How is the Deficit Like Iraq?

Here is David Wessel of the Wall Street Journal with a comparison of Bush's approaches to the deficit and to the war in Iraq. What would the "Deficit Study Group" say?:

Bush's Course on Budget Parallels Iraq, by David Wessel, WSJ (Free): The numbers in President Bush's budget add up -- arithmetically. If his assumptions come true, the deficit will evaporate in 2012.

But there are a lot of ifs -- if Iraq and Afghanistan cost only $50 billion in 2009 and nothing thereafter; if the president and Congress hold growth in ... domestic spending well below inflation; if they let the alternative minimum tax reach deeper into the middle class or raise taxes on others to prevent that; if Congress squeezes $66 billion (4%) from Medicare over five years.

OK. Give him a break. A presidential budget is an opening bid... But is it sound? If former Republican Treasury Secretary James A. Baker III and former Democratic Rep. Lee Hamilton led a budget commission like their Iraq Study Group, what would they say?

They would hardly need to rewrite their cover letter. "There is no magic formula . . However, there are actions that can be taken to improve the situation and protect American interests," they said in the Iraq report. "Many Americans are dissatisfied, not just with the situation...but with the state of our political debate . . Our country deserves a debate that prizes substance over rhetoric, and a policy that is adequately funded and sustainable."

William Gale of the Brookings Institution think tank -- populated by deficit-fearing Democratic wonks ... has been thinking a lot lately about the parallels between Mr. Bush on Iraq and Mr. Bush on the budget. ...

It is a provocative and illuminating exercise. Let Mr. Gale kick it off: The president took the U.S. into Iraq with "falsely rosy scenarios" about the post-Saddam landscape..., he says. Mr. Bush built his tax cuts in 2001 on a similarly unrealistic hope that the budget surplus was large enough to cut taxes without creating deficits.

Let us keep going. As Iraq proved different and more difficult than anticipated, and contingency planning was regarded by the Bush White House as a sign of weakness, ... Mr. Bush vowed to "stay the course." When then-Treasury Secretary Paul O'Neill and Federal Reserve Chairman Alan Greenspan argued for "triggers" to undo tax cuts if budget reality didn't match projections, the White House scoffed. Even when the Sept. 11, 2001, attacks and the wars in Iraq and Afghanistan drove spending on homeland security and the military far above projections, Mr. Bush didn't revisit his fiscal strategy.

Smart critics, even inside the administration, were disregarded and shunned. (Gen. Eric Shinseki on troops levels in Iraq, Treasury Secretary O'Neill on deficits.) Only true believers remained to give the president advice. Eventually, Mr. Bush changed his team -- hiring new secretaries of defense and Treasury -- but too late to get credit from the public or to forge bipartisan consensus in Congress.

Imagine what might have happened differently had Mr. Bush installed Josh Bolten as chief of staff, Rob Portman as budget director and Hank Paulson as Treasury secretary at the start of his second term, instead of waiting two years. Might the conversation on Mr. Bush's ideas for limiting tax breaks for health insurance be bearing fruit, not just taking shape?

Might overhauling the tax code be a legislative issue instead of the title of another report gathering dust on Treasury bookshelves? ... Might he have a shot at leaving the nation's long-term fiscal health better than he found it, instead of leaving a deeper hole...?

OK. Take a breath. The U.S. economy is not Iraq, and today's headlines are upbeat... But look ahead, and there is an unwelcome parallel between Iraq and the budget. Current policy is unsustainable, but there is no easy way out. Extend the president's tax cuts beyond their scheduled expiration in 2009 and 2010, and the fiscal hole is enormous. Let them expire, and the tax increases could derail the economy.

Messrs. Baker and Hamilton had little apparent effect on the president's Iraq policy. Maybe they would have better luck on economics.

That's doubtful. Two reasons, traditionally, that deficits are a problem are the interest payments that flow out of the U.S. to foreign holders of U.S. debt, a net drain of resources from the U.S., and the rise in interest rates that occurs when the U.S. government competes with private sector borrowers for the available funds in financial markets. The rise in interest rates lowers investment and lowers growth causing, in effect, a transfer from future generations to the present (the deficit spending increases current output at the expense of higher output in the future).

So far, we have avoided rising interest rates due to the inflow of funds from surplus countries in Asia and  OPEC, but the worry is that this could change very quickly if funds from foreign sources begin to dry up for any reason. Should this happen that will also exacerbate the second problem, the flow of interest payment out of the U.S. which has been rising in recent years even without interest rate increases due to the rising share of U.S. debt held outside the U.S. And of course, beyond the effects on the interest payments and the inter-generational transfer of resources, rising interest rates could also cause trouble for the U.S. economy more generally. Unlike Iraq, the deficit is not presently a big problem. But it's hard to deny there are risks going forward.

Comments

[kharris]

Qatar announced today that it will accept euros in payment for natural gas, following similar decisions by Iran, Venezuela and Indonesia concerning oil pricing. Qatar said that decisions to honor requests for invoicing in euros would depend on Qatar's own reserve portfolio needs. Russia today announced a euro-ward shift in its reserve policy, following the UAE and Syria.

[calmo]

I am distracted by the casual, no, recreational, tone of Wessel's remarks which are sprinkled throughout this...piece...perhaps written at Half Time.

OK. Give him a break.
Let Mr. Gale kick it off:
Let us keep going.
OK. Take a breath.

I just can't suspend whateveritwas against such an onslaught of caricature-proof political Quarterbacking.

[James Killus]

Yes, by all means let's imagine a better world with George W. Bush making wise decisions instead of (let's be kind here) behaving like a psychotic gerbil.

Or perhaps we could imagine a world in which someone else won the 2000 election.

[William Smith]

Suddenly I am struck by the thought that any serious attempt to tackle global warming by reduction in our demand for oil might trigger a retaliatory response from OPEC in the form of less capital inflow, and similar response from Asia, particularly China, for any attempt to reduce carbon emissions on a multi-national scale.
Now that would be a serious problem, especially for future generations. Either we pay for it now doubly or force future generations to suffer both consequences of global warming and serious financial chaos.

[Matt]

FYI - Access those Wall Street Journal articles for free with a netpass from: http://news.congoo.com

Andrew Tobias blogged this last week.

[pgl]

I suggest that we lock up Brad DeLong and Andrew Samwick in a room until they come up with a mutually agreeable long-term plan - and then we support whatever these two come out with.

[anne]

Rubbish; Andrew Samwick is a Republican, and every sense that Samwick has is to smash and slash at all Democrats have afforded in social benefit and social insurance programs since the New Deal. Phooey on listening to Samwick. Though some do not seem to have noticed Democrats control Congress, and especially so the House of Representatives and Samwick has lost.

[anne]

The idea that we can all bypass politics for the likes of supposedly non-political technical decision making is nonsense. The New Deal legacy was fought for politically, and will not be set aside other than politically and the setting aside is happily no longer possible. Enough with Republican nonsense.

The Brookings wonks, by the way, the Brookings wonks have done the best they can to drive us to attack Iraq, to drive us to occupy of Iraq, and to drive us to remain in Iraq. Phooey on Brookings wonks.

[anne]

What is Iraq? Iraq is thousand of Americans killed, tens of thousand physically and psychologically wounded, hundreds of thousands of Iraqis dead. Iraq is a nation morally wounded. The budget analogy here is frivilous nonsense, however terrible the material cost of Iraq, though where is mention of the $2 trillion material cost? Where is such mention?

[Movie Guy]

Federal Budget Data

According to OMB, discretionary spending has fallen from 68% in 1962 to 38% in 2006. Meanwhile, mandatory spending increased from 26% to 53%. Interest payments now represent approximately 8.6% of the federal budget whereas interest payments represented 6% in 1962.

Interest payments as a percentage of total federal budget outlays:

FY2006 - 8.52%
FY2007 - 8.58%
FY2008 - 8.99%
FY2009 - 9.18%
FY2010 - 9.216%
FY2011 - 8.99%
FY2012 - 8.78%

The interest payment obligations are based on these projected interest rates:

Fiscal Year ......................2006..2007..2008..2009..2010..2011..2012

Net interest -.................. 227....239.....261....274....281....284....285
Interest rates:
91-day Treasury bills: ...... 4.7%..4.6%..4.4%..4.2%..4.1%..4.1%..4.1%
.. Administraton estimates:.4.7%..4.6%..4.4%..4.2%..4.1%..4.1%..4.1%
..Blue Chip Consensus ...... 4.9%..4.8%..4.7%..4.5%..4.5%..4.6%..4.7%

10-year Treasury notes: ... 5.0%..5.1%..5.2%..5.3%..5.3%..5.3%..5.2%

Federal Government interest payment obligations:

Actual:
FY2006 - $227 billion
Projected:
FY2007 - $239 billion
FY2008 - $261 billion
FY2009 - $274 billion
FY2010 - $281 billion
FY2011 - $284 billion
FY2012 - $285 billion

If the interest rates rise, the mandatory interest payments cut into discretionary spending outlays. Or additional debt will be incurred to make the increased interest payments. In light of the short turnover period of many outstanding Treasuries, this could create major budget problems.

[maria]

Right you are, Anne, in every respect. I get tired of expatiating on the mendacity and depravity, moral and intellectual, of this administration. I just hope to be able to keep hoping until things change in 2008. But will they? You look at the major candidates and despair sets in.

[Movie Guy]

Federal Budget Data

According to OMB, discretionary spending has fallen from 68% in 1962 to 38% in 2006. Meanwhile, mandatory spending increased from 26% to 53%. Interest payments represent approximately 8.6% of the federal budget whereas interest payments represented 6% of the federal budget in 1962.

Interest payments as a percentage of total federal budget outlays:

FY2006 - 8.52%
FY2007 - 8.58%
FY2008 - 8.99%
FY2009 - 9.18%
FY2010 - 9.216%
FY2011 - 8.99%
FY2012 - 8.78%

The interest payment obligations are based on these projected interest rates:

Fiscal Year..........2006..2007..2008..2009..2010..2011..2012

Net interest:........ 227....239.....261....274....281....284....285
Interest rates: %
91-day Treasury bills: ..... 4.7%..4.6..4.4..4.2..4.1..4.1..4.1
..Administraton estimates:.4.7%..4.6..4.4..4.2..4.1..4.1..4.1
..Blue Chip Consensus .... 4.9%..4.8..4.7..4.5..4.5..4.6..4.7

10-year Treasury notes: .. 5.0%..5.1..5.2..5.3..5.3..5.3..5.2

Federal Government interest payment obligations:

FY2006 - $227 billion
FY2007 - $239
FY2008 - $261
FY2009 - $274
FY2010 - $281
FY2011 - $284
FY2012 - $285

If the interest rates rise, the mandatory interest payments cut into discretionary spending outlays. Or additional debt will be incurred to make the increased interest payments. In light of the short turnover period of many outstanding Treasuries, this could create major budget problems.

says...

maria - In the big picture Iraq is nothing. Leave now and in 50 years Iraq will be a topic for grad students discussing failed movements and bad ideas.

[anne]

"In the big picture Iraq is nothing."

Of course, to those Iraqis and Americans who have been killed and suffered so, to those who have loved them, of course, to them Iraq is something and to them Iraq always will have been something, of course. A big enough picture, there, say what? Lunatics worrying about budget this or that, but Iraq is nothing. Iraq is life and death and interminable pain. Big enough?

[anne]

http://www.nytimes.com/2007/02/03/opinion/l03military.html

The Photograph of a Dying Soldier

To the Editor:

I am writing to express my profound disappointment in The New York Times's decision to publish a photograph of a mortally wounded American soldier.

Not only are the photograph and video offensive, the clear depiction is also directly counter to the written agreement made by the reporter and the photographer before publication.

The article that accompanied the photograph and Web site video, " 'Man Down': When One Bullet Alters Everything," by the reporter, Damien Cave, and the photographer, Robert Nickelsberg, was a story of soldiers operating in and around Haifa Street in Baghdad.

This story can and should be told. That is not in question. What is disturbing to me personally and, more important, to the family of the soldier depicted in the photograph and the video, is that the young man who so valiantly gave his life in the service of others was displayed for the entire world to see in the gravest condition and in such a fashion as to elicit horror at its sight.

This photograph will be the last of this man that his family will ever see. Further, it will cause unnecessary worry among the families of other soldiers who fear that the last they see of their loved ones will be in a New York Times photograph lying grievously wounded and dying.

To achieve a mutually agreed upon standard of working together, all reporters and photographers are required to sign the Multinational Forces-Iraq News Media Ground Rules. In it, they agree to the following:

"Media will not be prohibited from covering casualties provided the following conditions are adhered to: (a) Names, video, identifiable written/oral descriptions or identifiable photographs of wounded service member will not be released without the service member's prior written consent."

No such consent was sought or provided.

All of us bear a responsibility to provide for the dignity of our service members in combat. This soldier and his family deserved better.

(Lt. Gen.) Raymond T. Odierno
Cmdr., Multinational Corps-Iraq
Camp Victory, Iraq, Feb. 2, 2007

[Movie Guy]

maria - "maria - In the big picture Iraq is nothing. Leave now and in 50 years Iraq will be a topic for grad students discussing failed movements and bad ideas."

In 50 years, they will be talking about the Sunni-Shia Middle East conflict that lasted for decades. And many of their professors will likely overlook how the radicals were reined in to fight in the region as opposed to waging violence on Westerners and Easterners. They will conveniently forget that little issue.

Iran can't win this fight. It is already beyond that stage.

[anne]

Years and years, we will be talking of the thousands of Americans and hundreds of thousands of Iraqis killed, of the tens of thousands Americans wounded, of the trillions of dollars spent beyond justice, beyond morality, against our democratic heritage, for a fear-driven deception.

[anne]

All that matters is leaving Iraq immediately, and saving lives and limbs and minds and souls and our democratic heritage. There is the picture that will be forever remembered. "Shut the eyes of the dead, not to embarrass anyone," cry the benighted.

[maria]

The USA, a model of generosity.

http://apnews.myway.com/article/20070209/D8N64SDO0.html

Now let's see: how much have we been spending every day or week to kill Iraqis and others? Remind me.

[bakho]

MG makes a very good point. Bush Treasury was able to cut debt service costs significantly by moving to shorter term securities. While it makes sense in the short run, it could add to volatility in debt service costs. OTOH, it puts pressure on the Fed to keep interest rates lower and move in the direction of inflating away the debt.

[bakho]

If we were not running a deficit, where would the additional revenue be collected?

A VAT? Probably not.

Higher top income tax rates? Most likely.

Deficit spending then becomes a transfer payments from future taxpayers to purchasers of T-Bills. In other words, Bush is making future tax payers pay for his tax cuts. By the time the future tax payers complain, Bush will have left office and perhaps those taxpayers will blame someone elese. Bush is the revenge of the "me" generation.

[Movie Guy]

bakho,

Yeah, if they are lucky enough for the interest rates to stay low, they're in good shape.

On the other hand, some of the global players are chasing the Euro right now. Brad Setser covered this again recently.

I have thought that Calculated Risk would drop by and comment, as he has a good grasp of this material. But...

There is a good chance that you're right, they may very well try to inflate their way out. Of course, we as consumers take a hit on that, too.

[johnchx]

The johnchx tax bill:
Direct the IRS to calculate the benefits derived from the Bush tax cuts for each household with an income in the top 5% for each year of the Bush Administration, plus interest. This amount is due and payable at once, though taxpayers may pay over four years (a minimum of 25% of the principal amount per year) with additional interest accruing. In other words, recover the proceeds of the "tax cut" retroactively from the most affluent recipients.
Direct the OMB to calculate the full marginal cost to date (including increased disability and VA benefits) of fighting the Iraq and Afghan wars. Direct the IRS to compute and apply a personal income tax surcharge sufficient to recover the cost to date over the next four years. That is, pay for the war we've already fought.
Direct the OMB to estimate the average expense of fighting the Iraq and Afghan wars for the next four years. Direct the IRS to calculate and apply a personal income tax surcharge sufficient to raise revenues to cover those costs. That is, if we continue to fight the war, we pay for it.

This is really just a beginning. It undoes some of the most egregious finanical management of the Bush years. Actually getting national finances into a sound condition is going to take a lot more, even ignoring Medicare.

[anne]

Nicely done, John Chx.

[Rob Lazarus]

Does anyone know how much of privately held US debt is financed by long term instruments with fixed interest rates? It is obvious that the US must reform entitlement spending and fix the structural budget deficits as quickly as possible to avoid increasingly worrisome economic repercussions. But the US also has many needs requiring necessary investment such as infrastructure, education, homeland security, environmental protection, alternative energy development, etc.

The Chinese and Japanese recognize that in order to keep their economies growing they must rely on US consumers until the Chinese domestic market matures enough to create sufficient demand for their goods and services. Until then, they must continue to lend us enormous sums at ridiculously low interest rates knowing full well that they will be paid back in devalued and inflated dollars. Are they buying long term bonds with fixed interest rates or are most of the bonds they hold inflation protected?

If the debt is not inflation protected, if we reform entitlement spending and if we are borrowing to invest rather than financing tax cuts and consumption, then some monetizing the US debt would be a good thing. In that case, current trade and budget deficits might not be as destructive to the US economic outlook as they appear. If most of the debt purchased by foreign governments and investors is inflation protected, given that their domestic considerations compel them to continue to purchase US debt, is there any means to get them to buy more long term debt at fixed interest rates?

[anne]

"It is obvious that the US must reform entitlement spending and fix the structural budget deficits as quickly as possible to avoid increasingly worrisome economic repercussions."

No; it is decidedly not obvious the Social Security or Medicare spending must be reformed. There is a massive and growing surplus for Social Security, while Medicare spending can be limited by simply allowing drug price negotiation by the agency and in time a minor tax increase. I am not in the least worried about either program, aside from the constant refrain that this or that is obviously wrong with the programs.

[anne]

"If the debt is not inflation protected, if we reform entitlement spending and if we are borrowing to invest rather than financing tax cuts and consumption, then some monetizing the US debt would be a good thing."

No; inflating away the value of bonds would be a bad thing, a very bad thing indeed. Inflating away the value of bonds would raise long term interest rates dramatically, which is the last thing we need for a healthy investment generating economy. As for portfolio management, fairly constant duration portfolios would offer no long term problem for bond investors who would accumulate new bonds at premium interest rates.