Friday, September 16, 2005

Like Drunken Sailors

Daily Kos diarist Bonddad, who focuses on economic policy, has a very good post today reflecting on BushCo's continued strategy of attempting to buy off the American public to gain political foothold while continuing to sell us all down the river, economically speaking. (I know, I know--you say reading about economic policy is about as fun as, well, reading about economic theory or a local city council meeting on your municipality's government cable station. But economics will be the deciding--and, more importantly, limiting--factor to what we can do as a nation in the near and long term.)

Last night, Bush once again decided the best thing to do to gain popularity was to buy people's affection without asking for any sacrifice.  While I am sympathetic to the after-affects of Katrina and also believe something should be done, I also understand it will require sacrifice.  The US cannot go through its fiscal life without recognizing it can't afford everything it wants.  It cannot give money away to the well off, fight a voluntary war, spend recklessly on non-prioritized domestic needs and rebuild an area destroyed by a hurricane.  By believing it can, Bush has placed the United States - a country I love and hold very dear for all it stands for - in a position to fall into economic ruin.
Bush started his first term with a massive tax-curt for the rich, arguing that tax cuts in fact pay for themselves.  While this didn't work when Reagan tried it in 1981, Bush gave it a second try.  First, tax cuts don't increase receipts.  In fact they decrease them.  According to the Congressional Budget Office, in 2000 individual tax receipts (receipts from individual tax payers) totaled 1.004 trillion dollars.  Many on the right will scream that I am using a boom year for comparison, so in 1997 and 1998 tax receipts were 737.5 billion and 828.6 billion respectively.  For the years 2001-2004, individual receipts were 994 billion, 858 billion, 794 billion and 809 billion, respectively.  When you cut taxes, revenues decrease, in this case by 18% from 2001 - 2004.  Also note that Bush's tax receipts for 2004 were lower than Clinton's in 1998.  As another comparison, individual income taxes as a percentage of GDP decreased over the same time from 9.9% to 7%.
But the Iraq war was not the only item of spending on Bush's table.  Again, according to the CBO, total outlays in 2001 were 1,863.0 trillion.  This number increased to 2,292.2 in 2004.  Over the same period, total revenues decreased from 1,991.2 in 2001 to 1,880.1 in 2004.  In other words, spending increased and revenue decreased.  If we take the Iraq figures from above out of the total increases, we still get a net increase of 179.5 billion dollars.  
At 400 billion, the US budget deficit is about 3.6% of total US GDP.  And this is where the problem begins.  At some time in the near future, the US will experience a recession.  Why?  Because all economies move in cycles.  Typically, national governments increase spending during a recession to stimulate the economy, hoping to either limit the recession's impact or bring the country out of the recession into expansion.  

This is where the real problem comes.  Assuming federal expenditures remain the same for the foreseeable future - tax cuts remain, Iraq continues and the Federal government spends opulently on rebuilding - there is little the Federal government can do to get the US out of the next recession.  Assuming things stay the same, an increase in federal spending would increase the national deficit to near 5% of GDP.  At this level, the currency markets will notice the US is not taking care of its fiscal house and start to sell the dollar.  To protect the dollar, the Federal Reserve will increase interest rates, further slowing the economy.  You get the idea.


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