The Great Deformation (127 page)

Issued in August 2000, the CBO's then ten-year outlook did not contemplate the GOP-led slash and burn of the tax base that would occur over the coming decade. Nor did it envision that the steadily failing US economy would generate far less taxable income than projected, and far more resort to Keynesian tax-cut stimuli such as the payroll tax holiday and the innumerable corporate tax gimmicks pushed through by K Street lobbyists doing their part to promote “recovery.”

So the $1 trillion shortfall in CBO's revenue forecast for 2012 was the product of a double whammy of less growth and more tax cuts. Strikingly, both errors in CBO's decade-ago forecast are virtually certain to be repeated in the current ten-year baseline.

By the same token, a decade back CBO had projected that federal revenues in fiscal 2012 would come in at 20.5 percent of GDP, or nearly identical to the 21 percent of GDP that it is now forecasting for 2022. In fact, actual 2012 receipts came in at only 16 percent of GDP, meaning that about one-third of the $1 trillion revenue shortfall for 2012 was due to economics and the balance was caused by legislative action that depleted the revenue base.

There is a striking difference in CBO's prospective forecasting error this time around, however. Back in August 2000, the federal revenue take was at a historic high of 20.5 percent of GDP. So even though its descent to 15–16 percent of GDP over the next decade caused a large miss compared to the CBO projections, it did provide a Keynesian tailwind to the otherwise tepid rate of GDP growth. Since there was still runway available on Uncle
Sam's balance sheet, deficit-financed tax cuts happily pilfered future GDP from unborn workers and taxpayers.

This time around, however, there will be a ferocious Keynesian headwind. The tax take from GDP is starting at a fifty-year low and then is projected to rise by nearly one-third, to 21 percent of GDP under the CBO baseline for 2022. Needless to say, the battle to wrestle higher taxes through the Congress and the resulting relentless squeeze on the Main Street economy will push the growth of jobs, wages, and GDP sharply downward.

THE EXPLOSIVE COST OF THE WELFARE STATE IN A SUNDOWN ECONOMY

The struggle to extract much higher taxes will also compound the spending-side error factor in the current CBO baseline. The reason is that a weak, tax-burdened national economy will generate far more joblessness, poverty, and economic distress than represented by CBO's wildly optimistic assumptions. Transfer payment spending will thus soar far above its baseline projections.

As indicated, when it comes to excessive optimism, CBO puts Rosy Scenario to shame. The aforementioned ten-year growth rate for annual wages and salaries, for example, amounts to an annual gain of nearly $4.5 trillion by 2022. By contrast, at the actual 3 percent growth rate of the past decade the gain would be only $2.3 trillion. That $2.2 trillion difference is a lot of phantom middle-class income, to say the least.

Likewise, CBO's baseline forecast assumes that 20 million new payroll jobs will be created in the next decade. Unaccountably, the green eye-shades at CBO conjured this cornucopia of jobs when in reality there had been essentially zero growth of non-farm payroll jobs in the last decade. Consequently, there is likely $200 billion annually of higher transfer payments unaccounted for in CBO's rendition of Rosy Scenario.

Again, this potential drastic underestimate would be a replay. CBO projected in its 2002–2012 baseline that entitlement and other mandatory spending during fiscal 2012 would total $1.85 trillion, or 10.8 percent of GDP. It actually came in at $2.1 trillion and 13.2 percent of GDP. While some of this huge $200 billion difference was owing to legislated changes such as Part D Medicare benefits, most of the transfer payment overshoot was due to the much weaker than forecast national economy.

In fact, the full story of the CBO drastic underestimate of mandatory spending lies in the crash of the labor force participation rate. Had it remained unchanged at the 2002 level of 66.5 percent, unemployment would have averaged nearly 12 percent during fiscal 2012 versus the 5 percent that CBO assumed (and 8.3 percent actual average).

What this illustrates is that the headline unemployment rate is largely irrelevant to the cost of federal transfer payments. The real driver is the so-called employment-population ratio; that is, the share of adult citizens holding jobs, even part-time ones. By definition, those not employed are likely to receive unemployment insurance, means-tested welfare such as food stamps, or move into the social insurance system via the disability insurance rolls or early retirement on Social Security.

In fact, this is exactly what happened in the past decade. The employment-population ratio fell from 62.5 percent in 2002 to an average of 58.5 percent during fiscal 2012, meaning that there were 10 million more adults not employed owing to the ratio deterioration. Overall, the number of adult citizens (over sixteen) not employed, including ordinary course retirees, rose from 82 million to 101 million during the period. It was this 19 million rise in the count of citizens not employed that drove the transfer payment share higher, and also caused CBO's baseline projection to drastically underestimate entitlement program costs.

This is virtually certain to happen again. Given the headwinds of higher taxes and higher savings rates, the American economy will be lucky during the next decade to create 7 million new jobs, as measured by the household survey (including part-time jobs). That would be no small achievement, since only 7 million jobs were added to the household survey during the bubble-fueled decade ending in fiscal 2012. Even then, however, the number of adults not employed would rise to 113 million by 2022, a figure dramatically higher than is implicit in the CBO baseline.

In fact, the “hockey stick” syndrome that has recurrently led to excessively optimistic long-term budget forecasts is strikingly evident in the CBO assumptions for disability insurance, unemployment, food stamps, and other means-tested programs. These core safety net programs are projected to decline sharply by 25 percent in real terms. This makes no sense whatsoever, especially in light of the last decade's steep gains.

In constant dollars (2012$), these programs grew from $160 billion in 2002 to $270 billion at present (fiscal 2012), or about 5 percent annually. And the driving force was food stamps, which grew in constant dollars from $25 to $80 billion, and disability insurance, which rose from $90 billion to $140 billion. The caseloads and costs for these programs exploded for a reason which is not going away anytime soon; namely, the American economy is failing and leaving more and more adult citizens with few choices except to lean on the state.

Accordingly, CBO's projected march back down the hill to $200 billion by 2022 for this complex of safety net programs is exceedingly implausible; this is especially so in the face of the aforementioned likelihood that the
number of adults not employed will rise by another 12 million. Even a 2 percent real growth rate for these safety net programs from current levels, therefore, would result in $150 billion higher nominal outlays for entitlements by 2022 than in the current CBO baseline.

These trends vivify why the Keynesian state will end in political paralysis and enervating conflict. Indeed, viewed in the big-picture framework this outcome seems certain. On the one hand, the US economy can no longer grow at even close to its historic rate because it is trapped in $54 trillion of debt and a debilitating 3.6X leverage on national income that was accumulated during the Keynesian era of high living.

At the same time, the share of the population not employed is soaring owing to the baby boom's aging and the post-Keynesian economy's inability to create new jobs. Accordingly, the state will be afflicted by insuperable demands on its waning fiscal resources: between 2002 and 2022 it is likely that the number of adult dependents (i.e., not working) will have risen from 82 million to 113 million, or by nearly 40 percent.

It is in this context that the cost of the nation's jerry-built safety net and social insurance system will become painfully oppressive. As the dependent population continues to grow, caseloads and expenses for the above-mentioned safety net programs will rise sharply. There will also be additional spillover into Medicaid and social insurance, especially as retirement-age citizens are forced to fully exploit Social Security and Medicare eligibility. Even a 1–2 percent pickup in caseload or program utilization for these latter programs would generate an extra $50 billion per year in federal outlays, but a much larger overshoot is easily imaginable.

Overall, CBO's Rosy Scenario projects that the social insurance and the means-tested safety net programs will cost $3.5 trillion by 2022, or 14.1 percent of its projected GDP. By contrast, under the unrosy scenario outlined above and with minimal allowance for the CBO's underestimates of dependency, caseloads, and costs, likely outlays for these programs will exceed $3.7 trillion, or 16 percent of GDP; that is, social insurance and the safety net will absorb the entirety of federal revenue that will be obtained under the recently installed “New Year's Day” tax policy before even a dime is spent on national defense, general government, or debt service. Therein lies the conflagration ahead.

WHEN THE NEOCONS GOT THEIR GUNS: ANOTHER CONTRIBUTOR TO THE NATION'S EMPTY TREASURY

The reason that the battle over the permanent fiscal cliff will be unimaginably brutal is that the Republican Party was hijacked by modern imperialists during the Reagan era. As a consequence, the conservative party
cannot perform its natural function as watchdog of the public purse because it is constantly seeking legislative action to provision a vast war machine of invasion and occupation. So doing, it acquiesces to liberal demands for butter in order to get the neocons their guns.

Here again lies an apostasy. Robert Taft and Dwight Eisenhower were bitter rivals for the 1952 Republican nomination, but neither of them believed that the US had an imperial responsibility to police the globe. The Eisenhower Minimum was predicated on overwhelming nuclear deterrence directed at the paranoid dictatorship which occupied the Kremlin, but its fiscal cost was modest because it eschewed land wars and the buildup of massive conventional military capacity. In provoking the resignation of the army's top generals, Ike lined up in the tradition of Senator Taft and Herbert Hoover. Taft had rightly argued that a “cavalry in the sky” could keep the nuclear peace while avoiding the massive fiscal drain of a cavalry on the ground with hundreds of forts, depots, and supply lines sprawling the globe.

At the present time, the US hardly needs even a cavalry in the sky since it has no industrial state enemies. So even the Eisenhower Minimum at $425 billion in present-day dollars (constant 2012$) would be an unnecessary luxury. Yet it is here that the neocon takeover of the GOP has been so destructive.

President Bill Clinton had courageously allowed the military-industrial complex to attrite to slightly below the Eisenhower Minimum, as befit the post–Cold War world. His outgoing defense budget was $385 billion in present-day dollars (2012$), but that epochal attrition was stopped cold by the Cheney-Rumsfeld-neocon putsch. Like the Reagan reversal of 1981, the warfare state was given a massive new lease on life.

Thus, by 2012 the national defense cost $700 billion, or nearly 80 percent more in constant dollars than Clinton's perfectly adequate outgoing budget, and that does not include some $50 billion for security assistance and foreign aid that has also grown immensely during the last twelve years. Yet when the Congress stumbled into the accident of a one-time level change of $55 billion per year owing to the automatic sequester, that prospect uncorked a frenzy of clacking about “the sky is falling” from the neocon Republicans, including Romney-Ryan, that would have made Chicken Little proud.

In truth, the DOD sequester would result in constant-dollar defense outlays of about $620 billion in 2022, not even a 10 percent reduction from the current wildly bloated levels which mainly keep the generals and military industrial complex in business but have no rational relationship to national security in the twenty-first century. In fact, the post-sequester budget level would still exceed the Eisenhower Minimum by 50 percent,
and it is that startling fact that dramatizes the fiscal infamy that should be accorded the neocons.

In today's world what is expensive is military manpower and hardware; that is, the stuff of massive land and sea forces and the capacity for global intervention, invasion, occupation, and resupply. The half billion dollar per week cost of operating the resupply lines over the Hindu Kush is a dramatic case in point. By contrast, what is increasingly and radically cheaper is silicon, and the cost of standby nuclear deterrence and satellite- and technology-based intelligence gathering.

The Republican Party thus desperately needs an Eisenhower or a Taft to champion flinty-eyed austerity and realism in national security policy. Yet populating the congressional defense committees with acolytes of Cheney and Rumsfeld, it is positioning for an all-out battle to keep the defense budget at the high end of the $620 billion to $700 billion corridor that brackets current policy with and without the sequester. So doing, it will squander the political capital of the conservative party, thereby prolonging and worsening the fiscal cliff rather than showing the way forward. Ironically, the Keynesian state is on the road to failure because the conservative party which is supposed to fight it became enamored with carrier battle groups and cruise missiles and a figment of neocon imagination called the new caliphate of Islam.