Tuesday, February 10, 2009

Trillion dollar deficits -- PART 3

My big fear is that Congress is going to ruin the currency…ULTRACON.

A version of the following article appeared at FrontPageMagazine on 2/11/2009 under the title Overstimulation. This is the longer unedited version:

Stimulating Ourselves to Death
By Jon N. Hall
February 9, 2009

When Democrats campaigned to retake Congress in 2006, they ran on PAYGO.

PAYGO (pay-as-you-go) is a commitment to not expand the federal budget deficit. With PAYGO, spending for new programs would be “deficit-neutral”, as it would be offset by cuts elsewhere in the budget. Nancy Pelosi said she was committed to PAYGO and wanted PAYGO to be “the law of the land”.

Fiscal 2007 began October 1, 2006, when the Republicans were still the majority. The federal budget deficit for FY 2007 was $162 Billion. The Democrats have been in control of the budget for the last 2 fiscal years, and the deficit for FY 2009 is now estimated to hit $1.2 Trillion.

So whatever happened to PAYGO? Unfortunately, PAYGO seems to be dead.

When the dimensions of the financial crisis became apparent in September 2008, pundits opined that the Democrats’ plans for universal health-care and other new programs would need to be shelved; there just wasn’t any money for new spending.

But now the Democrat Congress tells America that the economy needs a “jolt”, a “jumpstart”: a stimulus bill entailing massive deficit spending.

At a conference for House Democrats on February 5, President Obama mocked those who differed with him on the stimulus bill:

"So then you get the argument, 'well, this is not a stimulus bill, this is a spending bill.'…[dramatic pause]…What do you think a stimulus is? That's the whole point," Obama said to laughter.
OK, but if deficit spending is a part of government stimulus, then America has been getting stimulated since 1930. The most generous accounting for the federal budget (the “unified budget”) shows that Congress produced 12 balanced budgets in those 79 years: There were 3 immediately after World War II; 4 in the 1950s; FY 1969; and 4 during the recent bubble economy, FY 1998 through 2001.

So during the last 40 years Congress has stimulated us for 90% of the time [1].

Democrats are fond of telling us that the national debt doubled during the last 8 years. Since the debt is now more than $10 Trillion, that would mean that Congress has done $5 Trillion worth of stimulus in just the last 8 years. Obviously, the stimulus of the last 8 years didn’t prevent the financial crisis. So, is stimulus really the cure for what ails us? Can we really just spend our way out of this recession?

Despite the nearly constant stimulus of the $Trillions they’ve been injecting into America for lo these many years, Congress says it wasn’t nearly enough, we need more. Before we plunge into this brave new world of Trillion dollar deficits “for years to come”, we might do well to remind ourselves how we came to our sorry state.

Debt—by government, business, and households—is what got us into this mess. So it seems counter-intuitive to think that debt is what will get us out of it. But NYTimes columnist Bob Herbert assures us: “There is broad agreement that we have no choice but to go much more deeply into debt to jump-start the economy.”

“No choice”, you say? But what if the “received wisdom” is wrong? What if the various stimuli don’t work and all we end up doing is adding Trillions to the national debt without solving the underlying problem? Perhaps one problem is that Congress and all the gurus aren’t addressing the real problem.

Perhaps stimulus itself is the real problem. America is already over-stimulated. And over-leveraged, over-stored, overbuilt and over-extended. Perhaps the only thing we have to fear is stimulus itself. Stimulus is debt. Debt is bad. We need to stop borrowing so much.

And the folks understand this instinctively. They’re pulling back, cinching up their belts. Many used their stimulus checks last year not to stimulate the economy by buying things but to pay down debt. Or, they just saved it. American households seem to be embracing the “Old Verities” of thrift, postponement of gratification, living within one’s means, self-denial, caution, and, yes, pay-as-you-go.

But Congress says that’s all wrong: We’ve got to spend more; we’ve got to take out more loans; the credit must flow. The folks are trying to go “cold turkey”, but their enablers in Congress are buying them shots of stimulus with money borrowed from the grandkids. Congress is borrowing to stimulate more borrowing.

There are some who say Congress should forget the stimulus bill, and just do nothing. The “do nothing” position is that the economy will right itself—if we just let it. And this would have especial merit if the recession ends before the stimulus starts trickling down into the economy. Indeed, much of the stimulus doesn’t kick in until the out-years. Then there’s the question of whether the items in the stimulus bill are even stimulative. It’s hard to stimulate something that’s already over-stimulated; the patient is building up a resistance to the medication.

If Congress must “do something”, why not lower the payroll tax? That would provide immediate relief. How about lowering the corporate income tax rate? America has the second highest corporate tax rate in the world. How about creating incentives for manufacturers to move back home? If Congress wants to get citizens working again, how about repatriating a few million illegal aliens?

After attending the forum at Davos last week, Harvard’s Niall Ferguson writes:

The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments currently propose to do.
Ferguson’s solutions provide the counterpoint to Bob Herbert’s “broad agreement”. And he actually tackles the problem that started the crisis: mortgages.

Is there any hope for the resurrection of PAYGO?

PAYGO was a sham from the get-go. Democrats, you see, don’t cut spending. Of the 12 surpluses since 1930, only those for FY 1947, 1948 and 1960 coincide with cuts in “discretionary” spending. This year’s estimated deficit of $1.2 Trillion together with the $819 Billion stimulus bill is more than ALL federal spending for as late as FY 2002. With stimulus bills and bailouts still to be decided on, it remains to be seen if this year’s deficit will end up being 10 times what the Democrats inherited just 2 years ago.

“Uncharted waters” does not begin to do justice to where Congress is taking us.

Jon N. Hall is a programmer/analyst from Kansas City.

[1] To confirm my figures, check out the latest budget history from the feds, toggle Bookmarks on the left and click on the third item: Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (–): 1789–2013. You’ll be on page 25 of Adobe Acrobat, but page 21 of the document itself. (Dial-up users: This 342-page PDF is almost 2.5 megabytes and might take 5+ minutes to download.)


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