Commentary: Budget Pains

Commentary: Budget Pains

BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

It’s been two weeks since the dreaded sequester took effect and we’re still standing. So far, the only casualty of the sequester has been the White House tour.

There actually have been some positives, with both parties presenting budgets—an inexcusable first for the Democrats who so far have been quick to criticize Republican plans but reluctant or unable to produce budgets of their own.

Both the GOP—read: Paul Ryan—budget and the Democratic plan have one major similarity: Each is dead on arrival and destined to be at best, a one-house budget, which leaves the country back where it was.

Well, not exactly. The current fiscal year, which ends in September, is on track to produce an under $1 trillion deficit ($845 billion to be precise, according to the Congressional Budget Office) and marks the second year in a row the deficit has gotten smaller. The deficit was $1.417 trillion in fiscal year 2009, Obama’s first year in office (but the year was three and a half months old when he took office), up from $454.8 billion the year before. In fiscal year 2010, it was $1.294 trillion. In fiscal year 2011, it was $1.299 trillion and then $1.089 trillion in fiscal year 2012.

If the $254 billion year-over-year reduction were to continue, we’d have a balanced budget by fiscal year 2017, the president’s last budget year.

Of course, straight-lining the deficit reduction is overly simplistic, but it does serve as a reminder to Obama critics who complain of his lack of fiscal toughness. Indeed the president was tough, insisting on tax increases that contribute to the deficit reduction. Budgets, after all, are two-sided documents consisting of revenues and expenses. We can either raise the bridge or lower the water, since relying too heavily on either side of the ledger can create a new set of problems.

That, of course, is the rub, and both Democrats and Republicans have been too eager to embrace a meat cleaver approach to a problem which requires something closer to a surgeon’s scalpel.

It is often at times like these, though, that legislators—or at least those elected to sit in the legislature—resort to more grandiose schemes like turning to a “balanced budget amendment” as the solution to the nation’s finances. While a proposal such as separate capital and expense budgets for the federal government (advanced in this space a few weeks back) might be just as theoretical, the balanced budget amendment—just as both the Democratic and Republican budgets—skirt the fundamental issue of what role we want or expect of government.

Budgets, when we get down to it, are political documents. Those who describe President Obama as a “redistributionist” are not wrong because that is what government—Republican or Democratic—budgets do: redistribute resources from one segment of the population to another. The question becomes whether, in the minds of those who give, those who receive should.

Governments are called upon to work in “bad” times, whether the bad times are a disaster (think Katrina or the Joplin tornadoes) or a recession throwing millions of people out of work. Indeed, the counter-cyclical spending in the federal budget—primarily unemployment insurance and food stamps—coupled with reduced tax revenues represented nearly half the increase in the deficit between fiscal year 2008 and fiscal year 2009.

In fiscal year 2005, the fiscal year immediately following and including Katrina aid, the federal emergency management administration spent $24.1 billion, more than twice the $11.8 billion it spent the year before. While some of those dollars may have been wasted (“heck of a job Brownie”), the overall objective was on target: the federal government coming to the rescue of those who need it. That’s no different than what was done in the aftermath of the slower moving but perhaps more devastating “storm” known as the Great Recession.

Getting back on track is equally difficult, but not impossible.

One possible approach is to take small steps. While neither of the competing Democratic and Republican budget plans achieve a balanced budget in the short term, there is an alternative.

The first step would be harsh but perhaps less so: developing a plan to achieve “practical balance”—a balanced budget excluding interest on public debt—in an agreed-upon time frame. In the last fiscal year, the government spent about $454 billion on interest, about 42 percent of the total deficit and about 54 percent of the projected 2013 deficit.

While cutting $454 billion would not itself be easy (though certainly easier than cutting $845 billion), it would at least avoid the awkward situation of going deeper into the hole because of interest payments.

Under the new legislation government credit cards, each credit card statement indicates how much debt we run up by making only the minimum credit card payment each month. Setting a target for practical balance would take the country a step closer—with less pain—toward reducing the deficit while at the same time recognizing the deficit is not the immediate problem.

The week ahead:

Housing numbers will be in the news next week, starting with Monday’s report on builder confidence from the National Association of Home Builders. After reaching a six-plus year high in December, the HMI stalled and then slipped. The consensus forecast sees the index resuming its upward climb in March, but not setting a record.

Single-family housing starts hit their highest level in January since July 2008, a milestone almost lost as multi-family activity dragged starts down. Total starts,reported Tuesday, are expected to recover in February, again dominated by multi-family activity.

Existing-home sales recovered slightly in January, but the real story was a sharp decline in the inventory of homes for sale, which fell to the lowest level since December 1999, with the months’ supply (based in part on the sales rate) at the lowest level since April 2005. The consensus forecast shows a rebound in sales to be reported Thursday, but the range is wide enough to include a further slip.

The Federal Open Market Committee meets this week as well with a new round of economic forecasts to be released following the meeting statement Wednesday.

Hear Mark Lieberman on P.O.T.U.S (Sirius 124) on Fridays at 6:40 a.m. and again 9:40 a.m. EST.

 

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