Decade of fiscal stimulus yields nothing but debt
NEW YORK — When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion more freshly authorized by Congress.
Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.
It doesn’t sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That’s one-half of one percent. And it qualifies as a “cut” only in the fanciful world of government accounting.
The Budget Control Act of 2011 will save $917 billion over 10 years relative to the Congressional Budget Office’s baseline. It leaves the tough work to a bipartisan congressional committee of 12, to be appointed by the leadership in each house. If this supercommittee fails to agree on a minimum of $1.2 trillion of additional savings over 10 years, automatic spending cuts — evenly divided between defense and nondefense — will kick in.
Is there any reason to think the same folks who couldn’t agree on a grand bargain this past month will join hands and find commonality in the next three, with one month off for vacation?
Even if the committee agrees on the prescribed savings by Nov. 23 and Congress enacts them by Dec. 23, as required, laws passed today aren’t binding on future congresses.
Throw in the fact that revenue and budget forecasts tend to be overly optimistic, and there’s even less reason to think Congress has put the United States on a sound fiscal path.
In a July 2011 working paper for the National Bureau of Economic Research, Harvard economist Jeffrey Frankel identified a pattern of over-optimism in official forecasts, a bias that gets bigger in outer years. A fixed budget rule, such as the euro area’s Stability and Growth Pact with its mandated deficit-to-GDP ratios, only exacerbates the tendency.
“Political leaders meet their target by adjusting their forecasts rather than by adjusting their policies,” Frankel writes.
The deal hashed out in Washington at the eleventh hour this week does nothing to curb the unsustainable growth of entitlement spending — on programs such as Medicare, Medicaid and Social Security. Medicare outlays have risen 9 percent a year for the last 30 years in a period of stable demographics, according to Steven Wieting, U.S. economist at Citigroup. The automatic spending cuts outlined in the budget act would limit reductions in Medicare expenditures to no more than 2 percent a year.
By the end of 2012 or start of 2013, the federal government will be back at the trough with a request for additional borrowing authority. The debt will keep rising, and the ratio of publicly held debt to GDP will increase from 62 percent last year to as much as 90 percent in 2021, according to some private estimates, depending on what Congress does about the expiring tax cuts, the Medicare “doc fix” and the alternative minimum tax.
The time has come for what former Treasury Secretary Paul O’Neill calls “architectural change.”
The current tax code is burdensome, inefficient and costly to administer. O’Neill says it costs the Treasury an estimated $800 billion annually, divided equally between administrative costs and uncollected revenue.
Caroline Baum, author of “Just What I Said,” is a Bloomberg View column.