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April 25, 2005

Why Oh Why Are We Ruled by These Fools? (Yet Another Bush Budget Edition)

Howard Gleickman of Business Week watches the clown show:

Washington's Deficit Plan? Nada: By Howard Gleckman: Waiting for Washington to get the deficit under control? Pull up a chair and relax. It's going to be a while. Despite annual deficits that are approaching $400 billion -- and that will explode as the baby boomers begin to retire over the next decade -- Washington seems unwilling to take action. There are only two solutions: raising taxes or cutting spending. Lawmakers will do neither.

Despite their brave talk about the need to control the red ink, President George W. Bush and Congress are marching in the opposite direction. At Bush's urging, lawmakers are about to approve an additional $80 billion to fund the war in Iraq for 2005. The House has voted to repeal permanently the estate tax -- at a staggering 10-year cost of nearly $1 trillion. Congress is abandoning a White House request to trim farm subsidies, and lawmakers are balking at modest cuts in Medicaid.... You don't need a green eyeshade to understand the long-range problem. Today, as a percentage of the economy, federal tax revenues are at 50-year lows -- only about 16% of gross domestic product. But spending is humming along at 20% of national output.

And that's just the beginning of the problem. As the boomers age, three government programs -- Social Security, Medicare, and Medicaid -- will suck up a mind-boggling chunk of the income the nation produces. In just two decades, those programs alone will eat up every dollar of anticipated tax revenues.... Even Federal Reserve Chairman Alan Greenspan, who gave the green light to big deficits in early 2001 when he put his stamp of approval on Bush's tax cuts, told the Senate Budget Committee on Apr. 21 that the budget is "on an unsustainable path."

For a good description of the mess, as well as some solutions, take a look at a new Brookings Institution study called Restoring Fiscal Sanity 2005.... Medicare is off the table for now because both parties are leery of touching it. Social Security reform is explicitly exempted from the budget debate, and any overhaul Congress agrees on is likely to add to the deficit. That leaves Medicaid. The budget agreement has been stalled by a battle over how much to trim the joint state/federal health program for the poor. Bush and the House want to trim $20 billion from planned Medicaid spending over five years -- about a 2% reduction. But the Senate has balked. If lawmakers agree at all, they'll split the difference at roughly $10 billion. But that would be far from enough to reduce deficits... the House and Senate... [will] cut [taxes] by at least $70 billion over the next five years -- mostly by extending the 15% rate on capital gains and dividends through 2010. Plus, if they reach a deal on the estate tax -- which would be passed outside of the budget framework -- deficits will explode....

The biggest problem by far remains taxes. Earlier this year deficit hawks such as Senate Budget Committee Chairman Judd Gregg (R-N.H.) were willing to combine spending reductions with a freeze on new tax cuts. But they were overruled by the White House.... Democrats won't cut their favorite programs while seeing ever more tax cuts. Even GOP strategists concede that deficit reduction will go nowhere unless tax hikes are in the mix. Trying to eliminate deficits on the spending side alone is "completely insane," says Ron Haskins, a senior fellow at the Brookings Institution and former House GOP aide.... [T]here's no reason to believe serious deficit reduction will be on the table for the rest of the Bush Presidency.

Posted by DeLong at April 25, 2005 02:34 PM