What was the best part about yesterday's Congressional Budget Office (CBO) budget projections for the next decade? Certainly not the projections themselves, which showed the United States awash in red ink as far as the eye could see. No, the best part was that reporters quickly noticed that the CBO's projections vastly understated the true size of the long-term deficit. The White House, it seems, is finding it tougher and tougher to conceal its own fiscal insanity.
Early in the day, both the New York Times and the Washington Post were quick to note that the CBO projected a reduced deficit for 2005 only because the White House had not yet included any spending for Iraq. Indeed, even without those figures, it was immediately obvious that the deficit had worsened considerably. As the Washington Monthly's Kevin Drum pointed out, "Last September CBO was projecting a 10-year deficit of $861 billion not counting Iraq. Today, CBO is projecting a 10-year deficit of $1,364 billion not counting Iraq. In other words, the projected deficit sans Iraq has gone up 58%."
Later in the afternoon, Bush administration officials admitted that the White House would ask for at least an additional $80 billion for Iraq, bringing the 2005 deficit up to a record $427 billion. To put that number in perspective, last summer the White House predicted that the deficit would fall from 2004's $412 billion. Now that we can discard that prediction, however, it's difficult to see how Bush will even come close to fulfilling his promise of halving the deficit by the time he leaves office. That's especially true now that military officials have estimated that the U.S. will likely keep at least 120,000 troops in Iraq for the next two years. As defense analyst John Pike, told Reuters, military spending for Iraq may continue to grow "because we just don't know the rate at which the insurgency will grow or subside, and we don't know the rate at which the Iraqi security forces can be stood up."
That's not all, though—the picture gets far, far worse. Even setting military costs aside, the CBO's ten-year "baseline" projection—which amounts to a deficit of $861 billion—still understates the problem. As the Center on Budget and Policy Priorities notes, not only did the agency also left out the costs of making Bush's tax cuts permanent, and permanently repealing the Alternative Minimum Tax. When you add all those promises in, as Max Sawicky does in this chart, the deficit balloons by trillions over the next ten years. Meanwhile, all those interest payments will continue to add up, and the United States will have to figure out some way to convince Asian central banks to continue buying up our debt.
And we haven't even mentioned Social Security. As we know, Social Security currently takes in more in payroll taxes than it pays out in benefits. The Social Security Trust Fund then invests this surplus in U.S. Treasury Bonds, effectively loaning the money to the federal government. Indeed, Ronald Reagan, Alan Greenspan, and a bipartisan Congressional caucus raised payroll taxes in 1983 specifically to create this surplus, so that Social Security could handle the coming baby boomer retirement.
So what happens to the Trust Fund surplus? The federal government then takes this money and, well, spends it. Here's the problem. Starting around 2016, Social Security will start paying out more in benefits than it collects in payroll taxes, so it will need to ask the federal government for its surplus back. Had the federal government set this surplus aside all along—put it, for instance, in the sort of "lockbox" that Bill Clinton and Al Gore advocated—there would be no problem. But the government clearly doesn't have the money any more, which means that come 2016, it will either have to raise taxes or borrow trillions more to pay back Social Security. And that's on top of deficits as far as the eye can already see.
Some might be tempted to look at the situation and argue that Social Security is clearly unaffordable, that we should start cutting benefits immediately. That would be quite wrong. Look at it this way: the Trust Fund has been paid for largely by low- and middle-income workers (since payroll taxes are only levied on the first $86,000 or so of income.) But the surplus has been used to paper over the federal deficit, allowing the government to keep income taxes lower than they otherwise would be. Had the Social Security surplus been put off-limits, George Bush certainly would have had a more difficult time passing his first four tax cuts.
Hence, slashing Social Security benefits in order to avoid paying back the Trust Fund would amount to a massive transfer of wealth from low- and middle-earners to high-earners. How massive? Dean Baker of the Center for Economic and Policy Research has calculated that a full default on the Trust Fund in 2016 would mean that " more than $1 trillion (in 2001 dollars) would be transferred from the bottom four quintiles to the households in the top 5 percent of the income distribution." There aren't really words to describe the scale of this sort of swindle.
And no, we haven't even talked about the addition $2 trillion the president wants to borrow to try to privatize Social Security. This is what opponents of privatization mean when they say that there's no Social Security crisis, instead there's a general budget crisis that needs to be addressed immediately.
The fair and rational thing to do, then, is first to repeal the Bush tax cuts, and then figure out ways to start controlling other costs. Though Bush has talked about submitting a "tough budget" and gutting programs like housing vouchers, CBPP recently showed that such discretionary spending makes up only a small fraction of the deficit. Most of the blame falls on tax legislation—in fact, in the absence of the tax cuts enacted in Bush's first term, the federal government would actually be running a surplus this year. Obviously that figure ignores whatever boost in growth Bush's policies have created, but economists such as Mark Zandi argue that the tax cuts offered a pretty low stimulus for how much they ended up costing. Repealing the cuts would bring income tax rates back to their levels during the 1990s—when, note, the economy didn't do too shabby at all. Anything less and a real fiscal crisis will likely be upon us very soon.