decisions designed to maintain their power, and if the government defunds itself, it loses power. So various weasel techniques will be used to justify the capitulation to reality, but they have no choice. It's borrow or die. The government simply does not earn enough money to come close to paying its own way. As long as the Treasury can borrow cheap, it will continue to borrow as much as it can, and the national debt will ratchet its way toward $15 trillion, $20 trillion, whatever number the world will allow.

The alternative, after all, is to face reality, and that is just not an "exceptional" thing to do.

No comments:

Post a Comment