The Economist Finds Its Snark

For a surprisingly large part of the time over the past six years, the Economist has been like Austin Powers without his mojo--has spent far too much time on its belly making craven and pathetic excuses for the incompetent, inept, mendacious, and malevolent George W. Bush administration.

Now it looks like it may have its snark back:

Bush's bulging deficits | Economist.com : POLITICAL speech is always full of slippery locutions, but George Bush's state-of-the-union address last week may have set a new standard for involuted meaning when he urged Congress to “act responsibly, and make the tax cuts permanent”. At that time, the official White House projection of the budget deficit for the 2006 fiscal year was $341 billion, a substantial portion of which could have been erased by rolling back the tax cuts so dear to Mr Bush’s heart. On Monday February 6th, the use of the word “responsibly” suddenly looked even more idiosyncratic, as the administration released a $2.7 trillion proposed budget, and announced that the 2006 deficit projection had grown to $423 billion, or 3.2% of America’s GDP.

The Bush administration claims it is trying to reduce spending to match the hefty tax cuts the president passed during his first term.... [S]uch fiddling is the fiscal equivalent of rearranging the deck chairs on the Titanic. After shrinking surprisingly quickly in the 2005 fiscal year, the budget deficit is once again expanding, thanks to big bills for the wars in Iraq and Afghanistan and the clean-up after Hurricane Katrina. If a Republican Congress and president can only manage to cut their least favourite programmes by a paltry amount when faced with a budget deficit soaring towards the half-trillion mark, then it is time to concede defeat and raise taxes. Mr Bush’s Democratic critics do not, of course, want him to trim spending at all.... [E]ven many of Mr Bush’s natural political allies are unenthused. The health-care cuts, after all, are projected to save only $3.2 billion next year, a drop in America’s sea of red ink.

Moreover, all this assumes that Congress will actually pass all of Mr Bush’s proposed spending cuts into law.... And even if Congress does oblige, the budget projections require some rather heroic assumptions about the future course of spending. Military spending is currently supposed to fall off sharply after 2007, the last year in which extra spending for Iraq and Afghanistan is budgeted. This seems hugely optimistic, considering the problems still faced in both countries.

The projections also receive a boost from assuming that America’s tax code will not change much in coming years. The Office of Management and Budget has assumed no alteration to the Alternative Minimum Tax (AMT), a special levy designed to catch wealthy people who had moved most of their income out of the taxman’s reach. Thanks to bracket creep, the AMT will soon threaten to catch the middle class in its net; most experts agree that it will probably be necessary to reform it soon, to refocus it on rich tax avoiders.

America’s gigantic budget deficit is not merely a concern for the generation of Americans currently in nappies, who are likely to be on the hook when the debt comes due. Many economists worry that the growing fiscal gap is one of the main forces driving the expansion of America’s current-account deficit, which was over 6% in the third quarter of 2005, the most recent for which figures are available. And that current-account deficit is a big global problem.

Since the worldwide economic slowdown of 2001, America’s gluttonous appetite for imports has been one of the mainstays of the global economy, allowing other countries to export their way back to a modicum of economic health. China, in particular, has deliberately fuelled its economic growth by keeping its currency cheap against the dollar, making its goods attractive to American consumers.... The federal budget deficit, economists worry, is essentially being financed overseas, particularly by central banks like China’s, who buy dollars to raise their price against the local currency, and then park those dollars in US Treasuries. Should the banks' appetite for American debt wane, American borrowers, including the government, would face sharply higher interest rates. This would be a nasty shock not only to the American economy, but to all those countries that depend on American demand to keep their own economies rolling along.

Many economists are urging the government to put the books in order now so as to lessen the potential blow of a disorderly correction. Even those who are not convinced that federal borrowing is driving America’s current-account deficit wider (such as Ben Bernanke, who has just replaced Alan Greenspan at the head of the Federal Reserve) are calling on the government to get its finances under control in order to improve the national savings rate and lower the bill that Congress hands to future generations.

But not even rescinding all of Mr Bush’s tax cuts would close the gap; much of the budget deficit is the result of new spending, on expensive projects, such as the Iraq war and a new prescription-drug benefit for Medicare, and the unexpected decline in tax revenues that occurred after the stockmarket bubble crashed. Bringing the budget back to balance will require a politically unpalatable combination of tax increases and spending cuts.

But for all their rhetoric, so far the Republicans have barely touched domestic discretionary spending. Even if they did find the gumption to make real cuts, this would be insufficient, since mandatory spending—which covers things like Medicare, Social Security and interest on the national debt—accounts for the lion’s share of federal outlays. That share will only grow as America piles up debt and the baby-boom generation retires. Mr Bush’s modest changes to Medicare rules are certainly not enough to alter that ruthless arithmetic. But neither the Republicans nor the Democrats have the stomach for any serious reforms to the popular programme—most of the political debate over Medicare has focused on how the government can spend more to help the elderly buy drugs. Perhaps Mr Bush’s successors will be able to find a creative new definition of “bankrupt”.