Budget Woes
Continuing today's focus on budget items (as budgets have consumed my life), a CBO report requested by Senator George Voinovich (R-Ohio) predicts a $900 billion budget deficit by 2012 if government spending continues at its recent rate of growth and tax cuts are made permanent. In fact, this may be understated. If we do go to war with Iraq, government spending will likely increase at a faster rate of growth than the last several years. In addition the uncertainty caused by such a war will deepen economic woes, leading to a higher probability of additional future tax cuts.
However, we do need demand-side tax cuts to spark economic growth. We are in danger of a deflationary spiral, and monetary policy alone will not suffice. In fact, with the discount rate at 0.75% and the Fed Funds rate at 1.25%, the ability to use monetary policy through interest rate cuts is near an end.
There is the possibilityof the Fed focusing on exchange rates instead, by purchasing foreign currencies (such as the Euro) to promote a weakening in the dollar. This would have the result of making American exports more attractive. But it is questionable as to how effective that would be. We haven't really relied on manufacturing exports as a source of economic growth in some time, as even with a weaker dollar they are still not price competitive with foreign goods. Such a strategy is better suited, perhaps, to solving Japan's problems. We would be better served if the Fed were to increase holdings of government securities to finance an expansionary fiscal policy.
Comments
The thing about the war is that it's a self finacing venture. We go in, bomb them, install a puppet dictatorship, and take their oil to pay for it. The only real problem is if we dump too much Iraqi oil on the market the Russians will get mad at us for putting a dent in their hard currency inflow.
Posted by: Rick DeMent | December 3, 2002 08:05 PM
That works only after we win. I'm not so sure we would win that quickly. The Army is certainly training for urban warfare, and Saddam has said he would do his best to tie us up in an urban war. We still have to finance it while we're fighting it.
Posted by: Lesley | December 3, 2002 08:08 PM
You make a good point; I'm a little squeamish handicapping invasions. Actually it may be as simple as convincing Saddam to go into exile with a few well-placed smart bombs. Or is could be a long drawn out bloody affaire as you, and many others, suggest. But your point about the budget is dead on. A close to one trillion dollar debt is something that the public can't get its mind around.
I have people telling me now that all we have to do is cut some spending and we'll be just fine. And they're right, if by cutting some spending you mean eliminating all means tested welfare, Medicaid, and 25% of the discretionary budget.
Posted by: Rick DeMent | December 3, 2002 09:30 PM
State houses are faced with a different budget woe. Most maintained budgetary growth rates throughout the 90's at unsustainable levels and created new programs with tobacco money and rosy scenario forcasts for regular tax receipts. Well the business cycle did what it always does; it cycled down. Albiet a relatively minor downturn when measured against past downturns. So all these state houses faced something all politicions hate. Cutting spending back (most have balanced budget laws).
So now we have this economic situation where the recovery is taking longer to establish itself, in part due to lower government spending at the state and local level. Politicions, being what they are, unwilling to hold back the urge to spend evermore are now racheting up every tax and fee they can find. This will have a further dampening effect on economic growth.
Of course when we, you and me the people that actually make the economy work, overcome this fiscal policy foolishness and right the economic ship the next election cycle will be started. Politicions at the federal level will claim it was because they cut our taxes and increased their spending in the 'right' area. (debatable - which tax bracket are you in? How much more does farm produce and steel products cost you due to additional tarrifs?) Those in the state governments (and local) will claim it is because they increased your taxes and spent in the 'correct' places.
Isn't that a wonderful thought heading into the holiday season?
Posted by: Justin | December 4, 2002 07:38 PM
In speaking with my military sources, it's believed by the experts that an all out invasion of Iraq will take no longer than 30 days regardless of the urban warfare.
Posted by: Jay Caruso | December 5, 2002 01:55 PM
Jay, wars have a habit of being unpredictable. It depends on several factors.
Will the command and control follow the LBJ model (and Jimmy Carter Hostage rescue attempt), marching orders from officials physically in the pentagon and Whitehouse rather than the commanders on the field? Will we use overwhelming force or attempt to use a politically correct proportional force and weaponry?
How willing are the people of Iraq in aiding and assisting the ruling regime?
How much building and digging and hiding have the Iraqi's done since Sr.? Not that we should have access to intelligence reports for the era (security reasons) but I have my doubts about the intelligence gathering from the previous administration, and the current one too.
Will Hussein learn from his mistaken strategy of the Gulf War? That is will he attempt a force on force battle or will he revert to the Mao Tse-Tung hit-n-hide model?
I don't doubt our ability to take the regime down, nor to eliminate Iraq's ability to prosecute a conventional war. Nor should Hussein be allowed to remain in power unchecked. BUT What is the afteraction plan? After his head is on a platter, what then? That is when the real costs are likely to be incurred. (Lives lost in a war are real, I just doubt there will be many in the prosecution of the impending war) That is when vigilence will have to be stepped up.
I would be more comfortable if we had a succesful working model of regime building in a similar culture, because that is what this will turn into, whether or not you agree with or like the notion of Nation Building.
Posted by: Justin | December 5, 2002 02:22 PM