Tuesday, April 12, 2011

The 2012 Budget. Sigh.

With the 2011 budget finally (hopefully) behind us - and surprisingly without a government shutdown - it's time now to argue about the 2012 budget. Arguably, the budget is the very reason Republicans and the Tea Party took control of the House in 2011, as people became more and more concerned over government spending. I'll admit that my understanding of economics and the budget is dodgy at best, so this here is my attempt to understand what has been happening and what the best way forward is.

One thing that we hear a lot about is that there is a great budget deficit. This graph illustrates the federal budget deficit by year as a percentage of GDP.

Also, very handily this website by Stephen Bloch breaks the budget down by year AND by the party that controls the House and Senate at the time. Both charts seem to suggest that the current increase in budget deficit was down from $1.89 trillion in 2009 to $1.65 trillion in 2010. Good but still pretty huge.

So what caused the current budget deficit? It appears that the breakdown of the deficit causes looks like this:



When Bill Clinton left office, there was a surplus. Almost immediately it was reduced by $291 billion due to the stock market crash of 2000, the 2001 recession and the safety net spending and reduced tax revenue during the 2002-03 jobless recovery period.

Then came the Bush tax cuts of 2001 and 2003. Theoretically, tax cuts in a booming economy would stimulate said economy, which in turn would increase tax revenue, thus paying for themselves. And certainly the CBO in 2001 was projecting a surplus for 2008 equal to 4.5% of domestic product (instead we got a deficit of 3.2% of GDP). Then came the spending increases, especially during 2001-03, which were mostly military and homeland security spending, particularly the wars in Iraq and Afghanistan. Together, the Bush years added $673 billion to the budget deficit.

When Obama and the Democratic controlled Congress came into power in 2008, instead of repealing Bush's tax cuts and ending the wars in Iraq and Afghanistan, they extended them. That's an additional -$283 billion. So much for their radically liberal ways...

Finally came the economic crisis/recession that started in 2007. The decline in revenue and the increase in safety net spending (that's Medicaid, unemployment benefits and food stamps), so called automatic stabilizers (transfer payments, consumption expenditures) were a big part of this particular deficit.


The bailout, stimulus and other Obama programs contributed relatively little to the deficit.

click on image to enlarge. image source

It was news to me, by the way, that the bailout is now considered to be paid back and actually turning a profit for the tax payers. Too bad none of those bankers, CEOs and rating agencies were made to pay for causing this huge crisis, but that's a rant for another day....

So now we have a huge budget deficit (though it does appear to be going down a bit), but most economists aren't too worried about this short term, recession driven deficit. They figure more spending now on these safety net programs and on job creating fronts will level this whole mess out on it's own as the economy improves. In fact, running a deficit right now is the most appropriate action, according to Keynesian school of thought. It's the long term, so called structural deficits that are a problem and a cause for concern. That's the deficits that are "projected to exist in coming years — even when the country is at peace, even when the economy is growing, even when unemployment falls. " Primary culprits are Medicare and Medicaid, but there is also Social Security and infrastructure spending (and of course the interest payments on the debt, which only increase with the debt). Here is a view on the breakdown of spending in 2011:


A more in depth graphic for the 2012 budget proposed by the White House would have this breakdown:

click on image to enlarge. image source

Alternatively check out the NY Times version which color codes spending increases (green) and decreases (red):
click on image to enlarge. image source

The Independent Medicare Advisory Board that was established by the health care reform act might help (source. For an opposing view check out the Christian Science Monitor).

IMAC is a 15-person board of independent experts chosen by the president, confirmed by the Senate, and empowered to cut through congressional gridlock. IMAC will write reforms that bring Medicare into like with certain spending targets. Congress can't modify these proposals, it can't filibuster these proposals, and if it wants to reject them, it needs to find another way to save the same amount of money.


Mind you the CBO is now revising it's estimate as to whether or not the health care reform will cut the deficit over the next 10 years. In fact, the 2012 budget is getting pretty bad reviews from the CBO altogether (source).

The White House's goal is to reach a point where the budget is balanced except for interest payments on the $14 trillion national debt. Such "primary balance" occurs when the deficit is about 3 percent of the size of the economy, and economists say deficits of that magnitude are generally sustainable. But CBO predicts that the deficit never gets below 4 percent of gross domestic product. That means that by the time 2021 arrives, the portion of the debt held by investors and foreign countries will reach a dangerously high 87 percent. And, as a result, interest costs for the government would explode from $214 billion this year to almost $1 trillion by decade's end.

The big, all encompassing, $2 trillion dollar question is how do we fix the future budget deficit? The budget proposal by Budget Committee Chairman Paul Ryan would cut almost $6 trillion over the next 10 years in spending. Oddly (or perhaps not so oddly, considering that he is a Republican), there aren't any major defense spending cuts in this budget, but it does plan to repeal the affordable health care act and create block grants for Medicaid. Medicare (which would be privatized) recipients would go from paying 27 cents for every dollar of their care to 61 cents by 2022. While the Ryan budget does cut federal spending dramatically, it basically shifts the costs to states and individuals, especially when it comes to things like federal, civilian and military retirement, food stamps, Supplemental Security Income, parts of the earned-income and child-tax credits, and most veterans’ programs. So while the rich get a tax cut, those who can't afford health care and food have to pay more. But it does balance the budget...

I have not yet found a budget plan that I like. Certainly it seems to me that cuts in defense spending are in order, as are higher taxes (or at least closed loop holes for corporations). But I cannot escape the eventuality that Medicare/aid and Social Security will have problems in the future. (I wonder if universal healthcare would have helped at this point?). But for those of you opposed to tax hikes, let me leave you with this little nugget - Bank of America and GE, two American companies that received bail out money from us, and that had tax benefits of $1 billion and $5.4 billion respectively in 2010, paid zero dollars in federal tax. That's loop holes for you.

And then there is this quote that I thought was rather interesting:

As estimated by the New York Times, even if we were to eliminate welfare payments, Medicaid, Medicare, military spending, earmarks, social security payments, and all programs except for entitlements, and in addition stopped the stimulus injections, shut down the education department, got rid of a number of other things and doubled corporate taxes on top of all of this, the budget deficit would still be over 400 billion.

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