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Monday, November 13, 2006

Hank Paulson and Ideology vs. Reality

by Calculated Risk on 11/13/2006 12:02:00 PM

Many stories this week discussed the recent U.S. election in terms like left vs. right, conservative vs. liberal, Democrat vs. Republican. In my view, a more accurate description would be Ideologues vs. Realists, and the realists appear to have won - at least with regards to Iraq.

From Newsweek's cover story: The Prodigal Returns

"The apparent triumph of pragmatism over ideology on Iraq was welcome news, at least to the public."
The Iraq situation appears intractable, but one thing is certain, no progress would ever be made until the U.S. faced the reality of the situation. The same is true with the current U.S fiscal challenges.

Unfortunately, I don't believe the general public yet understands that the economic policies of the Bush Administration are as ideologically driven as the Bush foreign policy. As an example, the new Treasury Secretary Hank Paulson ignores reality in this Fortune interview: Mr. Paulson goes to Washington
"... we still have a fiscal deficit that's roughly 1.8% of GDP, and that's below the average size of the deficit over the past 40 years. Revenues are pouring in right now. The whole concern about the deficit doesn't come from the current fiscal deficit; it comes from looking ahead a number of years to the entitlement deficit we see looming on the horizon."
Paulson confuses the annual increase in the publicly held portion of the debt with that actual deficit. It is true that economists are currently not concerned about the crowding out effects with the publicly held portion of the debt increasing at approximately 2% of GDP per year.

However, in the reality based world, the NPV of the non-healthcare General Fund deficit is approximately the same challenge as healthcare entitlements. These are the two largest fiscal challenges for the United States, and Paulson demonstrates a lack of understanding concerning one of the two major fiscal issues.

In reality, the current fiscal deficit should be a major concern. Until Paulson comes to grips with this reality, he will never make progress on the U.S. fiscal challenges.