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Posts tagged “Federal Spending

Death Spiral Debt Deal

As I’m sure we’re all aware, the major political players in Washington agreed to debt ceiling deal last night. Reuters has a terrific breakdown of the final deal here. I’m not happy with this “deal” at all and if I were in Congress, would certainly vote “No” on passage.

Why? Simply put, this agreement does absolutely nothing about either the current deficit or the even larger problem of the national debt. In fact, passage guarantees that the debt will double over the next decade. And just for grins and giggles, there are also some really rosy ideas about anticipated economic growth baked into the framework – ideas that in light of last week’s GDP reports are proven to be a complete sham.

Let’s start with the sham of an idea that this deal somehow trims the deficit. The only guaranteed cuts in the whole package are for FY2012 – and they total all of $6 billion. Even if you use the overly-optimistic CBO estimate of “only” a $1.049 trillion deficit for FY2012, that amounts to about ½ of 1% of the deficit. To put this in perspective, it’s the equivalent of the average American cutting their total annual spending by $37.85, or the typical price for a dinner for two. This is every bit a dog-and-pony show, not budget cutting.

Secondly, this deal does little to curb long term spending, either. The final total of $2.4 trillion takes place over the remaining 9 years. However, the combined deficits over the next decade are forecast to equal another $13 trillion. That would bring the national debt to a total of around $28 trillion by 2020. Even if future Congresses don’t reduce that $2.4 trillion in deficit reduction (good luck with that), the federal debt will amount to $25.6 trillion in 2020. This package doesn’t do anything to actually begin reducing the debt. Only in Washington could a package that will grow the federal government’s debt obligation by 77% be considered a “debt-reduction plan.”

Finally, there’s the kabuki-theater method of arranging these “cuts.” Part of the reduction comes from presupposing that the Pentagon can find $350 billion in cost savings as a result of the wars in Iraq and Afghanistan ending. The deal-makers completely ignored the fact that we recently got involved in another war in Libya and also imagine that we won’t get involved in any others before 2020. I would like to go on record now as believing in the tooth fairy and unicorns, since those are less farfetched assumptions. There is a “super committee” that’s supposed to recommend budget cuts on a straight up-or-down vote; failing that, across the board reductions in all government programs. Well, almost all – federal employee pay, Medicaid, Social Security, welfare and veteran’s benefits are excluded. Considering we’ve already had 16 deficit committees in the past 20 years, each of which has said that the principle way to reduce the debt is to transform entitlement programs – and this deal exempts most of them from automatic cuts – how successful do you suppose this one will be? Expect another political dog-and-pony show, only this one should be a spectacle that would make PT Barnum proud. After all, it’s taking place during an election year. The posturing and grandstanding over recommendations that have no chance of passing both Congressional houses will liven up campaign ads and the evening news, but mean nothing.

So, no, I can’t support this deal. It just lends further proof that Washington is run by inept morons and snake-oil salesmen.

Spending is the problem

Now, Wait a Minute!

President Obama has finally realized the federal debt is a real problem, not something that can be pushed off for another decade or so. I’m not certain what woke him to a fact millions of Americans already understood, but welcome to the party, anyway. Unfortunately for the country, he seems obsessed with the idea that the reason our debt problem is crucial is because the federal government doesn’t have enough money.

On the one hand, the President is right when he says that federal revenues are lower than at any point in a generation. In 2011, the government is on pace to gather less than 30% of the nation’s GDP in revenue for the first time since 1983. But the reason for that isn’t because tax rates are too low – it’s because despite all of those reassurances that the economy is recovering, it isn’t. After adjusting for inflation, real GDP growth has fallen to less than 1% and is in real danger of turning negative. Add in the fact that that the economy is now 14 million jobs short of full employment (vs. 8 million when he took office), and it becomes pretty easy to see where the revenue shortfall comes from.

In traditional Democratic fashion, the President’s answer to the economic malaise has been to throw as much money as possible into the economy. The results have been disastrous. Deficit spending as a percentage of GDP during his tenure is running higher than at any point since the closing days of WWII. Since 2009, the federal deficit has averaged 9.91% of GDP, the second highest three year average over the past century. Only the period from 1944-1946 saw a higher level of deficit spending, at 24.02%. But besides the obvious (we were spending to save the world then), there are two marked differences between that period and this one:

  1. The US GDP accounted for close to 80% of the world’s total economic output. Europe and Asia were bombed out ruins and wouldn’t actually see real recovery for another 15 years. Africa and South America were not industrial or economic centers. Much of that debt was racked up as loans to our allies and repaid by the mid-1960’s. Today, the US is now less than 30% of world GDP and projections show us steadily losing share over the next decade. We face the prospect of having to pay much of our debt to overseas lenders, while at the same time having fewer assets with which to pay them.
  2. All of this new spending is taking place on top of what was already a huge debt burden to begin with. At the advent of WWI, the total federal debt – even with New Deal spending – stood at 67.62% of GDP. When the current recession began in 2007, debt stood at 85.53% of GDP. Today, we’re at 129% of GDP –the only time it was higher was from 1946-48. But by 1950, debt was down to 97.7% of GDP and by 1960, 70.51%.

The President has spent much of his time screaming from the mountain that the tax cuts enacted under his predecessor (which he voted for, by the way) are the leading cause of our current deficits. But he should re-check his math: in the 6 years after their passage prior to his assuming office, federal deficits averaged 2.04% per year – roughly one-fifth of the deficit spending under Mr. Obama. And federal revenues averaged 33% of GDP, slightly higher than the average for the previous 20 years (32.7%). So where is the discrepancy? If those tax cuts actually produced more revenue, why are deficits exploding?

The answer is completely on the spending side of the equation. Under President Bush, federal spending averaged 35.08% of GDP. Under Presidents Reagan, Bush Sr., and Clinton, federal spending averaged 34.83% of GDP. Under President Obama, federal spending has averaged a whopping 40.72% of GDP. For historical perspective, under President Roosevelt spending averaged 27.62% and under President Johnson (who also fought an unpopular war and greatly expanded social services) federal spending averaged 29.82% of GDP. In fact, the US government didn’t begin spending more than a third of our GDP consistently until the Carter administration.

In short, the President can stop with all his nonsense about needing to raise taxes. If he wants the nation to take him seriously when he says he wants to balance the budget, then he should start by simply bringing spending back down to the historical levels for the previous 30 years. That won’t solve all the nation’s economic ills, but at least that’s the starting point for a rational discussion.