It was only three months ago that our elected representatives signed into law the Budget Control Act of 2011. Remember that embarrassment? At the center of it all was whether we should or should not raise the debt ceiling – a limit that began to be imposed in 1917 by the Legislative on the Executive’s ability to issue debt to pay our Federal government’s bills.
The Act, signed 2 August, was the culmination of what became a many months long, intense and emotionally charged debate in our nation – one likely to continue for some years.
At the core of that conversation is a question that still needs an answer. If you will, if that question were a mythical beast in need of slaying, it would be a hydra – many heads, but of one body. Should the US Federal government continue spending as much as it has been? Does it need to raise more revenue? Are our deficits out of control? Are our debts one day to become a Greek tragedy? Should we use the debt ceiling as a lever to discipline our fiscal habits? And who is going to pay for all of this anyway?*
Many questions; really just one quandary. Questions that should start surfacing once more in our media’s consciousness, as we approach 23 November. That day is the deadline for Congress to produce legislation that would enact at least $1.2 trillion in Federal spending cuts before 23 December, or else face “consequences”.
Federal expenditure (for the trailing twelve months through September 2011) is now $3.6 trillion a year, or 24.1% of GDP. It has averaged 21.1% over the past few decades. Unfortunately, Federal receipts (for the same period) are only $2.3 trillion, or 15.4% of GDP, versus its three decade average of ~18.0%.
This leads us to our present (through September 2011) Federal funding deficit, which is 8.7% of GDP. That’s down by almost 2% from about two years ago. It’s decrease is certainly not from any tax increases, but instead from the natural, albeit anemic growth of the economy. Even at this below-2009-peak-level of deficits, we are still at the highest it’s been for the post World War II period.
Those deficits pile up over the years as our debt. Presently, there is about $10 trillion in net Federal debt “held by the public” (meaning, not counting the debt held by other Federal entities, because that effectively becomes an inter-agency elimination). Gross Federal debt (which includes some of that debt held by other agencies, mostly the Social Security trust funds) is about $15 trillion. All of that excludes the total liability for social insurance and other entitlements, estimated to be another $30-50 trillion in present value (depending on your assumptions).
Our Federal gross debt is now in the zone of 100% of GDP. You can add another ~15% for state and local’s $2.2 trillion of debt, which is more “apples-to-apples” to include, when comparing to other nations. That ~100% is up from ~60%, five years ago. Our current level is now roughly approaching the World War II related peak, achieved two years after war's end, in 1947. Also, according to the IMF, this now tops the Euro area which is 91%, up from ~70% five years ago.
So we have a $1.3 trillion annual hole in the budget. We might spend far less compared to the Europeans still (their governments’ expenditure is more like ~45% on average for the last five years, whereas ours, including state and local, is more like ~35%, according to IMF data). But we spend too much, at least in relation to what we take in. It is so out of hand at this point, that the only fix will ultimately have to come from both less spending and more revenue.
After combing through the fiscal 2010 Federal budget (year-ended 30 September, 2010), I estimate about 65% of all expenditure, or $2.3 trillion, is some form of social subsidy. About 21%, or $710 billion, is Defense and Homeland Security related (which excludes $160 billion in Veterans’ Affairs, military retirement, military health care and other military benefits; which are all a form of “social subsidy”). Only about 1%, or $35 billion, (of the stuff they show us) is related to foreign affairs.
So most of the real cutting will ultimately have to come from entitlements and defense, as opposed to from the more discretionary or “pork” or “eliminating waste, fraud and abuse” that not-really-serious people trying to get elected constantly refer to.
Even with sizable cuts to those programs, it appears at this point that taxes will have to go up too. And it’s going to have to go up for everyone – for both the “1%”, as well as the “99%”. They just don’t want to tell you that before November 2012.
For fun, I’ve rather unscientifically fiddled with data supplied by the Tax Foundation (which has been criticized by left-leaning CBPP, but their data I used is source IRS, for what it’s worth). I calculate, all else equal (excluding avoidance, for example) if you raised the effective tax rate by 10% on the top 1% income tax filers in the US, that would raise ~$130 billion in revenue annually (just very simply because they collectively had adjusted gross incomes, or “AGI”, of $1.3 trillion for 2009). That would still leave a ~$1.2 trillion current Federal budget deficit. If done to the top 10% filers, it would raise a total $340 billion annually – still a cool, $1 trillion to come up with.
Raising it 10% on everyone, including now the other 90%, would raise a total of $780 billion annually (the data states that all 138 million filers had combined AGI of $7.8 trillion in 2009). That would still leave an over $500 billion annual deficit at our current levels. All we would need to do at that point is cut everyone’s subsidies a mere one-fifth [place your favorite cynicism emoticon here]. (The more recent numbers will look a little better as the economy has improved, but really not that much.)
Having said all that, government revenue can go up simply by growing the economy too – as it has in the past couple years, for example. So if we won’t cut spending enough, the only solution is not necessarily just higher income tax rates, or value-added taxes, etc. It could be much more effective to promote new technologies that form new businesses that need to hire – just like what the digital boom of the 1990s did for us.
And look at those Clinton Administration years, for example – so often praised for balancing the budget, purportedly through higher than predecessor tax rates and spending cuts.
By December 1992, Federal expenditure was $1.4 trillion, about 22.5% of 1992 average GDP. Revenue was $1.1 trillion, or about 17.4%. The budget deficit was $327 billion, about 5.2%.
I calculate that, if we froze revenue at 17.4% of GDP back then – in other words, didn’t raise taxes – and grew expenditure at consumer inflation rates, the budget would have balanced itself simply from the organic growth of the economy by the first few months of 2000.
Instead, the President and Congress raised the top rate on inflation-adjusted incomes of $388 thousand – which is in the zone of our cut-off to be in the top 1% incomes today – from 31% to 39.6%. Also, inflation-adjusted incomes over $178 thousand went from 31% to 36% – they would be in the zone of today’s top 5% cutoff. (All filing as “Single”, which, with today’s divorce rates…).
Instead the budget was balanced in the first few months of 1998 – a whopping two years earlier, than had we done effectively nothing. Is this what the proponents of the time are so proud of? Dare I suggest, might we give some credit to the hard work and innovation of little-old us showing up for work every day in the actual economy? A little credit for expanding the economy by over $3 trillion in those six years ended December 1999; what the government leeched off of to balance their books?
Again, my method was very simplistic, my math “back of the envelope” but (and pardon the argumentative fallacy) it can’t be worse than any given politician’s – and at least I’m not running for anything.
So here we go again.
The 2011 Act raised the debt ceiling immediately by $400 billion (subject to further, goal-based increase) – something we’ll burn through in under four months, counting from three months ago.
The Act contemplates cutting a total of $1.5 trillion over ten years. If Congress does not enact at least $1.2 trillion in spending cuts by this coming 23 December, it puts in motion a series of what have been characterized as severe spending cuts not subject to negotiation. Not so highlighted in the public discourse, however, are those cuts don’t commence until 2013 (read, after the architects’ presumed re-election) and are spread out and back-loaded all the way to 2021 – easily buried in a subsequent decade of fiscal noise.
Even if they come up with the spending cuts, that’s $1.2 trillion over a decade – so it’s only $120 billion annually, or less than one-tenth of our current budget shortfall. Even with our hypothetical taking of 10% from everyone that actually works for a living, it would still leave a hole over $300 billion.
So we’re all going to have to pitch in and pay our share – whether it’s “fair” or not. We’re all in this together – all 100% of us. I am very aware of the income inequality issues that have been in the works, really for some decades. We absolutely need to address those issues as well. I think it starts with education – but that’s a whole ‘nother conversation we need to have, and another post for me, for another time.
The solutions for our present fiscal mess are going to have to come from all quarters, high and low, left and right. From the 1%. And from the 99% too. And the sooner we can stop pointing fingers at each other, in the midst of yet one more election cycle, the sooner we can actually get down to some real business and fix this pickle.
* Answers: No, yes, yes, we’re certainly heading there, no and all of us.