Bacon's Rebellion

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Boomergeddon Update: Deficits Rising Again

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by

James A. Bacon
in

Source: Congressional Budget Office
Source: Congressional Budget Office

by  James A. Bacon

Blame who you want for this sad state of affairs — it’s always the other guy’s fault, right? — but after six years of shrinking federal government deficits, red ink is on the rise again. And unless Congress enacts significant budget reforms, deficits will get worse every year pretty much forever until the wheels fall off the bus.

The chart above comes from a new report from the Congressional Budget Office (CBO), which, to my knowledge, is not funded by the Koch Brothers. What should be really scary is that the forecast is based upon the assumption of slow-but-steady economic growth (about 2% annually) over the next 10 years — without a recession, a totally improbable supposition. The current business cycle, though anemic, is seven years old, and the global economic situation is a mess. When a recession does occur, revenues will decline, spending will climb and deficits will shoot higher.

Some will comfort themselves from the chart above by observing that CBO’s projected deficits for the next 10 years are no worse than the deficits of the Reagan/Bush I era. That’s true, assuming we don’t have a recession, in which case it won’t be true. But such thumb-sucking ignores the fact that we have a $19 trillion national debt, which, as a percentage of the economy, is higher than at any time since the Korean War. It ignores the fact that the percentage of the budget on auto-pilot (entitlements and interest) will be far higher, which will give Congress far less latitude to cut spending should it need to. It ignores the fact that the Federal Reserve Board today is pursuing a highly stimulative, near-zero interest policy today, in contrast to the slam-on-the-brakes interest policy of the early 1980s. And it ignores the fact that the 1980s-era economy had greater growth potential than our economy today with its aging workforce, debilitating tax code, over-regulation and seriously impaired global economy.

What does this imply for us mere mortals residing south of the Potomac? President Obama and Congress made a pact with the devil to jack up discretionary spending in the latest budget, thus easing the pain of sequestration. But long-term, the prognosis for Virginia’s federally dependent economy is grim.

discretionary_spending

Expressed as a percentage of the economy, federal discretionary spending (which includes defense spending) will continue to shrink as mandated spending and interest payments hog new revenue dollars. That bodes ill for the military-intelligence-homeland security complex in Northern Virginia and Hampton Roads.

Bacon’s bottom line. First the uncontroversial: Virginia needs to ramp up its efforts to diversify its economy away from federal spending. Next, the controversial: Put state and local finances (including pension obligations) on a tighter leash. And then, the super-controversial: Don’t trust federal funding promises for anything. What Uncle Sam giveth, Uncle Sam can taketh away. And that includes federal dollars for Medicaid expansion.

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10 responses to “Boomergeddon Update: Deficits Rising Again”

  1. LarrytheG Avatar
    LarrytheG

    re : don’t trust the Feds –

    I AGREE

    but one must also understand the difference between a dedicated tax like FICA and general revenues.

    dedicated tax revenues don’t go away unless Congress intentionally repeals them.

    for instance, as long as the gas tax is not repealed – it will generate money for transportation.

    the same is true for airport fees, FICA, and the Medicaid Expansion.

    I don’t expect folks to change their left/right philosophies but I DO expect them to deal honestly with the fiscal truth of budges where earmarked taxes exist and are separate from general revenues.

    Next – the amount we spend on National Defense as currently depicted allows ignorance of the realities.

    Real national defense spending encompasses much much more than just DOD operational.

    For instance the VA and Military retirement benefits – pension and health care is not characterized as DOD spending.

    Nor is Homeland Security, all the national law enforcement and civilian security agencies, NASA secret military satellites, the DOE that does nuke weapons and nuke ship reactors… which total up to more than a trillion dollars in spending .

    Next the actual unrestricted revenues once you subtract the FICA tax revenues – ends up about 1.7 Trillion total while we spend far more than that on National Security and civilian entitlements.

    60 million people get guaranteed health insurance for about $125 a month including people who make 85K in retirement income.

    a trillion dollars in tax breaks including 330 billion for employer-provided insurance, mortgage deductions and tax-free capital gains for inheritances… etc

    My simple view is that whether you are right or left – the first step is to NOT talk about what you’d cut – but instead do you really know where the money comes from and goes – overall?

    do you know the “truth” of the finances… at the start BEFORE you exercise your own biases as to what deserves funding and tax breaks and what does not?

  2. Cville Resident Avatar
    Cville Resident

    I’d respectfully disagree.

    I think you’re working in a first half of the 20th century mindset.

    Globalization has made a mockery of the fear of debt among the most powerful nations in the world.

    The reality is this: all of the big players are in debt to each other. There’s simply no way that anyone’s going to “call” the other’s debt. Here are 2 real life examples.

    Japan’s debt to GDP ratio would make the U.S. blush. Its economic and demographic problems are much worse than America’s. Yet, Japanese bonds are scarfed down to the point that this morning-January 29, 2016-the Bank of Japan is now going into negative interest rates. Boomergeddon indeed!

    Or there’s this piece that decimates a right wing argument of just 5 years ago….we’re doomed, doomed I tell you…..if China cuts its purchases of U.S. bonds:

    http://www.bloomberg.com/news/articles/2016-01-10/china-retreat-from-u-s-bonds-prompts-shrugs-where-fear-reigned

    Again, real world finance…not speculation. No one blinked.

    And this week, I was reading a report that China, yes China, has a debt to GDP ratio of over 300% when you take the local and provincial debt (where their national gov’t has hidden a lot off of the account books).

    The point is: there isn’t going to be some massive “accounting” in the current global financial system. It’s simply a fact that everyone is so tied to everyone else that “calling in” debt is in no one’s interest. In fact, it’s not only not in their interest, it’s the equivalent of suicide…ask Russia about isolating oneself from the global financial structure.

    When the money supply was tied to a gold standard, then yes…there was a time when the idea of sovereign debt was a true threat to a powerful nation’s economy. But now? I think that’s outdated.

    1. James A. Bacon Avatar
      James A. Bacon

      If you’re right, Cville, it looks like we’ve discovered the fiscal-monetary equivalent to the perpetual motion machine! All we have to do is pump limitless liquidity into the financial markets of the U.S., China, Japan and European Union, and we can keep the global economy chugging along forever without negative consequence! At long last, pain-free prosperity for all!! Everybody owes everybody else — what possibly could go wrong?

      Forgive me if I’m skeptical. In every credit bubble in history, the standard refrain has been, “This time it’s different.” The details may vary, but every bubble ends in a crash.

      1. Cville Resident Avatar
        Cville Resident

        I think the big difference is the lack of a gold standard. I don’t think any monetary economist would dispute that since the Depression and the establishment of post-WW2 economics, we’ve had one true question about liquidity in the global financial system (2008). And that didn’t last very long.

        So, yes, I think there is an enormous difference between our global financial system today and in the past.

        There will be economic slowdowns based on the business cycle. But, I just can’t see sovereign debt ever being the cause of a worldwide crash. Every major player (investment banks, national governments, private investors, private enterprise) has every incentive to not cause a disruption because the consequences are so much deeper to the world as a whole than they ever were before our current age.

        Saying “this time it’s different” was incorrect before our modern global financial structure. But, there are a lot of structural differences between now and any time in global history when it comes to capital markets. Japan does prove the point that “this time it’s different.” It’s been in what should have been a “bad” position in global capital markets for 25 years…it’s been in a “very bad” position for at least a decade….and here they go to zero interest rates. 25 years is a long time, proving the point that this time it is different. If we were in the early 20th century world, Japan would have collapsed years ago under sovereign debt distress.

        If you can explain Japan’s avoidance of a sovereign debt collapse for over 2 decades when “classical” economics points to doom, I might buy that this time isn’t different.

  3. LarrytheG Avatar
    LarrytheG

    earmarked taxes are not part of the deficit and debt issue.

    no matter what you do with earmarked taxes – increase them or repeal them – they have no effect on the deficit and debt.

    there is a fundamental misunderstanding in this issue.

    the only way earmarked taxes would affect the deficit is if you kept the taxes but removed the earmark. So for instance, you’d keep the FICA tax but no longer use it to fund Social Security – just use it to reduce the deficit.

    that concept is so far beyond discussing the deficit and debt – and spending and cuts – to the discretionary – or even mandatory budget its funny.

    That idea just totally jumps the shark of any legitimate and credible discussion of deficit and debt – spending and general revenues taxes.

    if you really want to actually discuss real deficit/debt and not just go off into the ozone on treating earmarked taxes like they are actually part of deficit and debt – you’d be honor bound to acknowledge some basic realities.

    the first is that only 1.7 trillion comes from income taxes – individual and corporate –

    the second is that we currently provide a trillion dollars in income tax deductions – i.e. we do not tax some kinds of income – like employer-provided health insurance, mortgages, money paid on State and Local taxes, accrued capital gains interest when passed from parent to offspring at death.

    The funding for the MedicAid expansion does NOT come from general tax revenues. Not taking the expansion does not reduce the deficit. one penny. The only way to kill the expansion would be to kill the program and repeal the special taxes – and doing that has zero effect on the budget deficit.

    the only way you’d reduce the deficit by killing the Medicaid expansion would be to kill the program and keep the tax revenue from the earmarked taxes.

    I think by continuing the discussion about deficit and debt and the MedicAid expansion without explaining how the Medicaid Expansion is actually funded – contributes to and further propagates ignorance on the subject – which apparently is okay with some folks.

  4. LarrytheG Avatar
    LarrytheG

    intergovernmental debt comprises about 5 trillion of the debt.

    Can anyone list out the primary agencies that hold that debt?

    Social Security is 1/2 of it. Can anyone name which govt agencies hold the other 1/2?

    http://www.factcheck.org/2013/11/who-holds-our-debt/

  5. Les Schreiber Avatar
    Les Schreiber

    One thing that must be watched here is the behavior of sovereign wealth funds.As the price of oil has fallen to about $35 a barrel, some of these usual buyers of US debt may be forced to become sellers. The amounts involved could be disruptive.

  6. James A. Bacon Avatar
    James A. Bacon

    Let’s see… sovereign wealth funds… Brazilian bonds… Venezuelan bonds… bonds of a dozen oil-exporting African countries… and the black box that is China finance… Who knows who owns what? Who knows how bad debt will cascade through the system because of leverage that the regulators and the public never knew existed?

    And that’s this business cycle. In “Boomergeddon” I speculated that the U.S. could survive another recession. But I expect that we’ll be hobbled even worse by that one than the one we’re still recovering from. The powers-that-be will get the economy cranked up one more time before the final crack-up.

  7. wrk2 Avatar
    wrk2

    Based on the original article and the comments, how do we ever address the massive national debt that we have accumulated for ourselves? How do states and localities continue to fund their needs? How do we fund Social Security, Medicare and Medicaid in the future without some kind of fiscal sanity? Why would the Milennials continue to pay taxes to a program they have no faith in? Most important, when do taxpayers wake up to the reality that they are being asked to pay 6o cents of every dollar that they earn to fund some level of government and/or government program (some form of taxation)? When do they throw up their hands and say “I am mad as hell and I am not paying any more?”

    1. Cville Resident Avatar
      Cville Resident

      Well…it’s heresy in the American tradition, but one way to dramatically decrease taxation and expenditures and provide better services would be to abolish federalism from our constitutional structure.

      To be honest, states are an anachronism. They’re a mid level that just redistributes federal or local dollars in the 21st century. Outside of VDOT, it is hard for me to really come up with a state agency that isn’t highly inefficient and redundant.

      If we wanted to be serious about reducing taxation and expenditure in America, we’d abolish the role of states in governmental services, we’d consolidate a lot of local government, and we’d treat bureaucrats like other nations do: as professionals. I personally like the Scandanavian/Asian tradition of having the best and brightest work for the gov’t to create a great federal civil service. I’ve even seen Mr. Bacon heap praise on the competence of these governments in a comment the other week. In America, working for the gov’t is seen as a “loser” job. No wonder the services provided are so poor. I’d prefer to see us admire our civil service and try to attract great and competent people to those roles. But again, we have an “American tradition” that teaches us about the “value” of states and to hate gov’t bureaucrats.

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