It is now official

Karl Rove is the Bush Administration’s economic policy czar, and de facto Treasury Secretary.

In addition to responsibility for political affairs and strategic initiatives, Mr Rove has been appointed deputy chief of staff to co-ordinate policy, both domestic and international.

Scott McClellan, the White House press secretary, suggested Mr Rove’s chief focus would be economic policy, domestic policy and international economic policy, leaving national security and intelligence to Joe Hagin, the other deputy chief of staff.

But Mr McClellan also made clear that Mr Rove’s promotion positions him to get involved in any and all administration business:

"Karl will continue to oversee the strategy to advance the president’s agenda. He will also co-ordinate policy within the various White House councils . . . the Domestic Policy Council, the National Economic Council, the National Security Council and the Homeland Security Council," Mr McClellan said. The responsibilities will only add to the aura of Mr Rove, the most storied figure in the Bush White House

Good-bye Rubinomics; hello Roveconomics.

The basic political plan behind the current budget seems clear to me: generate enough of a fight about the FY 2006 deficit to give the Administration’s supporters grounds to argue that the Administration really is committed to limiting deficits. If the Administration is serious, and the FY 2009 deficit is forecast to be much smaller than the current deficit, it will be easier to convince Republican deficit hawks to sign up for the borrowing required to finance the partial privatization of Social Security. With W’s historical legacy secure, the real debate about the FY 2008 and FY 2009 can begin. In all probability, barring market pressure to cut the deficit, the structural gap between revenues and expenditures created by cutting taxes during a war will be squared by yet more borrowing.

The markets seem to be in a particularly forgiving mood right now, for whatever reason. The bond market rally continues, the dollar is up against most major currencies since the beginning of the year too, supposedly on the Administration’s new commitment to cutting the deficit. The markets seem to want to believe that global adjustment already has started happening, even if the Chairman is not quite as sure as he seemed on Friday. That way it is OK if the market moves in ways that take the pressure off the United States.

Fiscal deficits will be brought under control so the long rates can go below 4%; the current account deficit has peaked, so the dollar can rally ...

The Washington press corps, fortunately, is in a less forgiving mood, as is the generally quite conservative Washington Post oped page. Most of Washington is expressing great doubt about the Administration’s budget forecast. Fool me once, shame on you, fool me twice, shame on me ... or something like that.

The real news is not the Administration’s wildly unrealistic FY 2009 forecast, or even the set of proposed cuts to domestic discretionary spending, but rather the Administration’s admission that the FY 2006 deficit is likely to be well above $400 billion -- the current forecast is $390 billion, and that leaves out the supplemental funding needed to cover the cost of keeping an army in Iraq.

It is hard to make a big dent in a $430 billion deficit with small cuts, no matter how much political heat they generate.

Limiting farm subsidies for large producers: annual savings of $0.6 billion, from what I can gather.

Getting rid of Amtrak subsidies: annual savings of $1.2 billion.

Cutting Medicaid reimbursement of the states: annual savings of $4.5 billion.

Cost of transforming the Army now being hidden in the supplemental budget: at least $20 billion

Cost of the Medicare prescription drug benefit: now estimated at roughly $70 billion a year over the next ten years, with annual costs of closer to $100 billion a year in 2014. The actual cost is closer to $1200 billion over ten years, but there are supposedly offsetting savings that would reduce the real cost to "only" $700 billion. I don’t know enough to know if those savings will prove to be real, or just smoke and mirrors. Note that the Administration kept the initial ten year cost estimate of the drug benefit down in part by not implementing it immediately, so the ten year estimate included several years of no spending -- their Social Security forecasts use the same trick.

The cost of the Administration’s plan to privatize Social Security without cutting current benefits: lots more than that.

Think a permanent increase in the US debt to GDP ratio of something like 25% (our current debt held by the public to GDP ratio is 38%). The offsetting savings are so far off that they are not really worth talking about; even if the savings materialize, and the rest of the budget blows up, barring any policy changes, well before then in any case.