Meet John Boehner Ryan – The GOP’s Favorite Fiscal Fake Folds Fast

That didn’t take long. Recall that just two months ago Speaker John Boehner announced he would abruptly resign right in the middle of his term. He said he was tired of taking gaff from conservative backbenchers on account of his serial sell-outs of even tepid House GOP efforts at fiscal discipline.

We greeted Boehner’s announcement with a Bronx cheer: Good riddance to Johnny Lawnchair, the fastest fold on the Potomac!

Supposedly a new era was dawning under his successor Paul Ryan, but not so. The lawnchair never left—-its just got a new occupant.

Now after just 51 days in office Ryan has forced the GOP to walk the plank on what under any honest form of fiscal accounting is a $2.5 trillion addition to the national debt.

Well, make that any form of accounting at all. This whole stinking pile of backroom deals was pushed through so fast that even CBO has not had a chance to fully analyze and score the bill.

In that regard, for the first time in his life, Harry Reid told the truth after this Ryan-Obama midnight special was whisked through the House and Senate. Said the man of legendary forked tongue,

Sometime in the darkness, the bill was finalized……..no legislation is perfect, but this is good legislation.”

I have said all along the Paul Ryan is a complete fiscal fake. After all, he has spent years braying about the national debt, but never saw a defense program he didn’t want to fund or a bailout that would help his Wisconsin district that he couldn’t rationalize.

Fiscal conservative?  The man voted for the TARP bailout of Wall Street and the bailout of the GM/UAW thieves, too.

And year after year he proposed a “Ryan Budget Reform Plan” that was a complete fraud. He did not remove one dime from social security spending, ever.

Nor did his  fiscal plans do anything about the $700 billion in annual cost of Medicare for at least a decade into the future. And he didn’t even bother to balance the Federal budget until 2037!

But what is so obnoxious about this current pork-festooned betrayal of the taxpayers is that it was totally unnecessary.

Ryan could have simply announced that there is a new sheriff in the House and that no one would leave town until New Year’s Eve if need be—–unless the pork was excised first and the $680 billion worth of tax benefits, gimmicks and loopholes were either removed or off-set with honest “payfors”.

Needless to say, Speaker Ryan had a totally different take. While this week’s fiscal abomination is just water over the damn, there is always another chance tomorrow:

“Congress can now move into 2016 with a fresh start…..”

No it won’t. This week’s action on the FY2016 omnibus appropriations bill was just another ruse in a moveable fiscal scam which has been underway since the debt ceiling crisis of August 2011.

Back then Congress claimed to cut the 10-year deficit by $2 trillion in return for raising the debt ceiling.  And $1.2 trillion of that was to be realized through the so-called appropriations sequester after the super-committee failed to come up with equivalent entitlement and other permanent reforms.

But here’s the skunk in the woodpile. Congress claimed $1.2 trillion in savings from discretionary spending caps over a 10-year period through FY2021, yet appropriations bills are good for only one year. So what it really did was establish a mechanism to have its cake and eat it too.

Because the future year caps are statutory, CBO must dutifully score them as a reduction in the budget baseline every time it does a ten year projection. At the same time, during each annual appropriations cycle, Congress can modify or bust the caps entirely for the current year, and then either take a “one-time” hit to the deficit or find gimmicks to off-set some or all of the cost.

In fact, every year since 2011 Congress has lifted the discretionary spending caps for the current fiscal year in order to make room for bloated domestic and DOD appropriations, and this week’s omnibus bill does the same. Discretionary appropriations for DOD and domestic agencies will be $100 billion higher than the caps adopted with so much fanfare back in 2011.

Thus, we are now halfway through the ten-year cycle initiated in the August 2011 crisis——so “savings” from the sequester caps on the annual appropriations bills should have totaled at least $500 billion by now. In fact, when you cut through all the gimmicks, ruses, re-estimates and program reconfigurations which have been deployed in the interim it would be hard to find any savings at all.

There are two features of the current bill which expose the manner in  which this moveable scam operates. The first is something called  CHIMPs or changes in mandatory programs. These gems are claimed to be budget authority cuts that offset appropriations which exceed the caps.

In the current bill these CHIMPs savings for FY 2016 total $18.6 billion, and they permitted literally hundreds of add-ons to be stuffed back into the 12 appropriations bills.

But only $0.6 billion or 3% of these CHIMPs savings will actually reduce cash outlays. By contrast, $13 billion represents savings in FY 2016 that get added back in FY 2017. And the remaining $5 billion are technical cuts to budget authority that will never results in a dime of cash savings during any year.

Likewise, Congress has stuffed $73.7 billion into the OCO (overseas contingency operations) bucket, which in theory was set up to cover the one-time and unusual cost of military operations in Iraq and Afghanistan. Apart from the fact that Imperial Washington does nothing abroad on a one-time basis and that wars of intervention are not a contingency but a permanent policy, there was never any justification for exempting these expenditures from the caps in the first place,

After all, spending is fungible. When it comes to allocating the multi-billion annual operating cost of a carrier battle group stationed in the Persian Gulf between it “peacetime baseline” and its “war contingency” elements, for instance, you can get any answer which is convenient.

The point is that the OCO has provided a huge cookie jar for spending increases that nullify even the modified appropriations ceilings that Congress has enacted each year since 2011.

This year roughly $15 billion of the OCO will go to the State Department for foreign aid and other international security programs, and this figure is up roughly $6 billion from a similar OCO allocation last year.

At the same time, the omnibus bill cuts the State Department’s “regular” appropriation by about $5 billion, and re-allocates these funds to a huge smattering of pork and add-ons to the other domestic appropriations bills.

On a net basis, therefore, everybody wins…..except the taxpayers. That is, the State Department’s available funding will be up by $1 billion as between the regular and OCO buckets, while appropriations for the domestic agencies will be higher by $5 billion. Yet none of this will show up in the $1.066 trillion ceiling on discretionary spending; its all backdoored through the OCO.

The larger point is that the Fed’s massive repression of interest rates has spawned a fiscal culture of unspeakable deception, duplicity, lies and dysfunctionality on Capitol Hill.

On the one hand, it means that the $19 trillion of national debt can be serviced on the cheap—–currently at a weighted average yield of about 1.8%. Accordingly, debt service costs which would be upwards of $1 trillion under normalized interest rates (5%) are currently only about $350 billion. So the politicians feel no financial pressure, and become accustomed to kicking the can.

At the same time, the moveable fiscal scam hinted at above has resulted in an utterly deceptive 10-year deficit forecasts——even after funding the national debt on the cheap.

The CBO’s so-called baseline projections show out-year spending far lower than what is actually built into the system owing to the phony out-year caps and entitlement reforms that CBO is required by Congress to credit. Yet these fiscal curtailments never happen during the current year; they are simply suspended, deferred or covered up with off-setting gimmicks like those in the current omnibus bill.

By the same token, baseline revenues are projected to be far higher than will actually materialize under current policy. That’s due to the operation of the same kind of moveable scam on the income side of the budget ledger.

In this case, there are literally hundreds of billions per year of tax incentives, subsidies and loopholes that have been in the IRS code for years or even decades that are made to artificially and abruptly expire a year or two down the road. Accordingly, CBO scores a commensurate increase in the out-year revenue base, thereby contributing to the appearance that the long-term deficit is shrinking.

But when we get to the statutory expiration dates, these provisions never happen and the huge revenue drains continue. The culprit is something called that annual “tax extender” bill, which mostly just rolls forward the expiration dates by a year or two so that the CBO can keep projecting sunny fiscal skies ahead.

This is evident in spades in the $680 billion worth of so-called tax-extenders contained in the current bill. One of them is the corporate tax credit for research and experimentation, which costs about $12 billion per year in foregone revenue.

Now that particular item has been “extended” about 16 times over the past decades, meaning that out-year budget projections have always included higher revenue from the expiration of this item that were never destined to happen.

In fact, the proof is now in the pudding. In a token gesture to honesty, the current bill actually makes the research credit permanent, and thereby reduces 10-year revenues by $113 billion. That particular chunk of phantom revenue will be no more.

Unfortunately, that can’t be said for much else in the tax package. For instance, the completely unjustifiable and wasteful tax credits for solar and wind energy have been “expiring” almost annually since they were enacted years ago. This time they were extended effectively for three and one-half years at a cost of $26 billion, according to the Joint Tax Committee.

In truth, the giant lobby behind these boondoggles has demonstrated its insurmountable power so many times over the last few years that there is no chance these “expirations” will ever happen. So the actual 10-year cost of these “renewable energy” provisions is more like $75 billion.

One of the most egregious cases of this kind of double shuffle pertains to the three Obamacare taxes, which are deferred by several years at an alleged cost of $28 billion. In truth it’s more like $260 billion.

Here’s why. Recall that the true cost of Obamacare was in the trillions, but it was outrageously disguised as a deficit reducer through a series of huge gimmicks, such as changing the student loan program from an entitlement to a direct loan; and also through a series of stiff taxes on insurers, medical devices and so-called Cadillac medical plans.

However, these so-called “payfors” were backloaded into the middle of this decade in order to pacify the intense political opposition to them and to get the razor thin partisan majority by which the program was enacted in 2010.

In particular, core Democrat constituencies like the labor unions were violently opposed to the so-called “Cadillac tax” on expensive, gold-plated employer health plans. That was even after the threshold plan value was raised to $27,000 per year for family coverage before the 40% tax kicks in. So the inception date was deferred into the distance future—to 2018.

Well, the distant future is now getting closer, and like with almost everything else in Obamacare that created intensive political opposition, such as the employer mandate, the time has come time to kick the can.

So the Cadillac tax is being deferred two years until 2020. Likewise, the tax on medical devices is  being “paused” for 2016 and 2017—–an action consistent with previous pauses and deferrals. A health insurers tax that pays for part of the Obamacare subsidies to families up to 3X the median income is also paused for a year.

The plain fact of life is that none of these out-year Obamacare taxes will ever be collected. Accordingly, the real hit to future deficits is in the order of one quarter trillion dollars over the next 10 years.

The above matters do not even begin to itemize the fiscal largesse embedded in the omnibus bill. But they do crystalize the underlying moveable fiscal scam at work——a systematic process by which future spending growth is disguised and future revenue collections vastly exaggerated.

In the current bill alone, the true impact on revenues over 10 years is about $1.2 trillion, not the $523 billion scored by CBO. After the interest carry cost even at the low rates assumed by CBO, the add-on to future deficits is in the order of $1.5 trillion.

Likewise, CBO scores the spending increases at $158 billion over the next decade, but for all practical purposes this bill marks the end of the sequester caps that were enacted in 2011. Accordingly, if you eliminate the phony outyear reductions that are still in the CBO baseline, spending would be about $1 billion higher after interest carry.

So on Speaker Ryan’s first turn at bat he has produced a $2.5 trillion budget buster!

And that’s not the half of it.

The current bill implements the two-year fiscal package that Ryan and Boehner negotiated earlier this year, and forced through the Congress with a majority of the votes coming from the Democratic side of the aisle.

So there will be no meaningful budget action in 2016, meaning that the next opportunity to actually change the shape of the budget is 2017 after a new Congress and new Administration arrives in Washington. Given the lags in the legislative process and implementation schedules, this means that meaningful cash savings and deficit reductions could not be effectuated until FY 2019 or FY 2020 at the earliest.

Alas, no one has outlawed the business cycle under which recoveries have lasted an average of 61 months since WWII. Yet by FY 2020, this so-called recovery would be 125 months old.

That has never happened before, and its certainly not even a remote possibility in a world that is plunging into a deflationary recession even now.

Historical Length of Recoveries - Click to enlarge

Historical Length of Recoveries

So here’s the truth.  Add the $2.5 trillion in this package to the current CBO baseline of about $8 trillion in added debt over the next 10 years; and also toss on several trillions more for similar spending cuts and revenue increase scams that are built into the current budget baseline.

On top of that make an allowance for the devastating impact that the next recession will have some time during that interval, and likely sooner rather than later.

Taken altogether, therefore, I estimate that the real world addition to the national debt will be at least $15 trillion during the next ten years. And by the 2016 election we will already have a public debt of $20 trillion.

Can this nation manage a $35 trillion public debt at the very time that the baby boom is retiring at a rate of 10,000 per day?

That’s not likely under any circumstances——but most certainly never under the watch of fiscal fakes like Speaker Paul Ryan.