woody_zimmerman_118_2007An amazing thing has happened during the past week: Democrats have suddenly discovered fiscal responsibility. All of a sudden Obama Administration officials and Congressional Democrats see that we are in a federal-spending hole so deep that it might actually threaten the financial health of the country. Somebody (they seem to be saying) must put things right.

How we got into this fix isn’t entirely clear, as Democrats tell the story. George Bush is responsible, of course, but details are a little vague. Federal Reserve Chairman Ben Bernanke told Congress this week that “unprecedented” trillion-dollar deficits, out into future years, are “unsustainable.” Indeed, the word “unprecedented” has been tossed about lavishly in recent weeks to describe our government’s totally out-of-control spending. Dems using the word seem not to realize that it means "W" didn't really start it.

There is little political will to rein in the spending, but luckily our fearless young president is doing something. He has established a bipartisan National Commission on Fiscal Responsibility, and he has ordered it to make recommendations on how to put our fiscal house in order. The commission will report its findings around December to avoid perturbing the elections with unnecessary visions of tax-increases, broken campaign promises, degraded entitlements, and (possibly) a lingering, jobless recession.

Actually, Mr. Obama ordered the commission’s creation two months ago, on February 18, 2010, after Congress declined to establish it. (They were much too busy with the endgame of Health Care Reform.) The president wanted to be seen “leading” the move to fiscal responsibility, but he didn’t say much about it until the health-care reform legislation was actually signed. Too much talk about trillion-dollar deficits might have distracted nervous congresspersons from enacting the historic legislation.

The tale of how that legislation was pushed through is instructive for all who will study and learn. Arm-twisting, inducements, bribes and threats applied to certain congresspersons by Mr. Obama and Mrs. Pelosi were much in the news, of course, but the cornerstone of enactment was cooked numbers from the Congressional Budget Office. The CBO is the arm of Congress tasked with fiscal “scoring” of any proposed legislation on the basis of data supplied by Congress. The CBO did this for the proposed legislation, but the numbers produced were immediately decried by political opponents because the specifications from Speaker Pelosi and other House leaders were known to be unrealistic.

During the endgame leading to the bill’s March 21st passage, for instance, the Mainstream Media ceaselessly repeated Democrats’ claims that the bill would reduce the deficit by nearly $150 billion over ten years. But House Budget Committee Ranking Republican Paul Ryan showed that the bill had omitted the so-called “doc fix,” whereby scheduled annual reductions of the fees paid to doctors under Medicare and Medicaid are routinely reversed.

The doc-fix is a regular annual event, but Democratic leaders specified in the reform bill that the reversal would not be made – thus preserving the appearance that the bill produces a net reduction in budget deficits. Without those reductions, the reform bill will increase deficits by $60 billion over ten years. As Mr. Ryan noted, history suggests that the doc-fixes will continue every year. This single item already moves the bill into a deficit posture, contrary to Democrats’ claims.

The CBO also included the following assumptions in its scoring of the health-care reform bill:

> A significant tax on “Cadillac” health insurance plans;
> Artificial slowing of the growth in Medicare/Medicaid subsidies;
> Unrealistic future cuts made by a Medicare Commission.

The CBO estimates that if these actions do not occur, the cumulative federal deficit for the decade after 2019 will be close to ¼% of GDP – i.e., approximately $600 billion. The Cadillac tax has already been delayed twice in the run-up to passage. Its implementation is now postponed until 2018. Mandated slowing of the Medicare/Medicaid subsidies also seems extremely unlikely. And history indicates that cuts supposedly to be made by the Independent Payment Advisory Board will never be implemented because political pressures from seniors simply will not allow them.

In addition, $500 billion in Medicare cuts were notoriously double-counted by the Congress – as even Hottentots in Africa know by now. The CBO was bound to accept Congress’s assumption that these cuts would reduce the reform bill’s cost. But Congress also bragged that the cuts would enhance the health of the Medicare system for the future. They cannot do both. In the CBO’s own words:

“In effect, the majority of the HI trust fund savings under H.R. 3590 and the reconciliation proposal would be used to pay for other spending and therefore would not enhance the ability of the government to pay for future Medicare benefits.”

There are plenty of people, including politicians, whose eyes glaze over when you start talking trillions, or even billions. Indeed, Mr. Obama, himself, acts as though numbers of this size are “above his pay-grade.” But the time when most voters couldn’t count that high is long-gone. Even guys making $12 an hour can see that a trillion dollars is a lot, and that annual deficits that high, for years on end, will break us. To paraphrase Senator Everett Dirksen: “a trillion here and trillion there – before you know it, you’re talking about real money.” (Actually, the senator said, “a hundred million here and a hundred million there…” That’s a factor of 10,000, showing how times have changed.)

Tempus is fugiting, too – meaning that time is marching inexorably on toward November. Senators and representatives have noticed this, of course. Some may not be the brightest bulbs in the chandelier – like the congressman who famously worried that Guam might capsize if too much building goes on there – but most do know that the midterm elections are right around the corner. This means donning their “fiscal hawk” hats to convince voters that this time they really (really!) – cross their hearts and hope to die! – are serious about fiscal responsibility.

This is why congresspersons who blithely voted for a gigantic takeover of health care – with a huge, ill-estimated cost – are now preaching about “bringing spending under control,” and spouting other related nonsense. It’s what my buddy Al (of Al’s Coffee Shop) calls the “silly season” – that wonderful time in the election cycle when politicians try to convince voters that they are determined to act in ways directly opposite to the ways they have acted throughout most of their previous term(s).

Pols hope vague talk about fiscal responsibility will get them elected to a new term. They pray (even though this is illegal now) that voters will imagine vigorous swipes of the meat cleaver at the bloated federal budget, although the more likely outcome, if history is a guide, will be higher taxes. Of course, taxes will not be mentioned until after the elections, when the bipartisan commission’s report comes out. Then the grave talk of “making the tough decisions” – most of them involving other people’s money – will go into high gear, and the hoi polloi will find themselves snookered again.

At an investment dinner I attended this week, a questioner wondered about proposals to tax funds in IRA and 401-K accounts that have, until now, remained untaxed until they are withdrawn. Another idea being bandied about is a European-style Value-Added Tax (VAT).

Both taxation ideas were mentioned prematurely, of course. The Senate emphasized this when it voted, 85-13, against imposing a VAT. The non-binding vote was held to defuse the incendiary idea, which had been circulating through Washington in recent weeks. It is important to keep up the no-new-taxes illusion until safely after the elections.

But the rubes in flyover-land might not fall for the ruse this time. The time for a Great Reckoning is at hand. Congress and the president have been like the town drunk on a 15-month bender. Time to pour the booze down the drain and get them into rehab.

In the dark of night, President Reagan’s oft-quoted admonition comes unbidden to mind: “A government big enough to give you everything you want is big enough to take everything you’ve got.” The cold light of day in November will be a time to go to the polls with those words written on the palm of your hand.