Robert J. Samuelson: The looming US budget crisis

Robert J. Samuelson, a journalist who takes his duty to objectivity so seriously that he refuses to vote  in any elections, has a must-read piece on the looming US budget crisis. Some gleanings:

When historians recount the momentous events of recent weeks, they will note a curious coincidence. On March 15, Moody’s Investors Service — the bond rating agency — published a paper warning that the exploding U.S. government debt could cause a downgrade of Treasury bonds. Just six days later, the House of Representatives passed President Obama’s health-care legislation costing $900 billion or so over a decade and worsening an already-bleak budget outlook.[…]

Let’s be clear. A “budget crisis” is not some minor accounting exercise. It’s a wrenching political, social and economic upheaval. Large deficits and rising debt — the accumulation of past deficits — spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.

Greece is experiencing such a crisis. Until recently, conventional wisdom held that only developing countries — managed ineptly — were candidates for true budget crises. No more. Most wealthy societies with aging populations, including the United States, face big gaps between their spending promises and their tax bases. No one in Congress could be unaware of this.

Two weeks before the House vote, the Congressional Budget Office released its estimate of Obama’s budget, including its health-care program. From 2011 to 2020, the cumulative deficit is almost $10 trillion. Adding 2009 and 2010, the total rises to $12.7 trillion. In 2020, the projected annual deficit is $1.25 trillion, equal to 5.6 percent of the economy (gross domestic product). That assumes economic recovery, with unemployment at 5 percent. Spending is almost 30 percent higher than taxes. Total debt held by the public rises from 40 percent of GDP in 2008 to 90 percent in 2020, close to its post-World War II peak.

To criticisms, Obama supporters make two arguments. First, the CBO says the plan reduces the deficit by $143 billion over a decade. Second, the legislation contains measures (an expert panel to curb Medicare spending, emphasis on “comparative effectiveness research”) to control health spending. These rejoinders are self-serving and unconvincing.

Suppose the CBO estimate is correct. So? The $143 billion saving is about 1 percent of the projected $12.7 trillion deficit from 2009 to 2020. If the administration has $1 trillion or so of spending cuts and tax increases over a decade, all these monies should first cover existing deficits — not finance new spending. Obama’s behavior resembles a highly indebted family’s taking an expensive round-the-world trip because it claims to have found ways to pay for it. It’s self-indulgent and reckless.

But the CBO estimate is misleading, because it must embody the law’s many unrealistic assumptions and gimmicks. Benefits are phased in “so that the first 10 years of [higher] revenue would be used to pay for only six years of spending” increases, a former CBO director, Douglas Holtz-Eakin, wrote in the New York Times on March 20. Holtz-Eakin also noted the $70 billion of premiums for a new program of long-term care that reduce present deficits but will be paid out in benefits later. Then there’s the “doc fix” — higher Medicare reimbursements under separate legislation that would cost about $200 billion over a decade.[…]

So Obama is flirting with a future budget crisis. Moody’s emphasizes two warning signs: rising debt and loss of confidence that government will deal with it. Obama fulfills both. The parallels with the recent financial crisis are striking. Bankers and rating agencies engaged in wishful thinking to rationalize self-interest. Obama does the same. No one can tell when or whether a crisis will come. There is no magic tipping point. But Obama is raising the chances.

Zombie: A tale of two rallies

My blog-ancestor compares the faces of Tea Party and far-left rallies. , and finds a stark “right”-“left” divide. It’s a study in opposites in every respect (political and social), really — but not in the way the legacy media would let you believe. Go and see for yourself.

Zombie, who made a career out of chronicling the insanity of the extremist left and of the “useful idiots” of Islamofascism,  states not to be affiliated with either the right or the left: in practice, judging from online writings, Zombie is a small-l libertarian who opposes both social conservatism and liberal nanny-statism. (S)he also holds up a mocking mirror to political lunacy and intellectual dishonesty: it is however most often the “left” which finds itself skewered, not only because there is so much more loonbattery on today’s “left”,  but also because Zombie is located in one of its hotbeds. The blogosphere would be much poorer without him/her.

Passover video: Metallica, “Creeping Death”

What I am doing (re)posting a Metallica video in honor of Passover? Well, in the Seder we remember, among many events, the Ten Plagues of Egypt that led Pharaoh to let our people go.

The Tenth Plague is of course the death of the firstborn sons (makkat bekhorot – plague of the firstborn – in Hebrew).  See Parashat Bo (Exodus 10:1–13:16) for the Biblical narrative.

This is the subject matter of one of Metallica’s signature songs, “Creeping Death”, from Ride the Lightning. The band wrote the song (with which they often opened concerts) after viewing the movie “The Ten Commandments”.

Several people on YouTube have combined  edited footage from the movie with the audio from the studio track. Here are two examples:

Happy Passover

Chag cheruteinu kasher ve’sameach

Next year in Jerusalem!

Apropos video: Pink Floyd, “Sorrow”

This mournful Pink Floyd tune is very much apropos current events. I’ve always had a soft spot for David Gilmour’s lead guitar playing — while he would never win a shredding contest with the likes of Malmsteen or Steve Vai, his silvery sound simply oozes emotion without ever becoming sentimental. 9Now of you want both the shredding and the feeling, Dream Theater’s John Petrucci is your man.)

Studio version with some psychedelic  imagery:

Live version from “Pulse”: David’s vocals sound tired, but his lead playing on the outro has some neat twists

… awakes to a morning, with no reason for waking…

… and silence that speaks so much louder than words, of promises broken…

Krauthammer: VAT is coming

Charles Krauthammer: The VAT is coming  [Read the whole thing]

OBAMA KNOWS that the debt bomb is looming, that Moody’s is warning that the Treasury’s AAA rating is in jeopardy, that we are headed for a run on the dollar and/or hyperinflation if nothing is done.

Hence his deficit reduction commission. It will report (surprise!) after the November elections.

What will it recommend? What can it recommend?

Sure, Social Security can be trimmed by raising the retirement age, introducing means testing and changing the indexing formula from wage growth to price inflation.

But this won’t be nearly enough. As Obama has repeatedly insisted, the real money is in health care costs – which are now locked in place by the new Obamacare mandates.

That’s where the value-added tax comes in. For the politician, it has the virtue of expediency: People are used to sales taxes, and this one produces a river of revenue. Every 1 percent of VAT would yield up to $1 trillion a decade (depending on what you exclude – if you exempt food, for example, the yield would be more like $900b.).

It’s the ultimate cash cow. Obama will need it. By introducing universal health care, he has pulled off the largest expansion of the welfare state in four decades. And the most expensive. Which is why all of the European Union has the VAT. Huge VATs. Germany: 19 percent. France and Italy: 20%. Most of Scandinavia: 25%. [Israel’s is somewhat lower, at 16% — Ed.]

American liberals have long complained that ours is the only advanced industrial country without universal health care. Well, now we shall have it. And as we approach European levels of entitlements, we will need European levels of taxation.

Obama set out to be a consequential president, on the order of Ronald Reagan. With the VAT, Obama’s triumph will be complete. He will have succeeded in reversing Reaganism. Liberals have long complained that Reagan’s strategy was to starve the (governmental) beast to shrink it: First, cut taxes – then ultimately you have to reduce government spending.

Obama’s strategy is exactly the opposite: Expand the beast, and then feed it. Spend first – which then forces taxation. Now that, with the institution of universal health care, we are becoming the full entitlement state, the beast will have to be fed.

And the VAT is the only trough in creation large enough.

As a substitute for the income tax, the VAT would be a splendid idea.

Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax.

Ultimately, even that won’t be enough. As the population ages and health care becomes increasingly expensive, the only way to avoid fiscal ruin (as Britain, for example, has discovered) is health care rationing.

It will take a while to break the American populace to that idea. In the meantime, get ready for the VAT. Or start fighting it.

People of a classical-liberal bent in Western countries who see things going pear-shaped look to the USA as an alternative to immigrate to. At this rate, why should they bother?

Related news item:

There really are two Americas

WSJ: THE GOVERNMENT PAY BOOM.It turns out there really is growing inequality in America. It’s the 45% premium in pay and benefits that government workers receive over the poor saps who create wealth in the private economy. And the gap is growing. According to the U.S. Bureau of Labor Statistics (BLS), from 1998 to 2008 public employee compensation grew by 28.6%, compared with 19.3% for private workers. In the recession year of 2009, with almost no inflation and record budget deficits, more than half the states awarded pay raises to their employees. Even as deficits in state capitals widen and are forcing cuts in services, few politicians are willing to eliminate these pay inequities.

[…] What if government workers earned the average of what private workers earn? States and localities would save $339 billion a year from their more than $2.1 trillion budgets. These savings are larger than the combined estimated deficits for 2010 and 2011 of every state in America. In a separate survey, the federal Bureau of Economic Analysis compares the compensation of public versus private workers in each of the 50 states. Perhaps not coincidentally, the pay gap is widest in states that have the biggest budget deficits, such as New Jersey, Nevada and Hawaii. Of the 40 states that have a budget deficit so far this year, 28 would have a balanced budget were it not for the windfall to government workers.”

It used to be that government workers were paid salaries below market in exchange for greater job security (see this related post). Now we have a situation where government workers enjoy both higher salaries and greater job security than their private sector counterparts. This is what some people’s idea of “social justice” really entails: the New Class feathering its own bed (and that of its clients).