Cato Institute: Budget Disaster Looming

The Cato Institute has the following on their front page,

Budget Disaster Looming
At a briefing last week, House Majority Leader Tom DeLay declared an “ongoing victory” against bloated federal spending. Congress passed $62 billion of spending for Hurricane Katrina relief that will push the deficit back up to the $400 billion range. When asked whether Katrina relief should be offset with budget savings elsewhere, DeLay said “bring me the offsets, I’ll be glad to do it.”

Cato Institute scholars Steve Slivinski and Chris Edwards have the offsets that the majority leader is looking for. They have compiled $62 billion in spending cuts that would offset Katrina relief in the short-term and create savings to reduce the federal deficit over the long-term. (Graphic)

The graphic lists the cuts and the rationale for each cut. The cuts are targeted at business subsidies, welfare for the well-to-do such as farm subsidies, and activities that should be funded by states and the private sector. The cuts would not affect programs for the poor, and thus could get support from reform-minded Democrats. Many of the cuts were proposed, but not realized, by House Republicans in the 1990s.

Slivinski and Edwards think that Mr. DeLay needs to sit down and reexamine the federal budget. DeLay said “after 11 years of Republican majority we’ve pared it down pretty good.” Yet total federal spending, aside from interest, has increased 79 percent since 1995 — much greater than the inflationary increase in prices since 1995 of 28 percent. The budget has certainly not been “pared down” by the Republicans.

In a piece for Friday’s Newsday, Slivinski writes: “There’s no reason why money spent on natural-disaster relief should not compete with spending in other areas of government. If the relief spending is truly more necessary than other programs in the budget, then those less essential programs should be pared back to make room for it. Congress does not seem concerned about how the federal government (read: taxpayers) is going to pay for any of this. Yet now is exactly the time to figure that out. Charity does require sacrifice, even from big-spending politicians using other people’s money for charitable purposes.”

Chris Edwards weighed-in on Monday, with a piece in the Washington Times: “Today the GOP needs to rally behind new fiscal leaders and a new blueprint for reform, akin to the 1994 Contract with America. House conservatives have a new plan in the “Family Budget Protection Act” and they have new leaders such as Rep. Jeff Flake of Arizona. What they need is for party leaders, such as Mr. DeLay, to embrace the new generation of reformers and put their ideas front and center in Republican policymaking. Republicans need to look back to the 1990s to appreciate that budget cuts can be a winning strategy. And they need to look forward to realize complacency is no longer an option. Huge Katrina expenses, continued Iraq spending and rising entitlement costs means now is the time to launch a new Republican budget revolution.”

This further highlights that the era of big government is here to stay and those ushering it in are the Republicans. It should be clear that Republicans in general are no longer interested in reducing the size of government. There is quite a bit of fat to cut in the federal budget. Add on top of this huge spending programs like the Medicare Prescription Drug Plan and it is obvious that Bush and Republicans do not have a problem expanding the size of government to unprecedented levels.

FILED UNDER: Economics and Business, US Politics
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Herb says:

    Steve,

    You are right on target. But, then again, look at any of our glorious politicians in Washington DC. Everyone of them would no sooner cut their pet money projects than jump out of an airplane without a parachute.

    The lavish spending of every politician is their only means of re-election. In other words, their only legal means of vote buying.

    If anyone wants to place the blame on someone. “Look in the mirror”

  2. ken says:

    What is funny is that the Cato Institute is so late to to the party on this. It was entirely predictable that the Bush tax cut policies, which the Cato Institute supported, were going to lead to increased budget deficits. But now, that Bush spending policies are causing even higher deficits, now, they are suddenly against deficits. Wellcome to reality.

    Now if they would just grow up and stop pretending that tax cuts can fund increased spending they might gain some overall credibility.

  3. Matilda Zuckerman says:

    Ken said ….

    “It was entirely predictable that the Bush tax cut policies, which the Cato Institute supported, were going to lead to increased budget deficits.”

    Unfortunately, Ken, you are dead wrong. Since the tax cuts became effective in 2002, federal tax revenues have risen sharply.

    In other words, in an over-taxed world such as ours, lower taxes lead to higher revenue.

    This has happened many times before and is plain to see so I don’t know why the “left” doesn’t get it.

    The reason we have budget deficits is simple…the federal government is spending money like drunken sailors.

    If we raise taxes back to pre-Bush levels, revenues will drop and then we will really have a deficit problem.

  4. Paul the Great says:

    Matilda, did tax revenues rise during Clinton presidency? They did? Wasn’t that while taxes increased?

    It’s laffer-able that as has been said many times eloquently, that for Republicans tax cuts are the way to end recession, decrease deficits, limit the size of government, promote abstinence, slice watermelon, etc.

    Just a coincidence that greed = wanting to keep things to oneself, I suppose.

  5. ken says:

    Matilda, never before in world history, until the current crop of addle brained conservatives came upon the scene, did anyone think that you could raise revenue by lowering taxes. Reagan proved that by levying the largest tax hike in American history that revenue would go up, as was expected. Clinton proved that even a modest tax hike can increase revenues. Bush II is proving that massive budget deficits can also provide a temporary hike in revenue, although at an extremely high cost.

  6. McGehee says:

    Matilda, never before in world history, until the current crop of addle brained conservatives came upon the scene, did anyone think that you could raise revenue by lowering taxes.

    You’re including President John F. Kennedy and practically every president of either party before him in “the current crop of addle brained conservatives” — you do realize that, don’t you?

  7. ken says:

    Wrong McGehee, Kennedy specifically was concerned about the looming budget surpluses that could act as a Keysian brake on the economy. His tax cuts where to battle surpluses. He cut taxes, cut revenue and preserved government deficit spending which is what is stimulative.

    Tax cuts cut revenue. It is the deficit spending that makes up for the lost revenue from the tax cuts.

  8. Steve Verdon says:

    What is funny is that the Cato Institute is so late to to the party on this. It was entirely predictable that the Bush tax cut policies, which the Cato Institute supported, were going to lead to increased budget deficits. But now, that Bush spending policies are causing even higher deficits, now, they are suddenly against deficits. Wellcome to reality.

    This is misleading, which appears to be typical for ken, the Cato Institute has been opposed to Bush’s spending for years. A quick search of their site of Bush and Spending will turn up numerous results.

    Now if they would just grow up and stop pretending that tax cuts can fund increased spending they might gain some overall credibility.

    Again, this looks misleading. I don’t know of anywhere where the Cato Institute has taken such a position.

    Unfortunately, Ken, you are dead wrong. Since the tax cuts became effective in 2002, federal tax revenues have risen sharply.

    In other words, in an over-taxed world such as ours, lower taxes lead to higher revenue.

    Actually, in 2002 tax reciepts were lower, as well as for 2003. In 2004 receipts were higher, but how much of it was due simply to economic growth. Granted tax rates play a role there, but the numbers we are talking about are not sufficient to make me think that lower taxes have substantially raised revenue beyond what revenues would have been without the tax cuts and the economic growth.

    Matilda, did tax revenues rise during Clinton presidency? They did? Wasn’t that while taxes increased?

    Yes, total government receipts, as well as federal income tax receipts increased every year Clinton was President. Same for corporate taxes on corporate income.

    Matilda, never before in world history, until the current crop of addle brained conservatives came upon the scene, did anyone think that you could raise revenue by lowering taxes.

    Of course, Ken is once again being misleading. Not only did John F. Kennedy make this very argument, but so have others such as John Maynard Keynes. Of course, the idea is that one has to be on the right hand side of the “Laffer curve”, which in all likelihood we aren’t.

    Wrong McGehee, Kennedy specifically was concerned about the looming budget surpluses that could act as a Keysian brake on the economy. His tax cuts where to battle surpluses. He cut taxes, cut revenue and preserved government deficit spending which is what is stimulative.

    Another inaccurate statement from Ken. Kennedy’s statement about tax cuts:

    “It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.”

    Further, McGhee is correct about deficits being the rule rather than the exception. Since the end of WWII there have been surpluses for only 7 years.

    Bush II is proving that massive budget deficits can also provide a temporary hike in revenue, although at an extremely high cost.

    And this is just plain wrong. Deficits cover for revenue shortfalls, they are not revenues, and are in fact represent future liabilities.

  9. ken says:

    John F Kennedy:

    Taxation: In the first place, our tax structure as presently weighted exerts too heavy a drain on a prospering economy compared, for example, to the net drain in competing Common Market nations. If the United States were now working at full employment and full capacity, this would produce a budget surplus, at present taxation rates, of about $8 billion this year. It indicates what a heavy tax structure we have, and it also indicates the effects that this heavy tax structure has on an economy moving out of a recession period. We saw that after the ’58 recession; we have seen it after the ’60 recession in the last months.

    Steve, you obviously are coming to this discussion from an idealogical position that ignores actual facts that are important for someone to understand any kind of tax policy.

    Kennedy also faced the threat of inflation. The P/E ratios for the DJI at the time were 23:1, a clear signal that the market was expecting higher earnings in the future. Kennedy believed that that there was only only one way for companies to reach those higher earning: raising prices (inflation) as the economy was nearing full capacity and full employment. The market was signaling that this is what was expected.

    His solution was to target tax cuts to businesses. This would provide businesses with internally generated funds to fund CAPITAL equipment which increases productivity which leads to non-inflationary growth.

    As to deficits producing revenue: borrowed money, once spent, goes to pay for salaries and other taxable economic activites. For example, every borrowed dollar that ends up as taxable income can return 30% to 50% back to the treasury as income and payroll taxes. Our host on this site is a good example of this. His salary at DISA is paid with borrowed money, yet he still pays taxes on his salary.

    I know the whole area of economics is complicated so unless you are willing to go beyond the rhetorical talking points you find in conservative publications I suggest you stay away from the subject altogether.

  10. DL says:

    Big Tents are expensive! Porous borders are more expensive – The Pres. agreeing with the race card players is even more expensive. Playing one -ups-manship with the liberals is the most expensive! For this we fought Kerry and Company?

  11. Steve Verdon says:

    I know the whole area of economics is complicated so unless you are willing to go beyond the rhetorical talking points you find in conservative publications I suggest you stay away from the subject altogether.

    Based on your quote ken, I think it is fair to say that I’ve forgotten more about economics than you’ll ever hope to know.