The Return of the Budget Busters

Now it’s getting serious. House Speaker John Boehner warns that he’s won’t sign off on a short-term spending extension to keep the deficit-laden federal government operating. “Read my lips,” he says. “We are going to cut spending.” The budget showdown is here.

The current authority for spending runs through March 4. Between now and then, Congress will either cut spending or come up with a temporary measure to keep the government running. Perhaps a bit of both. Barring a workable outcome, however, a shutdown looms.

That’s unlikely, but the odds aren’t zero either. Let’s call it the risk of brinkmanship. The calendar is helping either. As Jaime Dupree notes,

Congress is off next week, so while the House will approve a stop-gap budget (with billions in budget cuts), the Senate won’t be back until the week of February 28 to deal with it.

And as of right now, it’s not even the first item on the agenda for the 28th.

“The Senate is adjourned until the 28th, at which point we’ll take up the…patent bill,” tweeted a bemused Don Stewart, spokesman for Senate GOP Leader Mitch McConnell (R-KY).

Paul Krugman charges that all the talk about the budget debate is essentially “fraudulent,” asserting,

House Republicans talk big about spending cuts — but focus solely on that same small budget sliver [nonsecurity discretionary spending].

And by proposing sharp spending cuts right away, Republicans aren’t just going where the money isn’t, they’re also going when the money isn’t. Slashing spending while the economy is still deeply depressed is a recipe for slower economic growth, which means lower tax receipts — so any deficit reduction from G.O.P. cuts would be at least partly offset by lower revenue.

The whole budget debate, then, is a sham.

Krugman argues that “if you’re serious about the deficit, you should be willing to consider closing at least part of this gap with higher taxes.” In theory, yes. But that opens the door to the ancient debate about whether we’re in this mess because taxes are too low or spending is too high. We’re not going to resolve that issue here, but a little perspective never hurts. Here’s your fiscal Rorschach test for the day by way of a graph of the historical tax brackets for individuals.

In the end, the government can adjust two levers: revenue and spending. The details are messy, but that’s the playing field once the political dust clears. On that note, one more chart to chew on. The annual change in current federal receipts (blue line) vs. current expenditures (red line) in seasonally adjusted terms recently moved into something approximating an encouraging state. Yes, that’s a drop in an ocean of deficit projections. But at least there’s a hope that if the government can restrain the growth of spending–a massive if–the possibility for some degree of progress in budgetary matters isn’t doomed.

No matter what happens, getting the government’s fiscal house in order is going to be painful, and the problems of red ink willl be with us for years. The real issue is deciding how to dig ourselves out of this hole without shooting ourselves in the head. Cutting the budget when job growth is weak carries risk, but so too does raising taxes. The numbers suggest that some of both will be necessary to make meaningful progress on the deficit. Everybody knows that. The question is how that reality will reveal itself in actual legislative changes.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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