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Monday, November 09, 2015

'Budgetary Sleight-of-Hand'

Congress enjoys a "political free lunch," budgetary illusions that make it appear that tax cuts, new spending -- whatever -- will not require cuts in other spending, an increase in taxes, or change the deficit. Ben Bernanke reveals the trickery behind the latest attempt at deception:

Budgetary sleight-of-hand: The House voted Thursday to pay for planned highway construction by drawing on the Federal Reserve’s capital. The idea of using Fed capital to pay for government spending, which comes up periodically, is a bad one, for several reasons. ... More substantively—and this is what I want to focus on in this post—“paying” for highway spending with Fed capital is not paying for it at all in any economically meaningful sense. Rather, this maneuver is a form of budgetary sleight-of-hand that would count funds that are already designated for the Treasury as “new” revenue.

To see why, first note that the Fed, as a side effect of its other activities, is already a major source of revenue for the federal government. The Fed earns interest on its portfolio of securities. This income, less the Fed’s operating expenses and interest paid on Fed liabilities, is sent to the Treasury on a pretty much continuous basis. These remittances are large: Over the past half dozen years the Fed has sent nearly half a trillion dollars to the Treasury, funds which directly reduce the government’s budget deficit. ... The Fed’s capital account provides a buffer that absorbs any losses on the Fed’s portfolio and allows the payments to the Treasury to be smoothed over time.

Unlike the Fed’s remittances, which are real resources whose availability reduces the burden on the taxpayer, drawing down the Fed’s capital provides no net new funding for the government. ...

Legislators who care about the integrity of the budgeting process should not support this budgetary sleight-of-hand.

    Posted by on Monday, November 9, 2015 at 10:40 AM in Budget Deficit, Economics, Monetary Policy, Politics | Permalink  Comments (99)


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