Sunday, November 28, 2010

The 800 Pound Political Gorilla in Washington: How to Get Beyond the Deficit Hysteria.

With all the “recent” talk about the budget deficit and the growing national debt that at present stands at over $13.8 trillion and is growing at $4.15 billion per day, there seems little evidence that either political party will come to the table with substantive solutions to this growing menace. Republicans seem unwilling to accept the fact that keeping the Bush tax cuts on the books amounts, ostensibly, to an extra $4 trillion in unpaid debt over the next decade. Democrats are unwilling to look at an ever-expanding “government as the solution” narrative that has now taken on a life of its own.

Let’s look at the numbers, shall we, courtesy of Wikipedia.

The 2010 budget is as follows:

Total Receipts: $2.38 trillion (estimated)

· $1.061 trillion – Individual income taxes
· $940 billion – Social Security and other payroll tax
· $222 billion – Corporation income taxes
· $77 billion – Excise taxes
· $23 billion – Customs duties
· $20 billion – Estate and gift taxes
· $22 billion – Deposits of earnings
· $16 billion – Other

Total Spending: $3.55 trillion

Mandatory: $2.184 trillion (+15.6%)

o $677.95 billion (+4.9%) – Social Security
o $571 billion (−15.2%) – Other mandatory programs
o $453 billion (+6.6%) – Medicare
o $290 billion (+12.0%) – Medicaid
o $164 billion (+18.0%) – Interest on National Debt
o $11 billion (+275%) – Potential disaster costs
o $0 billion (−100%) – Troubled Asset Relief Program (TARP)
o $0 billion (−100%) – Financial stabilization efforts

Discretionary: $1.368 trillion (+13.1%)

o $663.7 billion (+12.7%) – Department of Defense (including Overseas Contingency Operations)
o $78.7 billion (−1.7%) – Department of Health and Human Services
o $72.5 billion (+2.8%) – Department of Transportation
o $52.5 billion (+10.3%) – Department of Veterans Affairs
o $51.7 billion (+40.9%) – Department of State and Other International Programs
o $47.5 billion (+18.5%) – Department of Housing and Urban Development
o $46.7 billion (+12.8%) – Department of Education
o $42.7 billion (+1.2%) – Department of Homeland Security
o $26.3 billion (−0.4%) – Department of Energy
o $26.0 billion (+8.8%) – Department of Agriculture
o $23.9 billion (−6.3%) – Department of Justice
o $18.7 billion (+5.1%) – National Aeronautics and Space Administration
o $13.8 billion (+48.4%) – Department of Commerce
o $13.3 billion (+4.7%) – Department of Labor
o $13.3 billion (+4.7%) – Department of the Treasury
o $12.0 billion (+6.2%) – Department of the Interior
o $10.5 billion (+34.6%) – Environmental Protection Agency
o $9.7 billion (+10.2%) – Social Security Administration
o $7.0 billion (+1.4%) – National Science Foundation
o $5.1 billion (−3.8%) – Corps of Engineers
o $5.0 billion (+100%) – National Infrastructure Bank
o $1.1 billion (+22.2%) – Corporation for National and Community Service
o $0.7 billion (0.0%) – Small Business Administration
o $0.6 billion (−14.3%) – General Services Administration
o $19.8 billion (+3.7%) – Other Agencies
o $105 billion – Other

Budget Deficit: $1.17 trillion (estimated)

Now let’s look at the 2009 budget:

Total Receipts: $2.7 trillion (estimated); $2.1 trillion (actual)

· $1.21 trillion - Individual income tax
· $949.4 billion - Social Security and other payroll taxes
· $339.2 billion - Corporate income tax
· $68.9 billion - Excise taxes
· $29.1 billion - Customs duties
· $26.3 billion - Estate and gift taxes
· $47.9 billion - Other

Total Spending: $3.1 trillion

Mandatory: $1.89 trillion (+6.2%)

o $644 billion - Social Security
o $408 billion - Medicare
o $224 billion - Medicaid and the State Children's Health Insurance Program (SCHIP)
o $360 billion - Unemployment/Welfare/Other mandatory spending
o $260 billion - Interest on National Debt

Discretionary: $1.21 trillion (+4.9%)

o $515.4 billion - Department of Defense
o $145.2 billion(2008*) - Global War on Terror
o $70.4 billion - Department of Health and Human Services
o $68.2 billion - Department of Transportation
o $45.4 billion - Department of Education
o $44.8 billion - Department of Veterans Affairs
o $38.5 billion - Department of Housing and Urban Development
o $38.3 billion - State and Other International Programs
o $37.6 billion - Department of Homeland Security
o $25.0 billion - Department of Energy
o $20.8 billion - Department of Agriculture
o $20.3 billion - Department of Justice
o $17.6 billion - National Aeronautics and Space Administration
o $12.5 billion - Department of the Treasury
o $10.6 billion - Department of the Interior
o $10.5 billion - Department of Labor
o $8.4 billion - Social Security Administration
o $7.1 billion - Environmental Protection Agency
o $6.9 billion - National Science Foundation
o $6.3 billion - Judicial branch (United States federal courts)
o $4.7 billion - Legislative branch (United States Congress)
o $4.7 billion - Army Corps of Engineers
o $0.4 billion - Executive Office of the President
o $0.7 billion - Small Business Administration
o $7.2 billion - Other agencies
o $39.0 billion(2008*) - Other Off-budget Discretionary Spending

The financial cost of the Iraq War and the War in Afghanistan are not part of the defense budget; they are appropriations.

Budget Deficit: $407 billion (estimated)

Now, what’s interesting about these numbers isn’t so much the outlays, but the revenue. When compared with 2009’s budget, which many people still don’t understand is George Bush’s budget that he submitted to Congress in February of ’08, the big difference – aside from the fact that the cost of both the Iraq and Afghanistan wars are not included in Bush’s budget but are in Obama’s – is the projected revenue. Bush estimated $2.7 trillion in revenue; the actual receipts were $2.1 trillion. Actual spending in Obama’s budget went up only $450 billion from $3.1 trillion. If you factor in the lost revenue – owed directly to the affects of the recession – that alone added $600 billion to the deficit. So what was projected to be a $400 billion deficit became a $1 trillion deficit just based on ’09 estimated receipts. Obama, in fact added only $450 billion in spending to Bush’s budget of ’09. Factoring in an expected modest increase in revenues – which still might prove overly optimistic - that accounts for the current deficit we now face.

So much for the numbers. How do we move both lines closer together? Keep in mind the budget for fiscal 2011 calls for $3.7 trillion in spending.

For starters, a 10% cut in ALL non-defense discretionary spending should be a no brainer. Unfortunately, that only puts a dent in the deficit. The more painful choices are right there in front of us for all to see.

Defense spending, entitlements and the unfunded Bush tax cuts continue to comprise the overwhelming majority of that 800 pound gorilla that nobody seems to want any part of. We’ll tackle each one here.

Defense: It is high time that this woolly mammoth gets a shave. Closing bases in non-essential and non-strategic places around the world could save in the neighborhood of $100 billion or more annually. Do we really need a presence in England and Italy to name just two countries? Are we expecting a return of Hitler and Mussolini? How about Japan? Is Emperor Hirohito still alive somewhere in a bunker? Elimination of any and all non-essential weapon’s systems and planes – the F-22 would’ve cost $1.75 billion per to build – could save billions more. A 20% cut is not unrealistic or irresponsible and would certainly not deprive the Pentagon from essential funds needed to protect the nation. That adds up to an estimated $135 billion reduction from 2010 numbers. As we scale down forces in Afghanistan and pull out of Iraq, we should expect further reductions over the next few years.

Social Security: While it is secure for the time being – in deed the fund is solvent thru 2037 – there are some things that can be done to extend its well being for decades to come. The first is to eliminate the cap on contributions, currently at $104,000. Bill Clinton did the same thing for Medicare in 1993 and it helped stabilize the fund. It is absolutely ludicrous, in a nation with so many workers earning over $100,000, to even have a cap in the first place. Another thing that would help would be to change the current taxable portion tables for beneficiaries. Currently, individual filers who earn between $25,000 and $34,000 must pay taxes on 50% of their combined income; if they earn over $34,000 they pay taxes on 85% of that income. For joint filers those numbers go up to 50% for $32,000 thru $44,000 and 85% above $44,000. Changing it to 85% and 100% respectively would add still more revenue to the fund. The important thing is without raising the retirement age or slashing benefits, just doing these two things would vastly improve the fund’s bottom line and add decades to its life expectancy. How the Debt Commission missed this is beyond me.

The Bush Tax Cuts: There is no way to get around this; the nation simply can’t afford to extend them. It isn’t just a matter of keeping them for those making under $250,000 and eliminating them for everyone else. Even if you buy Democrats’ claim that everyone earning over $250,000 is rich – a stretch even in 1993 – the fact is that just keeping them for the “middle class” would only net you a $70 billion annual savings. Hardly worth the bother. But eliminating them all would save $400 billion annually, or $4 trillion over the next ten years. A look at federal receipts over the last twenty years show a modest increase during the Bush years over the Clinton years, which is what conservatives always point at to justify the lower brackets. However, the additional expenditures that the lower tax rates incurred were not offset by the additional revenues. It comes to an estimated eighty cents received for every dollar spent. Anyone who's ever worked on a spreadsheet could figure this out. The politically courageous thing to do would be to return the tax brackets to where they were in the ‘90s, the last time the nation had a balanced budget.  Parse it anyway you want, you can't say you're for fiscal responsibility and keep tax cuts that are not paid for on the books. Period!

OK, let’s add it up, shall we?

$63 billion from 10% cut in all non-defense discretionary spending (estimated)
$135 billion from 20% cut in defense spending (estimated)
$200 billion revenue from increases in social security taxes (estimated)
$400 billion revenue from elimination of all Bush tax cuts
$798 billion combined from spending cuts and tax increases.

Now, allowing for a modest improvement in the economy, it is not completely out of the question to see a further increase in receipts of another $200 billion. That gets us almost to an even trillion dollars. For those who have a calculator, that brings the deficit just under $200 billion. Anyone think they can’t live with that?

Dealing with deficits isn’t easy. It takes shared sacrifice; it takes thinking outside the box; and it takes political courage. Of course these numbers aren’t etched in stone. In fact, with the exception of the additional revenue from letting the Bush tax cuts expire, there is no way to get a precise reading on what impact these spending cuts and tax increases might have on the budget. For all we know the actual impact might be considerably greater. There is also the very real possibility that discretionary spending cuts could actually trigger a double dip recession, which would basically wipe out any savings incurred and then some. The point is that at some point we are going to have to deal with the deficit in a meaningful way, and not with the usual rhetoric of wishful thinking. The old Republican line that all we have is a spending problem and we don’t need to increase revenue has to be tossed out the window, along with the Democratic one that spending cuts are off the table. Both sides are wrong and both are going to have to swallow hard to come up with a tenable solution. That’s what happens when you build a bridge. You start on both sides and meet somewhere in the middle.

No comments: