Can We Afford All This Spending?
There has been a war of words written about Washington's recent increase in spending. However, none of this has focused on the numbers -- as in the data. So, let's take a look at the numbers to see what they tell us.
First, some background. I was against Bush's deficit spending for a large part of his administration. One reason was I was against the Iraq War more or less from the beginning. From an economic perspective, war is a horrible utilization of resources. In addition, Bush made the same fiscal mistake Reagan made: he decreased revenues by cutting taxes and increased spending. This is a recipe for increasing debt, which was the final result of Bush's policies. Total debt outstanding at the end of Bush's first year in office (9/30/01) was $5,807,463,412,200.06. When he left office 9/30/08) that number was $10,024,724,896,912.49.
However, I supported most of the current spending (see this article and this article for more information). The reason for that is simple: read A Monetary History of the US by Milton Friedman -- especially the chapter titled "The Great Contraction". Starting with the announcement of Bear Stearns in the summer of 2007 that two of its hedge funds were suffering major losses the US financial system has been in a shooting gallery. What really made the great depression worse were the financial events of 1929-1933 when the US went through major financial turmoil. That essentially shut down the economy, leading to a contraction of more than "50% in current prices from 1929 to 1933". This time the situation was no different. In addition, by the end of 2008 it was obvious the country's greatest threat was a deflationary spiral. In short, the government had two choices: do nothing and practically guarantee economic free fall or do something to prevent it.
Throughout the above statements is the idea that government should act prudently during good times in order to spend during bad times -- that is, use its spending muscle during the bad times to limit the economic damage of a slowdown while cutting its spending and letting the private sector take over when the economy turns around. At least -- that's the ideal. It has yet to happen in real practice (although the 1990s came pretty close).
All that being said, let's take a look at where we are now. According to the Bureau of Public Debt, total US debt is $11,406,012,959,882.55 while total nominal US GDP is $14.089 trillion, making the debt/GDP ratio 80.956%. That's not good, but not catastrophic either. However, the budget projections from the CBO provide the following deficits for the years 2009-2012: $-1.845, $1.379, $-.970 and $-658. So, assuming these estimates are correct, by the end of fiscal 2012 we'll have $4.852 trillion more in debt. Tacking that onto the current daily total of all debt outstanding we get $16.258 trillion. Now -- assuming we have no growth for the next four years and our nominal GDP stays at $14 trillion we would have a debt/GDP ratio of 116% by the end of fiscal 2012. That is not a good development. That does assume there will be no GDP growth over the next 4 years which is also not likely. However, no matter how you slice the information it is not a healthy way to run an economy.
But let's look at this from another angle: interest paid on the debt. Let's assume we don't retire any debt (which we won't) buy only pay interest on the debt. Can we at least afford that? Here is a chart of the percentage of interest payments as a percentage of total federal expenditures.
This number was at its highest in the late 1980s to the early 2000s when it fluctuated between (roughly) 14% and 15%. It dropped during the first part of this decade thanks to record low interest rates. Those will not remain for the next four years. However, the above chart indicates the interest payments are not so high we will face current problems. In addition, we do have room for upward movement on interest rates.
So -- the overall conclusion is we're going to be pushing the envelope of US finances which is never good. Overall debt/GDP will most surely be at 100% by the end of fiscal 2012. In addition, the interest component of the federal budget will surely increase as well. Now -- is this development fatal? No. But are we adding more stress to the system? Yes. But finally, do we have a choice? That is, is there another viable option right now? No. Fiscal conservatives (who by the way don't exist in the Republcan party's policy implementation arm) will argue to do nothing. But given the precarious nature of the economy right now that is still a recipe for economic suicide.
Thomas Frank: No Future for You.
The Republicans tell us they wish they didn't have to take this course; that the bailout violates their own first principles; that they're so, so sorry. But none of this is true.
Donnie Fowler: Deficit & Debt: The Republican Legacy
The lies that we are getting from the Republicans, supported too often by the mainstream media, have put the entire federal deficit and debt onto Barack Obama's shoulders. Well, here's the truth about it.
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Even if we make it through this round of spending the numbers around the future costs of entitlement programs (social security, medicare, medicaid..
Stimulus spending by the federal government is needed to get us out of the recession, so that tax revenues can increase and social safety net spending can be decreased.
...and bailouts are needed to make sure the stimulus meets its goals. Commercial paper would not have started again on its own if the federal government simply gave everybody another stimulus check. Deflation would not have been averted if business lending continued at December/January levels. When the bailouts and stimulus were first proposed, I heard economists talking about debt/gdp reaching 75-80% this year. That's not unheard of. Right after WWII, debt/gdp was 120%. At that time, we didn't have room to move upward in debt interest payments. After 120%, we're in uncharted territory but right now, we're simply stressed.
Why is HUFFPO not addressing the two Japanese swindlers with the 135 bn missing TARP FUNDS into Switzerland, oh yeah, not the TARP but treasury notes? Why did the officials claim it was
fraud not the real thing but I don't see it being mentioned even. something smells here.
I must be crazy but if congress just allocated 105 billion to the two wars I have to say we are NOT broke yet.
Government Spendometer. Are we having fun yet?
http://www
During the Reagan years in spite of reducing tax rates the receipts to the Fed Budget went up by 60% while during the Clinton years when taxes were raised the receipts went up by 58%. Just check the facts and lets destroy this myth that revenue went down because of tax rates being reduced. While Clinton had a huge economic boom with the internet bubble his tax revenue did not increase as fast as Reagan in a comparable period
source please
Every administration since World War II has seen revenue growth irrespective of tax policy. Also, revenue dropped during Reagan's first two years and much of the growth in revenue came after he RAISED taxes, yes he raised payroll taxes and later income taxes. Bush had revenue drop the first three years of his terms.
Wrong.
See http://www
There is no meaningful dufference in the year over year increase in percentage change in tax receipts.
Also -- try adjusting for inflation next time.
The REAL COST of 1RAQ was determined to be $3 Trillion as published in Harvard Magazine!
That can more than pay for the CBO false and Exaggerated COST of Health Care that ASSUMED NO PUBLIC OPTION!
They exaggerated the cost at $1 Trillion over ten years while 1RAQ cost THREE times that over 7 years!
The actual cost of Iraq is around $800 billion for the 7 years, if you spend $3 Trillion, in one year that a problem.
That's direct cost and does not include cost to support people coming home, lost equipment, etc.
Nancy Pelosi voted for 106 billion more to extent the wars in Iraq and Afghanistan. Instead of representing her consituants by using the money to support state budgets, she wasted it on Bush's wars, now Obama's wars.
Obama is on his way to combine the w o r s t of both Carter and Bush. More welfare and more wars. The greatest president ever LOL. Watch stagflation rear its head again. I wish we had someone like Merkel here. Steadfast and does not believe in more stimulus stupidity.
The Germans experienced the collapse of their currency in 1923, after an expensive WWI. Their leaders at that time also believed in deficit spending. I imagine German students are taught something about their troubled history and are anxious to avoid repeating the mistakes of their ancestors. Americans, all to often, don't think they have anything to learn from the rest of the world.
Hal
how much money could be made off 1 cent per share tax on all stock transactions
robinhood1. You may be on to something profound. This story seems relevant. Through serendipity, I went to my doctor and discovered that my prostrate was compleat with cancer. Following your ideas I was content realizing that my demise would help save social security, the deficit and America. No such luck. My uriologist compelled me to follow a treatment that has me still existing after 4 years.
For the sake of the Republic I am somewhat disappointed. For the sake of this lucky, gracious recipent of superior medical care through medicare, I am eternally grateful.
You are correct. Without the costly earned medicare, the millions of post-work citizens will meet or exceed Federal predictive life expectancies and our budgetary problems will be erased. Guys like me won't be around to chase young women and pester power.
Take care of yourself. Row well 41 and live. (from "Ben Hur").
hal early moring idea ? how much money would be made off 1 cent per share, on all markets ?
There are brilliant staff members who are required high intelligence to unravel the opaque thievery and fraud of criminals we know as deliquent bankers: President Obama proclaims. Indeed, he must be right because he is himself brilliant. But let's be honest. Things aren't going anywhere near what these brilliant men predicted as trillions were showered on criminals.
On this blog there is a knowedgeable man. (I don't know if he is brilliant.
"Hello, You've reached the Olephart residence. I'm sorry that Mr. Phart can't come to the phone right now as he is currently indisposed. It seems he was overcome with the vapors after receiving too much high praise and (humble gentleman that he is) had to be hospitalized and given oxygen to restore his equilibrium. He is expected to pull through and be back posting soon. Meantime any flowers, monetary donations (gratefully accepted) or phone calls from the president, can be forwarded to St. Judes Amish Hospital of the Plain. Thank you, and have a nice Depression
There has grown up a self-serving theory that unhinged, corrupt banking practices of concentrated power, that cause a world depression while going insolvent, can somehow be ameliorated simply by printing , borrowing and flooding those same financial institutions with our treasure. Friedman found crack pot facts and theories to back his finanical benefiting ideology. Other bought economists reeforced Friedman's ideas into America's unexamined knowledge.
In a declining organization the knowledge that is the basis of decision-making is used for the advantageof those individuals and groups that benefit from society's decline.
The fatal error was to spend a dime on the broken institutions. We should not have been panicked by the likes of Obama's corrupt subordinates and advisors. Instead let the system collapse and then Uncle Sam could pick up the pieces with a more solvent treasury. And then create wealth producing jobs on a massive scale, as the Chinese are wisely doing at this moment.
Now we are flat broke with no room to manuever without relinquishing our independence to our creditors. And our unemployed citizens have no future except poverty and hopelessness. Such are the repertoires of nation-destroying leadership.
Bonddad, my amigo, you have been swept to wrong conclusions on the basis of faulty knowledge. Beware of the truths floating around this failed organizati
Bonddad presented a simple graphic a year or so ago that showed the relationships of business, consumers and financial institutions. All must function for a stabile economy. When the major institutions that provide the financial services required for a functioning economy were faced with imminent collapse (due entirely to their own malfeasance) most of our political establishment panicked and bailed them out.
What was not brought forth at that time or since was that what had to be saved were not the institutions themselves but the functions they provided to the economy as a whole. The Federal Reserve did step in to facilitate the commercial paper market which reinforces the contention that the institutions were unnecessary. Thus AIG should have failed and have been broken into its solvent regulated insurance side and its insolvent unregulated CDS side. Federal monies would not have gone to Goldman or other institutions and had these failed their functions would have been broken up, sold to solvent institutions or taken over by the Government. Their toxic assets would have been sold in an orderly fashion for their market prices or maintained and backed by the Government if they were held behind deposits (money market funds for example). The stockholders, bondholders and executives would have eaten the losses. Fannie and Freddy had to be nationalized and, at some cost, could have continued facilitating the mortgage markets. Thus functions would be maintained and the bad apples culled just as when the FDIC closes a bank.
All of this rhetoric is useless! Simply give the stimulus money back to American taxpayers. It is ours in the first place. We can restart the economy from the ground up. Too much BLAH BLAH BLAH!
Sometimes the simplest ideas are the best. Yes, if we had the money we wouldn't need the banks, would we? Ooops--think I just answered why they got it and we didn't.
You certainly did, Rule.
The concept of decreasing Federal expenditures for interest as a per cent of total Federal expenditures being a relevant statistic can be misleading. The primary mover now is the expanding level of Federal expenditures. This wouldn't be a concern except they are largely based on deficit spending. Thus the increasing denominator is masking the increasing numerator. The secondary input was lower interest rates. As was pointed out this situation cannot be relied upon to remain constant.
Examine the interest equation, I = P x %. Both I and P have inherent feedback loops when the interest paid is also borrowed. That is I is added to P or I = (P+I') x % where I' is the prior year's interest. If both P and % increase simultaneously the result could lead to an exponential growth of both the interest and the total debt. When the increase in the interest required to service the debt becomes greater than the potential increase in revenues bankruptcy will be assured.
"is there another viable option right now? No."
Yes, cut spending and raise taxes. Both Wars, Foreign military expenditures, cold war era weapons systems, crony privatization efforts and unbridled contracting to list a few. Raise taxes on incomes greater than $250,000 per year, hedge fund profits and everything Larry Kudlow holds dear. Cap the home mortgage deduction, child tax credits and number of dependents. Raise gasoline taxes. Raise the standard deduction and payroll tax rebates to compensate the lower incomes.
From your mouth to Obama's ear?
I must be losing it. I even left out the contribution of the ongoing spending deficit and the effect of increasing interest rates. That would be I = (P+P') x (%+%') where P' is the prior year's spending deficit and %' is the increase in interest rate. Combining the equations yields: I = (P+P'+I') x (%+%'). Thus it should be intrinsically obvious to even the most casual observer that the interest is compounding on an independently increasing principal at a rate that will increase proportionally to the other increases plus it's own independent contribution. Sorry to have led you to a false sense of security in my first posting.
you mean actually pay for everything we spend money on. you are obviously a socialist and hate the troops. i will continue to borrow myself into hope and no new taxes. (while my property taxes go up) i think if you cut taxes.....
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