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The Real Deficit...and the problems it presents
Posted by: Jon Henke on Friday, August 04, 2006

USA Today reports the stark, difficult truth about the federal budget...
The federal government keeps two sets of books. The set the government promotes to the public has a healthier bottom line: a $318 billion deficit in 2005.

The set the government doesn't talk about is the audited financial statement produced by the government's accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included — as the board that sets accounting rules is considering — the federal deficit would have been $3.5 trillion.
Two problems come to mind, in convenient bipartisan form:
  • Republicans: Tax revenue and spending cannot continue diverging. One can only live on credit cards for so long before the books must be balanced; and if Republicans suggest seriously cutting the programs that make up the vast majority of that debt, it will be a generation before the Republican Party has another pleasant November.
    how do you plan to keep the latest tax cuts—or propose more—with deficits like that?
    So, how do you plan to keep the latest tax cuts—or propose more—with deficits like that?


  • Democrats: The current Official Make-Believe Deficit is around $318 billion; the Official "playing by the rules we made for the rest of you proles" Deficit is $760 billion. Eliminating the recent tax cuts — even figured on a static basis to leave out the stimulative effects — would net the government a couple hundred billion or so. But you can't leave out the dynamic effects of tax cuts, so you'd also have to accept that you'll cut economic growth to some degree. But your party wants to increase education spending and provide health care for everybody. That's many hundreds of billions in additional federal spending, so crank that current deficit up from $760 billion to, say, way more than that.
    whose taxes will you be raising to cover that $1+ trillion deficit, and by how much?
    Now, generally speaking, before people make trillion dollar purchases, they like to know how much it costs and who's going to be paying for it. So, whose taxes will you be raising to cover that $1+ trillion deficit, and by how much?

Of course, there's a third choice: raise taxes a bit, cut the rate of spending growth a bit, deal with deficits and a bit of inflation, while scoring political points off all of the preceding as if you had a magical cost-free plan that didn't involve raising taxes or cutting spending by so much that you'd lose elections Mondale-style.

Hint: expect to see the one that allows politicians to score political points and win elections.
 
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So if the government goes to full accrual accounting, does that mean that the value of all assets will be added to the bottom line? I had a graduate econ course once where the professor made the argument that doing that might actually put the government in the black.

I don’t pretend to be an accountant, but assets do have value. Just what is the value of Yosemite anyway? The White House? The USS Ronald Reagan? (We probably have a good idea on that one.)

Maybe you can’t determine their value. If that’s the case, and assets are indeed an integral part of accrual accounting, then it looks like we are stuck with cash accounting.

Besides, suddenly raising the deficit by a whole order of magnitude just by changing the "accounting rules" will most likely lead to people throwing up their hands and declaring the problem unsolvable. Maybe its better to take bites out of the small elephant for a while to prove it can be done. Then we can start on the brontasaurus.

Not that anyone in government is taking any bites out of anything right now.
 
Written By: MJP
URL: http://
...and if Republicans suggest seriously cutting the programs that make up the vast majority of that debt, it will be a generation before the Republican Party has another pleasant November.
The converse option for the Democrats (the "Mondale strategy") has been shown to fail, as you note. But this option for the GOP (serious spending cuts) has never been tried. Would the effect really be to contaminate the GOP for the long term?

Today, I’d probably agree with you that it would. I don’t necessarily think that will always be true. The collapse of a European national economy or two might make that option politically possible. Of course, that means piling on a lot more debt in the meantime, making the eventual balancing harder.

I think there is a smaller cutting strategy that could be used right now (by either party) that would not be political poison. Cut *all* corporate welfare, which as far as I’m concerned includes crop subsidies. GOP voters who are not directly affected should be OK with that because it reduces spending by around $150-200 billion a year. The left should be fine with it, because of their general anti-corporate animus, so the Democrats could probably also get away with it.

Other strategies that can help close the gap include cutting programs where the direct impact on spending isn’t that big, but the effects on growth are large because they remove a burden on business. Getting rid of Sarbanes-Oxley tops that list. I think the general population is confused enough about it that there would not be too much fallout. ADA is the next most likely candidate, though it would not have nearly the effect. Changing the FDA’s mandate to make it easier to get new drugs to market would help. Etc. Etc.

The biggest get-growth-via-simplification is to completely overhall the tax code. Some estimate of tax compliance in the private sector go as high as $400 billion a year.

Clearing out this deadwood would give us a better chance of outracing the deficit via growth. Don’t misunderstand me - I’d rather see serious spending cuts. But if they are not politically possible, then pro-growth changes (that don’t directly cut taxes) are the next best thing.
 
Written By: Billy Hollis
URL: http://
Just for perspective the U.S. government has run a budget "surplus" only a few dozen times in its entire history. The last time the national debt was paid off was in Andrew Jackson’s time which was around 1836 for the non-history majors.

This may not be able to go on "forever", but the country has survived quite a long time without a balanced budget. As a proportion of GDP the budget deficit today is not a great concern in itself and the easy prescriptions (increasing tax rates) for fixing it are worse than the disease. At these low interest rates funding the shortfall by raising taxes would be pretty dumb.

In the end the govenment has a spending problem, the deficit is just a minor side effect of taxing, spending and regulating too much.

The real fly in the ointment is the Ponzi scheme known as Social Security. Mr. Ponzi is sitting on a beach in Jamaica and those left at the bottom of the pyramid are about to find out that they were duped.

No amount of increased taxes will pay for all of this. Over the past 100 years marginal tax rates have gone from a high of 91% down to 28% and back up to 35%, and all over in between. During that time government revenues have consitently averaged between 16% and 20% of GDP. The Laffer Curve that many claim doesn’t exist is at work here. The U.S. can’t tax its way to out of this, nor can any of the other developed countries with a large number of retired people on the dole.
 
Written By: DS
URL: http://
So if the government goes to full accrual accounting, does that mean that the value of all assets will be added to the bottom line?
That’s a good question. I’m not terribly knowledgeable about finance and accounting, but I’d certainly think this would be the case — at least to some degree. I’m not sure how much it would help. How liquid is, e.g., Yosemite or the White House? I mean, we’re not going to sell them, so what it their value? To creditors, I’d imagine ’none’. But that’s a tough question.
But this option for the GOP (serious spending cuts) has never been tried. Would the effect really be to contaminate the GOP for the long term?
Man, Social Security isn’t called the "Third Rail of American politics" for nothing. And have you seen how much mileage the Democrats get when Republicans threaten to merely cut the rate of growth of a program? Or the polls indicating public approval of, e.g., universal health care, social security, etc? Massive spending cuts have never been tried because they’re political suicide. The electorate likes their loot. Bread and circuses have been political winners from time immemorial, and I don’t see a sudden revolutionary change occuring.
Cut *all* corporate welfare, which as far as I’m concerned includes crop subsidies. GOP voters who are not directly affected should be OK with that because it reduces spending by around $150-200 billion a year.
Do you have a cite for that figure? last I heard, the Cato had a figure somewhere around 80 billion or so. I’ve no doubt it’s gone up, but I’m not sure how much.

In any event, the non-military discretionary spending is, all thing considered, a really minor part of the long term debt. You could cut it entirely — well, no, you couldn’t, but bear with me — and only make a marginal impact. SS and Medicare (mostly Medicare) are the problem areas, and any solution will have to primarily involve them.
This may not be able to go on "forever", but the country has survived quite a long time without a balanced budget.
I should be more clear. It’s not the mere existence of a deficit that causes a problem. Within a limited range, deficits are infinitely financible. But that range can be exceeded. And whether you pay for it in higher taxes, inflation, lower growth, etc....it must be paid for.
 
Written By: Jon Henke
URL: http://QandO.net
"So if the government goes to full accrual accounting, does that mean that the value of all assets will be added to the bottom line?"

As I recall, an asset is something that can or will be used to generate income, so many, probably most, gov’t. assets could not be used as assets for accounting purposes. Of course if the USS Reagan were to be rented out for dinner cruises, that would be a different story. I would love to see the library in the Pentagon turned into a rental library.

There is also a difference between a balance sheet(assets, liabilities) and an income statement(income, expenses), but it has been so long since I took accounting that I am not sure of the details and implications. We are already running a deficit in the income statement, and I am sure that if all the liabilities were added to a balance sheet it, too, would be negative.
 
Written By: timactual
URL: http://
What reasonable scenarios are there for how the impending doom of Baby Boomers reaching Social Security age will play out? It gets discussed a lot by pols, but I get the feeling that most are just biding time because it will be someone else’s problem.

With our Silent Generation parents nearing SS age and Boomers starting right after, I and my 30-something friends simply view SS as a tax, not as "buying into" a benefit program. We assume SS won’t survive and don’t expect to receive any benefit from it.

Just out of curiosity, what presidential term will it be when the big Boomer impact hits? 2012, 2016? And will any big political players really want to be president when that happens?
 
Written By: Scout
URL: http://
Jon - This plunge into an endlessly deep ocean of red ink might lead to the eventual failure of American Democracy as we understand it now from economic and currency collapse - leading to a recovery under a caretaker military Junta, repudiation of all Federal debts, creation of the "New" dollar - while the dysfunctional aspects of our Constitution and centuries of laws ordering the provision of government goodies to certain constituents are fixed.

We have unfortunately proven as a people unable to avoid taking on massive debt to satisfy the demands of local constituencies, national groups of citizens lobbying, government employees, corporate plutocrats, even foreign ethnic constiutuencies, for more free stuff and services under our present system.

Talk of ending corporate welfare, free schooling & medical care for illegals, free agricultural subsidies, cutting SS COLA+ growth, new health care perks - the endlessly expanding entitlements - has proved impossible under our democratic system. Any politician that does not use the unlimited Federal debt credit card promissory to fuel the spending his constituents want but won’t pay for, or get donations, loses his/her job to someone that can execute more extravegent promises. And the judges are appointed by free-spending politicians with the expectation they will "rule" for more unfunded mandates and more entitlements.

Billy Hollis -
The converse option for the Democrats (the "Mondale strategy") has been shown to fail, as you note. But this option for the GOP (serious spending cuts) has never been tried. Would the effect really be to contaminate the GOP for the long term?

Today, I’d probably agree with you that it would. I don’t necessarily think that will always be true. The collapse of a European national economy or two might make that option politically possible. Of course, that means piling on a lot more debt in the meantime, making the eventual balancing harder.
That a European financial system might collapse before America on the weight of entitlements and reckless spending might have been a possibility in the 80s, and they still have serious rollbacks to make - but mainly due to the German impact on the EU system, then French....Europeans have already made major strides in achieving financial responsibility and cutting entitlement costs.

1. EU entry was predicated on getting fiscal houses in order. Italy had major cleanups in Gov’t pork and spending programs. Greece’s entry was delayed many years. The VAT ensured that the very wealthy paid their fair share in total tax rate, unlike the US where total taxes and fees are less on the rich than the upper class.

2. Health care costs in Europe were lowered by relentless work on getting efficiencies - so their burden is now about 55% per capita that of the US, with longer life expectancy. Nursing home costs are lower. The administrative overhead for medical and other entitlements is far lower. European social security is pegged to inflation, not COLA+.

3. America now has the fastest growing debt, the fastest widening current account deficit. If the dollar was not the reserve currency - and many voices are now calling for it to be dumped for the Euro, our day of reckoning might have already come.

Henke -
SS and Medicare (mostly Medicare) are the problem areas, and any solution will have to primarily involve them.


I think I saw America’s unfunded liabilities amount to 42 Trillion long-term. While people have justly pointed out that Bush’s reckless spending and tax cuts for the wealthy funded by foreign debt are small in comparison, Bush has managed to lock us into a huge structural debt from loss of tax revenue coupled with dramatic new entitlement and pork spending. That means that each year, a growing part of the Federal budget is obliged to our Chinese, Japanese, Saudi, French, Israeli, and American fatcat creditors. The only reason why interest on debt is not the largest budget expense is because - perversely - Bush has added more spending line items and grown the Fed Budget to accomodate them - and expanded the Budget by deficit finance so much that the growing interest charges are "magically" reduced to a smaller percentile. This ruins us by making our ability to deal with greater future Medicare and SS burdens even harder because the payments to various PRC Generals have to be meted out.

And the claims that massive tax cuts for the wealthy would "grow the economy" far more than the loss of revenue - the cherished dream of libertarians and the radical supply side fanatics has finally been put to the test. It looks like borrowing 100 dollars from a Saudi financier, to feed a Miami fatcat his/her new tax breaks, generates 20 dollars in new revenue from economic growth. Bush finally gave the supply-siders their shot, and has all but crippled America’s long-term financial health in doing so.
 
Written By: C. Ford
URL: http://
Is it possible that by adding the SS and Medicare future liabilities to the calculus of the publicized deficit numbers the politicians may finally have sufficient incentive to do something about those specific programs?

The USA Today articles states that the current (and I suspect most previous) administration’s argument against including SS & Medicare liabilites in the deficit figures is
Congress can cancel or cut the retirement programs at any time, so they should not be considered a government liability for accounting purposes.
A not unreasonable argument, regardless of how it fits with GAAP. Also an implicit admission that people should not count on these programs because they can be cut at any time.

This seems like a perfect opportunity. If you balloon the deficit by including future Social Security liabilities, you can then wipe out most of that same deficit by "privatizing" Social Security. Medicare could be handled in much the same way. The politicians can then take credit for substantially reducing the deficit.

This may just be the kind of incentive today’s politicians need to do something.
Then again...



 
Written By: MJP
URL: http://
The Massachusetts state goverment recently managed to significantly expand access to health-care on a revenue-neutral basis. Programs like that sort of knock a hole in the easy slap-on Democratic Plan, ey, Jon?


The winner of a situation is to roll back the tax cuts, cut the defense budget by 100 billion, and then focus on tradeoffs, cutting federal spending on special interest groups in favor of imaginative programs to enable the poor and middle class - without keeping overall government spending flat. That would be reasonably responsible fiscal policy, very politically popular about now, and true to Democratic and left-of-center values.

It wouldn’t make the libertarians happy, but it ought to, because flat government spending under said Democratic regime is a lot less than massively expanding spending under current Republican one.

 
Written By: glasnost
URL: http://
Jon Henke wrote:
and I don’t see a sudden revolutionary change occuring.
Not in human nature, but yes, I see Revolutionary change as quite possible.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
Glasnost wrote:
The Massachusetts state goverment recently managed to significantly expand access to health-care on a revenue-neutral basis.
I expect that ceiling will fall on their heads before too long.

Not to mention since it isn’t "universal", the programs boosters won’t want to stop there.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
Do you have a cite for that figure? last I heard, the Cato had a figure somewhere around 80 billion or so. I’ve no doubt it’s gone up, but I’m not sure how much.
I was using a figure from the old Boston Globe series from 1996. They estimated $150 billion, and I figured it’s got to be higher than that. So that’s where my off-the-cuff $150-200 billion plus number came from.


Various other sources suggest the direct outlays are easily over $100 billion. I looked up the Cato Study - it was $87 billion in 2001, and a conservative 20% increase would put it up well over $100 billion. And that 20% would mean an increase of only 4% per year - I bet the increase is higher than that. Also, they use a pretty conservative approach by only counting direct outlays, and I typically expect hidden outlays associated with those programs to add another 25%.

And, of course, the dissolution of any such program has benefits beyond the direct dollars saved, as the distortions introduced by the stupidity of government spending work their way out of the system.
 
Written By: Billy Hollis
URL: http://
I expect that ceiling will fall on their heads before too long.
I’ve had that line up a whole freakin day and nobody bit on it.

You guys are slowin down.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://

 
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