StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



America Realizes It Likes Federal Spending After All

26 Jun 2012
Posted by Stan Collender

As I explain in my column published in today's Roll Call, the next few months should be a pretty humbling experience for all those on Capital Hill who have been insisting that fedreal spending is the problem and claiming that there's massive support for cutting it.

Americans Are Realizing They Don’t Really Like Cuts

By Stan Collender
Roll Call Contributing Writer
June 26, 2012, Midnight

There’s about to be a big change in the federal budget debate. In the end, the big winner will be the part of the budget that supposedly is so unpopular — federal spending — that a candidate for office this year cannot currently say he or she supports it without risking massive political condemnation and reprisals.

It’s been relatively easy to be anti-spending up to now because the reductions being proposed have mostly been theoretical and weren’t really likely to happen.

They also were mostly discussed in statistical terms that don’t typically strike fear into the hearts of most voters. After all, what does it really mean to reduce federal spending as a percentage of gross domestic product, to keep spending to its historical average or to implement an across-the-board cut?

And if all that has to be done — as some wishful thinkers have repeatedly said — is to eliminate waste, fraud and abuse and you’re sure what you care about doesn’t meet any of those definitions, then cutting federal spending isn’t really that worrisome.

The irony is that this is about to change because of something that spending cut proponents themselves demanded. The sequester — the spending-cut-only alternative they insisted on if the anything-but-super committee failed — that will occur on Jan. 2 is the opposite of most of the plans that have been part of the federal budget debate up to now: It’s in place and will happen unless Congress and the president take some action to prevent it.

And it’s forcing companies, industries and voters to face the reality that the spending cuts could actually occur and, despite what they’ve been saying publicly, that they really don’t want it to happen.

This is not a guess. The military community has been so actively opposing the spending cuts the sequester will impose that you can almost feel the desperation in its rhetoric and tactics. The Aerospace Industry Association has released reports about the economic turmoil and lost jobs the spending reductions will cause and has been at the forefront of what is a highly coordinated public relations and lobbying effort to block the cuts.

The same type of effort is taking place on the domestic side of the budget, with everyone from medical schools to state and local governments to local chambers of commerce organizing to prevent the sequester-imposed reductions that will hit their favorites.

In addition, it’s been clear for months that Federal Reserve Chairman Ben Bernanke is concerned about the economic damage the spending cuts and other policy changes that will occur at the end of 2012 could do to the economy. Bernanke’s concerns have begun to be so frequently echoed that the phrase “fiscal cliff” is now commonly thought of on Wall Street and elsewhere as an economic and financial four-letter word.

Some of the opposition to the spending cuts is not new. Polls have shown for years that while Americans strongly want to cut federal spending when it’s described in general terms, there’s remarkably little support when specific parts of the budget are mentioned.

In fact, with the exception of foreign aid and sometimes NASA, most polls typically show significant and often overwhelming support for at least maintaining the current level of every area of federal activity. There’s also often a great deal of support for Washington, D.C., spending more on specific programs and for certain purposes. This is regardless of whether those being polled are a representative cross-section of voters or those who identify themselves as fiscal conservatives.

The change now is that, in addition to them being more likely to occur than most other spending cuts that have been mentioned in recent years, the reductions that will go into effect because of the sequester are beginning to be seen by diverse groups that don’t always work together as being in their joint interest to oppose.

While defense contractors and their trade associations have been leading the charge against the Pentagon sequester, unions in those industries are also working to stop the spending reductions from happening. In addition, investors with an interest in companies that work with the Pentagon have been expressing their own concerns about the impact of those cuts on the economy, not to mention on the price of their stock.

Add to that the growing worry on Wall Street that the cuts are too big and will occur at the wrong time and polling results that show less support for specific reductions than is assumed, and you get the start of the new federal budget reality that spending cuts aren’t really all that popular.

This is going to put federal spending cut proponents on the defensive in the months ahead as it becomes increasingly obvious that their position is not aligned with a majority of the country. It will be a humbling experience for many of those who have been so sure of themselves on this issue that they insisted on a spending-cut-only sequester that caused the change.

It might help if the public

It might help if the public understood that we aren't spending too much, our income taxes are simply too low. From 1945 to 1980 income taxes averaged near 12% of GDP. Reagan reduced marginal tax rates so much that they fell close to 9%. Clinton increase them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses have remained 12%(+/-1%)) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. But, not only can we no longer continue to borrow from the trust funds, we have to start paying money back as beneficiaries start relying on the trust funds. In the short term, we have to raise income taxes to 12%, simply to cover on budget expenses. In the long term, income taxes must rise above 12% in order to pay back the trust funds.


And the typical Fox watcher

And the typical Fox watcher says you've just proved why we need to cut spending.

P.S. Captcha just gave me Toureg as my mystery word. So that's where VW gets the names.


Paying back the trust fund

Couple of points: first, the SS trust funds are just an accounting technique--in reality they don't exist. That is, it wouldn't affect anything at all if we simply abolished the trust fund and started paying SS benefits out of general revenues. So it doesn't make much sense to talk about paying back the trust funds--this is simply a matter of how we label different streams of revenue and spending.

On a broader point, however, it is worth noting that your assertion that we will eventually need above average tax rates to pay down the debt is not generally correct. If the interest rate we pay on the debt is less than (or equal to) the growth rate in the economy, then we never have to pay back any of the debt at all--the debt will shrink as a percentage of GDP as long as we balance the budget. In fact, if the interest rate is less than the growth rate of the economy (and it is) we can actually continue to run modest deficits and still watch the debt shrink as a percent of GDP.

To sum up, the debt is only a problem if interest rates go way up. This is happening to a number of countries tied to the Eurodollar, such as Spain and Greece, but not to any country that has full fiscal and monetary independence such as the US, Japan, and UK.


The irony is that I'd guess

The irony is that I'd guess the yutzes who came up with the sequester plan didn't think ahead to it actually coming into play--they figured that having it hang over the heads of the Great and Powerful Committee of Oz like a sword of Damocles would cause the committee to produce something. Now they have caught themselves in their own trap.


Leadership

Well, congress people ran for office to be in a position to make hard calls balancing limited resources. If they don't think that is their job, then we should directly vote on legislation rather than through our representatives, and save the money we spend on them. It might also be harder to lobby hundred of thousands of individuals than a single congressperson, since it is impossible to offer sinecures to all the voters in a district.

I would cut the military 50% without blinking if I were in those representatives chairs.


spending

I agree, Stan. When we disaggregate, we all become like rent seeking trade associations, labor unions, charities. The politicians, from both parties, are at pains to persuade us that it's other peoples' money, not our own. Public Choice claims we seek focused benefits and socialized costs.




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