My musings on different political topics relevant to America today.

Monday, May 21, 2012

Debts, Deficits, and Gay-marriage, oh my!

The absurdity of American politics astounds me.  America's debt is going gangbusters, yet the train keeps chugging forward at full speed, with none of the passengers aware that they are about to fly off a cliff.  Instead of debating how to fix the deficit, we are debating secondary issues like birth control and gay marriage.  It would be kinda like the passengers of a train debating what table they should sit at in the train cafe when the whole train is about to fall off a cliff.  The absurdity of the whole thing astounds me.  Our nation better get its priorities straight, and fast, before we wind up like Greece (All of you who don't know what I am talking about, just search "Greece" in google search, and you will quickly learn what I am talking about).

Alright, here is a quick breakdown of just how big the problem is.  According to Reuters, the fiscal deficit in 2011 was $1.3 trillion, that makes 8.6% of GDP.  You know how big that is!?  Our deficit is larger than Mexico's entire economy, and it is barely smaller than Australia's.  The national debt is over 100% of GDP.  Our nation's debt, is larger than our entire economy.  It is over %15 trillion.  We are now in the same camp with the likes of such austere nations as Greece, Italy, Ireland, and Portugal.  Why is no one worried about this?  If our debt continues to grow as fast as it has been, at 8.6%, the debt will quickly implode.  This is not to say it will.  Indeed, the debt probably will not climb that fast.  Assuming economic growth grows larger than the budget from year to year, the deficit will slowly decrease.

Nevertheless, this may calm people's fears more than it should.  The economic growth has been sporadic.  The first quarter of 2010 saw economic growth at almost 4%.  However, economic growth had slowed to 0.4% by the first quarter of 2011.  However, now it has recently recorded in the past two quarters growth of 3% and 2.2%.  In addition to the sporadic growth rate, the deficit as a percentage of GDP as only declined modestly over the past several years.  It did decline from 10% to a bit under 9% between 2009 and 2010, but now declines have been much more modest, despite the improved growth.  Its been floating above 8% for 2 years and soon that will extend to 3 once 2012 closes.  Here is the graph:

What is blatantly odd is how exactly the deficit declines so rapidly between 2012 and 2014? It seems such declines are ideal, but far from likely.  If the deficit has been steadily above 8% despite economic growth, why are we so optimistic it will plunge rapidly in 2013 and 2014? 

The reason this graph and others like it take such an optimistic view is because they rely on estimates prepared by the CBO (Congressional Budget Office).  Why everyone likes its projections is obvious, their optimistic.  However, they really don't have any good reason to be as optimistic as they are.  CRFB (Committee for a Responsible Federal Budget) has challenged these the CBO projections on many levels.  1st, its projections of GDP growth are ultra-positive, at an average rate of 3.2%, when CRFB predicts 2.9%.  2nd, it assumes budget cuts that may or may not happen.  If it was a given that significant budget cuts would happen, then there would be reason for optimism, but this is not likely.  If the budget cuts do not happen, then the graph above is going to look a lot uglier, with deficits hovering around 8% for quite sometime.  In fact, a more recent report has modified the 2013 deficit to 7%.  Hmmm, its interesting how each year the estimate keeps getting modified upward, isn't it?

The reason it is not likely is because politics has become too partisan, the politicians care more about themselves than the country, and voters are more concerned with issues that are of secondary importance.  As long as the politicians can get away with doing nothing about the budget, they will.  Why? because touching the budget for sure will make enemies.  People will start screaming bloody murder once they realize the government is going to take away their goodies.  Only when people make it clear that they will kick people out of office that are not committed to serious non-partisan budget reform, will any true budget reform happen.  However, as long as people let themselves be distracted by issues that can be put off to another day, like "free" birth control or gay-marriage, the politicians will continue to put off what really matters.  If the deficit does not decline, we will be staring at a draconian debt of 180% of GDP in 10 years! We have to get serious about this!  Greece did not till it was too late, will we do the same?

Lastly I will like to adress a couple of objections that people are sure to bring up.  First, they argue that the debt is actually only 70% of GDP, for it doesn't make sense to include social security and other programs.  That is ridiculous, any government outlay of cash should be included.  It is absurd to think that social security spending should be exempt, or any other government spending.  No other nation does it.  The only point of such self-deception is too make us feel better about ourselves.  Either way, the problem is still there, and must be solved.

Second, many will argue that its all Bush's fault (of course).  They say that in actuality the vast majority of the blame lies on Bush's tax cuts.  That is ridiculous for one reason.  It assumes that government tax receipts are larger with greater marginal tax rates.  If this was true, then the Government revenue as a percentage of GDP should be larger before the tax cuts than after.  This is not the case.  They hover steadily around 18% before and after.  This graph to the right proves my point.  Therefore, it is a false assumption to believe that raising taxes (as the tax structure currently stands) will do much of anything.  In particular, just look at the decrease in the marginal rate caused by the Bush tax cuts in the early 2000's.  The decrease is tiny compared to previous changes in the marginal rate, and if the larger changes barely affected Government revenue as a percentage of GDP, why would repealing the Bush tax cuts do much of anything? If you really want to increase Government revenue as a percentage of GDP, the entire tax code will have to be modified to eliminate loop holes and exemptions.

Third, conservatives pretend they are serious about lowering the deficit, but are they? They always accuse democrats of being reluctant to cut social programs, however the conservatives have their sacred cows as well.  Any cut in military spending automatically produces an uproar.  Why? Its ridiculous, we utterly dominate everyone militarily.  You could cut our military spending by half and we would still be supreme.  Just look at the graph! The U.S. spent 700 billion dollars in 2010.  China, the "biggest threat" spent almost 150 billion.  Its utterly ridiculous how much we dominate.  We can take on all the other nations shown in the graph and we still would spend more!  If conservatives want democrats to throw overboard their sacred cows, then the conservatives should be willing to throw theirs as well.

Thus, my analysis is complete.  Both political parties, and the electorate at large, must get serious about the deficit.  The deficit should be at the top of the agenda, not free birth control.  Time to see through the distractions the politicians throw in our face, and demand real solutions to real problems.

P.S. Here are the websites I drew my data from, I hope you find them of use:
U.S. deficit at $1.3 trillion in fiscal 2011 | Reuters
Government Spending Chart: United States 2007-2017 - Federal State Local Data
Analysis of CBO's Budget and Economic Projections and CRFB's Realistic Baseline |
Projected Debt vs. Potential Debt | Mercatus
List of countries by military expenditures - Wikipedia, the free encyclopedia

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