Category Archives: Annual Deficit

CBO Analysis of the President’s 2014 Budget

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The Congressional Budget Office has just released “An Analysis of the President’s
2014 Budget”.  News reports highlight that the Obama plan will decrease the deficit over the next ten years by $1.1 trillion compared with the CBO baseline and that the
deficit in 2023 will be only 2% of GDP as opposed to 4.2% of GDP in 2013.  Federal debt held by the public (on which we pay interest) would grow from 73% of GDP ($11.3 trillion) at the end of 2012, to 77% of GDP ($12.8 trillion) at the end of 2014, and then shrink to 70% of GDP ($18.1 trillion) in 2023.
It may sound good to say that the deficit will be “only” 2% of GDP in 2023.  But this still represents about $600 billion being added every year to the national debt even 10 years from now.  Right now, with very low interest rates, we are paying $223 billion per year (8% of revenue) in interest on the debt.  When interest rates return to normal at 5% or so, interest on the debt will skyrocket, reaching $900 billion by 2023, representing 18% of the estimated $5.1 trillion in revenue for that year.  Just paying interest on the debt
will become a bigger and bigger burden for American society, continuing indefinitely into the future.
Here’s another problem with the President’s budget.  Almost half of the ten year deficit reduction ($493 billion) is achieved by limiting tax deductions to 28% of income (the tax
rate on income up to $183,000).  Using a limitation of tax deductions to shrink the deficit will make fundamental tax reform that much harder.  There is a strong bipartisan consensus for broadening and simplifying the tax code which means lowering, if not completely eliminating, many deductions in return for lower tax rates.  This should be the primary focus of tax reform in order to stimulate the economy by encouraging
more investment.
What we need is a credible plan to completely eliminate deficit spending in the
short term, and to do this together with pro-growth tax and regulatory reform.  It will be a huge challenge to get this accomplished but our future liberty and prosperity depend on it!

Updated Budget Projections from the Congressional Budget Office

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The Congressional Budget Office has just released an update to its February 2013 Budget Projections.  The deficit for 2013 is now projected to be $642 billion, down from the previous $845 billion.  This is good news but its main effect will only be to delay by several months until fall serious negotiations about raising the debt limit again.  The long term outlook has changed very little.  New debt for 2014-2023 is now projected at $6.3 trillion.  The total debt this year will be 76% of GDP and in 2023 it is projected to be at 74% of GDP and rising.  Over the past 40 years total debt has averaged 39% of GDP.
Such a large debt level now and for the indefinite future obviously has very serious negative consequences.  As soon as interest rates return to more typical higher levels, interest payments will rise by hundreds of billions of dollars per year, crowding out much other spending.  We can be sure that a new crisis will occur sooner or later leaving national leaders at that time in a precarious position, unless the debt level shrinks significantly in the meantime.
This means that significant additional deficit reduction is still needed at the present time.  Realistically, it should come from reforming entitlement spending which is becoming an even bigger driver of our continuing debt explosion.  Any national leader who denies the seriousness and urgency of our current frightful fiscal condition should be considered irresponsible and held to account for this failing.
The presently high unemployment rate of 7.5% is no excuse for inaction.  The way to boost the economy, and thereby reduce unemployment, is to encourage more business investment with tax and regulatory reform.  Economic stimulation and deficit reduction are not in opposition to each other.  They can and should be addressed together at the same time.

The New York Times and Fiscal Austerity

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The New York Times is devoting a lot of space recently to debunking the Republican’s supposed campaign to inflict fiscal austerity on the United States.  My May 10, 2013 blog entry responded to an NYT article on May 9 entitled “Emphasis on Deficit Reduction Is Seen by Economists as Impeding Recovery”.  Now they’re at it again!  Today there’s an Op Ed entitled “How Austerity Kills”, by David Stuckler and Sanjay Basu.  The authors state that “Recessions aren’t necessarily deadly.  But harsh spending cuts are”.
It needs to be pointed out over and over again, as often as necessary until it sinks in, that the current year’s federal budget does not represent a cut.  In 2012 actual expenditures were $3,538 billion while the 2013 federal expenditure budget, as estimated three months ago (in February 2013) by the Congressional Budget Office, is $3,553 billion.  This represents an increase of $15 billion from last year’s (2012) expenditures to this year’s (2013) estimated expenditures.  Holding down budget increases from one year to the next, at a time of enormous deficits, is exactly what our elected representatives ought to be doing.  If Mr. Stuckler and Mr. Basu want to argue that the sequester adjustments represent a poor way of holding back on large spending increases, then many Republicans, including myself, would agree with them.  Let’s definitely reduce spending increases in a more intelligent way!
But the larger issue is the question of austerity itself.  We’ve now had four years in a row of trillion dollar deficits and this year’s deficit is predicted by CBO to be $845 billion.  CBO projects deficits of $616 billion for 2014, $430 billion for 2015, and then annual deficits which start growing again (under current policy) and returning to the trillion dollar level by 2023.  This represents $7 trillion in additional debt by 2023 beyond the $6 trillion in debt already accumulated in the last five years.  To continue on this projected path is the height of irresponsibility!  And for the New York Times to refer to this amount of excessive spending as austerity is ludicrous, simply ludicrous!

Is Emphasis on Deficit Reduction Impeding Recovery?

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The New York Times reported on May 9, 2013 that “Emphasis on Deficit Reduction
Is Seen by Economists as Impeding Recovery”.  According to the reporter, “Tax increases and especially spending cuts, the critics say, take money from an economy that still needs stimulus now, and is getting it only through the expansionary
monetary policy of the Federal Reserve.  … In all of this time, the president has fought unsuccessfully to combine deficit reduction, including spending cuts and tax increases, with spending increases and targeted tax cuts for job-creation initiatives in areas like
infrastructure, manufacturing, research and education.”
The $845 billion deficit for the current year, as estimated by the Congressional Budget Office, hardly represents austerity, and is in fact a massive stimulus.  The president says that he wants “sensible” deficit reduction, but simply offsetting sequester
spending cuts and higher taxes on the wealthy with other spending increases and
targeted tax cuts as above, really amounts to no deficit reduction at all.
Most observers agree that it is entitlement spending, especially for Medicare and Medicaid, which is the main driver of the national debt.  Serious deficit reduction will not be achieved by further whittling away at discretionary spending, as wasteful as
some of it is.  The president has proposed changing the way the Consumer Price Index is computed, by switching to a “chained CPI” which will save the federal government about $30 billion per year.  This is a worthwhile change to make but represents a relatively modest savings by itself.
If the Democrats want to spend more money on “investments” and other forms of
fiscal stimulus, to try to speed up the recovery, they will have to get on board with serious reform of health entitlements.  The rapidly exploding national debt is a far too serious and urgent problem to ignore any longer.  The president might say that it should be addressed in a sensible manner, but postponement is no longer a sensible option.

Whither the American Economy?

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Paul Krugman, writing in today’s New York Times, ”The Story of our Time”, says that “this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again”.  On the other hand, Bill McNabb, the Chairman and CEO of the Vanguard Group, writing in today’s Wall Street Journal, “Uncertainty is the Enemy of Recovery”, says that “there is…most significantly, uncertainty about U.S. fiscal policy and the national debt.  Until a sensible plan is created to address the debt, America will not fulfill its economic potential”.
So there you have it, our country’s two premier outlets for news and opinion putting forward contrasting views of what needs to be done to restore vitality to the world’s leading economy.  Do we ramp up government spending indefinitely in order to increase demand, paying little if any attention to the size of the national debt, until hopefully, before too long, private industry is willing to increase spending and investing for the future?  Or do we instead concentrate on establishing those policies which will directly and immediately give business leaders confidence that political leaders are willing to make the tough decisions needed to get our fiscal house in order?
This question is indeed the story of our time.  Getting the answer right will determine our country’s (and the whole world’s) fate for many years to come.

The President’s Budget

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The Administration has now released its own budget, “Obama Makes Budget Gamble”  as reported by the Wall Street Journal on Thursday, April 11, 2013.  We now have three budgets to compare with each other, from the House Republicans and the Senate Democrats as well as from the President.  Not surprisingly the President’s budget is very close to the Senate’s for the entire ten year period ahead, both in year-by-year spending totals as well as revenue projections.
The President’s budget shrinks the deficit from 5.3% of GDP for 2013 to 4.4% for 2014 and down to 1.7% in 2023.  But just retaining the sequester level of spending for next year, as the Republicans propose to do, with no other cuts, would lower the deficit level to 3.7% of GDP for next year.  And, of course, the Republicans propose to entirely eliminate the deficit by 2023.  Shrinking the deficit to 1.7% of GDP by 2023, as the Democrats propose to do, sounds good on the face of it, but it means a deficit of over $400 billion still remains ten years out.  Bottom line: both the Administration and Senate budgets increase the debt by about $5 trillion over the next ten years, making no attempt to eliminate the deficit, compared with a Republican increase of $1 trillion in debt by 2023 while finally ending our awful slide into deeper debt.
The President’s budget does have some good features such as changing the way the Consumer Price Index is computed, to make it more accurate, which could save $339 billion over ten years.  The administration suggests additional means testing for Medicare recipients so that the more affluent would pay higher premiums than at present (significant but unknown savings).  Limiting tax deductions for the top 3% of taxpayers to 28% of income would generate $529 billion over ten years.  Taxing all incomes over $1 million at the minimum rate of 30% (The Buffett Rule) would raise an additional $53 billion over ten years.
The problem is that all of these spending cuts and tax increases in the President’s budget would go to new spending rather than deficit reduction.  Tax reform, with a tradeoff between lower rates and fewer deductions, would give a big boost to the economy.  But just raising taxes in order to increase spending neither helps the economy nor lowers the deficit.  The President is again failing to provide leadership on our most critical problems.
The job of providing national leadership on economic and fiscal issues thereby goes by default to the Republican majority in the House.  This is a very big responsibility for John Boehner and company.  But they’re doing a remarkably good job so far under very trying circumstances!

Why Medicare Is Such an Enormous and Urgent Fiscal Problem

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An article in today’s (April 4, 2013) New York Times, “Misperceptions of Benefits Make Trimming Harder”, explains why Medicare is such an enormous and urgent fiscal problem for the federal budget.  The article points out that an average single male who retired in 2010 will receive more than $100,000 in Medicare benefits in excess of what he pays into Medicare in taxes before retirement and premiums while receiving benefits.  The gap is projected to grow for future retirees.  Too many people are not aware of this huge discrepancy between what they pay into Medicare compared to the benefits which they will draw out after retirement.
According to the reporter, Democratic leaders, including the President, are aware of this funding gap but are unwilling to discuss it publicly.  Instead they take the easy way out by criticizing Republicans who do want to address the problem in a responsible manner.
The problem is so serious that trims around the edges, such as means testing and/or higher premiums for affluent retirees, will not accomplish anything more than making a small dent in the funding gap.  Raising taxes will not get the job done either because they would have to go up too much and too often as the problem keeps getting worse and worse.
The only way to really solve the problem is to control the costs of Medicare (and more generally for all of health care).  There are two basic ways to do this.  One way is to have a government run single payer system with very strict rationing.  The other way is to make everyone, including seniors, financially responsible for their own health care, with subsidies for people with low incomes.
The challenge for Republicans is to frame this basic choice as clearly and vividly as possible.  The American people must come to realize that the status quo in health care cannot continue.  If this message can be delivered effectively to the broad public, I am confident that a majority of people will want a free market system with choice rather than severe government rationing.

The Spending Crunch

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In the March 26, 2013 edition of the Wall Street Journal, the nonpartisan columnist Gerald Seib makes a very astute observation, namely that “Liberals Face Spending Dilemma”.  The Republicans are beating the drums for a balanced budget, the economy is growing at the anemic rate of 2% per year and entitlement spending is growing much more rapidly than this.  So what is going to happen?  Discretionary spending is going to have to shrink!   This means a big hit for both defense and nondefense discretionary spending, meaning most of the traditional programs funded by the federal government.
How do we get out of this predicament?  The best way would be to make the economy grow faster but this is unlikely to happen while the Democrats control the executive branch and are unwilling to implement pro-growth policies such as tax reform, deregulation and stepped-up international trade.
But even with more business friendly pro-growth policies, entitlement spending is growing way too fast and eating up a larger and larger piece of tax revenues.  The Republicans want to control the costs of Social Security, Medicare and Medicaid but simply cannot get this done without Democratic cooperation and support.  Either Democrats help figure out how to make significant cost cutting changes to entitlements or else steep cuts in discretionary social spending will have to be made.
The Republican drive to rapidly shrink deficit spending down to zero is for real and will not be denied.  The sooner the big spending liberals figure this out and adjust their behavior, the better off will be the whole country.

Budgeting 101: Don’t Forget Hauser’s Law!

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In 1993 the investment analyst W Kurt Hauser pointed out that “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”  Hauser’s Law of course is really just an empirical observation which is referred to as a “law” because it has been so amazingly consistent since 1945.  Some economists use Hauser’s Law to argue that there is no sense in raising tax rates because higher rates won’t really raise additional revenue over time.  To the extent which Hauser’s Law is accurate, the only way to significantly increase tax revenue is to grow the economy faster.

However Hauser’s Law is also quite relevant in figuring out how much money the federal government should be spending in a given year.  If revenues are limited to 19.5% on average over time, then overall spending should also be approximately limited to 19.5%, or else there will be a negative balance, i.e. a deficit.  If there is a large imbalance year after year, as during the past few years, then the national debt will grow rapidly and become the huge problem that it is today.

In this respect, take a look at John Taylor’s March 17, 2013 entry in his blog Economics One entitled “An Opportunity to Contrast and Compare Budgets”.  The Republican House Budget rapidly (over two or three years) brings federal spending down below 20% of GDP and then levels it off at about 19.5% after that.  On the other hand, the Democratic Senate Budget brings spending down to about 21.5% in 2017 and then it creeps back up to 22% by 2023.  This is why the House achieves a balanced budget in ten years while the Senate budget doesn’t even come close to achieving balance.

Can there be any question as to which of these two budgets is the more fiscally responsible?  To me it is obvious but if you feel otherwise please do say so in the comment section which follows this entry.

Are the Democrats Really Serious?

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In the March 18, 2013 edition of the Wall Street Journal, longtime Democratic party activist, Ted Van Dyk, essentially asks the above question in his op-ed column, “My Unrecognizable Democratic Party” . Mr. Van Dyk gives many examples of the lack of seriousness of the current national Democratic leaders.
One glaring example which he omits is the enormous difference between the recently proposed House Republican budget, which eliminates deficit spending over a ten year period, and the Senate Democratic budget, which makes no such attempt or even expresses any interest in doing so. The proposed Democratic budget actually increases the national debt by $5 trillion over the next ten years and ends the decade with annual deficits of over $500 billion dollars (see my previous post).
We have added $6 trillion in national debt over the past five budget years, 2009 – 2013, and the Democratic Senate proposes to add another $5 trillion over the next 10 years, with no end in site! How irresponsible can you be! How will this enormous new debt ever be paid off? What will happen when the Federal Reserve is forced to raise interest rates to combat the inevitable inflation which will arise from prolonged quantitative easing? When our public debt reaches $20 trillion, which will soon happen under Democratic budgeting, even an interest rate of 5% will require $1 trillion of interest payments per year forever!
It doesn’t take a lot of common sense to understand the painful fate awaiting our country if this scenario plays out. It is no consolation to predict that a conservative revolution will sweep across the country as a reaction to such irresponsible behavior from the Democrats. It would be far better for Democratic leaders to wake up and address our dire fiscal predicament before it gets even worse. Will this happen? Will Democrats heed Mr. Van Dyk’s warning? Let’s hope so!