Government Spending and Budget Cuts

There has been a lot of political effort and focus on the debt issue, and that is an improvement. So how big is the current change? Congress could only get a small down payment on cuts into legislation immediately. The Congressional Budget Office (CBO) scored the cuts as $917 billion over 10 years. To get more cuts, a Joint Select Committee is tasked with coming up with another $1200 billion more. If they fail, automatic cuts of $1500 billion are planned.

10 year cuts now: $917 B
Joint Committee: $1,200 B
Total: $2,117 B

So the total will be closer to $2.1 to 2.4 trillion, or 5% of expenditures. That is not enough with a current deficit at 40 % of expenditures. Compared to the projected expenditures of $45.8 trillion over this time frame, the effects will be small. A chart of the size of the initial cuts in blue compared to the projected expenditures in red puts the relative size in perspective:

The conclusion is that the best the government could do in making cuts is not enough to change the story that we will be spending more than we can afford, and that the scenario of dollar depreciation and gold rise will continue.

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Cartoon: Too Many Sacred Cows

The Bush Tax Cuts and the Deficit Myth

Brian Riedl looks at three myths of the Bush tax cuts:

Myth #1 The Bush tax cuts wiped out last decade's budget surpluses

Sen. John Kerry (D., Mass.), for example, has long blamed the tax cuts for having "taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see." That $5.6 trillion surplus never existed. It was a projection by the Congressional Budget Office (CBO) in January 2001 to cover the next decade. It assumed that late-1990s economic growth and the stock-market bubble (which had already peaked) would continue forever and generate record-high tax revenues. It assumed no recessions, no terrorist attacks, no wars, no natural disasters, and that all discretionary spending would fall to 1930s levels.

The projected $5.6 trillion surplus between 2002 and 2011 will more likely be a $6.1 trillion deficit through September 2011. So what was the cause of this dizzying, $11.7 trillion swing? I've analyzed CBO's 28 subsequent budget baseline updates since January 2001. These updates reveal that the much-maligned Bush tax cuts, at $1.7 trillion, caused just 14% of the swing from projected surpluses to actual deficits (and that is according to a "static" analysis, excluding any revenues recovered from faster economic growth induced by the cuts).

The bulk of the swing resulted from economic and technical revisions (33%), other new spending (32%), net interest on the debt (12%), the 2009 stimulus (6%) and other tax cuts (3%). Specifically, the tax cuts for those earning more than $250,000 are responsible for just 4% of the swing. If there were no Bush tax cuts, runaway spending and economic factors would have guaranteed more than $4 trillion in deficits over the decade and kept the budget in deficit every year except 2007.

He concludes:

Entitlements and other obligations are driving the deficits. Specifically, Social Security, Medicare, Medicaid and net interest costs are projected to rise by 5.4% of GDP between 2008 and 2020. The Bush tax cuts are a convenient scapegoat for past and future budget woes. But it is the dramatic upward arc of federal spending that is the root of the problem.

read the entire essay

Taxes and the Deficit

Who is to Blame fo the FY 2009 Deficit?

Some Republicans, for instance, complain that Obama tripled the budget deficit in his first year. This assertion is understandable, since the deficit jumped from about $450 billion in 2008 to $1.4 trillion in 2009. As this chart illustrates, with the Bush years in green, it appears as if Obama's policies have led to an explosion of debt. But there is one rather important detail that makes a big difference. The chart is based on the assumption that the current administration should be blamed for the 2009 fiscal year.




While this might make sense to a casual observer, it is largely untrue. The 2009 fiscal year began Oct. 1, 2008, nearly four months before Obama took office. The budget for the entire fiscal year was largely set in place while President Bush was in the White House.

So if we update the chart to show the Bush fiscal years in green, we can see that Obama is mostly right in claiming that he inherited a mess.

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Obama's Budget Deficits

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Economic Forecasts

2009
CBO Unemployment 9.3% Real GDP -2.5%
OMB Unemployment 9.3% Real GDP -2.8%

2010
CBO Unemployment 10.2% Real GDP 1.7%
OMB Unemployment 9.8% Real GDP 2.0%

2011
CBO Unemployment 9.1% Real GDP 3.5%
OMB Unemployment 8.6% Real GDP 3.8%

2012
CBO Unemployment 6.4% Real GDP 4.7%
OMB Unemployment 7.7% Real GDP 4.3%

The Obama administration said Tuesday that it now expects the 10-year budget deficit to reach $9 trillion, or about $2 trillion more than it estimated earlier in the year...

A 10-year deficit of that magnitude means the debt held by the public -- the accumulation of all annual deficits over the decades -- would reach 82% of gross domestic product. That's double the 41% recorded in 2008...


read the CNN story

Marc Faber on the Economy

“You cannot create prosperity through money printing and debt growth.”

Faber preached an idea that became the theme of the event: Government fiscal and monetary intervention, “can postpone, but not prevent crisis.

“I believe next year’s economy will face even larger deficits. Their deficit is attempting to stimulate credit growth. Unless real credit growth returns, they will have to put more and more money into the system to maintain the status quo. All polices target consumption. That is a mistake,” Faber said...

"In the period, 2001 -2007, the Fed managed to do something that had never before been done - create a worldwide bubble in just about everything. Stocks, bonds, art, oil, housing - you name it; it went up. The only thing that didn't go up was the dollar," Faber said.

read the article

Obama's Budget Deficits

According to the Congressional Budget Office, President Obama's budget will produce $9.3 trillion worth of red ink over the next 10 years. The CBO says that is $2.3 trillion worse than the White House predicted. Economists say that amount is "unsustainable." Unsustainable? What does that mean? What is the end result of continuing down this path? Meanwhile, politicians in Washington wail and gnash their teeth over AIG bonuses but give no thought to spending money on things we don't need with money we don't have.

read the CBO report