Monday, April 14, 2008

The fiscal consequences of the Bush administration


By Clive Crook
Financial Times
Published: April 13 2008

Competition for “most damaging legacy of the Bush administration” is lively. Iraq is the front-runner, of course, but bear in mind the wreckage of fiscal policy – although to use that term is to imply that the US even has a fiscal policy, when it does not. It would be more accurate to talk of fiscal consequences or fiscal footprint (an apt metaphor) than to imply anything as deliberate as “policy”.

All three presidential contenders criticise the administration on this, but none is offering much improvement. The Democrats remind the country that in the late 1990s the Clinton administration ran a budget surplus. With ill-designed tax cuts and reeling indiscipline on spending (partly, but not only, because of the war) the Bush administration turned this into a deficit. Barack Obama’s answer is the same as Hillary Clinton’s: undo the tax cuts and then raise spending by even more. John McCain, the Republican nominee and supposed fiscal conservative, is against raising taxes and promises to get spending down instead – but will not say how to do it.

The whole debate rings hollow anyway, because most Americans think it has nothing to do with them. The Democrats are promising to raise taxes only on the rich: the country’s vast middle class expects to be unaffected. And as long as Mr McCain declines to explain exactly how he will curb spending (aside from attacking earmarks, the special interest spending projects which in the larger scheme of things are trivial), voters will be equally blithe about that side of the calculation too. Everyone can deplore the fiscal incontinence of the Bush administration and hardly anyone need worry about what restoring fiscal control might require. In this, as in other areas, the thinking boils down to: “After George W. Bush, everything will be fine.”

On taxes and spending – as on Iraq – it will not. The point has become dulled through repetition, but the fact remains that the US faces, from a position of fiscal weakness, new and mounting pressures on public finance. In dealing with the larger problem, muddling through is unlikely to succeed. The country will have to change how it confronts fiscal questions.

If it proves incapable of changing its politics in that way – and it probably will – the outlook is a gradual, indefinite and growth-sapping rise in taxes and spending. At the moment, for good or ill, the US is still an outlier among rich countries, certainly as compared with Europe, in having a small state and relatively low taxes. This gap is already shrinking, however, and in the foreseeable future it will close further.

The biggest fiscal pressure comes through healthcare – with or without the universal or near-universal provision the Democrats are promising. Public spending per head on health is already higher in the US than in Britain, notwithstanding the National Health Service. Medicaid (for the poor) and especially Medicare (for the elderly) are enormous programmes and the cost of Medicare is rapidly rising as the baby-boomers retire.

Even with a fixed eligible population, US public spending on health tends to grow faster than the economy. New technologies push costs up and Medicare, like Social Security, is an entitlement programme, so higher spending comes through automatically, with no real oversight. By 2035, according to estimates by the Congressional Budget Office, the cost of Medicare and Medicaid will more than double, to nearly 10 per cent of gross domestic product. Now add universal access.

You might reasonably say, if the US wants European levels of social provision, it will have to have European levels of taxation – and what is wrong with that? Aside from the obvious, which is that people prefer low taxes and economies grow faster that way, the US is unprepared for any such fiscal transition. Because of the way Medicare and other entitlements are budgeted, control of outlays is weak. And on the revenue side, the tax base is much narrower than in most European countries. Close-to-European levels of revenue collected through anything resembling the current US tax code would require far higher income tax rates than the electorate or the economy can stand.

Even now, income tax rates in the US are not that low by international standards and the gap will get smaller still if the Bush tax cuts are allowed to expire as the Democrats propose. Yet the system raises far less revenue than you would expect because of tax expenditures – deductions for employer-provided healthcare, mortgage interest and much else besides. The revenue cost of these allowances is already in the neighbourhood of $750 bn a year. Also, of course, the US has no value-added tax, which provides a large and growing share of government revenues in Europe. The narrow base of the US tax system is incapable of bearing the strains of projected future growth in spending.

Mr Bush has done the cause of fiscal moderation grave harm. He presided over an unwarranted surge in spending and he pushed for tax cuts that were so politically ill-conceived that, in the view of many Americans, merely undoing them is all the tax reform the country needs. The issue is not so much that he moved the structural budget balance from surplus to deficit – though he did and that was a great pity – but that he spared the country until further notice the effort of examining its priorities and mending its failing fiscal machinery. In this election year, control of entitlements and far-reaching reform of the tax system are not even being discussed. Before too long, both will be unavoidable fiscal necessities. Cancelling Mr Bush is not enough.

Friday, April 4, 2008

Why we can't see the NIE

WSJ Report on the NIE:

Classified Iraq Report
Assailed by Democrats
By SIOBHAN GORMAN
April 4, 2008

WASHINGTON -- A new classified intelligence assessment about Iraq says conditions have improved on the ground since the last report, according to officials familiar with the document, and it has renewed a debate on Capitol Hill about the politicization of such analysis.

The report says little more than what hs already available in newspapers, the officials say, prompting criticism from some Democrats that it appears to be designed largely to bolster the administration's Iraq policy ahead of Congressional testimony next week from Gen. David Petraeus, the top U.S. military official in Iraq.

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• What's New: An intelligence report gives a more positive portrayal of the situation in Iraq than have previous reports.
• The Background: The assessment precedes congressional testimony next week about conditions there.
• What's Next: Some Democrats say the report's analysis is shoddy and that it appears to be designed largely to bolster the administration's Iraq policy ahead of the hearing.
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The report has been released to a limited number of lawmakers. Reflecting the consensus of all 16 intelligence agencies, the report is an update to an earlier National Intelligence Estimate on Iraq. Such estimates are the most weighty intelligence analysis the government produces. The update was overseen by Director of National Intelligence Mike McConnell.

The purpose of the report, Mr. McConnell has said, was to assess Iraq's "political, economic, and security trends." It was requested by Sen. John Warner (R., Va.) and delivered to Congress on Tuesday.
[David Petraeus]

While officials wouldn't describe details, they described the report broadly as supporting the surge strategy advocated by Gen. Petraeus. They said it focuses on improvements in security on the ground and in the Iraqi government.

"It's much less insightful than other, recent products and focuses narrowly on counterterrorism efforts in Iraq and the progress of the Iraqi leadership," said Rep. Jane Harman, a California Democrat who chairs to Homeland Security intelligence subcommittee.

A senior administration official said the report reflects the realities on the ground.

"The NIE update confirmed that the surge strategy the president announced in January of last year is working," one senior administration official said. "There's more work to be done, but progress has obviously been made."

Several Democratic officials said the report was notable for what it did not cover. It did not delve into questions of how developments in Iraq would be affected by changes in the region. Earlier reports assessed the potential impact of changes, such as a decision to pull out U.S. troops.

"One might ask whether the timing of the release and the apparent departure from usual procedures means this is more of a political document than an intelligence document," said Rep. Rush Holt, a Democrat from New Jersey who is a member of the House Intelligence Committee. He declined to say how the procedures were unusual.
[Michael McConnell]

Intelligence reports are often delayed by major developments that could affect the assessments. This report was not delayed to include the recent fighting between Iraqi-government forces and the Shiite militia of Moqtada al-Sadr.

Several senior Republican lawmakers said they wouldn't comment because the report is classified.

A report issued in August concluded that there had been "measurable but uneven improvements" in security in Iraq but that the level of violence remained high and the Iraq government remained "unable to govern effectively" and its status would become "more precarious" in the coming months.

Mr. McConnell has said he has no plans to declassify a summary of the report. His spokesman Ross Feinstein declined to comment.

A summary of the August report was released publicly in October, after which Mr. McConnell issued a policy that such declassified summaries would no longer be provided. He quickly broke with that policy and issued a declassified summary of a report on Iran in December, which reversed the long-standing U.S. position that Iran was actively seeking to develop a nuclear-weapons program.

Rep. Harman said that because much of the information in the latest report is "already in the public domain," she wants as much of the report as possible to be made public soon, allowing time for public discussion before Gen. Petraeus gives his report.

Democratic Sens. Edward Kennedy of Massachusetts and Carl Levin of Michigan wrote to Mr. McConnell on Wednesday to ask him to declassify the summary of the report. "There is no compelling reason not to release an unclassified version of this latest" report, they wrote. "This information is critical to the public debate in the coming weeks and months."