Budgetary Perspective

[Guest]

There have been dueling entries elsewhere in this forum about the need for cost cutting and the need for increased taxes, both in order to balance the federal budget and stop adding to the unsustainable level of national debt. I have said that we should look at Greece as an example of what will (not could) happen to the U.S. if our Congress doesn't begin to make some very difficult decisions relative to both cutting costs and raising taxes. Some here have alleged that any idea of raising taxes is nothing more than an extension of a typical liberal agenda. I've looked at our situation like a retired banker, from a purely financial perspective with no attempt to inject either political ideology or economic theory. Let me explain and give you a real example of what is likely to happen to the U.S. and our personal standard of living.

Greece's governing body finally made some very difficult decisions to cut their spending by an amount that approximates 2% of their gross domestic product. Other members of the European Union, who made the demands on Greece to take this difficult action, think this may be enough to stabilize Greece's debt and currency and preclude the EU from having to inject lots of money just to keep Greece afloat. There are no guarantees that this will be enough and the amount is certainly not enough to balance the Greek budget, but just enough to hopefully stabilize things.

If we were to apply this example to the U.S., that might suggest that those who could make such demands on our government, the holders of our debt--China, Japan and the oil exporting countries, principally Saudi Arabia--who between them hold 50.6% of our debt--would be the ones making the demands.

If they demanded that we cut our federal budget by 2% of our GDP, here would be the results...

-- Our $3.54 trillion federal budget would have to be cut by $276 billion, almost an 8% cut to the annual federal budget.

-- A spending cut of that magnitude would still come nowhere close to eliminating the annual budget deficit. The current U.S. budget will create a deficit of $1.41 trillion, which will be added to the national debt. Even with an 8% cut in federal spending, the annual deficit would still amount to $1.1 trillion, nowhere close to a balanced budget.

-- Where would the $276 billion demanded by our creditors come from? The current federal budget calls for spending of $3.518 trillion. Of that, 61% is defined as "mandatory spending" and includes payments for debt service, Social Security, Medicare, Medicaid, and various other programs such as VA insurance, etc. So, if the budget is to be cut, initially it will have to come from the "discretionary" portion of the budget, which amounts to only $1.15 trillion.

-- OK, so it looks like the discretionary portion of the federal budget must be cut by 24% to meet the demands of our creditors--not to balance the budget and eliminate further additions to the national debt, mind you, but just to satisfy the demands of our creditors.

-- So, what are those discretionary items that we need to slash? The largest discretionary item by far is the defense budget, $782 billion, or two-thirds of our government's discretionary budget. The other "stuff" will be all kinds of other spending that our politicians talk about all the time--school programs, fixing national highways, the national parks, public broadcasting, the FDA, NHTSA, FAA, air controllers, Homeland Security, and so on. What might a 24% cut to those budgets do?

Remember, the budget cuts I'm talking about come nowhere close to creating a balanced budget and eliminating further additions to the national debt. How can we accomplish a true "balanced budget"? I know the answer I'll hear from those that say that a reduction in taxes will kick start our economy and we'll grow our way out of the problem. Let's look at why that's impossible.

Some politicians, economists conservative bloggers and cable TV entertainers have argued that the U.S. can "grow its way" out of these fiscal challenges. Their argument is that economic growth (driven by tax cuts, productivity improvements, and borrowing) will generate sufficient tax revenue to offset growing entitlement spending. However, the General Accounting Office has estimated that double-digit GDP growth would be required for the next 75 years to create a balanced federal budget; GDP growth averaged 3.2% during the 1990s. Because mandatory spending growth rates will far exceed any reasonable growth rate in GDP and the tax base, the GAO concluded that the U.S. cannot grow its way out of the problem.

So, even after such unthinkable spending cuts, we're still left with a "deficit hole" of $1.1 trillion each year which would be added to our national debt. And we wouldn't be paying even one dollar against the reduction of that debt. Let's look at what might be necessary on the revenue side--tax increases--to balance the budget.

Last year, the U.S. had revenues of about $2.274 trillion. Those revenues came mostly from personal income taxes, with a smaller amount from corporate income taxes, and a tiny amount from sources like import duties and the like. As a percentage of our $13.84 trillion GDP, our combined tax rate was 16.4% (of GDP). To balance the budget, even after the dramatic spending cuts outlined above, that combined tax rate would have to increase to 23.6%. But still, we wouldn't have enough to pay even one dime against the $12.546 trillion national debt. If we set out to reduce our national debt from current levels to, say $5 trillion, and said we'd like to do it in 25 years--we'd have to further increase the total tax rate to about 25.8% (of GDP). Remember, all this is after those dramatic spending cuts talked about earlier.

So, folks, where do we go from here? How can we expect our lives to change when either our elected government or our creditors demand the obvious required changes to our federal spending? The choices are simple and will almost certainly include...
Increased income taxes
Maybe a VAT tax
Dramatic cuts in our defense budget. Could we continue to fight 2-3 wars and keep major troop deployments in places like Germany, Korea, Kosovo, and Iraq? Not likely.
Cuts in Social Security benefits (reclassification from "mandatory" to "discretionary")
Cuts in Medicare and Medicaid benefits (reclassification from "mandatory" to "discretionary")
And noticeable, lifestyle-changing cuts in all manner of services and programs currently funded by the federal government

If any of you refuse to accept my analysis on how and why our lives are going to change because of in ineptitude of our elected government--and we who elected them--please tell the rest of us how it's not going to happen. Tell me I'm wrong. Please, not only tell me I'm wrong, but show me how I'm wrong.

The clock is ticking.

[Guest]

Twenty people have read this post now, and not one response. I'm not surprised.

The tale told by the numbers is daunting. You will never hear any of those elected to high political office discuss our fiscal problem in it's entirety. People who post on blogs and forums like this one, very much like our politicians, find it easier to state and re-state partisan political metaphors defending one side or the other--the liberals argue for increased entitlements and the conservatives accuse the government of being a "nanny state" and that the whole problem will be fixed if federal spending is cut. Both political parties call for the oh-so-popular tax cuts.

Neither side is correct. Neither approach is affordable and neither will begin to resolve our escalating national fiscal crisis.. The solution will be far more "lifestyle-changing" than any of us can imagine right now. The only question is who will make the decision to make those changes--our elected representatives or people from other countries to whom we have become beholden?

Again, I solicit your responses. If you disagree, please tell us all why. Explain a different alternative than I've outlined and explain how it might work. And please don't fall into the oft-used pattern of repeating partisan metaphors or attacking either the source of the information or the analyst--me. If you disagree with my conclusions, explain why they are incorrect and provide some supporting facts.

I'm waiting. We're all waiting.

[Guest]

Twenty people have read this post now, and not one response. I'm not surprised.

The tale told by the numbers is daunting. You will never hear any of those elected to high political office discuss our fiscal problem in it's entirety. People who post on blogs and forums like this one, very much like our politicians, find it easier to state and re-state partisan political metaphors defending one side or the other--the liberals argue for increased entitlements and the conservatives accuse the government of being a "nanny state" and that the whole problem will be fixed if federal spending is cut. Both political parties call for the oh-so-popular tax cuts.

Neither side is correct. Neither approach is affordable and neither will begin to resolve our escalating national fiscal crisis.. The solution will be far more "lifestyle-changing" than any of us can imagine right now. The only question is who will make the decision to make those changes--our elected representatives or people from other countries to whom we have become beholden?

Again, I solicit your responses. If you disagree, please tell us all why. Explain a different alternative than I've outlined and explain how it might work. And please don't fall into the oft-used pattern of repeating partisan metaphors or attacking either the source of the information or the analyst--me. If you disagree with my conclusions, explain why they are incorrect and provide some supporting facts.

I'm waiting. We're all waiting.The lack of response likely reflects what my first thoughts were... any sitting politician in Washington reading this would say (to themself): "true... but not on my watch.... I'm gonna kick the can down the road a little farther instead."

[Guest]

If we don't kick the bums out in November, it will all be moot anyways. Last year US public debt totaled 7.5 trillion, a sum equal to all the indebtedness of 225 years.
By 2020 it will increase to 20.3 trillion , an increase of 171% in 10 years.

I credit the media for purposely not telling the public the truth. We cannot decrease the size of the beast( government) if it keeps this gluttonous pace.

[Guest]

History shows that raising taxes reduces revenues in the USA and every other place.

Writing long sagas to the contrary is a Liberal waste of time.

Government Revenues will increase only when businesses and individuals are allowed to keep more so they can spend more which will create more income and more taxes.

[Guest]

I'm still waiting for your response to my question for you in your "small article" thread. :shrug:

Who is the small group of people not getting their way?

This position appears to advocate Obamacare, but doesn't seem to reconcile with your post that gives budgetary perspective. You appear to advocate for budget cuts while at the same time advocating for health care reform that will be the most costly entitlement in the history of the world by even the most conservative estimates.

I view the passage of the proposed bill the final execution of the Cloward-Piven Strategy that calls for deliberately overloading America's entitlement system to the breaking point in order to bankrupt our economic system. This would than morph into a totalitarian government takeover based on a Marxist spread the wealth system guaranteeing a national income dictated by the govenment. Obama and the communists in the White House and halls of Congress must be giddy with the prospect realizing their dream.

[Guest]

...Again, I solicit your responses. If you disagree, please tell us all why. Explain a different alternative than I've outlined and explain how it might work. And please don't fall into the oft-used pattern of repeating partisan metaphors or attacking either the source of the information or the analyst--me. If you disagree with my conclusions, explain why they are incorrect and provide some supporting facts....

...History shows that raising taxes reduces revenues in the USA and every other place. Writing long sagas to the contrary is a Liberal waste of time...

This demonstrates precisely how the lack of willingness to study the situation, evaluate the alternatives, and use our only democratic right--the right to a vote--got us into the pickle we're in now. Until more Americans take the time to do that, the situation will worsen, until the Chinese or Japanese or Saudis change it for us.

[Guest]

...History shows that raising taxes reduces revenues in the USA and every other place.Writing long sagas to the contrary is a Liberal waste of time...

By the way, Cashman, in that you've avoided coming up with any meaningful response to the analysis I posted, I'll assume that none of the numbers you might have considered refuted my conclusions. But at least can you tell me how my conclusion that cutting federal spending cannot possibly result in a balanced budget and the repayent of any of our national debt, and that it's almost certain that taxes will have to be raised to achieve those objectives is a "Liberal waste of time"?

I thought that conservative ideology was based on the idea that "fiscal conservatism is the economic philosophy of prudence in government spending and debt."

So can you explain to me how my conclusion that in order to begin to have the U.S. live within its means and repay its debt that spending must be dramatically cut and taxes raised is a "Liberal" idea?

I'll wait.

[Guest]

By the way, Cashman, in that you've avoided coming up with any meaningful response to the analysis I posted, I'll assume that none of the numbers you might have considered refuted my conclusions. But at least can you tell me how my conclusion that cutting federal spending cannot possibly result in a balanced budget and the repayent of any of our national debt, and that it's almost certain that taxes will have to be raised to achieve those objectives is a "Liberal waste of time"?

I thought that conservative ideology was based on the idea that "fiscal conservatism is the economic philosophy of prudence in government spending and debt."

So can you explain to me how my conclusion that in order to begin to have the U.S. live within its means and repay its debt that spending must be dramatically cut and taxes raised is a "Liberal" idea?

I'll wait.


I agree we must control spending which is why I keep repeating we need to elect fiscal conservatives. I assume you agree that fiscal conservatism means smaller government and less spending.

You do not seem to get my point that for the government in order to receive more in tax revenues must reduce taxes for everyone that is every taxpayer corporate or individual.

If you believe that raising taxes will reduce our deficit then their is no point in debating with you because that premise is historically incorrect.

[Guest]

I do disagree, Cashman, and for one simple reason. We have never had a national debt approaching $13 trillion, or anything anywhere close to it. On top of that, our deficit-spending is increasing that debt at the rate of about 10% a year. There is no possible way that further reducing taxes will create sufficient increases in economic activity to result in sufficient increased revenues to either balance the annual federal budgets or begin to repay the national debt. In not too many years, there will be fewer people working and paying income taxes than there will be old, retired people expecting to live off the entitlements paid for with those taxes.

Reducing taxes used to work, but that was when our debt was only a fraction of what it is now, and our annual deficits were small and controllable, and when entitlements made up a much smaller proportion of the federal budget.

Combine the arithmetic of our current revenues and expenses with the rapidly growing proportion that entitlements (Social Security, Medicare and Medicaid) represent in the federal budget--entitlements paid to our rapidly-aging population--and you have a formula that cannot be solved using the economic theories that worked in the past.

Our political leaders are either going to pass the career-ending legislation for them--to dramatically cut entitlements, other federal spending and raise taxes--or the Chinese, Japanese and Saudis, our principal creditors, are going to do it for them (and us!).

Just to put all of what I have said in perspective, remember what the recent report of the independent Government Accounting Office said..."double-digit GDP growth would be required for the next 75 years to create a balanced federal budget; GDP growth averaged 3.2% during the 1990s." GDP growth in the U.S. has never been in double digits for any one full year in history.

So, yes, I do disagree. Taxes will have to be raised. There is no alternative that I can think of.

[Guest]

I have very limited experience in accounting and budgets. Two big life lesson I experiences was as a naive reporter were accrual accounting and a separate incident involving a paid private accountant doing a fiscal year-end-report for a government entity who said, regarding their deficit, "How do you want it to look? I can make it look anyway you want it to look." Believe me, the Associated press picked up my little story from a county of just under 50,000 at the time.

You, and other posters have vast more knowledge of the budget and discussions pertaining to it than I do, thus my reluctance to post on this particular thread. That being said, I am trying to educate myself.

What do you think of the information on these websites?



http://www.americanprogress.org/issues/2009/09/deal_with_it.html



http://www.federalbudget.com/

[Guest]

The national debt is the amount of money the government owes it's creditors which is about 12.5 trillion. $42,000 for every man, woman and child in the country.
Here is a link to an interesting article about the Social Security scam.

http://news.yahoo.com/s/ap/20100314/ap_on_bi_ge/us_social_security_ious

[Guest]

I have very limited experience in accounting and budgets. Two big life lesson I experiences was as a naive reporter were accrual accounting and a separate incident involving a paid private accountant doing a fiscal year-end-report for a government entity who said, regarding their deficit, "How do you want it to look? I can make it look anyway you want it to look." Believe me, the Associated press picked up my little story from a county of just under 50,000 at the time.

You, and other posters have vast more knowledge of the budget and discussions pertaining to it than I do, thus my reluctance to post on this particular thread. That being said, I am trying to educate myself.

What do you think of the information on these websites?



http://www.americanprogress.org/issues/2009/09/deal_with_it.html



http://www.federalbudget.com/

Excellent links, BK. I found this dandy about the Clovin-Piven Strategy.

http://frontpage.americandaughter.com/?p=1878

[Guest]

I'm glad to see people concerned about this (at last). My immediate steps would focus on two primary concerns - Government spending and energy independence. These two areas are closely tied. To cut government spending I would do the following as a start:

1. Stop the growth of government payroll. Have the President & VP take a 25% pay cut, cabinet members and members of congress, 10%. Similar pay cuts in the Judicial branch of government. Freeze them at those levels. The amount of money saved by this is not that much, but the symbolism is important.
2. Freeze civil service and military pay scales.
3. Freeze the pay at government contractors such as JPL, Los Alamos, CDC, etc.
4. Freeze social security at present levels.
5. Stop all new government programs/initiatives.
6. Cut back or eliminate 'nice to have' government programs such as NPR or support for the arts. Require the people of DC to fully support the Kennedy Center if they want live theater.
7. Increase SS Retirement age by 3 months/year.
8. Start pulling back troops from overseas. I see little purpose in keeping troops in Germany or Korea.
9. Sell one-third of US government owned land in the western US to private investors.
10. Take a hard look at the National Park System and close those that have few visitors.

This list can go on and on. It is what we would do if this was our own budget crunch. Instead we are going ahead full steam adding new programs such as Obamacare and cap and trade. The government continues to buy land, not sell and the 65+ crowd feels entitled to annual increases.

Energy independence requires the will to use more of our own resources such as oil-shale. There is more oil in US shale than there is in the Arabian Peninsula. Start developing our oil and natural gas resources. Follow Pickens' advice and convert the big rigs to run on natural gas. Pass laws severely limiting the time in which permitting and construction can be halted by action in the courts. Costs from any delays will be paid by litigants and their attorneys. Fully exploit nuclear power. Build new refineries, especially in California. Open Yucca Mountain. This activity will spur private industry growth and get us back some much-needed jobs in the private sector.

VK is right - if we do not do something along these lines and do it soon, we deserve what happens to us. The Chinese are already selling US Treasuries and have made it clear they will buy no more.

This week may well tell the story. If Obamacare comes into law, control of our deficits will be beyond anything we can do.

[Guest]

What do you think of the information on these websites?

http://www.americanprogress.org/issues/2009/09/deal_with_it.html

http://www.federalbudget.com/

The first one is excellent. I say that because it says almost exactly the same things I said in my initial post in this thread. And it happens to be a link that I have never read! But it tells the story very well, including the statement..."Finding the answer to this problem is not going to be easy. There are too many immovable objects—too many spending areas that can’t be cut, too many taxes that can’t be raised. And yet these deficits are too large to be tolerated. Something has got to give. And the longer we wait, the harder it gets, as the cost of debt service gets greater and deficits grow."

The second link is also an excellent place to begin understanding where our government spends (our) money and in what amounts. The page has all sorts of additonal links that you can follow to learn more detail about the federal budget, spending and debt.

Both links are excellent "finds" and I would recommend everyone read them. Good "finds", BK!

[Guest]

I do disagree, Cashman, and for one simple reason. We have never had a national debt approaching $13 trillion, or anything anywhere close to it. On top of that, our deficit-spending is increasing that debt at the rate of about 10% a year. There is no possible way that further reducing taxes will create sufficient increases in economic activity to result in sufficient increased revenues to either balance the annual federal budgets or begin to repay the national debt. In not too many years, there will be fewer people working and paying income taxes than there will be old, retired people expecting to live off the entitlements paid for with those taxes.

Reducing taxes used to work, but that was when our debt was only a fraction of what it is now, and our annual deficits were small and controllable, and when entitlements made up a much smaller proportion of the federal budget.

Combine the arithmetic of our current revenues and expenses with the rapidly growing proportion that entitlements (Social Security, Medicare and Medicaid) represent in the federal budget--entitlements paid to our rapidly-aging population--and you have a formula that cannot be solved using the economic theories that worked in the past.

Our political leaders are either going to pass the career-ending legislation for them--to dramatically cut entitlements, other federal spending and raise taxes--or the Chinese, Japanese and Saudis, our principal creditors, are going to do it for them (and us!).

Just to put all of what I have said in perspective, remember what the recent report of the independent Government Accounting Office said..."double-digit GDP growth would be required for the next 75 years to create a balanced federal budget; GDP growth averaged 3.2% during the 1990s." GDP growth in the U.S. has never been in double digits for any one full year in history.

So, yes, I do disagree. Taxes will have to be raised. There is no alternative that I can think of.

On this discussion of tax rates and various Liberal schemes to raise taxes we could not disagree more. We agree that we must reduce the National Debt.

You do not agree that increasing tax rates reduces revenues when it interferes with the private sector by draining it of resources needed to create jobs and more income.

You do come up with so many good ideas it is amazing how you insist that by raising tax rates we will create revenues. This is and has always been a Liberal myth.

[Guest]

and the ways of politics, it is the only way to be. I believe based on history there is NO HOPE!!!!
Example: the energy crisis of over 40 years ago...lots of arm waving and talk....since then absolutely nothing has been done to back one single commitment. Instead our dependence on foreign oil has doubled in magnitude from 40% to over 75%. And recently when gasoline was over $4 per gallon all the same WORDS and rhetoric.....result nothing being done to allay the ultimate disaster for America just waiting to happen....and it will happen...if we the people and the politics and the politicians they talk about dis liking has never resulted in any action to fend off the obvious.....just why would anybody have any faith some how magically the light will be allowed to shine through...it is not going to happen.

Maybe....MAYBE....HOPEFULLY.... by re-electing no one in 2010 and getting Obama out of office in 2012 or sooner.....MAYBE there COULD be a course correction.

Remember it takes 10 to 20 years for some of the energy salvation programs to effect their impact. I think it is too late to stop the USA we all love from becoming a second tier, also ran country.

btk

[Guest]

...it is amazing how you insist that by raising tax rates we will create revenues. This is and has always been a Liberal myth.

OK, let's agree to disagree. Spending cuts alone cannot create a balanced budget.

My conclusion is based on the arithmetic of our current situation. Taxes will be increased, I guarantee you. The only question is whether that will happen as the result of action by our Congress, or the demands and refusal of our creditors to extend any more credit to fund our deficit spending.