The Fly in the Martini

Saturday, July 16, 2005 | 07:17 AM

This week's snark comes to us directly via Barron's Alan Abelson, who is less than enthused about the recently released Federal Deficit numbers (I'll have more on this later).

Abelson notes:

"The fly in the martini in this case, it grieves us to report, is that kiting the revenues are a number of factors whose recurrence in the future is more than a little problematic. Like a substantially higher take from corporations no longer entitled to the break they had been getting when they bought new equipment. Or the spate of fat bonuses to captains of commerce and industry, which also has swelled the tax streams flowing into the Treasury (you may think that's a constant, but come the shareholder revolution, it may not be). And, by no means least, a mighty surge of capital gains, courtesy of a major bubble (real estate) and a mini bubble (the stock market).

The rather giddy forecast of inexorable future shrinkage of our deficit includes a very sharp fall-off in the $2 billion-a-week cost of the Iraq war; welcome as such a reduction might be, the assumptions behind it are unspecified. As last month's spurt in government spending suggests, rumors of restraint are already proving highly exaggerated, and it severely strains credulity to anticipate -- as the administration would have us do -- that Congress will be seized by a fit of fiscal responsibility in the years ahead.

As Andrew Tilton of Goldman Sachs shrewdly observes, the burst of budgetary optimism conveniently avoids the impact on revenues of changes to the egregious alternative minimum tax, which is affecting an ever-growing slice of middle-income America and which, accordingly, is the target of ever-growing pressure for relief. (Next year, in case you've forgotten, we get another chance to choose our representatives and not a few of our senators.) Tilton also points out that such optimism pays scant heed to the relentless upward spiral of the cost of Medicare and Medicaid as the geezer population grows and advances in medical technology explode."

Included with Abelson's missive is the following chart via Ed Hyman's ISI Group, and a Wall Street Journal poll. It shows a "remarkable disconnect between public perception (dour) and the official view (rosy) of the economy."

click for larger graph


As we mentioned yesterday, the headline economic numbers are rather misleading. Drill below the lead, and the data is far less encouraging.


Up And Down Wall Street: Fly in the Martini

Alan Abelson
Barron’s, Monday, July 18, 2005   

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