The Phantom Dividend


Thus far, only Republicans have offered any solid proposals in the debt ceiling debate.  Senate Majority Leader Harry Reid (D-NV) aims to change that… by offering a liquid proposal.

After well over two years of disgraceful inaction, Reid is supposedly about to release a budget at last.  (Believe nothing until you see sheets of paper covered with numbers.)  Part of his debt package is $1 trillion of phantom savings, conjured from the ashes of the military operations in Iraq and Afghanistan.

This is an old trick, with a bipartisan pedigree.  The idea is that the Congressional Budget Office builds a spending baseline for the next ten years by projecting all current expenditures forward… including the cost of wars that most likely would not be in progress ten years from now.  That even includes operations in Afghanistan, even though the President already announced a drawdown.

Of course that’s silly, but it’s how the CBO works.  It’s one of the reasons CBO projections are always wrong, especially when they model dynamic activity, such as… well, almost everything.  The past three decades have featured plenty of plans scored as “revenue neutral” by the Congressional Budget Office, and yet the national debt keeps climbing in the stratosphere.  Name a big government boondoggle, and you can bet it was scored with a vastly lower cost, or even declared revenue neutral, by the CBO at some point. 

That most definitely includes ObamaCare.  It’s hard to remember this now, as we watch Obama’s signature legislation blast the national debt into orbit, but at one point the CBO actually said it would reduce the deficit.  This was accomplished, in part, by front-loading all the “revenue enhancement,” and delaying the big costs until the out years.  Spending junkies are very good at manipulating these projections.  There are honest people working at the CBO who grind their teeth over these games, but they have no choice but to follow their standard procedures.

At any rate, Reid is actually willing to insult the American people by claiming over a trillion dollars in “spending reduction” from wars that were ending anyway.  He gets it by assuming all current spending on Afghanistan and Iraq remains constant for the next decade.  Anything less than that represents a huge “budget cut.”  That’s like getting your car totaled, and counting all the money you would have spent on gas over the next ten years as a budget reduction… even though you bought another car, and you’re filling it with gas.

 Among those blowing the whistle are the analysts at Goldman-Sachs… not exactly noted as a dedicated foe of Big Government.  Fox News quotes a memo warning that Reid’s accounting tricks will jeopardize the credit rating of the United States among those agencies which have not lowered it already:

Nearly half of the deficit reduction in Reid’s plan would come from phantom war savings, according to the Goldman memo. 

“The (withdrawal of troops from Iraq and Afghanistan) would show up in official budget estimates as savings of about $1.2 trillion versus current law,” the memo reads. “If this proposal were to prevail without a credible follow-on process, a ratings downgrade could ensue, since against most outside baseline budget estimates only the first portion of spending cuts, and not the war spending savings, would show up as deficit reduction.” 

The first portion was estimated to be worth just $1.5 trillion. 

“That would leave the fiscal consolidation far short of the ~$4 trillion S&P has said it is looking for, with no catalyst for additional deficit reduction before 2013,” Goldman warned. 

“S&P” is Standard and Poor’s, one of the big three credit agencies.  If they strip the United States government of its AAA rating, servicing the national debt will suddenly cost billions more each year, plunging us further into insolvency.

If you’re one of those who think the government performs all sorts of noble and vital functions to protect the downtrodden, climb out of that Mediscare tub you’ve been marinating in, and face the truth: it’s people like Harry Reid that are jeopardizing the funding for those government services.  If his little games wipe out our credit rating, the increased cost of servicing the debt will come right out of the programs you hold dear.  That’s going to happen soon enough anyway, but Reid will get us there so fast your head will spin.

Meanwhile, as for the Boehner proposal introduced this afternoon, Senator Rand Paul (R-KY) has not been shy about voicing his disapproval.  In a statement released today, Paul condemned it as a half-hearted waste of time:

The proposed deals being discussed today by House Republican and Senate Democrat Leaders do not make cuts to our debt. They do not solve our debt problems. They do not balance the budget, ever.

Proponents of the most recent debt ‘deal’ in the House are saying it will cut $1 trillion over 10 years now, with promises of $2 trillion more cuts from a ‘commission;’ Senate Democrats are proposing $2.7 trillion in largely smoke and mirrors. These plans ‘cut’ from a baseline that, under current law, will add $10 trillion in new debt over 10 years. So in reality these ‘deals’ add at least $7 trillion to the national debt with no end in sight.

These are not serious proposals, and they will not solve our fiscal problems. The plan proposed today by the House leaders does not meet the core standards of the Cut, Cap and Balance pledge. The Tea Party is willing to negotiate with the President over the specific spending cuts and spending caps, but any proposal must include a balanced budget amendment to ensure we solve our debt problem once and for all.

The debate needs to be about real spending cuts – not simply reductions in proposed increases. This ‘deal’ talks of cuts, but these ‘cuts’ are from a baseline that plans to spend over $45 trillion over the next 10 years. It is important that the public understand that the ‘deal’ involves allowing spending and debt to increase every year over the next 10 years. I cannot and will not support any deal that does not have as its end goal a balanced budget. Promises and commissions will not satisfy that goal.

(Emphasis mine.)  Senator Paul is exactly right.  Doesn’t the murderous burden of $14 trillion in debt, financed by hundreds of billions per year in interest payments, make an absolute mockery of anything less than a balanced budget, right now?  We’re never going to clean that mess up until we stop making it bigger… and that means dismantling the mechanisms that produce our relentless spending bloat. 

One of those mechanisms is the kind of accounting trickery that lets people like Reid make ridiculous claims about phantom budget cuts.  We should insist that any serious budget plan be – at a bare minimum – something that a private-sector financial officer could propose without going to prison.