I was emailing with some friends about what to do about the federal budget. Below are my thoughts and analysis, which should be classified as "back of the envelope" thinking.
Let's look at the problem.
First, according to the Bureau of Public Debt, the US has been increasing its total debt load by a minimum of $500 billion per year since 2003. This means the gap between spending and revenue is consistent and systemic.
According to the CBO the total US budget was 2.7 trillion in 2007. Of this 1.6 trillion was mandatory and 1 trillion was discretionary. The mandatory spending of 1.6 trillion is about 60% of the total US budget and includes SS, Medicare and Medicaid. A closer look reveals the following spending increases. Since 2000, SS spending has increased from $406 to $581 billion (a 43% increase), Medicare spending has increased from $216 to $487 (a 125% increase) and Medicaid spending has incresed from $117 to $190 billion (a 62% increase). In other words, the mandatory spending has spiked really hard.
At the same time, discretionary spending has spiked as well. The big increase here is from defense spending which increased from $295 to $549 billion (an 86% increase). Other domestic spending increased from $298 to $457 billion (a 52% increase)
And here's where the big screw-up comes in. Revenue from individual income taxes increased from $1 trillion in 2000 to $1.16 trillion in 2007 -- a 16% increase. This is the biggest source of funds for the federal government.
So, we have the following situation.
1.) A systemic problem of outlays outstripping revenues by at least $500 billion/year
2.) Nearly stagnant revenues
3.) Massive increases in spending.
Let's overlay the current economic environment on this situation. We're in a recession and we're not getting out of it anytime soon. That means that tactically, this is a terrible time to increase taxes. Clinton did raise the top rate, but only after the economy had been growing for a few quarters.
In addition, recessions usually mean increased government spending. The stimulus checks are a good example, as is the possibility of increased unemployment benefit spending. There is also talk at some level of a federal bail-out of the housing market, although the exact plan is still vague. But if it happens, it's going to be very expensive. Freddie and Fannie are going to need a ton of cash.
So, let's sum up everything so far just to make sure we're on the same page.
1.) The budget process is screwed and has been for the last 7 years.
2.) The budget is already a giant mess.
3.) Because the economy is in a recession, this is tactically the worst time to try and fix the budget.
All that being said, what do I advocate doing.
1.) Get us the hell out of Iraq. That's at least $150 billion a year and probably more.
2.) Let the Bush tax cuts expire. According to the Tax Policy Center, 57.6% of the 2001 - 2003 changes in tax law went to people with incomes over $100,000. At that level of the game, they can take care of themselves. The expiration will happen naturally because of the built-in sunset provisions. I have not seen an estimate of the amount of money this will bring into the Federal government. Let's be conservative and say an addition $150 billion year. That means between an expiration of the tax cuts and getting out of Iraq we've got $300 billion in savings.
That means we've got $200 billion more to go. I would advocate at least another $100 billion from the Pentagon. They've had a nice run of budget increases, but enough is enough. In addition, there have been several studies that say the Pentagon's accounting system is, well, fucked. That means all the increases we've seen in spending probably mean a ton of graft and corruption that needs to be investigated thoroughly.
So, now we've got an additional $100 billion. Frankly, if we get $400 billion in savings we'll be heroes. That would be enough from the markets perspective. If you want to get the extra $100 billion, I think there are plenty of places to get it from.
However -- and here's a big caution -- note the massive increases in mandatory spending over the last 7 years. Those increases are very real and will eventually eat our economic lunch if we don't deal with them now.
Bear Radar
5 minutes ago
11 comments:
Bonddad, the last 7 years?
It seems to me that we've been in systematic deficit spending mode since Reagan. The logic being that if we could win the Cold War, the "peace dividend" would more than wipe out what we spent on the victory.
Of course, now the story's shifted to "If we could bring Democracy to the Middle East, the peace dividend would be well worth whatever we spent to get there." The war in Iraq was supposed to cost about $65 billon. I suppose it's a good thing for the war profiteers that war is neither rational or fiscally responsible.
Currently, the nation is like someone who's financed their lifestyle off of their wallet full of credit cards. Make the minimum payment, never paying anything on the principal and always borrowing more. Does anyone even talk about paying down the national debt any more?
The Pentagon has NEVER passed an audit. Yearly audits are mandatory for all government agencies and the Pentagon is the only one that fails year after year after year. The GAO has been after the Pentagon for decades to clean up its act, but it just can't (or won't). The last I read, the Marines (the smallest branch) said it would have an auditable system by 2010; the other military branches are looking at 2012 or thereabouts (if ever). You're right: Graft and corruption is inevitable with such a shoddy accounting system! Aside from the fact that even a small % of skimming off the Pentagon's budget amounts to a huge wad of greenbacks, these are the guys who are responsible for keeping track of the world's lone super power's nuclear arsenal: former Defense Secretary Rumsfeld admitted in 2001 that the Pentagon could not account for $2.3 Trillion in transactions. Pretty scary, if you ask me.
RE: Manditory Spending Spikes
Former US Comptroller General for the GAO, David Walker, along with The Concord Coalition is giving a "Fiscal Wake Up Tour" regarding this very topic. You say it "will eventually eat our lunch"?
The Coalition's estimates predict that by 2024 "Social Security, Medicare, Medicaid and net interest consume all revenues" and by 2025 "debt held by the public exceeds 100 percent of GDP." That sounds more like breakfast lunch and dinner!
(http://www.concordcoalition.org/)
Raise the top rates, elimniate the limit on the amount taxed for social security, raise the corporate rate, raise the rate on capital gains, and get out of Iraq and a few more places. But beware, our military has been serving as the employer of last resort. What do we do with all the returning and jobless soldiers?
A sensible, moderate look at the budget.
Why no mention of the savings inherent in combining Medicaid, Medicare, VA Medical into a Universal HealthCare System?
To find other hundreds of billions in government spending that buys nothing at all that government could not produce for itself for nothing, pay ALL interest on the Federal debt with currency issued by the US Treasury.
Have you ever asked yourself why government pays interest for the use of money which it could create for nothing? In my opinion it is primarily a matter of the incentives faced by legislators.
President Lincoln tried to finance his side of the Civil War with non interest bearing greenbacks, but was blocked by the Bankers after he had financed about a third of his total cost of the war this way. Thomas Edison and Henry Ford argued for issuance of currency to finance revenue producing projects, in their case the huge building projects of the Tennessee Valley Authority.
Until there is an organic change in the incentive system faced by legislators, nothing really beneficial to the public will happen. You know it, I know it, we all know it. If we didn’t know it after the 2006 elections we ought to. Obama is showing how big money can be reduced in importance in presidential campaigns. To do the same and better for legislatures, here is a formula.
Build on the Alaska Permanent Fund. Create a cooperative owned by the public, with every member of the public having a basic ownership interest, carrying one vote.
Fund the new organization as the Alaska Permanent Fund was funded, by assigning certain flow of funds to the beneficial interest of the members, via the fund.
This creates a way of representing the economic interests of the WHOLE public to legislators just as forcefully as special interests present THEIR interests now.
By the traditional cooperative rule of benefit in proportion to contribution the cooperative would reward actors who make the public better off, treating public and private persons by the same rule, equally applied.
The cooperative would optimally benefit its members and itself by providing incentives to every link in the chain of producing value for the public [members], since the value produced will be limited by the weakest link in the chain.
Email me at colbert2422@yahoo.com for some massive potential projects and peer reviewed backup for what I put in here
William
Eliminate those tax cuts, as you mentioned. But the big specter is Social Security and Medicare/Medicaid. Until we come up with a fund, that cannot be touched by Congress for their pet projects, to fund these pension and healthcare initiatives, we're gonna be in trouble. I would love to have Universal Health Coverage, but if it's a merging of the current to Medi systems, then we're still in the same boat.
Get out of Iraq as #1 solution? Yeah, No Fucking Shit!
Iraq is killing our economy and our country period.
Of course killing another country for colonial purpose is plain wrong too. But just looking at it in the dumb selfish manner of our economy - yeah we can do without the crony squandering of our cash.
God I want the articles of impeachment to go all the fucking way today!!! If Kucinich succeeds then we won a victory for our economy, our political structure, and our very souls.
Bonddad,
Try inflation adjusting some of those numbers. Or better yet, normalize them by GDP to put them in better context. What that will show is our tax base is lower and our spending is higher, mostly as a result of our military spending increases, the prescription drug plan, and the Bush tax cuts.
Republicans = party of fiscal irresponsibility (cut taxes and spend)
Democrats = party of slightly less fiscal irresponsibility (keep taxes the same and spend)
Healthcare, not Social Security or Medicare per se, is the problem. We pay 50% more for healthcare than any other industrialized nation. That corresponds to about $700B by which we could reduce our cost structure. And there's no complication in doing it. We just expand Medicare to cover everyone. It's vastly cheaper than other medicine though, granted, it makes doctors accept lower reimbursements.
But ::sigh:: no one will listen. Organizations like Concord have so distorted the debate that no one actually fact checks their often silly arguments.
So, healthcare reform plus end defense overspending and the budget--and probably the CA-- is back in balance.
Good planning. The military is the real source of the problem here; but it is not the spending in the military it's the lack of control and what you are buying.
If this money was invested in infrastructure repair, renovation and innovations such as the Solar Grand Plan we'd be on our way to increasing the wealth of the nation.
By the way, two books I can highly recommend, and that every economics blogger really ought to read are:
The Origin of Wealth
and relevant to today and the question we now see being asked much more....'How to put America back on track...or the equivalent.' FDR and his posse knew how. And so do we if someone would shut the myriads of idiot 'conservative' gasbags up for ten minutes.
American-Made: The Enduring Legacy of the WPA: When FDR Put the Nation to Work
Seriously if you are not familiar with what's in these two you are very apt to get Kool-Aid poisoning.
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