Noses Are Growing In Washington

WASHINGTON. It was amazing to watch. Noses growing, growing prodigiously in a week. Democrat noses. Republican noses. Administration noses. Journalist noses. All they did was grow.

I refer, of course, to the much publicized agreement to balance the Federal budget by the year 2002. Government revenue, we are told, will equal government spending.

The long battle is over. We can stop worrying about future deficits and escalating debt. We can stop worrying about government borrowing, interest rates, and inflation.

Not a chance.

What politicians of both ilk’s are calling a balanced budget isn’t balanced at all.

What they are pointing to is the Unified Federal Budget, a convenient document that merges the surplus in the Social Security trust fund and a few other federal trust funds with regular government expenses. Last year the Social Security trust fund surplus was $67 billion, no small sum. Without that surplus, the actual operating deficit of the Federal government would look exactly that much larger. In other words, instead of the proudly announced $107.3 billion, the actual deficit was $174.3 billion.

What our friends in Congress have is the equivalent of a captive bank. Social Security overtaxes workers to create a surplus and winds up like the proverbial dead atheist— all dressed up with no place to go.

How large is this captive bank? Total growth in loans and leases in the entire banking system in 1996 was about $165 billion.

Nor is this cornucopia of new federal debt a one year fluke. Off Budget surpluses, virtually all from Social Security, have been underwriting other federal spending since 1983, piling up some $550 billion in Treasury obligations. For the current fiscal year the trust fund surplus will add another $73.9 billion to the Congressional credit line.

And it won’t stop in the immediate future. The Congressional Budget Office has estimated the Social Security surplus over the next five years at $465 billion, a sum that will contribute massively to the appearance of a balanced budget.

You can find these figures in two public documents: Economic Indicators, published monthly by the Council of Economic Advisors, and The Economic and Budget Outlook, most recently published in January.

Table 1, below, shows the figures over a ten year period. As you can see, the “On Budget” deficit bottoms this year and then starts to rise, year by year. Ditto, the Unified Budget, the one that takes the surplus from Social Security and spends it.

What our friends in Washington are crowing about is their plan to cut the Unified Budget deficit from $188 billion in 2002 to zero. They have not mentioned the help they are getting from the Off Budget surplus.

Ten Years of Deficits

Sources: Economic Indicators; Congressional Budget Office

Note that the surplus from Social Security in 2002 will be even larger… some $103 billion.

What does this mean?

Simply this: the real federal deficit will still be at least $103 billion in 2002. Over the next five years the Social Security Trust Fund will expand by some $465 billion in new Treasury obligations as the Federal government takes the cash, spends it, and drops new IOUs in the Trust Fund. In addition, the CBO estimates that an additional $291 billion in new Treasury obligations will be dropped into the fund as accrued interest, bringing the five year total debt increase to $756 billion. What we are looking at, in other words, is a captive bank whose assets will expand by as much in the next five years as loans and leases in the entire banking system have increased so far this decade.

As I said, noses in Washington are long and still growing.

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo by mali maeder

(c)  A.M. Universal, 1997