Wednesday, July 07, 2010

Our Deficit & Debt Problems Are Guaranteed To Worsen

And They are the Fault of Both Political Parties

The financial position of the US doesn't look good right now. That's because for the better part of four decades, our government has consistently spent more than it has taken in. Since 1970, the Federal Government has run deficits for all but four years (1998–2001).

Politicians, regardless of their political stripes, love to show voters in their districts that they can deliver, that they can bring home the bacon. This results in an array of "earmarks" for public works projects, like roads, bridges and public transportation infrastructure, plus more dubious expenditures.

But these earmarks are not the real drivers of federal budget deficits. Congress is on pace to spend $11 billion on disclosed earmarks in fiscal year 2010, according to Taxpayers for Common Sense.

While that is indeed a lot of money, in relative terms it's a pittance. The federal budget for fiscal 2010 totals a whopping $3.55 trillion. That amounts to more than 35,000 billion dollars. What this means is that earmarks account for just .032% of the total budget.

Americans are rightfully concerned — even angry — about the size of our annual budget deficits and their effect on our swelling national debt, which has now surpassed $13 trillion.

Much of this anger is currently directed toward President Obama.

As a lifelong Independent, I approach this criticism in a purely non-partisan manner. That said, I think it is important to make the facts clear.

Fully two-thirds of the federal budget is made up of mandatory spending. These are the items for which Congress lacks the discretion for spending, such as Social Security, Medicare/Medicaid, payments to veterans, and interest payments on the debt.

Even if there were no more deficit spending — in other words, if the government spent only what it collects in revenues — there would still be an enormous debt. And there also would be billions of dollars in interest payments still owed on that debt.

Ceasing deficit spending will not erase the debt. It won't even begin to address it. To begin paying off the debt would require the government to spend less than it collects in taxes for many years, a near unimaginable proposition. And it would require the politically combustible combination of tax hikes and budget cuts.

The government's fiscal year runs from October 1 to September 30.

During fiscal year (FY) 2008, the national debt increased by over $1 trillion. That was before Obama even took the oath of office.

In July 2008, the budget deficit for the fiscal year ending in September 2009 was projected to reach $482 billion — the highest number ever recorded.

Yet, the Congressional Budget Office later projected that the deficit for FY2009 would total $1.2 trillion, or 8.3 percent of GDP. However, supplemental appropriations for the Iraq and Afghanistan wars, and earmarks, eventually pushed the figure even higher.

During FY 2009, the federal government collected approximately $2.1 trillion in tax revenue. However, the government spent nearly $3.52 trillion — up 18% from FY2008. That resulted in a budget deficit of $1.42 trillion, significantly higher than the $482 billion originally projected. And the former projection would have been a record.

It should be noted that the fiscal 2009 budget was also enacted before Obama became president. The point is, we've been on a collision course with a hard reality for decades, and the impact date was rapidly accelerated during the last one in particular.

During the past decade, Congress passed two separate rounds of major tax cuts. Meanwhile, the military has been fighting two separate and very lengthy wars. From the beginning, this was a recipe for fiscal disaster.

As noted, approximately two-thirds of the Federal Budget is comprised by Social Security, Medicare & Medicaid, payments to veterans, and interest on the debt. Cuts to these budget items will range from brutal to impossible.

Meanwhile, federal revenues have been falling due to high unemployment and lower incomes. For example, during FY2009, the U.S. government collected about $400 billion less in tax revenues than in FY2008. At 15% of GDP, the 2009 tax collections were at the lowest level of the past 50 years.

Budget shortfalls are not some new phenomena. From FY 2003-2007, the national debt increased approximately $550 billion per year on average. In relative terms, from 2003-2007 the government spent roughly $1.20 for each $1.00 it collected in taxes. This increased to $1.40 in FY2008 and $1.90 in FY2009.

George W. Bush was president during all of these fiscal years. This is not to put the blame squarely on his shoulders, but it is worth remembering that deficit spending has long been a way of life in Washington. This problem goes back 40 years. Each party has contributed to the problem. Whether it's lower taxes or higher spending, the result has been continual deficits and a burgeoning debt.

All politicians promise the citizens exactly what they love to hear; you can have all the government services you want, without paying for them.

Two concurrent wars and falling tax revenues are currently driving our annual budget deficits. Perhaps Obama can be blamed for not halting two unending and unwinnable wars. The rising national debt will eventually force the US to offer higher interest rates to buyers of that debt.

Paying higher interest rates will slow economic growth. And aside from the higher costs to service the debt, the government fears slower growth because it would make the debt-to-GDP ratio even worse.

Much of the anger towards President Obama centers around the stimulus program enacted shortly after he entered the White House. How the money was spent is certainly up for debate, but since it was government spending, there was surely graft and waste.

While the stimulus was widely described as a $787 billion spending bill, $300 billion of that was directed toward tax cuts for 95% of Americans. So it was, in actuality, a $487 billion spending bill. One thing almost all economists recognize is that as bad as this recession has been, without all of that government stimulus upholding the economy and stepping in for reluctant consumers, things would have been even worse.

But while all that deficit spending lessened the problems associated with a stagnant or shrinking economy, it created an even worse debt problem. And the associated tax cuts also reduced Treasury revenues and added to the deficit.

The government was able to undertake its massive Keynesian spending practices (aka, stimulus, or deficit spending) during the Great Depression because it didn't enter that period with the massive debt levels it has today. That is now our Achilles Heel.

The U.S. was already running massive deficits even before tax receipts plummeted, which is making matters worse. As a result of consumer retrenchment (due to unemployment and the housing collapse), government spending is the only thing presently under-girding the economy, even as it increases the deficit.

However, if the government reduces spending, that will have a negative effect on GDP. In past recoveries the growth of the private sector has overcome that negative effect. But the private sector isn't truly recovering, and it cannot recover unless consumers recover. It's all a big, vicious cycle.

The deficit certainly needs to be cut. But cutting the deficit too fast could also throw the country into an even deeper recession. Deficit reduction will also reduce GDP. That means the government collects less taxes, which makes the deficits worse, which means it has to make more cuts than planned, which means lower tax receipts, and so on and so on.

The important thing is for Americans to fully understand the problem, and to not blame the president or any one particular party. They are all to blame. Our "leadership" hasn't led. Our politicians have been shortsighted, reckless, dishonest, and irresponsible. Both parties have failed us.

As I said, we've entered a big, vicious cycle. And life is going to become even more painful for most Americans.

In short, it's going to get ugly. Count on it.

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