StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Coming Attractions: The King Kong-Mothra-Godzilla Of All Budget Debates

25 Aug 2009
Posted by Stan Collender

Pete does a good job with an overview of the numbers from the mid-session budget reviews released this morning by OMB and CBO, so there's no need to repeat them.

It's important to note, though, that there are some indications that even the lower-than-previously projected deficit included by OMB in its report may be lowered further when the final numbers for fiscal 2009 are released in late October.  As Donald Marron posts on his blog, the actual deficit may well end up closer to $1.4 trillion than $1.6 trillion.

No matter what the actual deficit is, it is clear from reading the two reports that very little can be blamed on either the Obama administration or the current Congress.  Bruce Bartlett sent the following e-mail earlier today (which is quoted with his permission) with an excellent analysis:

CBO projected a deficit of $1,186 billion in January before Obama took office.  It now projects a deficit of $1,587 billion, an increase of $401 billion.  If one goes through the March update (pp. 6-7) and the August update (pp. 52-53) and adds up all the changes to the January estimate, you find that the deficit increase since January consists of $46 billion in lower than expected revenues due to the economy (11.5%), $129 billion in higher spending due to technical re-estimates (32.2%), and $226 billion due to legislative changes to both spending and revenues (56.3%).

This suggests that we would have had a deficit of at least $1,361 billion this year even if McCain had won (January deficit plus lower revenues and technical changes and no legislative changes)—assuming no stimulus and assuming that the economy would have done as well as it has done without it.  That’s only 14% less than the deficit currently projected.  And keep in mind that some of the legislative changes are due to higher defense spending and other non-stimulus related programs.

But McCain undoubtedly would have supported some sort of fiscal stimulus.  It might have been more tax- than spending-oriented, but would have increased the deficit nevertheless.  If we assume that McCain’s stimulus would have been half the size of Obama’s that leaves us with an estimated deficit of $1,474 billion under McCain—only 7% less than the deficit now estimated.

Frankly, I doubt that a McCain stimulus would have been half the size.  My guess is that it would have been at least as large as the one that ultimately was enacted.  Nevertheless, Bruce's basic point is sound: the deficit that Obama has to deal with was not of his making.

But regardless of who is to blame for the deficit, there's no doubt that it's Obama's responsibility to deal with it.

That leads to the most important result of the mid-session reviews: it's now far more likely that the fiscal 2011 budget debate, which will start next year when the president submits his budget to Congress in late January or early February, will be among the most difficult, vicious, and painful of any that has taken place in the past 30 years.

Here's why:

1.  It will be an election year

2.  Partisanship in Washington is much stronger now than it was during any of the previously budget figthts.  This includes the Gramm-Rudman-Hollings debate in 1985 and the Clinton-Gingrich debate in the mid-1990s that resulted in government shutdowns.

3.  The deficit is much larger now both nominally and as a percentage of GDP than it has been since World War II.

4.  The national debt is much larger now than it was when GRH was debated and Clinton and Gingrich sparred.  The much greater interest being paid on the national debt will put far more pressure on all other spending in the budget and tax increases.

5.  More than 50 Blue Dog Democrats will push the White House to deal with the deficit.

6.  The deficit will be a big issue for the first-term Democrats who were elected from what had been Republican districts.  They will be facing what could be the toughest reelection battles of their careers and will need to show their constituents that, because of them and their party, some progress has been made on the deficit.

7.  The bond market will push for deficit reductions.

8.  Foreign creditors, especially the Chinese, will push for deficit reductions.

9.  Some on Wall Street and elsewhere will express extreme concern about inflation and interest rates stopping the recovery in its tracks unless deficit reductions are put in place.

10.  Obama, who promised deficit reductions once the economy started to recover, will be hard-pressed not to live up to that promise.  He will be pressured to do so by the Blue Dogs, many of which supported the White House this year because they were told that the deficit would become a front burner priority next year.

The $9 trillion deficit

The government announced its frightening prediction the federal deficit would total $9 trillion in the next decade, increasing the current $12 trillion debt to $21 trillion in 2019, a 75% debt increase in only 10 years.
By comparison, the federal debt in 1979 was $800 billion. During the next decade it rose to $2.7 trillion, a 235% increase in only 10 years. As that increase was three times greater than the increase currently predicted, it might be instructive to see what it did to our economy.
In 1979, GDP was $2.5 trillion. Ten years later, GDP was $5.5 trillion, a 120% increase. That 235% increase in federal public debt resulted in a 120% GDP increase.
To achieve the same debt and GDP growth, today’s federal total public debt would have to increase 235% to $40 trillion by 2019, a total deficit of $28 trillion.
Please tell me again what historical evidence (not popular opinion) exists to show the projected deficit is a matter of concern.

Rodger Malcolm Mitchell

Rodger, some perspective (The $9 trillion deficit)

Rodger, some larger perspective re: ...

"To achieve the same debt and GDP growth, today’s federal total public debt would have to increase 235% to $40 trillion by 2019"

... Counting the "implicit debt" of unfunded obligations for Medicare, Social Security, Medicaid, federal-military pensions, etc., total US debt was already $64 trillion as of last year, 2008, discounted to present value. As of this year it's closer to $69 trillion.

OK. Now the Trustees of Social Security, the Treasury, etc., project a 6% long-term interest rate on US debt. Interest on the debt is paid in cash and thus by income taxes. There are 80 million payers of income tax in the US. And 6% of $69 trillion divided by 80 million works out to near $52,000, more than the average US household income of about $50,000.

Of course, taxpayers aren't paying for all of this yet. Today the cash-interest paying "explicit debt" is a mere $7.4 trillion of the total. But as the baby boomers have just started sailing into retirement, "implicit debt" from now on will be converting to explicit debt at an ever-accelerating rate to pay for it. (Note that the $62 trillion or so of implicit debt grows at about 6% a year until it converts to cash-interest tax-financed debt -- a rate faster than household income grows.)

That's why, before the recession and any of Obama's actions, on the basis of then-current policies and projections, both Moody's and Standard and Poor's projected that the Credit Rating of the United States would start falling in 2017, with S&P projecting it would hit "junk" by 2027.

Because by then, the tax bill for debt service sent to the average US income-tax payer would be driving up ever-higher annually towards a target higher than average US household income. (Just for service on the debt -- ignoring the tax cost of actually operating the government!) And that can't happen. That can't come anywhere close to happening. Something has to give first.

Now, perhaps you have an idea that escaped Moody's and Standard & Poor's about how the US govt is going owe cash interest on debt approaching $69 trillion (x 1.06 annually) without crashing its credit rating. Obviously, they didn't have any idea how. Dummies.

If you have the idea, please, let us all know! (Note that printing money, inflation, will not work because the obligations for Medicare, Social Security, Medicaid, & federal-military pensions are inflation adjusted or payable in real terms, which means inflation adjusted.)

Now is an excellent time to give us that idea, because after the effect of the recession and Obama's policy steps, the "explicit" part of the debt, apart from the "implicit" $62 trillion, just itself took a big jump up -- quite possibly even a lot bigger than reported here.

In summary, it's not today's $7.4 trillion of debt, nor the additional $9 trillion ($1.5 trillion more than all the debt incurred since George Washington's inauguration) that's going to be added to it in the next 10 years, that anyone thinks is going to crash the economy. It's the $62 trillion (x 1.06 annually) coming right after it -- of which part of the $9 trillion is just the camel's nose -- that's going to crash the economy for dead sure, if something isn't done about it.

I will give you one thing: The way budget mavens keep talking only about whether this year's deficit will be $1.6 trillion or $1.4 trillion, and whether a McCain deficit difference would have been $100 billion or $200 billion, and whether over the next 10 years the deficit will be $7 trillion or $9 trillion, and other little-dollar stuff like that, it's entirely reasonable for average people to assume that these are the big issues that matter, when they aren't.

When the experts up in the press box talk only of the details of "inside baseball", you can't blame the fans who are listening to them for not realizing that the real problem is the foundation of the stadium is burning.

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