Friday, February 18, 2005


Much has been made about Bush budget cuts being confined to to a small portion of the total budget. Spending is mandated or is considered off limits for about three fourths of the total budget.

To hear the whiners tell the story, Bush is left with nothing to do but make draconian cuts in social programs. The truth, in my humble opinion, is that Bush is simply preparing to do some "horse trading". If you are not familiar with horse trading, think of it is negotiating the best deal to trade your old car for a new one. To get the best deal, you must always at least threaten to do business with the dealer down the street.

Another truth, in my humble opinion, Bush is counting on growing out of the deficit. His tax cuts are stimulating the economy. Total government revenues are growing around 6%. All Bush has to do is hold spending increases to less than 6% to reduce the deficit. The strong economy we are enjoying is producing corporate profit increases, lower expenditures on unemployment benefits, higher payroll taxes, higher taxes on earnings, higher taxes on dividends and higher capital gains taxes.

Back to the horse trading. Republicans hold majorities in the house and senate. It takes only a majority to pass the budget, 51 votes in the senate. It takes 60 senate votes to pass social security reform. Bush needs to hold all republican votes and pick up 5 democrats or some other combination yielding a net gain of 5 votes.

The point is that if Bush needs to "save Amtrak" one more time in exchange for passing Social Security reform, Amtrak will be saved (at least in certain communities). If Bush needs to continue to pay farmers not to grow crops to pass Social Security reform, so be it (at least for certain crops in certain key states).

Steve Leesman of CNBC and others have correctly pointed out that relatively small cuts in the total federal budget are a big deal to the congressman who is getting his ox gored. The loss of a military base in certain home districts will determine if certain legislators are re-elected or fired.
Many democrats will vote against social security reform no matter what. Social security defines the democratic party in the democrats eyes as the "morally correct party". It does not matter that the system hurts the little guy more than the wealthy. They will argue the point all night long but while social security has helped a lot of people who needed help, it has taken money out of the pockets of the working middle and lower middle class and not given them ownership in their "savings". Paying out too much is about to catch up to reality. Millions have already retired with reduced income than they deserved.

Again the arguments about the efficiency of the system really do not matter. Bush has enormous power to push what he believes is best. Bush believes the young folks of today will be well served if they are allowed to keep a portion of their "savings". He believes the contry will be better off if resources are allocated by the free market. Bush needs to communicate reasonable arguments but in the end, the question will come down to which polititians will decide to trade a horse or two.

I know! Democracy is an ugly form of government. Serving on a church, charity or company board can be enough to turn one ones stomach inside-out. The old saying is true; sausage is very tasty but none of us want to watch it being made.

Effective government requires horse trading. Effective traders often end up with three fine stallions in exchange for a couple of piglets. There will always be inequities. Bush is holding the purse strings and will have to offer favors in return for key votes.

Texans know how to horse trade. Passing Social Security reform is a tough trade but I am betting on success. The stock market will do well when it is clear that social security reform will pass. That may be very late in the year. In the meantime, stocks are cheaper than bonds and bonds are cheaper than resort real estate. Therefore I am doing a little horse trading. I am selling beach properties and buying stocks.