The Deficit – One Big Hoax or a Looming Catastrophe?

I have spent five blog postings discussing the deficit as one big hoax. I did so not because I think that it is something that can be ignored, but rather because as used by the Republican Party, (and their ostensible tail that wags the dog, the Tea Party) it was being used not because of a real concern about the consequences of the deficit, which after all they created with malice aforethought, but rather as a weapon with which to try to destroy our safety net, and I spent those many words demonstrating this.

To summarize, they inherited a huge surplus from the Democratic Clinton Administration and turned it into a huge deficit, one even larger than it appeared because so many expenditures, such as the wars in Iraq and in Afghanistan were taken off- budget, as was the drug enhancement in Medicare, which, by the way, President Obama has restored to the budget, making the deficit seem larger by comparison.

Their Vice-President, Dick Cheney, famously declared: "Reagan proved deficits don't matter."

And the famous Ryan budget, which provides for the abolition of Medicare ostensibly to reduce the deficit, in fact increases the deficit, something that our media has not, to my knowledge, even mentioned. I had to go the The Economist to get the shocking fact that the Ryan budget not only does not reduce the deficit, but in fact increases it by $6 trillion over the next decade.

It was for that reason, as well as an article in the financial advisory letter of Fidelity Monitor that I called the Deficit a Big Hoax.

But if the reader will return to my blog posting entitled "The Deficit – One Big Hoax (Part I)" they will find near its end the statement: “But let me be clear! The deficit does matter! It needs to be reduced over time. But there is no urgency about doing this, and it can, and should be done with some targeted cuts, which I will identify hereafter, and with mostly revenue enhancements.”

Here I must refer to a comment, which I received from Edwin S. Bernstein Esq. of Boynton Beach, Florida, who wrote in response to my post referred to above,

“I think that the deficit matters…. We do need to balance our budget…”

If Bernstein had read my post to the end, he would have found my comment quoted above that deficits matter, but more important I take exception to his statement that “We do need to balance our budget…”

The fact is that the last time we had a truly balanced budget was in 1969 (Clinton’s surplus depended on counting the Social Security surplus in the budget, though the projection of surpluses in future years was real) and during this whole time it was never a problem. However, at some point the size of the deficit matters, though where that point lies is problematic.

The idea of a Balanced Budget amendment is sheer lunacy and would put our economic policy into a straight jacket. In supporting this, proponents often try to compare the US Government either to a corporation or to family budget. It should be fairly obvious that neither comparison is apt, since the responsibilities of the government are entirely different from either. But even if we were to accept the comparison it must be noted that neither a business, nor a family, ever manages without debt. Large businesses borrow to acquire assets they need, or to expand, and small businesses often have to borrow just to meet their next payroll. In addition both businesses and families strive to increase their income, while Republican dogma prescribes a deliberate lowering of income or revenues, The extent of borrowing can easily be seen if one looks at the corporate bond market, and few families could buy a car, not to speak of a house, without borrowing. The municipal bond market shows the need for borrowing by municipalities. Our infrastructure, whether of highways or railroads, or for that matter our electric grid could not have been built without borrowing. And can anyone imagine an emergency, such as a major war, requiring large outlays, leaving us with a Constitutional restraint requiring unimaginable tax increases or abject surrender and the proposed Constitutional Amendment would make the imposition of tax increases blockable by a small minority.

The problem we face is not the size of our present deficit but the size of our debt projected into the future, if we had done nothing, (and the much criticized deficit reduction agreement the President has signed off on, has reduce this looming catastrophe) and if we do nothing, we face a non-sustainable deficit, which I will discuss in greater depth hereafter.

But before I do this, (and this will once again have to be a multi-part presentation) I want to examine the oft-repeated charge that the Obama Administration, while it may have inherited a large deficit, made it much larger through irresponsible policies. Thus if we compare the last Bush budget in 2008 with Obama’s first budget in 2009, we find that the 2008 budget had a deficit 460 billion. In 2009 Obama’s budget showed a deficit of 1.41 trillion or an increase of $950 billion, a staggering increase, and one that Republicans, and even some news organization, have been pointing to with disapproval. But rarely if ever have we seen a breakdown of how this increase occurred. Once again the media doesn’t give us the facts. But they can be found through hard work.

-$320 billion were due to declines in tax receipts due to the effects of the recession
-$245 billion—resulted from outlays for the Troubled Asset Relief Program (TARP) and net payments to Fannie Mae and Freddie Mac.
-$200 billion American Recovery and Reinvestment Act of 2009 (ARRA)
-$185 billion due to increases in primary budget categories such as Medicare, Medicaid, unemployment insurance, Social Security, and Defense – including the war effort in Afghanistan and Iraq, which had previously been off budget.
-While the American Recovery and Reinvestment Act of 2009 (also known as the stimulus bill) was estimated to be $787 Billion at the time of passage, only some of it kicked in 2009, with some in 2010 and later, which is why only $200 billion of the $787 billion are shown above.

See the Congressional Budget Office Monthly Budget Review .pdf and here.

For those who may be interested in how the stimulus bill broke down $288 Billion was in the form of tax incentives, $155.1 billion for Health Care, $100 billion for education, $82.2 billion was for Aid to low income workers, unemployed and retirees, $105.3 billion was for Infrastructure Investment, $7.2 billion was for Government buildings and facilities, $10.5 billion was for Communications, information, and security technologies, $21.5 billion was for Energy Infrastructure, $27.2 billion was for Energy efficiency and renewable energy research and investment, $14.7 billion was for Housing, $7.6 billion for Scientific research and $10.6 billion was for miscellaneous items. See here and footnotes therein.

The CBO estimated that enacting the bill would increase federal budget deficits by $185 billion over the remaining months of fiscal year 2009, by $399 billion in 2010, and by $134 billion in 2011, or $787 billion over the 2009-2019 period. Ibid.

As for its effectiveness several independent macroeconomic firms, including Moody's and IHS Global Insight, estimated that the stimulus saved or created 1.6 to 1.8 million jobs and forecasted a total impact of 2.5 million jobs saved by the time the stimulus is completed. The Congressional Budget Office considered these estimates conservative. The CBO estimated according to its model 2.1 million jobs saved in the last quarter of 2009, boosting the economy by up to 3.5 percent and lowering the unemployment rate by up to 2.1 percent. Congressional Budget Office Monthly Budget Review .pdf and Ibid.

For the 2010 fiscal year the spending came to $3.456 trillion with tax receipts of $2.162 trillion, or a deficit of $1.294 trillion, which is a decrease in the deficit $116 billion.

(For those who may not be used to such astronomical figures, a trillion is 1,000 billion)

Given these figures it is hard to fault the Obama Administration for creating either the present fiscal shortfall or the projected one.

However, a review of the Congressional Budget Office projections gives us pause about the future. The CBO gives us a number of projections, the rosiest of which, makes a number of assumptions, not the least of which is that none of the Bush tax cuts would be extended beyond 2012, which is when they are currently set to expire. Since they will expire unless Congress extends them this could not be blocked by Republicans. However, the President pledged in his campaign that only those making less than 250,000 would be exposed to higher taxes. If this campaign promise were kept a large chunk of revenue would be lost. Furthermore, for the purpose of this projection they assume that the alternative minimum tax, which is impacting more and more middle class voters would not be adjusted, which is almost inconceivable, because if allowed to continues in its present form, it would make a mockery of the graduated income tax. Assuming these unlikely scenarios the CBO projects that government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt (emphasis added) would decline to the lowest percentage of GDP since before World War II. See the highlighted portion of CBO’S 2011 Long-Term Budget Outlook.

But not only are these projections based on some unlikely specific tax scenarios, they assume that the tax receipts would rise to 23% of GDP, a level that has not been seen in decades and much higher than the taxes under the Clinton Administration, and even than they do not include Medicare, Medicaid and Social Security spending. These are specifically excluded in the projections, which I believe is the correct approach. I believe that these programs should be taken out of the deficit projections, and should be treated as problems separate and distinct from the budget and the deficit.

In a way they already have been for the way the government budget is calculated masks the impact of these programs on the total budget or even on their own viability. An examination of the CBO’s paper entitled: "The Impact of Social Security and Medicare" shows the impact these programs have on the Federal budget. As the paper explains:

“Under the Congressional Budget Office's latest budget projections for the next 10 years, those trust funds are estimated to run sizable surpluses. However, those surpluses reflect more than an excess of dedicated revenues over spending. A substantial portion results from internal transfers between Treasury accounts--credits from the general fund of the Treasury to the trust funds. Thus, although the trust fund surpluses may accurately reflect the programs' spending authority, using them to gauge the programs' budgetary impact distorts their net effects..."

Similarly, from 2003 to 2026, instead of running a cumulative surplus totaling $6.5 trillion, as estimated by the Social Security and Medicare trustees, the programs would run a cumulative deficit totaling $6.6 trillion.

Therefore I will defer a discussion of these programs until my next post.

But before I close I feel it my duty to disclose the pessimistic projections by the CBO. Under what they consider the most likely scenario given the realities of the political process, the CBO projects that; “Debt as a share of GDP (Gross Domestic Product) would exceed its historical peak of 109 percent by 2023 and would approach 190 percent in 2035” See: CBO’s 2011 Long Term Budget Outlook .pdf a portion of which has been both highlighted and underlined in the document referred to.
Clearly the Bush Tax cuts must not be extended, and not just those for people earning over $250,000, and the cuts provided for in the Budget Control Act of 2011 (BCA), are an essential component of getting our deficit under control, without undermining our Social Safety net.