Ten Trillion and Counting

[Pangloss]

Anyone catch Frontline tonight on PBS? I know it varies when it's actually shown, so if you haven't gotten it yet you might get it Wednesday or Thursday night.

 

The episode has already been posted, though, and it's available for viewing online here:

http://www.pbs.org/wgbh/pages/frontline/tentrillion/

 

I thought it was awesome, and it's going to be a real sore point for just about everyone who watches it -- Obama supporters, pure-market economics supporters, Bush supporters, Clinton supporters -- everyone takes a hit here. I love it when the truth bites hard.

 

My only complaint about it was that it was a bit too one-sidedly against the Bush administration in terms of basically letting Clinton off the hook on increased spending suggesting that PAYGO stopped him from spending more, which just isn't true at all.

 

In 1998, in response to the first federal budget surplus since 1969, Congress started increasing discretionary spending above the statutory limit using creative means such as advance appropriations, delays in making obligations and payments, emergency designations, and specific directives. [4'] While staying within the technical definition of the law, this allowed "emergency" spending that otherwise would not be allowed.

 

It's a CUMULATIVE effort and Clinton, Bush 41 and Reagan definitely played important roles in the situation we're now faced with. But the episode didn't entirely blame Bush, and on the whole I thought it was pretty fair.

 

It was also damned chilling, really drilling down those CBO figures showing that the debt will hit 90% of GDP this year and soar well BEYOND GDP very soon.

 

I also thought the episode could have more clearly made the point that Obama's increased spending is NOT ENTITLEMENT SPENDING. Entitlement is certainly going up, thanks to the baby boomers beginning to retire, but the economic recovery spending is, at least by stated intentions, DISCRETIONARY and ONE-TIME spending.

 

The point being that it's clearly part of Obama's plan to STOP that new spending, and even roll back a lot of OTHER spending, just as soon as we possibly can. And this show made it abundantly clear why that is going to be so critical.

 

(It also touched on why healthcare has to be solved IN ORDER to cut spending, showing the importance of medicare and medicaid in the entitlement portion of the budget. That point just does not get hammered home enough, IMO.)

[padren]

I hope this is considered within the scope of this topic but - what countries are running at a surplus, and what are they doing that we aren't? Granted, nations like China or Saudi Arabia are no brainers, and I don't mean nations with what amounts to slave labor or giant oil reserves - what are first world democracies doing to run in the black?

 

I can't believe the US has a more generous "entitlement" system than places with universal healthcare. I know the taxes are a lot lower and military spending is a lot higher but that can't account for how bad things are can it? Are we just spending too much money overseas and not producing enough to sell overseas?

 

 

I think it would be interesting to see how other nations manage to run in the black, and if there may be some obvious economics 101 stuff we are missing here.

[bascule]

We're actually at $11 trillion and counting, or more precisely $11,033,157,578,669.78 as of last tuesday.

 

As a percentage of GDP that's roughly 76%, going by an estimated 2008 GDP of $14.58 trillion.

 

Here's a fun graph:

 

[iNow]

It also touched on why healthcare has to be solved IN ORDER to cut spending, showing the importance of medicare and medicaid in the entitlement portion of the budget. That point just does not get hammered home enough, IMO.

Thanks for the tip. Good program. They were really hard on W, which made even me a bit uncomfortable, but I certainly agree with the sentiment that his administration seemed to always put politics in front of economics (as they tended to do the same thing with all of the sciences...).

 

You're quite right about entitlements. That's rather scary, and watching this program really helped me to better understand why decreasing medical costs is playing such a dominant role in the policies and plans of the Obama administration. If we don't fix that, and fix it now, we're really frakked. To their credit, they're not relying on a Soylent Green approach (that I know of), however, I'm beginning to wonder if that will be the only approach which will ever truly work.

 

 

Thanks again for the suggestion on the program.

[padren]

You're quite right about entitlements. That's rather scary, and watching this program really helped me to better understand why decreasing medical costs is playing such a dominant role in the policies and plans of the Obama administration. If we don't fix that, and fix it now, we're really frakked. To their credit, they're not relying on a Soylent Green approach (that I know of), however, I'm beginning to wonder if that will be the only approach which will ever truly work.

 

 

Thanks again for the suggestion on the program.

 

Honestly though, how do other nations manage to handle their entitlement programs? All of these issues are by far not American issues, they are general issues of government, yet we seem to be lost in trying to figure out the right way to go.

 

Even if we ultimately do feel we don't want to copy other nations (which I agree with, never copy when you can improve upon them) I am sure we could learn a thing or two and give us some much needed insight.

[iNow]

I think Pangloss may have more insight into this than me, but on first thought... They simply charge more taxes in those other countries. That's my guess, but I'm unsure so will leave it at that.

[Dudde]

Indeed, that was very interesting, thanks for posting it up there.

 

I think they shouldered a bit too much on Bush, but I really think, well nevermind what I think about Bush -

 

I don't know that we're directly in line to keep expanding as a country if our citizens are fiscally and morally irresponsible, I should move to Japan

[Pangloss]

It's an interesting question. I've heard that tax rates are higher in Europe but if true I don't know if that's because of greater entitlement spending, or if they even break it down the same way. That entitlement/discretionary line is a political distinction drawn around a point of order (automatic continuance) that may not exist, or work differently, elsewhere.

[bascule]

It's an interesting question. I've heard that tax rates are higher in Europe

 

It's more like tax revenue, not rates.

 

Behold, the Neo-Laffer curve:

 

[padren]

They definitely have higher taxes in other first world nations, but they also all have nationalized healthcare, competitive public schools and generally substantially more safety-net programs. The main offset I see is our military budget is pretty big relatively, but I am curious to know if they simply get a better rate of return on some things, whether public or private. Kind of hard to suss that out though - not sure where to even find that sort of information.

[Pangloss]

Odd, that chart seems to show that we have higher tax rates than they do in Europe.

[iNow]

Yet lower revenues. That seems to be the key here. Why are our tax rates higher, but revenues lower?

[Pangloss]

I agree, that's very strange.

[padren]

I wonder how reflective that is of actual paid taxes, after deductions and such, as well as how reflective of the actual taxes paid per person on average, including those that do not earn enough to pay and those that just don't file.

 

It does seem like something is off based on that chart.

[bascule]

That graph appears to cover corporate tax rates versus revenue, and was inspired by this article:

 

http://online.wsj.com/article_email/SB118428874152665452-lMyQjAxMDE3ODE0MzIxODM4Wj.html

[Pangloss]

D'oh, you included the word "corporate" right there above the chart and I just completely overlooked it. I think that must be the source of my confusion -- I was thinking of personal income tax. Thanks.

[JohnB]

Another point to consider re Tax Rates.

 

Due to the differences between the US system and Australias the picture can be muddied.

 

Australian States cannot levy "SAles Tax" as they can in the US, here it is part of the "Goods and Services Tax" which is Federal.

 

Any attempt to compare the taxation systems of nations should be based on broad analysis of all levels of gov and include their commensurate responsibilities.

 

You may find that Federal taxes and responsibilities are lower, but State taxes and responsibilities are higher.

 

As an aside, something that amazes those outside the US is the amount spent on your "National Guard". You already have a national Military and Reserve, why do the various States need their own forces? Is Texas afraid they will be invaded by Idaho?

 

You could probably save tens of billions each year by dumping the whole thing.

[iNow]

Thwatching this program really helped me to better understand why decreasing medical costs is playing such a dominant role in the policies and plans of the Obama administration. If we don't fix that, and fix it now, we're really frakked.

A pretty powerful report out of the White House today on medical costs and why they're so important.

 

 

The Cost of Inaction

 

http://www.healthreform.gov/reports/inaction/

The United States spent approximately $2.2 trillion on health care in 2007, or $7,421 per person. This comes to 16.2% of GDP, nearly twice the average of other developed nations.

 

Health care costs doubled from 1996 to 2006, and are projected to rise to 25% of GDP in 2025 and 49% in 2082.

 

The proportion of spending attributable to Medicare and Medicaid in the health system is expected to rise from 4 percent of GDP in 2007 to 19 percent of GDP in 2082 <

more at the link

>

 

There are also some good references at the link supporting the numbers.

[bascule]

The main thing to consider regarding the deficit and tax revenues is, well, decreased tax revenues

 

We can attempt to increase revenue by increasing tax rates, but as has been demostrated earlier in the thread, there is a nonlinear relationship between tax rates and tax revenue

 

One of the best ways to improve tax revenues is... to fix the economy!

[Pangloss]

That's a good point, and in fact the projected increase in budget size is roughly comparable to the decrease in tax revenue. Both are around 14% -- i.e. tax revenue is projected to decrease by 14% (2.71 trillion to 2.38 trillion), and expenditures are projected to grow from 3.1 to 3.55 trillion. (I'm just using very rough numbers here from the well-sourced-but-sometimes-error-prone Wikipedia articles on the 2009 and 2010 budgets.)

 

Unfortunately that doesn't make up for the deficit, which is projected to be a whopping 50% of the budget. As the economy grows you can expect to whittle away at that deficit, but all the while you're increasing the debt, and that debt has to be serviced. So unless there is really MASSIVE growth (the kind we've never actually experienced even following WW2), we're going to have to cut expenses. A lot.

 

And we have to do that -- something we've never really done before -- at the very moment that entitlement spending is about to skyrocket due to retiring baby boomers.

 

We live in interesting times.

[bascule]

From what I understand the increased spending comes largely as a policy response to the financial crisis itself

 

Until we're out of the financial crisis we're going to continue to run record deficits. While they're spending more money, it's hopefully on the right things to stimulate the economy and get tax revenues up again.

 

Paying down the debt we're accruing will depend on getting the economy back on track and having another prosperous period like we did under Clinton.

[padren]

It seems a little voodoo to me, but there is also the expectation that some of the spending will cut future costs through modernization and such. I say voodoo, because I can't imagine how accurate these predictions can be made. Plus, modernization often means automation thus reducing labor and putting people out of work - so some of those costs float around and eat into the benefits.

[Pangloss]

From what I understand the increased spending comes largely as a policy response to the financial crisis itself

 

Until we're out of the financial crisis we're going to continue to run record deficits. While they're spending more money, it's hopefully on the right things to stimulate the economy and get tax revenues up again.

 

Paying down the debt we're accruing will depend on getting the economy back on track and having another prosperous period like we did under Clinton.

 

Well this is where the rubber meets the road in politics, right here.

 

Yes, it's "policy" spending, because it's entirely on the "discretionary" side -- the spending that's being done ostensibly to "fix the economy" is not entitlement spending. Which means it can be stopped at any time. You're absolutely right.

 

The problem is that lawmakers are already gearing up to fight that battle and reframe it as a matter of "spending cuts" to "important services". As you point out they were actually one-time massive increases that had nothing to do with those services, but they'll be fought over tooth and nail because that's how politicians get re-elected -- by pandering to special interests and their deep pockets.

 

We've never been very good at it -- we don't cut budgets, we increase them. There's never been a single time in history when we HAVE cut discretionary spending to a program that enjoyed any kind of support at all. The situation calls for an approach that is unique and unprecedented. And there's no groundwork going on at all to make that happen, even though it will HAVE to happen (or at least start happening) in the very next budget.

 

And here's the gut-puncher: That debate will take place just a few months before the mid-term election. Oof.

 

I can already picture the interviews....

 

"Senator, what do you think about the upcoming changes to the budget with regard to education spending?"

 

"Why thank you, Katie, I'm glad you asked. My opponent wants to cut the federal education budget in half, returning us to a time of No Child Left Behind, when we all knew that the problem with education in this country was the lack of sufficient spending at the federal level. Now that we have finally fixed that problem with appropriate spending, why would we want to cut that spending? Why does my opponent hate children?"

 

Now mind you Obama doesn't actually call to remove all that additional spending in the 2011 budget -- I believe the plan is to remove it gradually over time (which is why the OMB went apesquit and "corrected" Obama's projected deficit through 2019). But that actually makes the political problem worse, because each year that additional spending is on the books will make it that much harder to remove later. Not only will the politics get harder, but the bureaucracies will become more inured to those budgets as well.

 

It's going to be a tough nut to crack. This is one of (if not the) most difficult tasks on Obama's agenda for his entire presidency, IMO.

[bascule]

We've never been very good at it -- we don't cut budgets, we increase them. There's never been a single time in history when we HAVE cut discretionary spending to a program that enjoyed any kind of support at all.

 

What about at the end of the '90s?

 

--

 

And to reiterate: periods of economic growth are great times to combat debt! We went through one following post-9/11 economic recovery, and while it was fueled by bubbles, that didn't stop Bush and his fellow Republicans from not only failing to combat debt, but making debt substantially worse. Virtually every year the debt increased as the economy continued to grow. Rather than using this period of economic growth to fight debt, the Republicans cut taxes for the rich, while starting an unnecessary and expensive war with no exit strategy, and dramatically increasing spending elsewhere.

 

Now all of the sudden there's Johnny-come-lately concern from Republicans over the national debt. I was certainly talking about it when we were racking up what were at the time record deficits amidst a period of economic growth... in 2005 (when the debt topped $8 trillion) and in 2007 (when the debt topped $9 trillion)

 

Unfortunately for the Johnny-come-lately now foaming at the mouth teabagger conservatives, it's too late to fight debt now. We've got to fix the economy first. Your rage over the debt would've been better expressed during growth periods throughout the past decade. Voicing that opinion now is sheer idiocy.

Edited April 12, 2009 by bascule

[Pangloss]

We've never been very good at it -- we don't cut budgets, we increase them. There's never been a single time in history when we HAVE cut discretionary spending to a program that enjoyed any kind of support at all. [/quote']What about at the end of the '90s?

 

Certainly if there hadn't been some cutbacks then there wouldn't have been any budget surpluses. But even then I'm afraid there was little agreement to cut programs. The budget actually grew under Clinton by almost 30%, with 2/3rds of that growth coming during the "more responsible"/"surplus-producing" period of 1996-2001. There were cuts, especially to defense, but overall discretionary spending increased. Also much of the defense "cuts" were actually postponements to programs like the F-22 and F-35, which instead came "due" during the Bush administration (at a greatly increased cost per unit).

 

I won't say there aren't any examples of widespread support for cutting of specific items during the late 1990s, though. Were you thinking of something specific? I don't entirely disagree that the "cuts" that were made (such as they were) aided in producing the surplus -- certainly if they hadn't been made then there wouldn't have been any surpluses at all. I'm just not sure I see a lot of evidence for optimism about our ability to cut spending in that period of history.

 

It's an interesting footnote here that the line-item veto was one of the few things that Clinton and Gingrich agreed on. Not that it mattered in the end, since six supremes failed to share their POV. Had the line-item veto been preserved, our current budget picture might be very different today. Perhaps President Bush's weakened LIV should be resurrected (it passed the House but died in the Senate). A LIV would be very useful over the next couple of years, giving us the ability to cut costs without giving nearly so much weight to local-political and special-interest considerations. (Actually some senators might support the idea now, if they can be convinced that this gives them political cover to do what they know needs to be done. I don't see Arlen Specter giving up his doubled education budget, though.)

 

But for the present little has changed. Last week Gates announced the end of production orders for the F-22 and the C-17. The F-22 employs workers in two states, neither of which is likely to change their general political affiliations any time soon. The C-17 employs workers in 40 states. We'll see which one gets preserved (or at least fought over) when the debates hit the floor, eh?

 

 

Sources:

1991 budget (Bush 41's last)

Summary of budget submissions from 1996-2010