Country Club Economics

John McCain once told us that “the issue of economics is not something I’ve understood as well as I should.” Well, that much is clear. After all, how could he explain the inconsistencies between his rhetoric and the policies he advocates?

At every campaign stop, McCain is quick to tell adoring crowds that he would usher in a fiscal discipline that would put us quickly back on the path toward balanced budgets. It’s not clear how he plans to honor these promises but, if we look at his words, we must assume that ridding the budget of earmarks would be at the top of his list. In fact, it has almost become a holy crusade for him – a self-proclaimed maverick fighting valiantly to abolish the “pork-barrel projects” that slowly tear away at the soul of our government and undermine the trust of our citizens. For those bold enough to slip an earmark or two in legislation while McCain is President, he threatens: “I will make them famous and you will know their names.”

When one looks at reality, this bizarre obsession becomes more and more absurd. While acknowledging the inconvenient fact that earmarks (which were so shamelessly embraced by his running mate until recently) make up less up less than 1 percent of the federal budget, it’s also important to look at what they actually are. Technically, earmarks are provisions in law that direct approved funds to specific projects. Is there waste involved? Of course, there is. “Waste” is in the eye of the beholder but it’s tough to argue that there are many parts of the budget that could not use some trimming or efficiencies. And yes, there are often “bridges to nowhere” and funds directed toward questionable projects that get slipped mischieviously into legislation. That's why earmark reform should require a greater deal of transparency. At the same time, earmarks often provide much-needed funding for projects and programs such as child advocacy centers that provide care for sexually abused children or literacy programs that help low-income rural children learn how to read. Just because certain funding is “earmarked”, does that make it corrupt pork-barrel spending? If so, would you rather have, instead of your Members of Congress, unelected bureaucrats in Washington prioritizing the funding needs of your district and states?

The more inexplicable aspect of John McCain’s economic policy is that, while waging a crusade against earmarks, he has no problem with spending over $10 billion per month in Iraq when the Iraqi government has a budget surplus of nearly $80 billion. To compound the hypocrisy, he also supports the Bush tax cuts that have hampered our economy. Yes, the same cuts he once criticized for being too overly-generous for the wealthy. It’s a shame that he’s now blatantly pandering to that same population at the expense of middle-class working families.

So yes, it’s quite obvious that John McCain simply doesn’t understand economics. After all, his plan to balance the budget consists of “slashing” earmarks that make up less than 1 percent of the budget while dumping tens of billions of dollars into the pockets of millionaires and hundreds of billions into a war with no end in sight (if you follow his rationale).

For the Center on Budget and Policy Priorities, Richard Kogan and Gillian Brunet recently provided a better look at “How Projected Surpluses Became Deficits.” Was it earmarks? Not so much. It was tax cuts and increases in national security spending.

Impact of Tax Cuts and Spending Increases on the Budget for Fiscal Year 2009

As noted, tax cuts and program increases enacted by Congress have worsened the budget by about $1 trillion in 2009. (These figures assume that tax and program policies in place today will be continued.) As shown in Figure 1, the key components
are:

Tax cuts. Enactment of the 2001 and 2003 tax cuts, along with AMT relief, the normal “tax extenders,” and a variety of minor tax provisions have worsened the 2009 budget by $427 billion and thus account for 42 percent of the $1 trillion deterioration. These figures include both the direct costs of the tax cuts and their associated interest costs. (By reducing projected revenues, the tax cuts have increased deficits and debt relative to the January 2001 projection. With higher debt, the Treasury must pay more interest.)

Increases in appropriations for defense, international affairs, and homeland security. Expenditures projected for this portion of the budget in 2009 are much higher than CBO projected in early 2001. While a substantial portion of the extra costs stem from the wars in Iraq and Afghanistan, there have also been significant increases in the underlying budgets of the Departments of Defense, State, and Homeland Security that are not directly related to these wars. Total increases in this part of the budget amount to $399 billion in 2009, relative to CBO’s projection, and thus account for 40 percent of the $1 trillion deterioration, when the associated interest costs are included.

Increases in entitlement programs. Since 2001, Congress has enacted a number of entitlement increases, most notably the Medicare prescription drug benefit, but also increases in farm and nutrition programs, military retirement and health care, veterans’ education benefits, and other, smaller programs. These cost increases amount to $119 billion in 2009, or 12 percent of the $1 trillion deterioration.

Increases in appropriations for domestic, or non-security, programs. Funding for this portion of the budget has also increased above the levels projected in 2001, although this funding peaked in real terms in 2004 and has generally declined since then. The largest increases have occurred in education programs, veterans’ health care, and transportation programs. The increased expenditures in this part of the budget total $66 billion in 2009, or 6 percent of the $1 trillion deterioration.

As can be seen, tax cuts and defense/security increases account for 82 percent of the budget deterioration in 2009 that is attributable to legislation enacted since January 2001. Increases in domestic spending account for 18 percent.

Impact of Tax Cuts and Budget Increases Over the 2002-2011 Period

Tax cuts and program increases enacted by Congress have worsened the budget by almost $7.2 trillion over the entire 2002-2011 period, an average of almost $720 billion per year. (As noted above, these figures assume that tax and program policies in place today will be continued) As Figure 2 shows, the key components are:

Tax cuts. The 2001 and 2003 tax cuts and other tax provisions listed earlier will increase deficits by more than $3.3 trillion over the ten-year period, accounting for 46 percent of the $7.2 trillion deterioration. These figures include both the direct costs of the tax cuts and their associated interest costs.

Increases in defense, international affairs, and homeland security. These increases total almost $2.7 trillion over the ten-year period, or 37 percent of the $7.2 trillion deterioration, when the associated interest costs are included.

Increases in entitlement programs. These increases, plus the associated interest costs, total $745 billion over the ten-year period, or 10 percent of the $7.2 trillion deterioration.

Increases in domestic (or non-security) discretionary programs. These increases, plus the associated interest costs, total $456 billion over the ten-year period, or 6 percent of the $7.2 trillion deterioration.

Tax cuts and defense/security increases account for 83 percent of the budget deterioration over the 2002-2011 period that is attributable to legislation enacted since January 2001. Domestic spending increases account for 17 percent. In sum, tax cuts, increased defense and security funding, and a dose of economic cold water are, in order, the three key reasons that the large surpluses projected in January 2001 turned into substantial deficits. Increases in domestic programs have been relatively modest in comparison.

The federal budget is projected to run a $546 billion deficit in 2009, compared with the $710 billion surplus that budget experts projected for 2009 back when President Bush took office nearly eight years ago. This $1.3 trillion deterioration in the nation’s fiscal finances for 2009 can be seen by comparing estimates that the Congressional Budget Office (CBO) released this week with those that CBO released in January 2001.

The story is much the same for the entire ten-year period covered by CBO’s 2001 projection. In January 2001, CBO projected a cumulative $5.6 trillion surplus for 2002-2011. Now, CBO’s new report suggests the nation will amass a cumulative deficit of $3.8 trillion over that same period, marking a $9.4 trillion deterioration.

For both 2009 and the ten-year period, this massive deterioration is partly due to weaker-than-expected performance of the economy, along with other “technical” factors that are beyond policymakers’ control. But these economic and technical factors account for less than one-fourth of the fiscal deterioration for each period, and they are not responsible for the return of deficits. Even given the disappointing performance of the economy since 2001 relative to CBO’s earlier projections, there would have been large surpluses in every year — totaling $3.4 trillion over the 2002-2011 period — if policymakers had enacted no tax cuts or program increases since 2001.

The dominant factor in the unprecedented fiscal deterioration thus was not the performance of the economy. Nor was it increases in domestic programs. The key factors have been large tax cuts and increases in security-related programs. For fiscal 2009, some $1 trillion of the $1.3 trillion deterioration in the nation’s fiscal finances stems from policy actions, and tax cuts account for 42 percent of this $1 trillion deterioration. Increases in military and other security programs account for another 40 percent of the deterioration.

The story is much the same for the ten-year period as a whole. For the 2002-2011 period, tax cuts and increases in security programs account for more than four-fifths of the fiscal deterioration caused by policy actions. Increases in domestic programs played a much more modest role.