Tuesday, January 15, 2013

The next fiscal battle (Part IV)

Here we go with what I hope will be the last installment on the budget war coming up next month:

If nothing else, I’ve been trying at least to convince you that cutting the federal budget is nowhere near as simple a task as slicing a few hundred billion dollars off defense or transfer payment spending — or at least, not if you want to do it right — and that doing it in the middle of a weak, uncertain recovery has insidious potential for pushing us into another, more severe recession.  But yes, we have to start paying on the national debt; it’s poor stewardship to allow debts to go unpaid when you have the funds to start paying them off.  If you don’t have the funds, then you strip off non-essentials until you do.

There’s the rub: What spending is essential, and what spending isn’t? 

Because the transfer of wealth from the top to the bottom isn’t intrinsically or necessarily a government function, it doesn’t follow that for the government to do so is wrong, or that it can’t be done on a limited, even ad hoc basis.  That’s not consequentialism; that’s simply asserting that the Austrian school is wrong: capitalism doesn’t need an absolute right of property to thrive.  The common defense, on the other hand, is not only a necessary and intrinsic function of government but one of the reasons we junked the Continental Congress in favor of our Constitutional government: the Continental Congress simply couldn’t collect any taxes the states didn’t want to pay, so they couldn’t pay either the Army or the Navy.

Nevertheless, it’s true that these two categories, put together, transfer payments and defense make up most of the budget.  Since 1959, they have never comprised less than 74.97% of current federal expenditures; as of July 2012, they were 85.9%, the highest they’ve been in twenty-five years.  The other 14.1% is worth $538.1 billion, which is still a lot of money … but it’s only 20.14% of $2.671 trillion dollars in current federal receipts.

So let’s say we reduce total expenditures to 75% of receipts ($2.0334T), subtract out that first $538.1 billion, and divide the rest proportionally between defense and safety-net spending.  That leaves us with $366.3 billion for defense and $1.099 trillion for transfer payments — cuts of 56.11% and 54.21% respectively — leaving a $667.6 billion principal payment on the national debt; the “other” expenditures includes interest payments.  What would that do?

  • For starters, it would hit the food and healthcare industries with a drop of $1.3 trillion dollars’ revenue — almost 20 times the property damage done by Hurricane Sandy, a little over 10 times the total damage done by Hurricane Katrina.  Of course, since we’re talking about the entire US rather than just a small region, the damage would be socialized more, but it would still be a punch in the gut.  We’d also be talking about a loss of housing payments that would put quite a few more loans in default.
  • The damage to the defense-related industry would be proportional: $468.2 billion in lost revenue, not just to weapons manufacturers but to petroleum companies, electronics, textiles, food, automotive, education, etc.  Plus, some of that lost government money would be reflected in personnel reductions, meaning further lost consumption, further loan defaults.

But wait!  It gets better:

  • Speaking of banks: All funds eventually come from or go into banks, in the financial circle of life.  At the same time that $667.6 billion worth of loans would be retired without being replaced, the banks would also lose the full amount of the spending cut — that’s $667.6 billion plus the $1.089 trillion we were in the red last year, a total of $1.755 trillion dollars — in checkable deposits and government bonds.  In the peculiar way that banks work, that would mean at least $8 trillion that would not be available for capital investments, home mortgages, cars, shoes, ships or sealing wax — the required reserves would not be there.  More jobs lost or not created; less consumption; more defaults. Can you say “deflationary spiral”?
  • How many people would be thrown out of work?  I don’t have the data or the background to give a confident estimate.  However, we’re talking about hundreds of thousands of jobs lost at the same time that other people are having their transfer payments cut or taken away for various reasons.  The human toll would go beyond “catastrophic”.  As a working title, we could call it the Mother of All Depressions.

On the bright side, it would reduce the national debt to about — what, $15.8 trillion (as of this writing)?

The “fiscal cliff” cuts are much less — $1.2 trillion spread out over ten years as opposed to $1.8 trillion right away.  If, however, we treated the national debt as if it were a consumer debt consolidation loan, capped the debt at $16.45T and negotiated a flat rate of 4% over the next 100 years, the first payment would be the last; it would effectively nuke our economy … and probably every other economy tied to ours.

Is that what we need — economic free-fall?  A deflationary spiral would take care of a lot of problems, such as the widening wealth gap, the rapidly-increasing cost of higher education and out-of-control healthcare costs.  However, it would come with a frightening price tag of lives, homes, families and legacies lost, along with social turmoil of near-global proportions.  The national debt isn’t that analogous to a personal loan.

What’s needed — and what Congress should be working on — is more of a “controlled stop”, reducing the increase of spending to less than the increase of tax receipts, the latter growth driven by GDP rather than marginal tax increases, until the two lines cross and we achieve budget surplus territory.[*]  Instead of a slash-and-burn approach to entitlement and defense cuts, Congress should carefully prune, seeking expert management help to reduce redundancy, waste and fraud. 

Whether Congress is truly capable of that, I don’t know, especially in the current atmosphere of increasingly mulish and obstructive refusal to find common ground.  I know it won’t appeal to some people (*cough* Pat Archbold! *cough*), since we’re still talking decades to pay the national debt down.  Hell, I don’t like it either!

What I do know is this: if to run up a massive debt in the name of helping the unfortunate is consequentialism, then so is devastating the nation, and potentially the First World, in the name of a balanced budget.  If we’re gonna do this, let’s do it right.

*          *          *

Please, God, don’t let anyone bring up economics for a couple months or so.


[*] We may need further increases anyway.  The last fifty or sixty years of marginal tax changes on the top bracket hasn’t shown any real impact on job creation, as that is more affected by corporate tax, a separate beast.