What Is To Be Done About The Budget

Keith Hennessey's blog is by far the best thing I have found when it comes to analyzing and charting the various budget proposals floating around. This is his chart of the President's recent budget.

The lowest, black line represents a balanced budget. The yellow line represents the historical average of deficits that are about 2% of the GDP. The green line represents a deficit level that would keep deficits stable as a percentage of the GDP.

Key #1 to understanding the President's budget is that he would bring the deficit down below the green line and then make sure he doesn't break above it again…

Key #2 is that at no point in the next ten years would his deficits be at or below their historic average. The proposed blue line is at all times above the orange line.

Okay, so that's not exactly terrible. The President is content to live with deficits that are higher than the historical average into the near future; however, they will remain at a level that will not grow faster than the GDP. The worst thing you can say about that is that the new normal is worse than the old normal.

Now we have a budget proposal from Paul Ryan in the House. Here is how it compares to the President's plan.

Ryan's plan doesn't balance the budget over this ten year period, but it results in lower deficits every year than the President's proposal and brings it well below the historical norm. Whatever complaints you have about the Ryan plan, this is what a budget would look like if it actually begins to get us out of the soup instead of simply treading water for another decade.

If you are planning to die by 2022, you might consider this a wash. The President's plan concedes that government will swallow a larger chunk of the productive economy than it did in the past, but without short term runaway growth. The Ryan would mean a smaller bite into the economy and that deficits and debt would grow less than the overall economy.

If you are planning to live past 2022 or care at all about people who will, you might want to know something about longer term trends. While we cannot predict the future, we can project the budget into the future based on proposed budgets, current law, and current demographic trends. Here is Hennessey's longer term projection.

The upward trajectory of the blue line reflects the fact that the Administration has made no attempt whatsoever to address the genuine fiscal problems in our major entitlement programs. The downward trajectory of the red line means that Paul Ryan has made such an attempt. The short terms budget proposals charted above represent a short grace period, before entitlements bring irresistible pressures to bear on the budget.

Of course, projections are only projections. It is reasonable to ask what would have to change to make the projections wrong. Here is a short list of things that I can think of.

1. Everyone suddenly starts dying at age 65.
2. The average birthrate per woman suddenly jumps up to 5.
3. The economy begins to grow at double or triple the historical rate.
4. Someone invents a pill that costs a nickel a pop and cures all diseases.
5. The Vulcans land and share their technology with us (see #3).

Perhaps you could suggest other possibilities, but it would probably take more than one of the above to throw the above projections off much. The question is not which items on my list are more likely than not, but which we can count on.

If you don't like the Ryan plan, you might want to come up with an alternative that addresses the red line above. The President isn't interested in that. The Democratic Senate has been constipated for three years and cannot pass any budget at all. That is where we are.

Comments

[A.I.]

If one follows the link to Mr. Hennessey's blog, you will find buried in his prolific writing the crux of his economic philosophy: Government spending should be reduced. Why and at what cost?

Matt Miller:

"“Why don’t you balance the budget at 24 percent [of GDP] instead of 19 percent?” I asked.

“I think it would do damage to the economy,” Rep. Paul Ryan replied...

For starters, Ryan’s assumption that higher levels of spending and taxation would automatically hurt the economy can’t be right. If it were, America would be a poorer country today than it was a hundred years ago, when the federal government taxed and spent less than 5 percent of gross domestic product. But we’re obviously vastly wealthier. That doesn’t mean there isn’t a limit beyond which higher taxes and spending would hurt. Just that we’re not close to that point. How can we be, when President Reagan ran government at 22 percent of GDP?"

Find the rest of Miller's piece here: http://www.washingtonpost.com/opinions/paul-ryans-budget-to-nowhere/2012/03/21/gIQAe8qYRS_story.html

[Ken Blanchard]

And why not %150? After all, if the economy grew with a lot of spending in the past, then it will grow even faster in the future with more spending. And if I got better with one pill a day, next time I'll take ten pills and get better ten times faster! Such is the thinking behind the President's budget, if you are a typical sample.

Why a lower rate of spending now would be better is reasonably clear from the charts. We are headed into a period when spending goes out of control. It will be easier to handle it if we start earlier, and that means some deficit reduction right now.

[duggersd]

But Professor Fleming says deficits don't matter which of course says debt does not matter. So what is all of the hubbub about?

[Donald Pay]

Professor Fleming was quoting Dick Cheney, who was indicating the lessons that President Reagan taught us. Republicans talk a fiscal conservative line when Democrats are in power, but they govern as the worst borrow and spend liberals. You can't trust Republicans to run the economy.

[Mark Anderson]

You could just raise taxes, but if you want to drown the government in a bathtub that's probably not the right course.

[A.I.]

Whether we're talking about taxes, pills (prescription I assume), food or good wine, all things in appropriate doses KB--which is to say asking why not tax at some preposterous rate like 105% is a bogus response on your part. I will once again invite you to quit trying to put words into my posts.

[A.I.]

Or, turn about being fair play, why not tax at 0% KB. The economy would boom and revenues would soar based on volume--just like First CityWide Change Bank: http://www.hulu.com/watch/4253/saturday-night-live-first-citywide-change-bank-2

[Donald Pay]

Ryan's budget is an example of cost shifting in health care of the kind that is far worse for the economy than government debt. You say Ryan's budget will result in less government cost, but you don't tell us how. I will. Ryan just shifts the costs of elderly health care from government to the individual elderly person or their immediate family. Ryan's plan shifts debt from government to consumers. It does nothing to solve problems. Debt remains, it's just shifted onto people who have to pay a higher cost for service and a higher cost for debt. Ryan shifts medical costs from government, which can negotiate from a position of strength, to individuals, who can not negotiate against the major medical institutions. The end result is far higher health care costs overall, and more overall costs and debt. And the debt will cost more and take more out of the economy because government debt is at a fairly cheap rate, while individual debt is not.

[Ken Blanchard]

A.I.: the question of the "appropriate dose" is precisely what Hennessey provides for in the charts I have provided. I don't think I misinterpreted your posts. I merely pointed out the logical implications of your argument.

Is our fiscal system sustainable? If you think it is (as the President apparently thinks it is), then say so and show how. If not, then suggest a reasonable alternative. Mark thinks I want to drown the government in a bathtub. I reply that the government is drowning itself. After the next decade, the interest payments on the public debt will begin to squeeze out all other federal spending.

Donald thinks that the Ryan budget is "far worse for the economy than government debt". Okay. Should we then let the debt grow into the stratosphere? Ryan's budget brings the deficits down. So did the Bowels-Simpson Commission report, which the President commissioned and then ignored. If you don't like Ryan or Bowels-Simpson, then please suggest an alternative. The President isn't doing so. The Democratic Senate isn't doing so.

None of you, nor the Democrats in the White House or the Senate are willing to address the problem. All of you want the party to keep going on. Okay. One day rather soon the reckoning will come.

[Donald Pay]

You mean we don't want to address the problem that your party created? Hey, we did it once, we can do it again. There are quite a few ideas out there that would reduce, if not end, Republican-led deficit spending without throwing Grandma off the eighth floor of the hospital. You just don't want to consider them, because they would really end the party being thrown by the superrich corporate elite.

Let's start by introducing pay-go, which Republicans jettisoned when they wanted to pay off the elite, and by ending the Bush-era tax cuts. Let's end the tax benefits and subsidies given to the fossil fuel and nuclear industries. Let's allow the federal government to fully use its bargaining power to lower the costs of medication for the elderly. Let's cut defense spending by bringing troops home from Bush-era wars and occupations and from bases overseas. Let's reform social security by lifting the FICA tax cap.

[A.I.]

What you're really asking KB is that we decimate Medicaid, Medicare and a host of other domestic programs now in exchange for the "promise" of deficit reduction 10+ years hence. That's a deal no one in there right mind would take because even if those projections happen to come true, there is no guarantee another GW Bush won't tell us we're being "overcharged" and cut taxes again to the point we're right back into a deficit spiral.

As anyone who follows politics knows, Mark's reference to "drowning government in a bathtub" has nothing to do with debt. It is Grover Norquist's metaphor for shrinking government to that point because he advocates lowering taxes to the exclusion of all else. That is the underlying goal of the Ryan plan, the Tea Party and the Republican Party--not that the latter two are all that distinguishable from each other.

Never mind that the taxes we pay for programs like Medicare get us far more service than we would get for the same money spent in private markets--shrinking government is paramount. Killing Medicare may be good for Norquist, Ryan and those who stand to profit from their plans, but for a whole lot of people it's a sure ticket to bankruptcy and possibly death.

[Ken Blanchard]

What I am really saying A.I. is that the future is going to happen whether we prepare for it or not. Medicare growth, given the nature of the program as it exists now, is unsustainable over the long run. No reasonable and reasonably informed person doubts this. My father made out like a bandit from Medicare. He got about three times out of it what he paid into it. Do you really think that we can keep that up? It may make you feel better to blame demons for the problem, but it is you who are wishing Medicare into its grave.

I am sorry to have to keep reminding you of reality.

[DDCSD]

In FY2011, the federal government paid $454,393,280,417.03 ($454 billion) in interest on outstanding debt.

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

Ending the Bush tax cuts and cutting the budget for the Department of Defense in half (which I'm actually in favor of and don't think will hurt our defense capabilities a bit) won't even cover those interest payments. We're not even touching the principals on that that debt and we're adding more every day.

Ryan's budget shows us two things:

The first is that the Republicans aren't serious about getting the US Government's fiscal house in order. Ryan's budget proposal grows federal spending by 3.5% per year for the next ten years and will never balance the budget (yeah, they say it will balance it in 30 years, but I would bet everything I own that it wouldn't).

The second is that the Democrats seem to have even less fiscal sense than the Republicans. Wailing and gnashing their teeth over spending "cuts" that are actually 3.5% increases on an already bloated federal budget is nothing short of ridiculous.

I actually prefer President Obama's budget proposals. The faster we let this place burn down, the sooner we can start rebuilding it. Ryan's proposal is nothing more than trying to put out a raging house fire with a couple of garden hoses. You might be able to slow down the fire a little bit, but you're not going to save anything and you're only delaying the inevitable. Might as well go with the President's idea and throw a few water balloons at it and have some fun. We could even fill a few of them with gasoline.