Drivers of the Deficit

Federal debt that shrank by 1980 to 35% of GDP doubled to 70% under Reagan and Bush-1.  It dropped under Clinton, rose from $6T to almost $10T under Bush-2 and was rocketing up by the end of his term.  It has reached 90% under Obama.  Why?

2011 revenue (i.e., taxes) dropped to 76% of its 2001 level as a % of GDP because tax rates were cut and the Great Recession cut the income on which tax is levied.  Our nation would be better off if we could collect more from high-income individuals and large corporations that currently pay very low or no taxes but the even greater challenge is to restore growth.

The expense side is more interesting.  Discretionary non-security spending (education, etc) was flat.  Discretionary security spending, however, leaped to 174% of its 2001 level while spending that grows unless there are legislative changes grew to 132% of a decade earlier. 

The current debate about the Federal deficit is focused chiefly on “entitlements”, the spending that grows unless there are legislative changes.  What are their trends?  Where do we need to take action? 

Social Security spending is rising at a modest rate.  As noted in a previous post, because our population is aging the ratio of retired workers to those still working is dropping, which means we must raise the eligibility age and make other incremental changes.  Those changes have been made before and would straightforwardly fix the problem.  The big challenge is healthcare spending.

Healthcare spending is impacted by aging just as social security is; more of the population is eligible for Medicare.  But their trend lines are very different.  Healthcare spending is growing much faster because its costs are inflating.  We could cut Medicaid and Medicare to shift more of the cost to individuals, we could increase Medicare taxes to cover the unfunded prescription drug benefit introduced by Bush-2, we could make many changes to who pays what percentage of the costs. 

But more important even than getting rising Federal healthcare spending under control is to get rising health care cost under control.  As noted in previous posts, we spend double what other advanced economies do on healthcare without getting better results. 

The primary cause of the rocketing increase in the deficit in the past decade is not being discussed at all in the current debt ceiling unreality show.  Reagan greatly increased our military spending to break the USSR.  Bush-2 greatly increased it for discretionary wars in Iraq and Afghanistan and Obama increased it yet more.  Supplying our troops in Afghanistan is gigantically expensive because Afghanistan has no seacoast and is surrounded by nations that are not our friends.  Below is the CBO projection of the impact of reducing deployments in Afghanistan and Iraq.

 

My apologies for the hiatus in postings.  I still have some distracting projects that must be completed but took a short break to post this because our economy is a mess, the problems we must fix are being obscured and the solutions we’re being offered will not set us right.    

It is very, very tempting to rant.  I really don’t want to be thinking about these issues.  I want a government that does.

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10 Responses to Drivers of the Deficit

  1. Anthony C. Patzelt says:

    I think that corporations are making record profits mainly because they are afraid to hire and are benefiting from productivity gains. There are fewer and fewer off-shore tax issues as it stops making sense to move things off-shore as the Euro-zone economies are tanking.

    I guess India and China are not.

    Raising the tax rate on the rich will produce very little revenue. Increasing the tax rate on corporations will decrease R&D spending. Increasing the depreciation period for corporate jets will generate almost nothing.

    The reason the deficient has increased under Obama is the same reason that unemployment is so high. He is not a leader, he is a political hack.

    • Thanks Tony. The CBO projects that allowing the Bush-2 tax cuts to expire would raise revenue from 18% to 20% of GDP. That’s where it was in the late 1990s. Our tax code has so many incentives/loopholes that it’s easily gamed by individuals and large corporations who can afford the accounting manevers. However, it’s far more important to get the economy and jobs growing.

      • Tony responded: ” Martin, you are welcome. My fundamental point is that lack of leadership makes me ill. I do not care what party might be in power. I just care that somebody might lead the country.”

      • Tony, I see no hope that this Congress and President will take the right actions but when I started this blog I didn’t know what actions they should take. I still don’t, entirely, but I’m getting closer. It’s our duty as citizens to understand what must be done, and what must not be done, because we have the vote. I’m profoundly disappointed by things Obama has done, e.g., Afghanistan and Libya, and what he has not done, e.g., get anyone prosecuted for crimes that triggered the Great Recession, but I would vote for him and Biden again over McCain and Palin. What I will do more of in future is support better candidates for election, ones who know the right things to do and have executive skills. I will try harder to get the chance to vote forsomeone who will lead us in the right direction.

  2. Tony wrote:

    “Martin, the issue, in the short term, is compromise. I believe that we are not being given information as to why we are unable to reach a compromise. There are much longer term issues that are dependent on this short term issue. Increasing the debt ceiling is something that will not happen until early August. Then there will be the battles over the longer term issues. We do not have a “no confidence” vote in the USA. When Obama was elected, my position was to give him a chance. He has had many chances. Yes we get a vote in the House of Representatives every two years. Yes we get a vote for president every four years. Yes we get a vote for Senate every six years (and a third of the states every two years if you count the staggering.) I am heartsick over these events. As you know from my previous posts, I am most concerned about the lack of leadership. I wish we had a question hour as opposed to periodic and staged news conferences or equally staged town hall meetings. When the sitting president has already announced his intention to run for re-election, and he gets free press for planting a tree in Iowa there is something very wrong.”

  3. Harold responded:

    “The reason there is no compromise is because the Tea Party faction did not come to Washington to govern. And to govern by definition means to persuade and compromise. The Republican leadership is in a double bind because of this. If they did compromise, which means raising revenues, they couldn’t get the bill passed because Tea Party won’t buy that. If they don’t compromise the government gets shut down with dire consequences globally and they will be run out of office in 2012 because they will be viewed as intractable and unable to govern. I believe they retreated today and said Obama has the power to raise the debt ceiling himself, which has been implicit in the past.”

    • Section 4 of the 14th amendment to the Constitution states that public debts, once duly authorized by law , “shall not be questioned.” The immediate purpose was to foreclose any possibility of reneguing on debts, pensions and etc incurred to win the Civil War but it was intended to apply in all circumstances as the courts subsequently confirmed. The debt ceiling first enacted in 1917 when Liberty Bonds were issed was political cover to suggest that Congress would be “fiscally responsible” during and after WW1, a controversial war of unknowable cost. The debt ceiling is and always has been both nonsensical and unconstitutional.

  4. George Fulmore says:

    Watching “Meet the Press” on Sundays, I find host David Gregory repeatedly stating that “the entitlements are the drivers of the debt.” This is entirely misleading and false. Looking at the OMB 2012 federal budget summary numbers, the spending on the three big entitlements in 2010 was:

    Social Security: $701 billion
    Medicare: $446 billion
    Medicaid: $273 billion
    Total: $1.42 trillion

    But SS and Medicare have offsets from the payroll tax income. After these income offsets, the numbers are:

    Social Security: $69 billion
    Medicare: $266 billion
    Medicaid: $273 billion
    Total: $608 billion

    $608 billion is about 16% of the total federal spending in 2010 of about $3.8 trillion; it is about 33% of the total deficit for that year of about $1.8 trillion. But we should all know that it is the wars, the military, other “national security” expenditures and the interest on the federal debt that are the “drivers” of the annual deficit. These add up to $1.2 trillion per year or more, or at least twice the annual cost of the “entitlements.”

    NO WAY ARE THE “ENTITLEMENTS” THE “DRIVERS OF THE FEDERAL DEBT.” This is misinformation that needs to be challenged and corrected.

    George Fulmore
    Concord, CA

    • Thank you, George. I agree completely. Just the word “entitlement” increases misinformation because while in government publications “entitlement” means a legally conferred right and nothing more, in everyday use it has a negative connotation. From “someone with a sense of entitlement is a problem” it’s not a big leap to “entitlements are a problem”. Some believe the laws established by Congress grant people too many and too broadly defined rights/entitlements. Others believe existing rights should be extended and/or new ones established. It’s OK to advocate any opinion across that spectrum. It is not OK to misstate the facts. It is never OK. We need to do much more challenging and correcting. .

  5. Please someone check the CBO forecast of “debt ceiling compromise” spending reductions approved so far. The numbers appear to be: $21 billion in the 2012 budget year, $42 billion in 2013 and $59 billion in 2014. That’s hard to believe. Reductions of that magnitude would not be noticed. The “deep and real” cuts are yet to be decided but… Has Congress really kicked the can further down the road with great sound and fury that signify (almost) nothing?

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