Even Conservative Andrew Sullivan Now Admits.....

"EVEN CONSERVATIVE ANDREW SULLIVAN NOW ADMITS..." It's disappointing to see Andrew Sullivan sounding so much like Paul Krugman.

Andrew has been worrying for a while about increasing deficits and increasing government spending under a supposedly conservative administration -- and that's fine, I worry about all that too. But that's no excuse for uncritically passing on slanted and inaccurate scare stories in the media that claim the Bush administration is responsible for -- or worse, is trying to conceal -- some cataclysmic new fiscal threat to American civilization. And, disappointingly, that's just what Andrew is doing today.

I'll betcha anything that Krugman's just licking his lips, getting ready to quote Sullivan on this one in his next column. "Even conservative Andrew Sullivan now admits..." ...you can imagine the rest.

Today Andrew cites a story that ran Wednesday in the Financial Times. Here's what he says about it:

"CRIPPLING DEFICITS LOOM: A report commissioned by the Bush Treasury Department is left out of the budget, claims the Financial Times. Hmmm. Money quote:

"The study's analysis of future deficits dwarfs previous estimates of the financial challenge facing Washington. It is roughly equivalent to 10 times the publicly held national debt, four years of US economic output or more than 94 per cent of all US household assets. Alan Greenspan, Federal Reserve chairman, last week bemoaned what he called Washington's 'deafening' silence about the future crunch.

"With each Bush budget, the fiscal future of this country - including its ability to fight necessary wars - is being gutted. Why are there so few conservative voices protesting?"

Andrew's description is accurate enough, at least in terms of faithfully portraying the FT story -- it's pretty intense.

It describes a long-term budget study done by a former Treasury Deputy Secretary Kent Smetters and consultant Jagdessh Gokhale, reporting to former Secretary Paul O'Neill. The story strongly suggests that the study's projection of what the FT calls "a future of chronic deficits totaling at least $44,000bn" was deliberately suppressed by the Bush administration -- too hot to handle.

"...the Bush administration chose to keep the findings out of the annual budget report for fiscal year 2004, published in February, as the White House campaigned for a tax-cut package that critics claim will expand future deficits. The study asserts that sharp tax increases, massive spending cuts or a painful mix of both are unavoidable..."

By the time you're done with the story and Andrew's take on it, you have the idea that, after two years in office, the administration has concocted a plot to secretly pay trillions of dollars to Halliburton, to "leave it out" of the budget, and to purge all the honest people in the administration who knew what was happening.

But that's all simply untrue. And I can prove it, because in what I would hail as a breakthrough in high standards of reportorial integrity, the online version of the FT story provides links to the full transcripts of the FT reporter's conversations with Smetters and Gokhale, and to the report itself.

The most cursory scan of these documents reveals instantly that this study is actually about nothing more than a new method to account for the present value of Social Security and Medicare liabilities. Read the Smetters transcript. He says,

"...it's very clear that almost all the problems are SS and Medicare. It's not the rest of the government that's a problem."

But the FT story only mentions Social Security and Medicare in its very last sentence, and then only en passant, as part of the obligatory administration denial:

"An administration official... noted the budget's extensive discussion of projected, 75-year Social Security and Medicare shortfalls."

The report's new method for calculating Social Security and Medicare liabilities isn't even all that new -- the Trustees of the Social Security Trust Fund already started using the method this year (and in fact, Smetters says his report comes up with less alarming numbers than the Trustees did).

The Trustees have not applied the new method to Medicare yet -- this is the source of the big new liability described in the report. And it's a real issue that America will have to tackle someday.

But old or new, the present value of entitlement liabilities has never been tallied as part of the national debt (people like Milton Friedman, Alan Greenspan -- and I, too! -- have been complaining about that for years).

Until that happens, we're just talking about what amounts to an informational footnote -- and one way of calculating that footnote versus another. We're not talking about anything that would be included in "the budget" as it is commonly understood or reported on.

It pains me to see President Bush getting beaten up over this, because he has done more than any other president to try to address the problems of Social Security and Medicare head on.

He's dared to grasp the third rail of American politics, and to propose that Social Security be radically restructured to incorporate elements of personal choice.

Ironically, according to Smetters in the transcript, Bush's work on Social Security reform -- if implemented -- would do wonders to address the very problems cited in the report:

"This new framework would do wonders for analysing [sic] SS reform. The president's commission - which I had the honor to help work with during my time in DC - uses the older measures since the new ones were not yet available. If they use these new measures, plans like Commission Model #2 would look terrific."

I agree with Andrew that Bush should be a lot tougher on spending (but we've known all along he's a "compassionate conservative," and we know what that means -- so let's at least not act surprised).

But it's just flat-out wrong to imagine that there's a vast Bush-wing conspiracy to "leave out" things from the budget, or that the scary numbers estimated in this report are the result of some new thing that the Bush administration has done.

These are problems that have been festering since the time of FDR -- President Bush is part of the solution.

Does nobody recall a sometimes economist named John Maynard Keynes, who pretty much declared deficit spending in times of economic downturn a good thing? The theory was, when the economy was bad, and tax revenues were reduced, accelerate government spending and borrow funds to keep the government operating. When the economy recovers, then use the flush of revenue to retire the debt incurred.

Only an odd thing happened on the way to the bank. The Keynesian theory was applied during the Great Depression, and held through the Second World War. But the war was over, the flush of cash from the extremely high tax rates gave a false sense of entitlement to the Congress. In the early years after the war, many of the freshman Congressmen just back from the war, and largely Republican, looked at the huge national debt, and kept the high taxes in place. But reaction soon set in and Democrats swept back into power, hobbling real reform of the taxes for some time. The flow of cash, and the willingness to live with a large and growing national debt, resulted in a number of social programs being introduced, while at the same time, the military machine assembled from 1941 to 1945, was rapidly dismantled. When the military was called upon to remobilize for Korea defense in 1950, they were woefully unprepared. We were sending P-51s and P-80s into battle agains the (at the time) highly advanced MiG-15s, which could fly circles around either of these two front-line fighters and flat-out run away from them. Our ground troops were underequipped, and the logistics were dreadful in the early months of that engagement. We damned near got kicked completely off the peninsula. But worse than that, our national debt was ballooning again.

Keynesian economics kicks in again. Up rockets the national debt, the nation goes on wartime footing, and we all live with austerity. The social programs were reduced or put on the back burner, and the spending priorities made some sort of sense for a while. But then the Korean engagement comes to a stalemate, and the first cuts made? Right, the military again. The social programs were made the centerpiece of most new legislation, and the national debt was hovering around a hundred billion dollars or so. Never in our lifetimes, could we ever pay off this onerous burden.

Then came along John F. Kennedy, with a new idea, apparently untried, to reduce the rates on income tax. Notice that there was never any move to reduce taxes, only the rate at which they were taxed. When the new lowered rates kicked in, the INCREASE in revenue surpassed all expectations. So much so, that when the Viet Nam engagement heated up, the Johnson Administration had a belief that austerity was not necessary, we could have both guns and butter. We know how that turned out, people became nostalgic for a national debt on "only" a hundred billion dollars.

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