Nervous About the Numbers

by Charles

With all of the budgetary numbers flying around in the wake of Katrina, I did a little number crunching myself, but rather than just see the short term, I looked back the last twenty five years in five-year increments and then looked forward to 2010 (full disclosure:  I'm a CPA by training, not an economist).  Given the longer perspective, there are both encouraging and excouraging aspects to our fiscal future.  First, the spreadsheet, using CBO historical and projected figures:

Download cbo_budget_5year_bites.xls

I wish I could make it a workable image but I can't.  The CBO numbers don't reflect the $200 billion expected to be spent on Katrina, but I'll get to that.  The estimates are through August 15th, and I don't know if the highway bill porkfest was incorporated, but I think it is.

Our current budget deficit is 2.7% of GDP and will drop to 2.0% by 2010, lower than any other 5-year period in the last twenty five years except 2000.  A favorable trend.  [Update:  Or maybe not, using Heritage Foundation estimates.]  However, our total debt as a percentage of GDP is going up, and has been going up since 2000.  The percentage peaked in 1995 and dropped significantly over the next five years because of a growing economy and constrained spending.  The peace dividend didn't hurt either, since defense spending was $300.1 billion in 1990 and only $295 billion ten years later.

In a growing economy, we shouldn't be seeing such growth in total debt, and this bothers me.  I could get behind the idea of tax cuts and deficit spending during a recession, but not so much when the economy is flush, especially when it comes to spending.  What concerns me is that mandatory spending went up 39.7% in the first half of the aughts, and will go up another 31.2% in the next five years, thanks in part to the new Medicare drug benefit. 

Discretionary spending zoomed in the last five years.  Defense spending understandably increased 68.8%, but non-defense discretionary spending went up a troubling 45.1% over the same period.  Thankfully, the rate of increase for defense and non-defense discretionary spending is much slower for the next five years, but the damage is done and the slowdowns won't be enough to slow our accumulation of debt.  Instead of holding the line on spending, we now have a massive highway bill enacted and a massive post-Katrina reconstruction bill on deck.  The Bush administration is going the wrong way on this.  This is the opportune time to make offsets, not add on.  Sadly, what we're seeing right now is not limited government conservatism, but big government preservatism.  Pejman is right about the regulatory impacts of increased spending:  "Spending works hand in hand the growth of the regulatory state and it is impossible to address the former without addressing the latter."  More federal money plus more federal regulations means more federal power.  The libertarian in me shudders.  It rankles that the federal government consumes over 20% of our national economy.

Some other observations.  Even with the Reagan tax cuts and a fairly severe recession in the first of the 1980s, revenues still increased 42%.  By comparison, revenues in the last five years went up only 5.8%, slower than any five-year period in a quarter century.  Obviously, the Bush tax cuts had a hand in that.  Also, Reagan had the advantage of twice-as-fast GDP growth and he bumped Social Security taxes.  However, Reagan was serious about capping non-defense spending; he sent expense-cutting budgets to Congress and Tip O'Neill kept saying they were "dead in the water".  So even though spending went up during the Reagan years, Bush and Reagan are philosophically on opposite sides of the fence.  As with Peggy Noonan, I'm a Reagan conservative.

Another thing.  While everyone fondly remembers the economic boom times of the go-go 1990s, the first ten years of the 21st century don't look so bad by comparison.  GDP grew 69.2% in the 1990s and will grow 63.0% in this ten-year period (if CBO forecasts hold).

With the farm bill, the highway bill and now the Katrina bill, I can't and I don't support our spending levels.  They're too high and too irresponsible.  The Heritage Foundation put together an analysis for the next five years (which includes Katrina legislation), and their budget deficit estimate for 2010 is $539 billion, instead of the CBO's $317 billion.  These shortfalls will only be more exacerbated by the dwindling Social Security surplus, which will zero out by 2018.

The Cato Institute put out some spending offsets, and Investors Business Daily has a plan to cut $214 billion.   Republicans in Congress should put those spending cuts on the table.  This is not just fiscally smart, but politically smart as well.  Responsible budgeting means prioritizing how and where the people's money is to be spent, and it's time to start choosing instead of tacking on.  This may be heresy to fellow conservatives, but I'm not opposed to freezing tax rates for personal incomes over $200,000 (full disclosure:  I don't make over $200,000, so there may be a little bias).

Comments

[rilkefan]

"Our current budget deficit is 2.7% of GDP and will drop to 2.0% by 2010"

I'd be surprised to see that, but what do I know. Incidentally, what happens in 2011?

[Dantheman]

"Our current budget deficit is 2.7% of GDP and will drop to 2.0% by 2010, lower than any other 5-year period in the last twenty five years except 2000."

What are the assumptions underlying this? The typical set of CBO projections I have seen assumes:

1. all of the tax reductions passed in 2001 with time limits will not be renewed. For example, the estate tax will only be repealed for 1 year, following which, it will spring back to existence at the same levels and rates as prior to 2001.

2. there will be no modification to the Alternative Minimum Tax, so that it will by the end of this period affect roughly 1/3 of all families, offsetting, among other thigs, the deductions for mortgage interest, charitable contributions, etc.

3. we will spend no further money in Iraq, Afghanistan, and any other battles in the GWOT.

4. the deficit will be offset by the Social Security surplus, which means that it cannot be invested as part of any private account plan.

Since this is an unlikely set of assumptions, and each of them come with price tags in the hundreds of billions to trillions, I am taking this praise with boxes of salt.

[Jonas Cord]

Incidentally, what happens in 2011?

We all say goodbye to each other and put all of our business to rest in preparation for the apocalypse that follows in 2012 when the Mayan calendar ends.

[matttbastard]

Dammit, Jonas beat me to it.

[Chuchundra]

I believe the 2010 number is based on the Bush tax cuts riding off into the sunset. Seeing as how the GOP congress is already talking about making some or all of these "temporary" cuts permanent, forgive me if I take that number with a metric ton of salt.

[Charles Bird]

I believe the 2010 number is based on the Bush tax cuts riding off into the sunset.

I'm not sure about that. The CBO projections are based on enacted legislation, and I can't remember if the permanent tax cut legislation was passed.

[hilzoy]

Charles: as others have pointed out, the CBO makes assumptions about the future that are completely unrealistic. This isn't its fault: it is required by law to do so, for the perfectly good reason that allowing it to say, "well, we know that X isn't going to happen" would open the system up to a lot of manipulation. Nonetheless, here are some of the assumptions it uses:

"The projections start with the Congress's most recent budgetary decisions and show what would happen to the federal budget if no policy changes were made over the projection period. For revenues and entitlement programs, such as Social Security or Medicare, the baseline projections generally assume that current laws will continue without change. For discretionary spending, CBO (as directed by the Deficit Control Act) assumes that budget authority for discretionary programs will grow at the rate of inflation each year after 2005."

No policy changes means, first of all, that the tax cuts that are currently set to sunset are allowed to do so, and that no fix for the Alternative Minimum Tax is passed. Both of these are very unlikely, and both make our fiscal position a lot better.

The assumption that discretionary spending grows at the rate of inflation is likewise unrealistic, given the current people in office. Again, the CBO is required by law to make this assumption: it seems to me like a bad idea to let them decide whether to assume that the party in office will make unspecified future cuts or go on a spending binge or whatever. Nonetheless, offhand I would think that taking the rate of increase over the last few years would be more realistic.

There's a good summary of the issues, and forecasts using the CBO's numbers but making different assumptions, here.

[Dantheman]

Charles,

Another problem with your numbers is that they appear to all be in nominal dollars, with no inflation adjustment. This is the primary reason why "Even with the Reagan tax cuts and a fairly severe recession in the first of the 1980s, revenues still increased 42%" occurred, as the bulk of the increase was inflation.

Chart 2 of the historical data may be more useful in analyzing long term trends, as it sets forth these numbers as a percentage of GDP. It shows revenues decreased from 19.0% of GDP in 1980 to 17.7% of GDP in 1985.

Looking at the 2004 figures, we see expenditures are 19.8% of GDP, roughly in the middle of the historical data (and down from the record of 23.5% of GDP in 1983, when Republicans controlled the White House and Senate). On the other hand, revenues are at 16.3% of GDP, the lowest figure on the chart.

To put it simply, we have a Federal government with Great Society spending, but with tax revenues from before the Great Society.

[mac]

By "A favorable trend", I assume you refer to the glorious fact that the %GDP deficit has gone up since the dark days of divided government?

[CharleyCarp]

CB, the legislation to make tax cuts permanent has not yet passed. It's probably dead for 05, killed by the weather, but will be high on the list in 06, because it works well for the governing party coming into the midterms. Irresponsibility will be massively rewarded, again.

Worst form of government, except for all the others.

OT: Back in FLL on the way home. That free wireless in the whole terminal is a great thing, and ought to be replicated everywhere. I'm also thinking I ought to be able to deduct the cost of my iPod, which was a lifesaver on a 3.5 hour flight in a 9 passenger prop plane.

Neither client appears to be on hunger strike, and I watched one eat 2 filet-o-fish sandwiches, 2 large fries, and 3 snickers bars -- after his normal lunch. Both are fully into what I, as a layman, would call a prisoner mindset. I'd think there are at least half a dozen good PhD theses lurking in Gitmo, on a variety of psycho-social topics. Army just took over the camp where we meet them(when we were there in June, the Navy had just taken over) and organization and execution was far superior. Maybe it's because the Army people we saw in the camp were much lower in rank than the Navy people last time -- one consequence is that while we had at least 40 minutes a day to visit with the Navy guys last time while other Navy guys were trying to sort things out, this time we didn't get 10 minutes in 3 days to talk to the Army guys: we never had to wait for anything.

We took 35 pages of notes, which had to be left with the navy, and which will be delivered to a secure facility, where we can review them. We'll request declassification for nearly everything, and ought to get it. I'll have more to say then.

Back on topic, I don't know what the Gitmo thing costs, but it's got to be plenty. They'd do better using Leavenworth for war criminals, and something much lower tech for schmoes (and wannabees) -- again, on the mainland. Actually, pushing harder to repatriate schmoes would be a good way to save a little money.

Money spent trying to vindicate the outsized Caesar-like powers in the Exec is worse than money wasted, of course. All of the interests of the US can easily be served using powers we'd nearly all agree are present -- and getting legislation for anything else -- but the Admin is so determined to vindicate it's views of Exec power.

[Francis]

welcome back, glad you're safe. thanks for the update and please keep us posted.

[Chuchundra]

Yes, welcome back CharleyCarp. I'd say you're doing God's work, but I'm an atheist.

[freelunch]

Republican Presidents don't do as they say. I remember both Clinton and Johnson being chastised for being big spenders, but the only years that Federal expenditures were at or below 18.5% were 1964-1966 (Kennedy/Johnson), and 2000-2001 (Clinton). Ronald Reagan is the champion big spender, with every year above 21% from 1982 to 1989 with two years above 23% -- the highest ever spent outside of wartime.

Don't listen to politicians. Look at what they do. What we see is that Republican presidents have been the ones who keep increasing the size of government, but, current events tell us, not making our government work better.

Others have noted that you cannot do these analyses without normalizing the value of money. Inflation matters.

[Charles Bird]

Two general comments. First, these aren't my numbers. They're taken directly from the CBO. Second, I linked to the Heritage Foundation 2005-2015 forecast, which factors in the cost of Katrina, supplemental expenditures for WWIV, greater growth for discretionary spending and assuming tax cuts are made permanent. This is all the more reason behind my main point: That Bush and Congress need to stop tacking on and start offsetting.

[liberal japonicus]

of interest may be this EJ Dionne WaPo Op-Ed

But our current budget policies are built not on honest coherence but on incoherence or, even worse, a dishonest coherence. The president and members of Congress always insist that they are fiscal conservatives who believe in balanced budgets. Yet their actions bear no relationship to their words, and labels such as "conservative" have no connection to their policies. Our federal purse strings are in the hands of fiscal radicals.

[CaseyL]

A friend of mine used to get on my nerves something fierce when she parroted the GOP line about how "the country should be run like a business." We'd get into lively arguments about it, but I could never convince her that a nation isn't a business.

Funny thing: now that we have a "CEO President" who has been running the country the same way he once ran businesses, I suddenly don't hear that talking point out of her anymore.

[John Thullen]

Yes, government is not a business.

Let's get rid of the idea, too, that government should be making decisions like a family sitting around the kitchen table wondering how they might cut spending because the breadwinner has decided to ask his employer for a salary cut and the war with the neighbors has come up against stiffer and more expensive resistance then expected.

Also, I have no love for pork but I can't think of a definition of pork that wouldn't include, well, everything.

Also, this, Charles: "It rankles that the federal government consumes over 20% of our national economy."

Non-partisan question: Why?

I am quite sure that the arguments pro and con were just as rankling, not to mention vociferous, when the federal government consumed 15% of the economy, or 10% of the economy.

Why is 20% such a magic number?

Further, Warren Buffett, Bill Gates, and most of the high achievers seem to keep their achievement very high under all levels of tax rates.

[Jon H]

"there will be no modification to the Alternative Minimum Tax, so that it will by the end of this period affect roughly 1/3 of all families, offsetting, among other thigs, the deductions for mortgage interest, charitable contributions, etc."

Hell, if they let this happen, then extend it to the other 2/3 of families, they'll have the flat tax they 've wanted for so long.

[Trickster]

Defense spending understandably increased 68.8%

Well, yeah, it's understandable. I understand that for every $1000 we were spending on defense five years ago, we're now spending $1688.

I just don't understand why.

Other than that those who most wanted, for whatever political, philosophical, pecuniary, or auto-erotic reason, a larger military, used our national anger and emotional vulnerability over 9/11 to convince us temporarily that every problem was to be solved at the point of a laser-targeted MRLS barrage. Faced with a problem requiring a large investigative, police, espionage, and internal security response, we spent a few bucks here and there on our investigative, police, espionage, and internal security capabilities and simultaneously decided that we couldn't handle the modest military component of the required response with our previously existing armed force, which was already the most formidable in the history of the world.

So we spent a blazillion dollars on aircraft carriers, advanced fighter wings, and other unneeded irrelevancies, disorganizing our fiscal house and threatening what is beyond any doubt the true source of our might as a nation, our economy.

It makes me lament for us as a nation. It's sure easy to pick on our Democratic leaders who let this happen, but you know they were probably right in their calculations and if they had done other than shuffle along with the pack and seek an available compromise here and there they would probably have lost what little power they had and the Republicans would've gone even further. Because our populace just has not been ready to excuse weakness in a leader, even when compared to stupidity or dishonesty. And if we as a nation don't find a way to start valuing decisional factors other than testosterone, I just don't know what kind of future we have.

[hrc]

what does 'excouraging' mean? I would think discouraging is the apt word.

[243]

Regarding running government, like a business one wonders what percentage of businesses started in 1776 or earlier are still going strong?

[rilkefan]

Some angry partisan numbers.

[bob mcmanus]

Bruce Bartlett Testifying

via Max Sawicky. Coming from Bartlett, quite moving. I always have liked the guy. I am sure Congress was laughing at every word. Nice guy, but clueless.

[cleek]

Trickster: clap clap clap clap clap

[Frank]

Bob- I don't think Bruce is clueless, he is just telling us we should get ready to carry out our supply side economic function: Raise taxes (With the VAT) on the middle class. That way Republicans can continue to win elections with irresponsible promises of tax cuts.

They want the mommy party to continue to follow the chocholate covered toddler party around and clean up their messes for them.

[Jackmormon]

Arggg! Ok, once again, I've tried to use the trackback url provided, and once again it has availeth me nought.

Anyway, if you want to hate on Charles, I hzve set up a special thread cued to this post for that very purpose! here it is!

(As I have no interest in the success or otherwise of ihatecharlesbird.blogspot.com, I must say that CB in this here post is most reasonable indeed. If you think otherwise, take it to my site!)

[bob mcmanus]

"Bob- I don't think Bruce is clueless"

Bartlett understands who is the good guys and who the bad, he still doesn't understand how bad the bad guys are. If the Dems win, raise taxes and cut spending, Repubs will use it against them, win and tear the country the rest of the way to the ground. Bartlett still thinks this is incompetence and irresponsibility on the part of the GOP.
Nice guy, but clueless.

[Frank]

Bob- "Nice guy, but clueless."

Why do you believe that rather than that he is intentionally trying to feed us a poisoned pill?

[bob mcmanus]

"Why do you believe that rather than that he is intentionally trying to feed us a poisoned pill?"

Web contact, history, reputation

[bob mcmanus]

After going thru comments at Max's, I am less sure about Bartlett's righteousness.

[Frank]

thanks Bob