The federal budget

For an outstandingly responsible organization, see the
Committee for a Responsible Federal Budget.


Coercive Compassion
By James L. Payne
The American Conservatie, 2004-12-06

Entitlements rely on force.


Who bails out the US government?
No one. We have to avert the need for that by reprioritizing now.
By Leon E. Panetta and Bill Frenzel
Christian Science Monitor, 2008-11-05

[Emphasis is added.]

Just as homeowners and financial firms have been living beyond their means,
so, too, has the federal government.
The question then is:
Who bails out the US government when Washington overspends?

Unlike when a firm is in danger,
if the US government collapses there is no backstop;
there is no one to bail us out.

What the government needs is a plan
that puts the US on a gradual path to bring the budget back into balance
before a financial crisis larger than this one forces us to.

Though the $700 billion package comes at a time of need,
it comes also at a time when the government’s finances are weak.
The danger is that
in trying to bail out one exploding economic bubble
the nation may be creating another debt bubble that will ultimately explode.

Rather than paying off our mounting and increasingly burdensome debt,
we borrow more every year.
The federal debt is currently $10 trillion,
and next year’s deficit is likely to add more than $1 trillion more.
And even these numbers pale in comparison to our implicit exposure,
as we’ve promised $40 trillion in pension, Social Security, and Medicare benefits.

As subprime mortgage holders were relying on
the housing market to continue to grow
at the anomalous rate seen in the late 1990s and early 2000s,
politicians are counting on impossible levels of economic growth
to sustain Washington’s addiction to debt.

When that growth doesn’t occur – and it won’t –
and America’s Financiers realize it isn’t coming,
there will be serious trouble.

The next months will be devoted in large part
to dealing with the flagging economy, and rightly so.
Policymakers must act now to fix the budget mess and stabilize the economy.

Plans for further bailouts and stimulus must include
consideration for the bottom line of the government –
we can lend money now, but recouping some of that money for the government
should be part of any plan.

As enticing as it is to offer the American public
trillions of dollars in tax cuts,
it’s not feasible right now.
There is just no more room in the budget
for the kind of deficit expanding policies
both Sen. John McCain and Sen. Barack Obama ran their campaigns on.

The new president should immediately hold an emergency economic summit
to deal with the budget deficit crisis.

A budget turnaround will require tough choices from all policymakers.
New priorities such as expanding healthcare and cutting taxes
may have to be shelved.
Popular programs including Social Security and Medicare
will not be exempt as spending is curbed.
Taxes are more likely to go up than down
so we will have to reinvent the way we tax
to raise more revenue with less economic distortion.

To be sure, crafting such a deal will be immensely challenging.
But this situation requires leadership willing to tackle this problem seriously.

The economy has just given us a wake up call:
never-ending borrowing schemes come to ugly end.
The federal government has been on a borrowing binge that cannot continue.

Leon E. Panetta, former chief of staff to President Bill Clinton
and Bill Frenzel, former Republican member of Congress,
are the co-chairs of the Committee for a Responsible Federal Budget.

Obama's Risky Debt
By Robert J. Samuelson
Washington Post Op-Ed, 2009-05-18

[The conclusion of the column:]


The Obama budgets flirt with deferred distress,
though we can’t know what form it might take or when it might occur.
Present gain comes with the risk of future pain.

As the present economic crisis shows,
imprudent policies ultimately backfire,
even if the reversal’s timing and nature are unpredictable.

The wonder is that these issues have been so ignored.

Imagine hypothetically that a President McCain
had submitted a budget plan identical to Obama’s.
There would almost certainly have been a loud outcry:
“McCain’s Mortgaging Our Future.”
Obama should be held to no less exacting a standard.

Rising Interest on Nations’ Debts May Sap World Growth
New York Times, 2009-06-04

As governments worldwide try to spend their way out of recession, many countries are finding themselves in the same situation as embattled consumers: paying higher interest rates on their rapidly expanding debt.

Increased rates could translate into hundreds of billions of dollars more in government spending for countries like the United States, Britain and Germany.

Even a single percentage point increase could cost the Treasury an additional $50 billion annually over a few years — and, eventually, an additional $170 billion annually.

This could put unprecedented pressure on other government spending, including social programs and military spending, while also sapping economic growth by forcing up rates on debt held by companies, homeowners and consumers.

“It will be more expensive for everybody,” said Olivier J. Blanchard, chief economist of the International Monetary Fund in Washington. “As government borrowing in the world increases, interest rates will go up. We’re already starting to see it.”

Since the end of 2008, the yield on the benchmark 10-year Treasury note has increased by one and a half percentage points, rising to 3.54 percent from 2 percent, the sharpest upward move in 15 years. Over the same period, the yield on German 10-year bonds has risen to 3.57 percent, from 2.93 percent. And British bond yields have increased to 3.78 percent, from 3.41 percent.

Concern over the long-term effect of greater debt prompted Ben S. Bernanke, the Federal Reserve chairman, to say in testimony before Congress on Wednesday, “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

For now, the cost of more debt is the price government is willing to pay to spend its way out of recession, hoping that a return to fiscal health will increase tax revenue and repay the debt.

But in the last three weeks, the pace of the increase in the 10-year Treasury note’s yield has quickened, spurred by a Congressional Budget Office estimate that net government debt will rise to 65 percent of the gross domestic product at the end of fiscal 2010, from 41 percent at the end of fiscal 2008.

In 2009 and 2010, Washington will sell more than $5 trillion in new debt, according to Citigroup. A decade from now, according to the Congressional Budget office, Washington’s outstanding debt could equal 82 percent of G.D.P., or just over $17 trillion.

Governments borrow money in part by getting investors to buy their bonds, which are essentially i.o.u.’s. To attract investors for all the new debt, governments will have to compete with stock and corporate bond markets for investors’ money, hence the rising yields.

Although interest rates remain low by historical standards, the recent spike in rates comes at a critical juncture, threatening to damp the positive effects of new stimulus spending by governments around the world.

Under President Obama’s 2010 budget, total interest payments by the federal government could rise to $806 billion in 2019, from $170 billion this year, according to the Congressional Budget Office. Much of that projected increase is a result of higher government borrowing, but the forecast also assumes that the average 10-year note yield will increase to 4.7 percent.

Some of the increase in rates earlier this year actually stems from rising confidence in an economic recovery and growing tolerance for risk, as investors abandon government bonds for higher-yielding but riskier corporate bonds and stocks.

Now the threat posed by the rise in government debt is getting increasing attention from investors and traders.

“It’s a gigantic issue,” said Kenneth Rogoff, a Harvard professor and the co-author of a forthcoming book, “This Time is Different: Eight Centuries of Financial Folly.” “It leaves us very vulnerable to a global rise in interest rates that might be substantially beyond our control.”

Mr. Rogoff estimates that if the budget office’s debt estimate proves correct, every one percentage point increase in rates could eventually cost Washington an added $170 billion a year.

The long-term situation is particularly perilous, because the added interest costs will worsen what have become record deficits as Washington has rushed to bail out industries and stimulate the economy.

A year ago, under old budget and policy assumptions and before the financial crisis escalated, the Congressional Budget Office projected that outstanding federal debt would hit $5.3 trillion in 10 years.

“It’s an exaggeration of course, but it’s a little like what happened to the subprime borrowers,” Mr. Rogoff said. “People are just assuming the funding will always be there.”


America’s Sea of Red Ink Was Years in the Making
New York Times, 2009-06-10

accompanied by a neat graphic depicting the growth of the deficit

There are two basic truths about
the enormous deficits that the federal government will run in the coming years.

The first is that
President Obama’s agenda, ambitious as it may be,
is responsible for only a sliver of the deficits,

despite what many of his Republican critics are saying.
The second is that
Mr. Obama does not have a realistic plan for eliminating the deficit,
despite what his advisers have suggested.

The New York Times
analyzed Congressional Budget Office reports going back almost a decade,
with the aim of understanding
how the federal government came to be far deeper in debt
than it has been since the years just after World War II.
This debt will constrain the country’s choices for years
and could end up doing serious economic damage
if foreign lenders become unwilling to finance it.

Mr. Obama — responding to recent signs of skittishness among those lenders —
met with 40 members of Congress at the White House on Tuesday
and called for the re-enactment of pay-as-you-go rules,
requiring Congress to pay for any new programs it passes.

The story of today’s deficits starts in January 2001,
as President Bill Clinton was leaving office.
The Congressional Budget Office estimated then that
the government would run
an average annual surplus of more than $800 billion a year from 2009 to 2012.
the government is expected to run
a $1.2 trillion annual deficit in those years.

You can think of that roughly $2 trillion swing
as coming from four broad categories:
  1. the business cycle,

  2. President George W. Bush’s policies,

  3. policies from the Bush years that are scheduled to expire
    but that Mr. Obama has chosen to extend, and

  4. new policies proposed by Mr. Obama.

The first category — the business cycle —
accounts for 37 percent of the $2 trillion swing.

It’s a reflection of the fact that
both the 2001 recession and the current one
reduced tax revenue,
required more spending on safety-net programs and
changed economists’ assumptions about
how much in taxes the government would collect in future years.

About 33 percent of the swing stems from new legislation signed by Mr. Bush.
That legislation, like his tax cuts and the Medicare prescription drug benefit,
not only continue to cost the government
but have also increased interest payments on the national debt.

Mr. Obama’s main contribution to the deficit is
his extension of several Bush policies,
like the Iraq war and tax cuts for households making less than $250,000.

Such policies — together with the Wall Street bailout,
which was signed by Mr. Bush and supported by Mr. Obama —
account for 20 percent of the swing.

About 7 percent comes from
the stimulus bill that Mr. Obama signed in February.
And only 3 percent comes [so far] from
Mr. Obama’s agenda on health care, education, energy and other areas.

If the analysis is extended further into the future, well beyond 2012,
the Obama agenda accounts for only
a slightly higher share of the projected deficits.

How can that be?
Some of his proposals, like a plan to put a price on carbon emissions,
don’t cost the government any money.
Others would be partly offset by
proposed tax increases on the affluent and spending cuts.
Congressional and White House aides agree that no large new programs,
like an expansion of health insurance,
are likely to pass unless they are paid for.

Alan Auerbach, an economist at the University of California, Berkeley,
and an author of a widely cited study on the dangers of the current deficits,
describes the situation like so:
“Bush behaved incredibly irresponsibly for eight years.
On the one hand,
it might seem unfair for people to blame Obama for not fixing it.
On the other hand,
he’s not fixing it.”

“And,” he added, “not fixing it is, in a sense, making it worse.”

When challenged about the deficit,
Mr. Obama and his advisers generally start talking about health care.
“There is no way you can put the nation on a sound fiscal course
without wringing inefficiencies out of health care,”
Peter Orszag, the White House budget director, told me.

Outside economists agree.
The Medicare budget really is the linchpin of deficit reduction.
But there are two problems with leaving the discussion there.


even if a health overhaul does pass,
it may not include the tough measures needed to bring down spending.
Ultimately, the only way to do so
is to
take money from doctors, drug makers and insurers,
and it isn’t clear whether Mr. Obama and Congress
have the stomach for that fight.

[There is an alternative:
simply restrict the types of care for which the government will pay.]

So far, they have focused on
ideas like preventive care that would do little to cut costs.

even serious health care reform won’t be enough.
Obama advisers acknowledge as much.
They say that changes to the system
would probably have a big effect on health spending
starting in five or 10 years.
The national debt, however, will grow dangerously large much sooner.

Mr. Orszag says the president is committed to
a deficit equal to no more than 3 percent of gross domestic product
within five to 10 years.
The Congressional Budget Office projects
a deficit of at least 4 percent for most of the next decade.
Even that may turn out to be optimistic,
since the government usually ends up spending more than it says it will.
So Mr. Obama isn’t on course to meet his target.

But Congressional Republicans aren’t, either.
Judd Gregg recently held up a chart on the Senate floor showing that
Mr. Obama would increase the deficit —
but failed to mention that much of the increase
stemmed from extending Bush policies.
In fact, unlike Mr. Obama, Republicans favor extending all the Bush tax cuts,
which will send the deficit higher.

Republican leaders in the House, meanwhile,
announced a plan last week to cut spending by $75 billion a year.
But they made specific suggestions adding up to meager $5 billion.
The remaining $70 billion was left vague.
“The G.O.P. is not serious about cutting down spending,”
the conservative Cato Institute concluded.

What, then, will happen?

“Things will get worse gradually,” Mr. Auerbach predicts,
“unless they get worse quickly.”
Either a solution will be put off, or
foreign lenders, spooked by the rising debt,
will send interest rates higher and create a crisis.

The solution, though, is no mystery.
It will involve some combination of tax increases and spending cuts.
And it won’t be limited to
pay-as-you-go rules,
tax increases on somebody else, or
a crackdown on waste, fraud and abuse.
Your taxes will probably go up,
and some government programs you favor will become less generous.

That is the legacy of our trillion-dollar deficits.
Erasing them will be one of the great political issues of the coming decade.

Obama's Spending Plans May Pose Political Risks
Concern Mounts in White House as 2010 Elections Loom
By Scott Wilson
Washington Post, 2009-06-14

its graphic:
“Spending in Perspective”: Federal Projects Compared Against GDP

The Long-Term Budget Outlook
Congressional Budget Office, June 2009

CBO Paints Dire Portrait of Long-Term Revenue, Spending
By Lori Montgomery
Washington Post, 2009-06-26

The nation’s long-term budget outlook
has darkened considerably over the past six months,
and President Obama’s plan to extend an array of tax cuts and other policies
adopted during the Bush administration
has the potential to “create an explosive fiscal situation,”
congressional budget analysts reported yesterday.

In a new report, the Congressional Budget Office found that
extending the Bush administration tax cuts,
reining in the alternative minimum tax and
canceling a scheduled reduction in payments to Medicare doctors
would dramatically slash tax collections
at a time when federal spending would be “sharply rising.”
The resulting budget gap
would drive the nation’s debt over 100 percent of gross domestic product
by 2023,
the report says,
and past 200 percent of GDP by the late 2030s.

Obama has not proposed to extend all of the Bush tax cuts,
which are scheduled to expire in December 2010.
But he would keep all cuts benefiting the middle class --
a substantial portion of the total --
and has advocated additional borrowing
to cover the costs of that and other policy changes analyzed by the CBO.

The CBO released its report on the same day
that White House Office of Management and Budget Director Peter Orszag
appeared on Capitol Hill
to defend Obama’s request
to extend the Bush tax cuts and make other policy changes
without making up the lost revenue.
Orszag argued that
no one has offered “credible proposals” for raising the necessary cash,
and that simply allowing the tax cuts to expire
or permitting a 21 percent cut in payments
to doctors who care for Medicare patients
to proceed next year
would “unrealistically reduce costs or increase revenues.”

Democratic lawmakers generally agree,
and the budget resolution they adopted earlier this year assumes that
many of the Bush tax cuts will be extended and future deficits will rise.
Yesterday’s CBO report highlights the cost of that trade-off.

The news is not particularly good
even if the government were to collect the extra money,
primarily because of
the rapidly rising cost of Social Security
and federal health programs for the elderly and the poor.
According to the CBO,
the annual gap between spending and revenue
would briefly drop below 2 percent of GDP in the next decade
before rising to
5.6 percent in 2035,
8.3 percent in 2050, and
nearly 18 percent in 2080.
But the outlook is much worse
if the tax cuts and other policies are extended,
the CBO found:
Annual deficits would never drop below 4 percent of GDP;
they would approach 15 percent by 2035 and surpass 42 percent by 2080.

Already heavily in debt,
the nation would be forced to borrow
ever more massive sums to keep the government afloat, the CBO warns,
with the national debt nearly 200 percent of the overall economy by 2035.

“We’re drowning in unprecedented levels of red ink,
and there is no plan to fix the situation.
Having spent over a decade worrying about budget deficits,
I can quite honestly say that things have never looked as bad as they do now,”
said Maya MacGuineas,
president of the bipartisan Committee for a Responsible Federal Budget.
“We need to be focused on slowing spending
and finding better ways to raise revenue,
not on cutting taxes and introducing new entitlement programs.

We can either make these hard choices now,
on our own terms,
or we can make them in a panic
on the heels of a full-blown fiscal crisis.”

The Debt Tsunami
The CBO's latest warning on the long-term deficit is scarier than ever.
Washington Post Editorial, 2009-06-28

The Long-Term Budget Outlook
by Douglas Elmendorf, director, Congressional Budget Office (CBO)
cboblog.cbo.gov, 2009-07-16

Today I had the opportunity to testify before the Senate Budget Committee
about CBO’s most recent analysis of the long-term budget outlook.

Under current law, the federal budget is on an unsustainable path,
federal debt will continue to grow much faster than the economy
over the long run.

Although great uncertainty surrounds long-term fiscal projections,
rising costs for health care and the aging of the population
will cause federal spending to increase rapidly
under any plausible scenario for current law.
Unless revenues increase just as rapidly,
the rise in spending will produce growing budget deficits.
Large budget deficits would reduce national saving,
leading to more borrowing from abroad and less domestic investment,
which in turn would depress economic growth in the United States.
Over time, accumulating debt would cause substantial harm to the economy.
The following chart shows our projection of federal debt relative to GDP
under the two scenarios we modeled.

Federal Debt Held by the Public
Under CBO’s Long-Term Budget Scenarios
(Percentage of GDP)

Federal Debt Held by the Public Under CBO’s  Long-Term Budget Scenarios  (Percentage of GDP)

Keeping deficits and debt from reaching these levels would require
increasing revenues significantly as a share of GDP,
decreasing projected spending sharply,
or some combination of the two.

Measured relative to GDP,
almost all of the projected growth in federal spending
other than interest payments on the debt
stems from the three largest entitlement programs—
Medicare, Medicaid, and Social Security.
For decades, spending on Medicare and Medicaid
has been growing faster than the economy.
CBO projects that if current laws do not change,
federal spending on Medicare and Medicaid combined will grow from
roughly 5 percent of GDP today to
almost 10 percent by 2035.
By 2080,
the government would be spending almost as much, as a share of the economy,
on just its two major health care programs
as it has spent on all of its programs and services in recent years.

In CBO’s estimates,
the increase in spending for Medicare and Medicaid
will account for 80 percent of spending increases
for the three entitlement programs between now and 2035
and 90 percent of spending growth between now and 2080.
reducing overall government spending
relative to what would occur under current fiscal policy
would require fundamental changes in the trajectory of federal health spending.
Slowing the growth rate of outlays for Medicare and Medicaid
is the central long-term challenge for fiscal policy.

Under current law,
spending on Social Security is also projected to rise over time as a share of GDP,
but much less sharply.
CBO projects that Social Security spending will increase from
less than 5 percent of GDP today to
about 6 percent in 2035
and then roughly stabilize at that level.
Meanwhile, as depicted below,
government spending on all activities other than
Medicare, Medicaid, Social Security, and interest on federal debt—
a broad category that includes national defense
and a wide variety of domestic programs—
is projected to decline or stay roughly stable as a share of GDP
in future decades.

Spending Other Than That for
Medicare, Medicaid, Social Security, and Net Interest,
1962 to 2080 (Percentage of GDP)

Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, 1962 to 2080

Federal spending on Medicare, Medicaid, and Social Security
will grow relative to the economy
both because
health care spending per beneficiary is projected to increase
and because the population is aging.
As shown in the figure below, between now and 2035,
aging is projected to make the larger contribution
to the growth of spending for those three programs as a share of GDP.
After 2035,
continued increases in health care spending per beneficiary
are projected to dominate the growth in spending for the three programs.

Factors Explaining Future Federal Spending on
Medicare, Medicaid, and Social Security
(Percentage of GDP)

The current recession and policy responses have little effect
on long-term projections of noninterest spending and revenues.
But CBO estimates that in fiscal years 2009 and 2010,
the federal government will record
its largest budget deficits as a share of GDP
since shortly after World War II.

As a result of those deficits,
federal debt held by the public will soar from
41 percent of GDP at the end of fiscal year 2008 to
60 percent at the end of fiscal year 2010.
This higher debt results in
permanently higher spending to pay interest on that debt.
Federal interest payments already amount to more than 1 percent of GDP;
unless current law changes,
that share would rise to 2.5 percent by 2020.

Time for budgetary truth
Soaring deficits and national debt are rising concerns
By Joseph J. DioGuardi
Washington Times Op-Ed, 2009-08-24

Joseph J. DioGuardi,
a certified public accountant and
former two-term Republican member of the U.S. House of Representatives
from New York (1985-89),
is a public advocate for fiscal responsibility
as the leader of Truth In Government,
a nonpartisan, nonprofit organization.

Ducking the Deficit Issue
By Robert J. Samuelson
Washington Post Op-Ed, 2009-08-31


In $3.8 Trillion Budget,
Obama Pivots to Trim Future Deficits

New York Times 2010-02-02

[Here is the beginning of the preliminary web version as of 2010-02-01:]

WASHINGTON — President Obama sent Congress on Monday a proposed budget of $3.8 trillion for the fiscal year 2011, saying that his plan would produce a decade-long reduction in the deficit from $1.6 trillion this year, a shortfall swollen by $100 billion in additional tax cuts and public works spending that he is seeking right away.

“We simply cannot continue to spend as if deficits don’t have consequences, as if waste doesn’t matter, as if the hard-earned tax money of the American people can be treated like Monopoly money,” Mr. Obama said at the White House.

But at the end of the decade, the yearly deficits would begin moving up again, as the projected costs of health and retirement programs for an aging population start to escalate, according to forecasts in the administration’s new blueprint.


[The as-published version begins:]

President Obama declared in presenting his new 10-year budget proposal on Monday that “our fiscal situation remains unacceptable,” but he insisted that the country pursue his ambitious domestic agenda despite facing swollen budget deficits for the foreseeable future.

“Just as it would be a terrible mistake to borrow against our children’s future to pay our way today, it would be equally wrong to neglect their future by failing to invest in areas that will determine our economic success in this new century,” Mr. Obama said at the White House.

The budget projects that the deficit will peak at nearly $1.6 trillion in the current fiscal year, a post-World War II record, and then decline but remain at economically troublesome levels over the remainder of the decade. In the coming fiscal year 2011, which begins in October, the projected shortfall would be under $1.3 trillion.


Mr. Obama does not make the really hard choices
about entitlement programs — Medicare and Medicaid, especially —
and about taxes
that most budget analysts say are essential to cut annual deficits
and to begin paying down an accumulated debt.

Deficits May Alter U.S. Politics and Global Power
New York Times Analysis, 2010-02-02


His greatest hope, [Prof. James K. Galbraith] said,
was Stein’s law, named for Herbert Stein,
chairman of the Council of Economic Advisers
under Presidents Richard M. Nixon [37] and Gerald R. Ford [38].

Stein’s law has been recited in many different versions.
But all have a common theme:
If a trend cannot continue, it will stop.

[That is how the article (or “analysis”) concludes.
But a more complete, and responsible, analysis would not stop there,
but would go on to make several points
regarding Galbraith’s invocation of Stein’s law in this context.

Galbraith is quite wrong, it seems to me, to see any “hope” in that law,
in and of itself.
(By the way, that “law” is, essentially, merely a tautology.)

It should not be interpreted, as apparently it is by some (Galbraith is not the first),
as saying or suggesting that we need do nothing about
a trend that is sure to stop, somehow or another.
The question is not will some trend stop,
but rather how it will stop,
who will be the winners and losers produced by the way it stopped.

Take the instance relevant here,
the monotonically increasing buildup of federal deficit and debt.
The question is how will this end.
Four ways seem possible:
  • Fed-induced inflation, to inflate away the debt
    (always a favorite of debtors, but not of creditors).

  • An out-and-out United States default on its debt.

  • Crushing tax burdens on future generations
    to pay down the debt the current generation has left to them.

  • Effective efforts, now, to eliminate the deficit.
Clearly, at least to me,
each possible outcome will have its own set of winners and losers.
The challenge for our political system is to determine
who those winners and losers will be.
The current game plan is:
The current geriatric set wins
their best attempt at staving off the inevitable effects of aging;
the health care industry gets rich off those attempts, and
future generations get stuck with the debt.]

America's candor gap on the budget
By Robert J. Samuelson
Washington Post Op-Ed, 2010-02-08

In all the recent reports, speeches and news conferences
concerning the federal budget outlook --
including the administration’s proposed budget for 2011 --
hardly anyone has posed these crucial questions:
What should the federal government do and why;
and who should pay?

We ought to go back to first principles of
defining a desirable role for government
and abandon the expedient of assuming that
anyone receiving a federal benefit is morally entitled to it
simply because it’s been received before.

We have a massive candor gap,
led by President Obama but also implicating most leaders of both parties.
The annual budget necessarily involves a bewildering blizzard of numbers.
But just a few figures capture the essence of our predicament.

First, from 2011 to 2020,
the administration projects
total federal spending of $45.8 trillion against
taxes and receipts of $37.3 trillion.
The $8.5 trillion deficit is almost a fifth of spending.
In 2020, the gap is $1 trillion, again approaching a fifth:
Spending is $5.7 trillion, taxes $4.7 trillion.
All amounts assume a full economic recovery;
all projections may be optimistic.
The message: There’s a huge mismatch between
Americans’ desire for low taxes and high government services.

Second, almost $20 trillion of the $45.8 trillion of spending
involves three programs --
Social Security,
Medicare (health insurance for those 65 and over) and
Medicaid (health insurance for the poor --
two-thirds goes to the elderly and disabled).
The message:
The budget is mainly a vehicle for
transferring income to retirees from workers, who pay most taxes.
As more baby boomers retire in the 2020s, deficits would grow.


there is no way [original emphasis]
to close the massive deficits without
big cuts in existing government programs or
stupendous tax increases.

Suppose we decided to cover all future deficits by raising taxes.
Taxes would rise in the 2020s
by roughly 50 percent from the average 1970-2009 tax burden.

That’s the guts of it.
At age 65, average Americans live for another 18 years.
Government now subsidizes each of them an average of about $25,000 a year
(almost $14,000 Social Security, $11,000 Medicare).
We cannot sensibly afford all these subsidies without
oppressive tax increases (see above),
deep cuts in defense and other programs or
immense budget deficits that someday might trigger another financial crisis.
[“Might” is way too weak here. “Will” is the right word.]
Bond buyers might balk at swallowing so much government debt.
By the administration’s estimates,
that publicly held debt (the accumulation of all annual deficits)
balloons from $5.8 trillion in 2008 to $18.6 trillion in 2020.

Eligibility ages for Social Security and Medicare
should be gradually raised to 70,
coupled with a requirement for people to buy into Medicare at 65.
Wealthier retirees should receive lower Social Security benefits
and pay more for Medicare.
Programs that have outlived their usefulness need to be abolished:
farm subsidies, for instance.
Even with these cuts, future taxes would need to rise.
Unless you’re confronting these issues -- and Obama isn’t --
you’re evading the central budget problems.

True, this is a confusing time to engage.
Trying to cut the deficit immediately could undermine the economic recovery;
what’s needed are credible steps to curb future deficits.
It’s also true that Republican presidents and congressional leaders
(some exceptions: Rep. Paul Ryan and Sen. Judd Gregg)
have ducked the hard questions.
Obama has endorsed a bipartisan commission to propose budget changes.
But the commission’s powers are unclear,
and the administration’s goal is modest.
It’s not to balance the budget; the aim is merely a smaller deficit --
one limited to the annual interest payments on the debt.
By the administration’s estimates,
that implies a deficit of $571 billion in 2015 instead of $752 billion.
No big deal.

We can no longer just tinker.
We need to ask whether government spending serves genuine public purposes
or merely benefits favored constituencies.
Delay in acting has already eliminated a long grace period
to prepare for reduced retirement benefits
or to wind down useless programs.
Now, we are condemned to be unfair.
If we don’t cut spending, the young may complain (correctly)
that they’re burdened with crushing tax increases;
if we do cut spending, beneficiaries may complain (correctly)
that they didn’t receive ample warning.

The politics of procrastination is bipartisan and rests on shared assumptions:
that the public won’t stomach hard choices;
that we don’t know whether large budget deficits will produce a crisis or when;
and that, therefore,
the easiest political course is to dawdle and blame the other party.
But this self-serving inattention, coupled with much larger deficits,
is tempting fate.
If investors lose confidence in Treasury bonds,
they would demand much higher interest rates.
The ensuing crisis
would almost certainly compel abrupt spending cuts and tax increases
that would make today’s choices look gentle.


The welfare state wins this budget war
By Robert J. Samuelson
Washington Post Opinion, 2011-08-08


But the budget deal does reflect national priorities, for good or ill.
It’s mostly a triumph of the welfare state over the Pentagon.
Even before the deal, the Obama administration projected that —
assuming continued withdrawals from Iraq and Afghanistan —
defense spending would shrink to 15 percent of the budget by 2016.
This would be the lowest share since before World War II.
The deal’s cuts, potentially as much as $950 billion over a decade,
would reduce that further.
In the 1950s and ’60s, defense often was half of the budget.

Drastic military retrenchment seems unwise.
It would threaten readiness, training and the replacement of aging weapons.
Many planes, ships and vehicles are approaching or have passed
their planned service lives,
says Heritage Foundation defense analyst Mackenzie Eaglen.
To take one example:
F-18s were designed to fly for 6,000 hours;
now, many are headed toward 10,000, she notes.

The defense cuts show how, contrary to conventional wisdom,
the budget deal reflects liberal preferences.
The liberal agenda came in three parts:
First, raise taxes on high-income Americans to limit domestic spending cuts;
second, protect the social “safety net,” especially Social Security and Medicare;
and finally, cut defense spending to spare (again) domestic programs.

Liberals got two of three.
They failed on taxes, the Republicans’ litmus test.
But they prevailed elsewhere.
Social Security, Medicare and most benefits (food stamps, Medicaid) for the poor, regardless of age, were put off-limits.
Medicare reimbursement rates might be cut by 2 percent as part of a second round of reductions,
but that’s small potatoes.
Because retiree benefits constitute half of non-interest federal outlays,
the deal isn’t hard on overall government spending.

The real budget story is how protecting these vast retiree benefits
dominates policymaking.
If you shield almost half of spending and still want to cut,
pressure intensifies on everything else.
Along with defense, the budget deal also squeezes that catch-all category,
“domestic discretionary spending.”
This covers many programs:
roads, food safety, financial regulation, grants to states and localities, and much more.

We are penalizing general government to protect all retirees,
no matter how healthy or wealthy.
Earlier this year, the Congressional Budget Office projected that
domestic discretionary spending
would drop 30 percent — as a share of the economy — from 2011 to 2021.
The budget deal will deepen that.
President Obama keeps saying this spending will fall,
again as a share of the economy,
to its lowest level since Eisenhower.
Why is he bragging about this?

The conventional wisdom holds that Republicans, hostage to the Tea Party,
prevented a larger and more “balanced” deal
by their rejection of any tax increases — ever.
Not so.
It’s true that Republicans were unbending on taxes
and, at times, reckless in their rhetoric.
It’s also true that, even with sizable spending cuts,
tax increases will ultimately be needed to balance the budget.
But it’s not true that only the right blocked a more comprehensive agreement.

Although Obama said he was willing to trim “entitlements” —
presumably, Social Security and Medicare —
he never laid out specific proposals or sought public support for them.
There was more talk than action.
Even if Obama had been more aggressive,
he probably wouldn’t have carried most liberals, who adamantly oppose cuts.
They regard Social Security and Medicare as sacrosanct.
Not a penny is to be trimmed from benefits.

This is an extreme, even fanatical stance.
Social Security and Medicare do create a safety net
for many millions of poor and near-poor retirees.
But for millions of wealthier retirees, they are handouts.
Liberals’ unwillingness to admit and act on this distinction
has long stifled meaningful budget debate.
This would have doomed a bigger agreement.

Both the ideological right and left would have objected.
The center couldn’t have overcome that alliance.
We got what politics permitted.
It’s a modest package.
If fully implemented, it won’t dramatically affect economic growth.
It would still leave large deficits —
by one estimate, 3.5 percent of gross domestic product in 2021.
That projection assumes that the economy regains “full employment.”
This would usually be a safe bet,
but after last week’s dramatic market turbulence, who knows?

[My opinion: Samuelson is being overly wishy-washy on this.
Due to the fact that so much of what we buy is now being made overseas,
or otherwise outside of this country,
there is no way to restore the country to fiscal and trade health
without directly reducing that imbalance.
But our "elite" absolutely refuses to acknowledge, let alone address,
that fundamental issue.

Further, it is pathetic that the Fed is being called upon to produce adequate employment in the current circumstances.
It quite simply is the wrong tool for that job.
Oh sure, if the country's employment problems were due to monetary policy,
as the experts say they were in the Great Depression,
then adjusting monetary policy is the right corrective.
But the current problems are quite clearly not due to monetary policy,
but due to the fact that the American worker is no longer competitive in the international workforce.
If you doubt that, why do we buy so much from overseas?
Is that due to monetary policy differences?]

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