from Follow the Money

Borrowing is Saving, Up is Down

January 3, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Edmund Andrews of the New York Times provides the Rosetta stone that lets us decipher the Bush Administration’s plan to cut the deficit, which seems to be a plan to pretend to cut the deficit.

Here is the plan, based on Andrews’ excellent reporting.

Grade yourself on a generous curve. The Bush Administration never actually ran a $521 billion (consolidated) budget deficit -- the peak deficit was $413 billion. But they did at one time project a $521 billion deficit, and they have decided that their goal is to cut the projected deficit -- not the real deficit -- in half. That bit of fuzzy math means a FY 09 deficit target of $260 billion, not $206 billion.

Rely on faith-based economic forecasts. The Administration has faith that even if the tax cuts are extended, so tax rates stay the same, tax revenues will increase from 16.2% of GDP to 18% of GDP over time. The Bush Administration also has faith that a growing economy will lead tax revenues to increase by $217 billion in 2005, even though this year’s strong growth only increased revenues by $100 billion and most economists expect the economy to slow a bit next year. (FY 05 monthly revenues, on average, have been running $9 billion a month higher than in FY 04 ... )

Don’t count the costs of the Administration’s really big policy initiatives. The costs of invading Iraq? They don’t count. The costs of privatizing social security? Also don’t count.

This "plan" does not pass the smell test. It is no wonder that Alan Greenspan turned down John Snow’s job.

I still have faith that the markets -- or, perhaps the 6-10 central bank governors now providing most of the financing the US needs -- won’t let the US get away with this for the next four years. One of the jobs of the Treasury’s staff of international economists is to make sure that countries seeking IMF programs don’t fudge their numbers; I presume the People’s Bank of China also can find smart economists to try to make sure the US does not cook its books. Given the sums central banks are lending to the US, they have every right to be concerned.

In W’s first term, his administration was able to admit, more or less, that it thought deficits did not matter. Now, since our straight-talking Texan president said he planned to cut the deficit in half during the campaign, they have to pretend to have a plan. The initial approach at least was more honest.

I also don’t think that the market will buy the administration’s argument that the transition costs of privatizing social security -- costs that will take the form of new marketable treasury bonds -- are really "savings." From Andrews: White House officials say it is reasonable to treat the expected transition costs separately, because they will eventually be repaid as the government’s obligation to pay benefits declines sharply after 30 or 40 years. "These aren’t costs, they are savings," said Scott McClellan, Mr. Bush’s spokesman, at a recent news conference.

The borrowing associated with privatization will hit the market immediately, the savings are based on projections of what the world will be like in 30 or 40 years -- projections that should be appropriately discounted. Moreover, unless we put the rest of the government’s finances in better shape, the United States’ finances will blow up long before savings from cutting social security benefits really kick in. There is no particular reason why the markets should worry more about the projected gap in social security after 2042, or 2052, than about other, more pressing problems.

Look at these charts over at the Angry Bear.

We also have no way of knowing if the benefit cuts the Bush Administration is now talking about will be big enough to reduce social security’s long-term actuarial gap, and thus to generate these much discussed savings either. To get rid of the projected long-term deficit, benefits would need to be cut even if the payroll tax remained constant and the trust fund’s assets were not effectively diverted into private accounts. Partial privatization reduces revenues, so it makes the long-term deficit worse. With partial privatization, the cuts in benefits need to be big enough to both make up for the current actuarial gap and to make up for the additional gap that opens up as the system loses revenues to private accounts.

If benefits are not cut enough, or if the diversion of payroll tax revenues into private accounts is large enough, it is perfectly possible to create a system with private accounts that is in worse long-term shape than the current system. Watch the fine print carefully.

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