As China tops US as #1 goods-trading nation....
CBO's latest budget projections are scary....
But do not believe CBO's projections are likely to be correct; they are rosy scenarios, given that the past five years have been America's worst 5-year period since the Great Depression. They assume 1.4 percent GDP growth in 2013 (possible), followed by an average of 3.6 percent for the next 9 years (a pipe dream, barring a miracle). This assumes, the WSJ editors note, that tax revenues will rise more rapidly than historical levels over the past four decades:
The budget shop does say the revenues will be rolling in. CBO predicts that tax receipts will soar by roughly 25% over the next three years with higher tax rates. As a share of the economy, revenue will increase from 15.8% last year to nearly 17% in fiscal 2013 to 18% in 2014 and 19.1% in 2015 and then stay near that level—which is more than a percentage point higher than the four-decade average of 17.9%.
All of this is based on CBO's typically static analysis that tax rates won't change investor behavior or economic growth, which is almost certainly false. The budget gnomes say the economy will expand by 1.4% in 2013 and 3.6% on average after that. But every year since 2009 CBO has predicted that a new burst of growth is just a year or two away. Perhaps the Panglosses should revisit their optimism as the new taxes corrode work and investment incentives.
SO: Do YOU believe in the Tooth Fairy?
To be fair, CBO is an honest agency that tries to split things down the middle. But CBO personnel are--surprise!--fallible human beings. And they must make policy assumptions dictated by their Congressional overseers--which are driven by felt political necessities, not economic realism. Thus no budget projection more than a year out is worth a bet with coin of the realm (however depreciated).
The numbers could easily be far worse, and could then add several trillion to the national debt. Also germane is the huge concentration of assets in troubled megabanks, which, George Will argues, should be broken up so that there are no "too big to fail" (TBTF) banks:
In a sense, TBTF began under Ronald Reagan with the 1984 rescue of Continental Illinois, then the seventh-largest bank. In 2011, the four biggest U.S. banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo) had 40 percent of all federally insured deposits. Today, the 5,500 community banks have 12 percent of the banking industry’s assets. The 12 banks with $250 billion to $2.3 trillion in assets total 69 percent. The 20 largest banks’ assets total 84.5 percent of the nation’s gross domestic product.
Such banks have become bigger, relative to the economy, since the financial crisis began, and they are not the only economic entities to do so. Last year, the Economist reported that in the past 15 years the combined assets of the 50 largest U.S. companies had risen from around 70 percent of GDP to around 130 percent. And banks are not the only entities designated TBTF because they are “systemically important.” General Motors supposedly required a bailout because a chain of parts suppliers might have failed with it.
But this just means that the pernicious practice of socializing losses while keeping profits private is not quarantined in the financial sector.
As banks metastasize, whatever scale economies arise can be more than offset by managerial scale diseconomies--in lay terms, the enterprises become too complex to manage well. The result is that unsound practices escape scrutiny and decisions are made poorly. Put simly, in Will's view (mine also), TBTF is TBTM--too big to manage. And thus such banks are too big to exist.
Which is why the GOP is well-advised to take Charles Krauthammer's sage advice: call the president's "sequester" bluff. CK notes that the president himself proposed the $1.2 TR sequester in July 2011 during the debt ceiling negotiations: $600B each to be cut from domestic & defense spending; (b) the president already got his tax hike--$600B; (c) the president wants not tax reform--trading lower rates for closing loopholes--but closing loopholes alone, which is another tax hike; (4) at $16 TR national debt (actually, already at $16.5 TR) spending cuts are essential. Trading lower tax rates for fewer loopholes is (h/t CK) exactly what the White House once called for. Now, the president threatens to use the "Washington Monument ploy"--cutting federal spending where voters will feel the most pain, to enrage them & generate voter backlash.
CK notes that the lever of "automaticity" gave Obama the decisive edge in the end-2012 fiscal cliff negotiations, because taxes would have gone up far more had the Bush tax cuts not been renewed. This time, CK writes, "automaticity" gives the GOP the edge, as spending cuts go into effect if nothing is done. It is the only way to make Obama accept domestic spending cuts. Yes, CK adds, the defense spending cuts are awful. But there is no way to get us on the road to fiscal sanity without accepting them.
To which I would add the president, after all, has (incredibly) stated that we do not have a spending problem. In his view government only has revenue problems. Re defense sequestration cuts, he will force America to retreat anyway, and absent a sequester will likely exact bigger cuts from defense to preserve the domestic welfare state he is assiduously expanding even as Uncle Sam sinks deeper into the red ink.
Another anti-Obama policy weapon is newly unsheathed: state governments evading ObamaCare rules. They are turning full-time employees into part-timers, or simply cutting staff, to get below ObamaCare's 30-full-time employee trigger.
Nor does the president share the public's concern with unemployment, as he focuses on guns & immigration, whilst letting his jobs council go out of business after 4 meetings its first year & none the second. In the linked article, Byron York cites the results of a major study on the social impact of protracted unemployment:
In "Diminished Lives and Futures: A Portrait of America in the Great Recession Era," the Rutgers researchers found the impact of unemployment reaches far beyond today's jobless rate of 7.9 percent. A much larger number -- 23 percent of those surveyed -- have lost a full- or part-time job in the last four years. An additional 11 percent who have not lost a job said someone in their immediate family had. "Together, the data indicate one-third of American households -- approximately 39 million -- lost work as a result of the recession during the past four years," the report concludes.
The researchers found that an additional 26 percent had an extended-family member -- parent, cousin, aunt or uncle -- who had lost a job in the last four years. Still others reported having an unemployed close friend. Add them all together, and nearly everyone has been affected. "What we showed is that unemployment and what happened in the recession are society-wide experiences," says Rutgers professor Carl Van Horn, a co-author of the report.
Put simply, President Obama's core agenda is, after all, not solvency but transformation of America into: (a) a paradise of corporatist partnership with private business in which government is the senior partner in deciding allocation of capital; & (b) socialist redistribution of private wealth in which the government allocates benefits among competing societal groups.
Thus the GOP must continue to insist that future budget decisions be made via the normal budget process--which last was done, CK drily notes, before Apple's first iPad. Make the Democrats go on public record for any tax increases they desire, with the GOP declining to follow suit. Let Democrats own them. The GOP should instead press for tax reform, and pass same in the House--knowing full well that Harry Reid's Senate will bury them. The party lines would be clearly drawn for voters come 2014.
Bottom Line. Place not your faith in budget seers, however sincere. Nor place any faith in the president's promise of domestic spending cuts. They will be made, if at all, through the sequester.
Letter from the Capitol, LFTC, Economy, Conservative Politics