July 18, 2005

Four Reasons NOT to Be Impressed with the “Falling Deficit”

Filed under: Economy,Soc. Sec. & Retirement,Taxes & Government — Tom @ 11:45 pm

The Anchoress noticed the Mary Poppins post below (actually, I shamelessly brought it to her attention), and in reviewing her recent posts found that she is one of many characterizing the faster-than-expected reduction in this year’s budget deficit, and realistically hopeful projections of future reductions, as “good news” (okay, there’s a question mark on the post’s title). Michael Barone’s US News piece is her primary source, though there are many other similar columns in circulation.

So about those reduced current and projected deficits: Am I relieved? Sure, it’s beats deficits going in the other direction. Is it real improvement? Yes. Does it indicate that President Bush is on track to keep his promise to cut the annual “reported deficit” in half by the time he leaves office? Yup.

All well and good. But I can’t get too excited, for four reasons:

  • The improvement from a predicted $427 billion for FY 2005 to $333 billion means that this year’s reported deficit will “only” be a bit more than $1,100 for every man, woman and child in the country (vs. a projected $1,400).
  • Notice I’ve said “reported deficit” a couple of times now: Contrary to what you would expect, the officially reported deficits don’t equal how much the national debt has actually increased. The government incurs debt in all sorts of additional ways, too detailed to go over now, that are considered “off-budget” (something you and I could never get away with, of course). For proof, go The Bureau of Public Debt’s “The Debt to the Penny” web page; I would suggest saving this very sobering link. Here are the key stats of the moment (don’t you just love how the government can be so precise about some things, and not have a clue about so many others?):
    To prove that a lot of non-budget spending that adds to the deficit is taking place, you only need to note that:– The national debt rose $596 billion from Sept. 2003 to Sept. 2004 ($7,379 tril minus $6,783 tril), even though as noted above the “reported deficit” was $427 billion.

    – The July 15, 2005 national debt is $473 billion higher than it was in Sept. 2004 ($7.852 tril minus $7.379 tril), despite the official prediction that the “reported deficit” will be $333 billion–and the peak tax collection period is over.

    – While we’re looking at this, note that the national debt never went down in any fiscal year, despite all the noise about the “trillions in surpluses” that supposedly started happening in 1999 and 2000.

  • Unrecorded actuarial liabilities: The Nodometer on the left essentially represents the present value of unfunded promises the government has made to future Social Security recipients. That $1.72 trillion is NOT in the July 15, 2005 figure above. And the Nodometer is only the tip of the iceberg–there’s Medicare, the presecription drug benefit, military and government pension obligations, etc., ad nauseam. (By the way, companies have to record these liabilities in their financial statements–where’s Elliot Spitzer when you need him?)
  • Perhaps most important, we as a country, thanks to the poor example the GOP has set during the past four-plus years, are philosophically defenseless to argue that getting spending under control and at least reducing the REAL annual deficit to zero are good ideas. If we ever get close to an annuall break-even, the “demands” of the people who want to open up the spending spigots even more will be difficult to resist (“Aren’t you the guys who said ‘deficits don’t matter’?”).

So, if you don’t mind, I’ll have a beer to “celebrate” the improvement. Just hold the champagne.

A “Mary Poppins Economy”? Zheesh

Filed under: Economy — Tom @ 6:30 am

Okay, the economic news has generally been pretty good:

Industrial production, helped by a jump in utility output, surged in June at the fastest pace in 16 months, providing the strongest evidence yet that U.S. manufacturing is rebounding.

Meanwhile, wholesale prices were flat last month, matching the benign performance turned in by consumer prices during June.

Taken together, the two reports Friday helped to ease fears that manufacturing, hardest hit in the 2001 recession, was in danger of faltering again or that inflation, battered by high energy prices, was threatening to get out of hand.

And yes, the fact that the economic news is mostly good is why you aren’t hearing about it at the top of the hour on the radio, seeing it on the nightly news, or seeing it on the front pages of the Newspapers of Record.

Having said that, it’s not time to break out the irrational exuberance (fourth paragraph):

“This is about as close as you can get to a Mary Poppins economy–practically perfect in every way,” said David Wyss, chief economist at Standard & Poor’s in New York.

Somebody needs to check and see whether that’s really sugar they are using to help the medicine, er, coffee go down in the Econ Group at S&P.

For what it’s worth, BizzyBlog remains concerned, as does this columnist, about the level of risk home lenders and borrowers are taking, and about the possible impact of the draconian bankruptcy law that will take effect in three months. But on balance, I would say that things, while not too shabby, certainly aren’t supercalifragilisticexpialidocious.

Background: The history behind the term “irrational exuberance.”

Useless fact: Someone tell Mr. Wyss that in the movie, the song “‘Practically Perfect’ was intended to introduce Mary Poppins. But instead the melody of the piece was used for ‘Sister Suffragette’ (used to introduce Mrs. Winifred Banks)”.

UPDATE: For the pessimistic view, Paul Farrell (link requires free registration) identifies 20 bubbly reasons why there are storm clouds on the horizon.

UPDATE 2: Official Outside the Beltway Traffic Jam and Jawa Fatwa Festival participant.