- The Washington Times - Thursday, August 5, 2004

Observers who have been disillusioned by recent trends in federal spending and the budget deficit would do well to apply the stock market’s “dead-cat bounce” analogy to the White House’s midsession budget review. On the theory that even a deceased feline will bounce if it dropped from a sufficiently high level, the dead-cat bounce theory explains a temporary recovery following a prolonged decline, after which the market’s downward spiral resumes. Thus, the recent announcement by the White House Office of Management and Budget (OMB) — to wit, February’s projection of the 2004 budget deficit of $521 billion has been revised to $445 billion — should offer little solace. Yes, it represents more than a $75 billion improvement in this year’s fiscal position. But in the grand scheme of fiscal policy, both preceding 2004 and subsequent to it, it is likely to be a minor blip.

How minor? Well, consider how previous forecasts for fiscal year 2004 have fared. On April 9, 2001, when the Bush administration released its first budget blueprint, OMB projected a $262 billion surplus for 2004. That forecast incorporated the administration’s proposed 10-year tax-relief package of $1.612 trillion and another $420 billion in attendant debt-service expenses. The next forecast for 2004 appeared in the fiscal 2003 budget, which projected a $14 billion surplus. The fiscal 2004 budget included a 10-year, $640 billion economic growth package, of which $114 billion was scheduled for 2004, whose deficit projection was ratcheted upward to $307 billion. Fiscal 2004 commenced last Oct. 1. When the fiscal 2005 budget was released four months later in early February, OMB increased its projection of the 2004 deficit to $521 billion. That was more than $200 billion higher than the year-earlier forecast and nearly $800 billion above the April 9, 2001, projection. So, there was little cause for celebration last week when OMB reported that its midsession review had lowered its estimate of the 2004 deficit by $76 billion to $445 billion. Thus, because the latest projection of $445 billion exceeds the April 1, 2001, forecast by more than $700 billion, the $76 billion represents little more than a “dead-cat bounce.”

Nor should any comfort be derived from the fact that the reduced projection for 2004 would lower the deficit as a percentage of gross domestic product to 3.8 percent. True, as the administration asserts, this level is comfortably below the 6 percent level recorded by the 1983 budget. But take a closer look. The 2004 “on-budget” deficit, which excludes a $155 billion “off-budget” Social Security surplus, totals $600 billion, or 5.2 percent of GDP.

In 1983, there was no Social Security surplus. Moreover, fiscal 1983 commenced at the bottom of the worst recession since World War II. By contrast, fiscal 2004 began nearly two years after the end of the most mild recession in postwar history. In addition, the unemployment rate exceeded 10 percent during fiscal 1983, but it has averaged 5.7 percent during the first nine months of fiscal 2004. Yes, the nation is at war; but it will still spend only an estimated 4 percent of GDP in fiscal 2004 on national defense. In 1983, national defense comprised more than 6 percent of GDP.

The midsession review assumes that the administration will finally begin to control discretionary spending for nondefense and non-homeland security matters — but not until fiscal 2005. From fiscal 2001 through fiscal 2004, in an environment in which annual consumer-price inflation will have averaged 2.5 percent, discretionary budget authority unrelated to national defense and homeland security will increase by an average of more than 7.5 percent a year. The forecast for fiscal 2005 lowers that increase to 0.4 percent.

By way of comparison, between fiscal 1980 and fiscal 1988, despite the fact that the price level increased by more than 40 percent, nondefense discretionary budget authority actually declined in nominal terms from $167 billion to $161 billion. In terms of enforcing real spending discipline, much more is needed from the Bush administration than a dead-cat bounce from a midsession review.

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