The Aftermath: Spending, Debt & Deficits
By George Noga
A month has passed since we published “The Crisis of Spending, Debt and Deficits.” It provoked thoughtful ripostes from readers, the best of which I now share with you. Also, some significant developments and new data have become available. I promise this will be the last Communique for at least awhile on this subject – – barring something too tantalizing to resist.
New CBO data projects the deficit to be $6.2 trillion worse over the next 10 years than its projection of June 20, 2010. That’s right; in only a few months CBO has increased the deficit from 2011 to 2020 by an average of $620 billion a year! It gets worse. CBO is required to base its numbers on existing law. Therefore, it assumes, inter alia, the Bush tax cuts will not be extended; the AMT is not adjusted for inflation; and there are no annual Medicare doc fixes.
“The budget deficit for the next 10 years is $6.2 trillion worse than CBO’s forecast in June 2010 – a few months ago.”
Neither do CBO data include new Obama spending such as the R&D tax credit, infrastructure stimulus and credit union bailout. These add a few hundred billion to the deficit. But the real zinger comes to us courtesy of Heritage.
In late August the economists at Heritage released what they termed a “realistic” baseline budget for 2011 to 2020. The following conclusions are from Heritage and not MLLG.
1. The annual budget deficit never is below $1 trillion and approaches $2 trillion in 2020.
2. By 2020 half of all income tax revenue goes to paying interest on the debt and one-third of all government revenue goes to debt service.
3. The spending and deficit trends are completely unsustainable.
Another interesting aspect of Heritage’s data is how closely its numbers, prepared two months after MLLG completed its work, coincide with our numbers. I am not surprised by this because I was confident in my analysis; nevertheless, those harboring a less sanguine opinion of my analytic prowess may derive some comfort in the proximity of the two sets of numbers.
“MLLG and Heritage data are within 1% in most years.”
Just how close are they? MLLG projected the public debt increasing from $10.7 trillion in 2011 to $24.1 trillion in 2020; Heritage went from $10.3 trillion to $23.5 trillion. Projecting the annual budget deficits, MLLG went from $1,115 billion in 2010 to $1,965 billion in 2020; Heritage went from $1,110 billion in 2012 to $1,907 billion in 2020. We never are apart more than $60 billion in any year; in most years we are within one percent!
Critiques fell into two main categories. The first group played the Japan Card. I carefully considered the situation regarding Japan when I prepared the report; in fact, I anticipated comments about Japan on page 10. Those who played the Japan card noted that Japan already has a Debt/GDP ratio above 190% and they have not yet experienced the litany of possible horrors I portrayed. Regarding this riposte, I parry as follows.
Japan is unique; what happens there won’t be replicated. First, Japan has suffered over 15 years (and counting) of economic malaise and deflation. They have not exactly escaped without significant economic harm and the worst is yet to come. Second, Japan pays only ≈1% interest on its debt; that won’t happen here. Third, Japan is a nation of inveterate savers; 99% of its debt is held in Japan by Japanese citizens. Fourth, Japan’s (net) Debt/GDP ratio is ≈110% and not 190%. The Japanese government holds 80% of real (pension) assets to fund its deficit; thus, its NET Debt/GDP ratio is about 110% when computed comparably to the USA. Fifth, Japanese are homogeneous to a degree hard to fathom; if you live in Japan an d have the misfortune to be only one-sixteenth Korean, you will understand. What happens in Japan stays in Japan!
“Japan is unique; what happens there won’t be replicated.”
The second criticism went like this. The US can avoid a crisis by several years of strong economic growth, cutting the budget, perhaps raising a few taxes along with some benign inflation. I only wish it were this easy. To everyone who took that position I asked them to provide me specific assumptions for each of the variables and I would faithfully plug them into the model to view the outcome. Recently someone provided me assumptions they believed could avert a crisis. Their data were similar to my Exhibit I, the OMB budget projection. Their assumptions do not result in averting a crisis although they could postpone it a few years. My offer remains open.
The situation has gotten even worse since I wrote the paper this summer. Even if the November election results in a seismic shift in Washington, it will matter some but not as much as people think.
- There is little or no disagreement about the numbers between now and 2020. The only uncertainty is what form and degree of severity the ensuing crisis will take. Thus far MLLG is alone in attempting to describe the form and substance of the resultant crisis.
- Standard cost cutting measures will produce a lot of sound and fury signifying nothing. OMB, CBO, Heritage and MLLG all assume discretionary spending (including defense) already effectively is frozen (.4% increase per year) from now to 2020.
- Interest on the debt will go from $185 billion in 2010 to $1.2 trillion in 2020. It will go from 8% of revenue to over 30%. Remember inflation is a component of interest rates; even a little inflation will jack up debt service.
- Demographics of social security, Medicare, Medicaid and ObamaCare all are degrading at an ever-increasing rate; only entitlement cuts can impact this.
- Maybe, just maybe, some heroic efforts can postpone Gotterdammerung a year or two or three. Nevertheless, try as I might, I can’t see a realistic way out.
I don’t plan to revisit this subject at least for a few months. I do expect to update the 10-year projection and to prepare short updates each summer for publication the following September.
The media covering Chelsea Clinton’s marriage to Marc Mezvinsky worked themselves into a frothy frenzy. Yet, none of them reported Mezvinsky’s father, former congressman Edward Mezvinsky, was only recently released from federal prision after serving five years for 69 counts of bank fraud. To their credit the conservative media also chose not to report this story. Mezvinski still is on probation and owes over $9 million in restitution. I have no desire to be the skunk at this garden party – err, wedding and I have no quarrel with the media giving Mezvinsky a pass on the occasion of his son’s wedding. So, what’s my beef?
What if Mezvinsky’s son were marrying George W. Bush’s daughter, Barbara, and what if Mezvinsky were a Republican instead of a Democrat? The firestorm of so called main stream media coverage of Mezvinsky’s father’s criminal record would have eclipsed reportage of the gulf oil spill, the budget crisis and all other news for days. The liberal media would have stumbled over each other interviewing Mezvinsky’s cellmates and victims. Everyone in America would have known the Mezvinsky dirty laundry. Do you doubt it?
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