We Have Bigger Problems Than A Failing Deficit Committee

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If you read this web site the odds that you are also living under a rock are pretty small. That probably means you already know that over the weekend the so-called Deficit Reduction Supercommittee failed to reach an agreement (and had to admit its failings on Monday). A little back-story: the Debt Panel was trying to find deficit savings in excess of $1.2 Trillion over the next 10 years. A little more back-story: the entire concept and execution of the debt panel was a disgusting farce. The entire $1.2 Trillion was to be cuts from ‘baseline spending’, better known as ‘planned future spending increases’.

At heart, this is an Economics article but on the surface, it is a Political article. Feel free to attach your own biases while reading it, it’ll be more fun!

The Disgusting Spending Problem (and the Much Smaller Revenue Problem)

If the following statements seem biased, they aren’t.  They come from data in the Office of Management and Budget’s Fiscal Year 2011 Report.  In your PDF reader scroll to page 25.  If you have an issue, contact the Office of Management and Budget or escalate it to their boss. Note that the 2010 numbers are estimates!

  • $1.2 Trillion over 10 years is a joke.  Estimated spending in 2010 was $3,720,701,000,000.00.  In 2006?  $2,655,057,000,000.00.  You could save over a trillion dollars a year by just reverting to the 2006 budget.
  • $120 billion would be the average cut per year.  That is 3.2% of the estimated 2010 spending.  Even if $120 Billion hadn’t been spent in 2010 it still would have been the most the United States has ever spent in a year.
  • The most the United States has ever collected in revenue (in 2007) was $2,568,001,000,000.00.  Again, note I said ever.  Holding spending static at ~ $3.7 Trillion a year you’d still be adding over $1 Trillion to the deficit per year with that revenue.  To bridge the gap by taxes alone you’d have to increase all taxes by approximately 50% – even if you taxed the top 1% at 100% it wouldn’t bridge that gap. And any Economist (including Paul Krugman) will tell you that the relationship between taxes and revenue is not 1 to 1.
  • The Government has been spending more than that 2007 revenue number since 2006.  Even if revenue had stayed strong we’d still be adding to the US deficit.  This is a bipartisan problem (and having a Democratic Congress under President Bush is not an excuse for Republicans – note that the President can veto.).
  • The last time the Government spent less than it had in revenue was in 2001 (again, having a Democratic President isn’t a good excuse for Democrats – Congress was Republican when the surpluses started).
  • Some other funky stats: The Bush Tax Cuts of 2001 and 2003 did increase revenue.  2003 revenue was $1,782,321,000,000.00 and it was $2,568,001,000,000.00 by 2007.  Clinton both raised income taxes and cut dividend and capital gains taxes.  In 1993 revenues were $1,154,341,000,000.00.  In 2000?  A whopping $2,025,198,000,000.00.  Sure, some of that was the whole Internet Bubble thing… but revenue has never dropped below the 2007 numbers again.

Interesting stuff – as is the fact that $2,165,119,000,000.00 in revenue was collected in 2010, 15.6% less than 2007.  That revenue will come back as the economy recovers, but there is no automatic mechanism to bring spending back down to realistic levels.  Yes, revenue has decreased 15.6% since 2007.  That’s a problem.  You know what’s a bigger problem?  Spending has increased 36.35% at the same time (and there was already a deficit)!  If you made 15% less this year would you spend 36% more?  I doubt it.

The key to fiscal sanity, at least over the last 20 years?  Political gridlock.  Under Clinton, Congress and the White House were controlled by different parties.  There you have it… a reason to actually like Congress!  If they are fighting, at least they aren’t passing bad laws… Like my colleague Cameron Daniels wrote, the entire debate is kind of like “a 400-pound man who is gaining 50 pounds a year who plans on being 850 instead of 900 pounds in a decade while his doctors warn him of losing weight too fast.”.

Readers, what do you think?  Am I on to something?  Are you ready to embrace divided government?

Comments

  1. says

    In the long term, the situation is unsustainable. What we don’t know is, how long?  Could we see $20 trillion in national debt?  Maybe.  A trillion used to be an inconceivable number in public finance. Now it’s tossed around like nothing.  To paraphrase some politician that once said something like this (can’t remember who, can’t be bothered to look it up):  A trillion here,  a trillion there, pretty soon you’re talking some real money.

  2. Andy Hough says

    Gridlock may have worked in the past to keep spending under control but now that the problem is so large I think the parties are going to have to work together to solve the spending problem. I’m skeptical that will happen before we face a crisis like Greece but I hope I’m wrong.

    • says

      I highly doubt that we actually default on our debt – I just don’t see that happening. Since all of our debt is issued in dollars we can just fire up the printing presses (or, nowadays, literally just type a new number on a keyboard). We could, however, face some competition as the world’s reserve currency since I think we might pay off the debt with inflation eventually.

      I don’t like how this is playing out – we increased spending 36% and now we seem to be accepting that new number as the baseline instead of preparing to tone it down, especially if the economy improves. We can either:
      1) Grow our way out
      2) Increase taxes massively
      3) Increase taxes stealthily by inflating our way out

      If we block #1, #3 is the most politically palatable.

      Thanks for the comment!

      That’ll be fun!

  3. says

    I agree. Reagan had Deomcrats in Congress. Clinton had Republicans. Obama wasted the first two years with baloney and now that he has to fight Republicans the national discussion is changing.  

    That’s what I’m most impressed with: not that things are getting done (they aren’t), but that people are starting to wake up. 

    • says

      Bush had 4 years of Senate and House control at one point and he ran a deficit. Technically, spending increased most under the Democratic Congress of his last two years, but a lot of that was the Real Estate collapse. (Unless you finger Bush as the cause, heh).

      Since the trajectory is so bad I wonder if gridlock is enough – like Andy said. It might just leave us treading water as baseline spending increases pile onto the debt and increasing negative sentiment. The only prescription? Inflation. And not the mild kind that accompanies growth and comes with huge raises – the nasty stagflation type.

  4. says

    Thanks for sharing your graph and data.  Very interesting, but depressing as it seems we are drowning in quicksand.  Hope our government and the world governments can figure this crisis out.  If they don’t, we better learn as many skills as possible in case we go back to a barter system!

  5. says

    Love how you can prove, with actual numbers, that taxing the rich won’t do a damn thing!  Why can’t liberals and occupy wall street dummies recognize and understand this?  It’s all about creating class warfare in order to win the next election.  

    • says

      You’re right… unless you define the rich as something other than the top 1%. In 2010 the top 1% earned $1,324,572,000,000 and paid $318,043,000,000 in federal income taxes. That number doesn’t include state, local, sales and use taxes… but even then the Government would have to tax the top 1% at a 100% rate just to balance the current budget. We know that increasing taxes will decrease productivity (or increase tax avoidance)… so good luck with that.

      Truth is – the money is in the middle class. Whether the middle tax gets soaked by taxes or inflation (a hidden tax) is yet to be seen. Of course, we could cut spending, but I’m not holding my breath…

  6. says

    The supercommittee was destined for failure as soon as the members were selected.  Next time, let’s try having the Democrats pick the 6 Republicans, and the Republicans pick the 6 Democrats.  Then we’ll end up with centrists who will be interested in solving the problem.

    • says

      Yeah, the supercommittee was a super sham. My problem is that we’re now treating all of the ‘temporary ‘ stimulus spending as permanent baseline spending – instead of trying to cut from the high $2Ts, we’re in the high $3Ts.

      Inflation may not be immediately evident – but pick one: Inflation, Taxes, Spending Cuts. I listed them in the order I would expect them to be tried, haha.

      Thanks for your comment!

  7. Anonymous says

    There’s a debt crisis brewing not only for European countries, but for America.Based
    on the White House’s own figures, the national debt will reach $20
    trillion by the end of this decade—about 140% of our current Gross
    Domestic Product. If the economy falls back into a recession, government
    debt could run higher and GDP could fall, making the situation worse.profitconfidential

    • says

      Do you think it’ll be an immediate crisis, or a long lost decade (or two) Japan style? Countries that monetize their debt can float on for a long time in a holding pattern. I worry that our best case scenario looks more and more like Japan the further we kick the can down the road.

      Thanks for your remarks!

    • says

      They certainly don’t – but in nefarious hands (or mine, who know!) they can deceive. That’s why I don’t like saying $1.2T spending cuts when I’m talking about $1.2T in reduced planned future spending, heh.

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