May 17, 2012
FSM HOT TOPICS
Wars and Taxes: Why the U.S. Economy is in a Mess
by PETER HUESSY October 13, 2011
Why is the US economy still in a mess? A popular narrative is, of course, BBS, or the “Blame Bush Syndrome”.
The story consists of three parts.
First, there were tax cuts for the rich which cost $1 trillion; then there were two unnecessary wars not paid for which cost $2 trillion; and then a prescription drug benefit which cost $1 trillion, (and on top of which was a give-away to the drug companies and thus cost more than necessary).
So that is where the $4 trillion in debt Bush added to our national debt over eight years came from, and since the wars, the tax cuts and the drug benefit continue, that is why the US economy remains in a deep hole. Makes sense, right?
Well, no, actually, its baloney.
What Are The Facts?
Why did we cut taxes in 2001 and 2003?
In 2000-2, the US lost 3.2 million jobs due to the stock market collapse, the recession, and the attacks of 9/11. Go look at the Bureau of labor Statistics. They have month by month job data going back to 1949.
These jobs losses eliminated the projected budget surplus and put the US in the red, even before tax reform to spur the economy was put into place. To recover from the 4th worse recession since the Great Depression, we cut taxes across the board. This included a child tax credit and eliminating the marriage penalty, hardly “tax cuts for the rich”. Taxes on investment were lowered. Investment soared and revenue from capital gains for example reached $90 billion a year, a four-fold increase from the stagflation of the Jimmy Carter years.
From 2003-7, when the income tax rate changes kicked in fully, the economy grew by 7+ million jobs, or an average of 167,000 a month. By 2007, the economy was generating $2.8 trillion in Federal revenue, compared to $2 trillion in 2000.
Unfortunately, in 2007 oil increased to $147 a barrel and thrust the world into a financial and economic recession. This was largely triggered by the collapse of the housing bubble. How was the bubble created? Largely in the late 1990s by Housing and Urban Development Secretary Cuomo who led the charge to require mortgage loans to unqualified buyers to the tune of trillions of dollars, all guaranteed by Fannie Mae and Freddie Mac.
It is true using static scoring, the tax rate reductions for the top two income levels reduced revenue by $70 billion a year. In the period they kicked in fully from 2003-8, this amounted to $420 billion in added debt. But that assumes none of the money if left in the private sector to begin with would have added economic growth to the economy. But a general rule of thumb is that as this money would be spent and invested in the economy it would return about a third of the “lost revenue” to the US Treasury.
Thus, actual net cost in the Bush administration of “tax cuts for the rich” in the years 2003-8: No more than $280 billion.
Let us next take up the charge of "Two unnecessary wars not paid for".
Apparently critics knew the costs of defeating the Taliban before the war was even fought. Did Franklin Roosevelt "pay" for World War II? No, we borrowed the money.
Perhaps in the wake of the attacks of 9/11, with the US economy reeling, the US should have dramatically increased taxes to pay for liberating Afghanistan, the cost of which we did not know. Or better yet, we could pay for the war against the terror masters prior to fighting it!
Just as we “paid for” the “War on Poverty” starting in 1965, (now in its 46th year at a cumulative cost of $16 trillion).
What about the charge the two wars were not paid for? The Afghanistan war cost roughly $50 billion a year, and over its seven years during the Bush administration, that would be $350 billion.
But as we have noted, by 2007, the US treasury was raking in $2.8 trillion, more than enough to pay for the so-called tax rate reductions on the rich and the cost of the war in Afghanistan.
Now what about the liberation of Iraq? Was it really unnecessary?
In 2001, Saddam Hussein was shooting at US pilots daily. He had trained some of the Somalia terrorists that killed Americans there in 1994. He provided funding to the #2 official in Al Qaeda. He was also training terrorists from dozens of different countries in Iraq. He was the financier of the terrorist activities of the Sudanese government, which harbored Osama Bin Laden. Saddam brought Al Qaeda operatives into northern Iraq in the fall of 2002 to work against Kurdish Iraqis. ABC news reported in 1999 of the “long standing relationship between Iraq and Al Qaeda”.
According to new evidence unearthed by Jack Cashill, what appears to be one of the initial meetings of the 9/11 hijackers in Malaysia were hosted by an Iraqi with close connections to the Iraqi embassy. His brother helped mix the chemicals used in the 1993 World Trade Center bombing and was a partner of the mastermind Ramzi Yousef, who is the nephew of 9/11 mastermind Khalid Sheik Mohammed. Coincidence?
But what of the war costs?
Operation Iraqi Freedom has been very expensive. Roughly $100 billion a year for the period 2003-08 was due to decisions solely under the previous administration. That cumulative cost is $600 billion.
But it should be noted the current costs of the Iraq effort are now less than $40 billion a year, and certainly paid for within the $2.2 trillion collected in Fiscal Year 2011 by the Federal Government.
But let us assume of the FY 2011 $1.3 trillion deficit, $40 billion belongs to Bush for continued Iraq war costs. The entire cost of both counter insurgencies is now $118 billion a year.
Next, what about the prescription drug entitlement? The claim that the prescription drug benefit “was not paid for” is puzzling. As introduced initially by Senator Edward Kennedy, CBO said it would cost $85 billion a year. No bill paying for this was ever introduced by the late Senator.
The Bush administration's program as now implemented costs significantly less than first estimated. It does provide prescription drug benefits for millions of Americans at a cost of roughly $35 billion a year. Critics claim it costs forty percent more than it should because of the evil drug companies, so we can say that $14 billion of excess costs is due to the Bush administration in that even its cost critics apparently support the program itself.
Since the program has been in effect since 2006, the cost to the treasury during the Bush administration was thus three years times $14 billion or $42 billion. But the estimate is that at least 10% of its costs have been saved by eliminating the need for expensive surgery and thus the net cost is closer to $38 billion over this period or$13 billion annually.
Thus, what have we found out so far?
The annual current cost of two wars ($118 billion declining to $10-20 billion in ten years); the prescription drug benefit, ($13 billion a year net); and tax cuts for the rich ($70 billion) contribute $200 billion annually to the deficit of $1.3+ trillion in FY2011, or at most 15% now.
We now face a number of choices? Do we dramatically increase taxes to get our fiscal house in order, or would prudent spending cuts be more in order or some combination? Let us look at what we are now facing. Is spending just right and taxes too low, or the other way around?
The administration's eight year budget from FY2009-FY2016 was introduced in February 2011. It apparently is not on the reading list of the victims of the BBS syndrome. But let us now introduce them to its basics.
Spending is projected to climb from $2.982 to $4.467 trillion. Is that due to expensive wars?
During the period from today, FY2012-16, defense, some of homeland security, state department, and the military portion of the department of energy, is projected to increase $50 billion annually by the administration’s budget, but only if none of the defense spending cuts agreed to in the August debt agreement do not materialize. If they do, these national security elements of our national budget contribute nothing to our future deficits. They are paid for.
Another way of examining these issues is to look at the cumulative debt added from 2009-2016 under this administration's February budget proposal. It is projected to be $10 trillion over eight years.
This is primarily due to the following "un-paid-for" new spending initiatives over and above the baseline: Agriculture/Food Stamps: $440 billion; Education: $265 billion; Health and Human Services such as Medicaid: $3.2 trillion; Transportation: $330 billion; Treasury: $1.5 trillion; Social Security: $1.6 trillion; Energy: $90 billion; Office of Personnel Management: $130 billion.
These programs include adding 30 million new people to Medicaid, continuing stimulus spending, including loans to energy winners and apparently losers, and bailout funding of states over-budget on their public employee costs.
Now at the same time we are accumulating these unprecedented deficits, the administration proposes over the period FY2012-2021, $2.05 trillion in new taxes on so-called “rich” individuals and businesses. This is made up of $70 billion a year on the top two tax rate payers and another $45 billion to pay for “Stimulus Two” and $90 billion a year in new taxes under health care reform.
Yes there are "spending cuts" of a sort. There is a pledge to limit waste and fraud in Medicaid ($70 billion), limiting reimbursements under Medicare to drug companies, institutional care provides, hospitals and doctors ($250 billion), increasing co-payments in 2017 under Medicare for those earning $85-200,000, as well as some additional funding reductions in agricultural subsidies, all amounting to $450 billion over five years.
[Parenthetically, it should be noted defense spending was cut $330 billion in FY2009, with another $100 billion in FY2011. Added to that is the $450 billion in new defense cuts agreed to in the August debt ceiling deal. Cumulative defense cuts of almost $900 billion are already twice what the administration is proposing elsewhere, although defense is roughly only 16% of the Federal budget].
These spending cuts are offset by spending sent to states for public employees, infrastructure construction, and $245 billion taken out of the Social Security Trust Fund to extend payroll tax rate reductions for one year.
But all these spending increases and tax cuts are for one year, thus temporary. The tax increases are permanent. As are the defense spending cuts.
Thus, over the eight years 2009-2016 projected by the administration, they will:
Spend: $31 trillion (Bush responsible for $0.9 trillion).
Add: $10 trillion in new debt (minus the $2.5 trillion from the debt agreement in August and the debt super committee).
Raise: $2.05 trillion in new taxes.
In sum, the administration has hit the budget Trifecta:
(1) Spend the largest amount of money ever in U.S. history over a comparable period of time;
(2) Increase the national debt by record amounts; and
(3) Raise taxes more than ever before in US history.
The new national syndrome: SBT, Spend, Borrow and Tax.
FamilySecurityMatters.org Contributing Editor Peter Huessy is on the Board of the Maryland Taxpayers Association and is President of Geostrategic Analysis of Potomac, Maryland, a national security firm.
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