For the last week and a half, the nation has boggled over the stupendous $700 billion dollar price tag on the Paulson or Dodd bailout proposals. Citizens are protesting, right-wing radio hosts are frothing, and House Republicans are revolting (gee, that's a news flash!).
But I'm going to convince you that the impending bailout is not all you should be worrying about.
First, $700 billion is an amazing amount of money: it's about 80% of to-date expenditures for the Iraq and Afghanistan wars:
With enactment of the FY2008 Supplemental and FY2009 Bridge Fund(H.R.
2642/P.L. 110-252) on June 30, 2008, Congress has approved a total of about $859
billion for military operations, base security, reconstruction, foreign aid, embassy
costs, and veterans’ health care for the three operations initiated since the 9/11
attacks: Operation Enduring Freedom (OEF) Afghanistan and other counter terror
operations; Operation Noble Eagle (ONE), providing enhanced security at military
bases; and Operation Iraqi Freedom (OIF).
Perhaps we should call the bailout the "Global War on Error". It's too depressing to compare the bailout to discretionary federal spending, such as for education, alternative energy research, infrastructure, basic science and engineering, housing, or health care, but be assured that $700 billion would go a long way.
However, $700 billion isn't that big when you compare it to the public debt the federal government has taken on in the last 8 years. Look at the numbers (from CBO historical data and projections -- PDF format):
Focus on the two columns on the right, which track the cumulative budget deficit since 2000 (all numbers in billions). I picked 2000 as a starting point because it represents the pinnacle of Democratic stewardship of the budget. (And it was the high point of the booming 90's economy.) I've presented two sets of figures: one without the Social Security surplus, and the other including the $150+ billion annual surpluses. The former is a more conservative estimate of the net surplus or deficit, as the Social Security surplus is intended to offset the future increase in outlays as Baby Boomers retire. The projection for 2008 is pretty solid, but 2009 and 2010 are guesswork.
Look at the numbers! Between 2000 and 2008, the federal budget deficit has increased by $3,200 billion dollars. Using our new unit of financial measure 1 Bailout = $700 billion, the deficit has increased 4.6 Bailouts in nine years. That's the equivalent of a $700 billion bailout every 2 years for almost a decade! Even with the gimmickery of adding the Social Security surplus, the cumulative deficit is 2.4 Bailouts in that time. Worse yet, projected deficits for the next two years push those two sums to 6.4 and 3.7 Bailouts, respectively:
The bailout, a one-time cost (so far!), is represented by the dashed green line.
But what's the link between the bailout, admittedly a huge chunk of change, and the federal deficit? Simple -- this country has a credit limit.
Foreign investors have shown an insatiable appetite for US debt, so far, holding $2.4T (3.4 Bailouts) of US debt. As the US debt increases, foreign creditors reassess their investment, and at some point will signal that the U.S. has maxed out its credit card. We'll know this when the US Treasury holds an auction and no one shows. The US dollar will be heavily sold and will drop against other currencies. Guess what will happen to prices of imported goods, including oil.
The bailout is just another "big ticket item" on the US credit card. Will it max out our card? Maybe, maybe not. But the fiscal budget hemorrhage will eventually get us there. This is a direct result of the GOP attachment to supply-side economics, i.e. "borrow-and-spend". Combine with ideologically-driven deregulation and, well, we're screwed. And John McCain wants to cut corporate taxes, and the House GOP want to dramatically reduce capital gains taxes, even in the face of $400+ billion dollar deficits for the next two years, and likely much worse.
I worry about the $700 billion dollar bailout, particularly about its efficacy. But the biggest economic problem we face is our mounting deficit, and the Republicans' addiction to funding government with debt, rather than taxes.