The Obama Hat Trick: Three Hockey Sticks

While the solution to cutting spending is going to be tough, our spending problem is not hard to understand.  Chart I shows federal spending as a percent of GDP from the Eisenhower administration through estimated numbers for fiscal 2012, which ended in September.  The Eisenhower administration is a good starting point for post-war budgets because it is the first period of budgetary normality following World War II, demobilization, and the Korean War.  Spending as a percent of GDP gives a crisp number which is comparable over long periods of time.

Average spending for the federal budget as a percent of GDP from Eisenhower through Bush was 20.0%.  In its first year, the Obama administration blew out the budget to 25% of GDP.  That was when the Democrats controlled both Houses of Congress.  In order to lock in the 2009 level of spending, which included the allegedly temporary stimulus, the Senate has not passed a budget since April 2009, even though the Budget Act of 1974 requires it to do so every year (making Harry Reid a scofflaw). 

The government has been funded with continuing resolutions, which means that the current services budget is approved for the next year.  The current services budget does not mean that the same money will be spent next year as this year, but rather that the same level of services will be maintained, including increased claimants for entitlements, pay increases, inflation adjustments, and, for many programs, built-in increments based on population growth.  Expenditures for fiscal 2012, which ended September 30, 2012, came down to an estimated 23.1% of GDP, but it is not clear that that is a trend.  We will have to see when we get estimates for spending in the current fiscal year and for the GDP over the same period.

Obama did not run in the last election as "the 25% man."  He certainly did not run on restructuring spending, instead qualitatively expanding the relative size of the federal government from its post-war baseline and commensurately reducing the relative contribution of the private sector in the composition of GDP even though it is the private sector that must carry the load of government.

Want to see something that will curl your hair?  Chart II shows federal borrowing as a percentage of the federal tax revenues, meaning how much borrowing we are doing each year as compared to how much revenue we are raising from taxes.


What Chart II shows is that we borrowed over 40% over taxes raised in fiscal 2012!  This means that taxes would have had to be 40% higher than they were last year to balance the budget.  And remember, we are not at war in the sense of World War II, nor are we building a stairway to heaven -- meaning investing in some great national enterprise.  This is just the day-to-day spending of the government -- just a day at the office. 

What does the Obama administration plan to do about it?  Denounce the Republicans for wanting to get it under control and increase the pay of the federal workforce, which Obama just announced.

Want to see the effect of all this spending?  Chart III shows the increase in gross federal debt (there is another calculation for federal debt, netting out the Social Security Trust Fund, which the government calls "debt held by the public," but we are not using that here).

As Will Hunting says in the movie Good Will Hunting, "you like apples?  How 'bout them apples?"

What will become of us?  Nothing good if this continues.  The mechanism of financial ruin will be a collapse in the value of the dollar, perhaps occasioned by a return of the rate of interest the government pays on its debt to a normal level.  Currently, due to the unique circumstances of the slow growth world economy, the continued safe haven status of the U.S., and the Fed's quantitative easing, interest rates are at the abnormally low level of about 1.8% on the total federal debt.  Every 1% increase in the interest rate the federal government pays on its debt would add $125 billion to the budget.  An increase of 500 basis points, which would be large but not unprecedented, would add about $600 billion to federal expenditures simply to service the debt.  That could push the deficit to $2 trillion a year. 

It will not happen right away, because we are not in extremis -- yet -- and the world has no good alternative to the reserve and transaction status of the dollar -- yet.  But if that terrible day should ever come, it will come suddenly, and then Humpty-Dumpty will not be able to be put together again -- meaning the currency, not the U.S. of A, which would stumble along in some form, but not the one we know now.  The government would issue a new currency, effectively default on these debts, and the game would start over, but with tumbleweeds blowing through a lot of streets.  Also by that time we would have finished dismantling our military, a project which the administration is embarking on now in order to grab all federal spending for welfare programs in their various forms -- i.e., abandoning its one true constitutional duty to chase the socialist mirage that destroyed so many countries in the last century and saved none. 

The question with the Obama administration is always (1) does it know what it is doing or (2) doesn't it?  And then wondering which answer is worse.  The effect is the same.

But let's not fool ourselves.  A lot of people in the country have come to depend on this spending.  Cutting it back will not be pretty, nor can it be done all at once.  In round numbers, spending needs to be brought back to 20% of GDP, which is historically what the tax base has supported through both the high tax rates of the Eisenhower era and the much lower tax rates of the Reagan era. 

The "easiest" way to bring the country's finances under control is to hold the absolute dollar spending -- not the "current services budget" with its built-in increases, but actual dollar spending -- flat for eight years.  With reasonable economic growth, that would more or less balance the budget.  The only problem with that program is that 10,000 baby-boomers are retiring a day, with their claims on Social Security and Medicare plus the increasing cost of medical care itself. 

Getting spending under control would mean at the least means-testing those programs.  That would be only a down-payment, perhaps solving 30% of the problem.  The rest would have to be done with a sharp pencil.  The right mental image is that the administration clears out at least one floor of the Eisenhower Executive Office Building next-door to the White House, turns it into cubicles, and brings in an army of accountants to go over every item in the budget.

There are three major battles over the next two months on the financial future of the country: (1) the debt ceiling, (2) the second round on the sequester, and (3) the continuing resolution to keep funding the government, given that the Senate won't pass a budget.  Since the administration refuses to concede that we have a spending problem, the debt ceiling is really the only tool the Republicans have to get its attention -- the proverbial club to hit the mule on the head.  The Dem strategy is to pretend that there is no problem and denounce the Republicans for bringing it up. 

This budget battle is a turning point for republican government as significant as Caesar crossing the Rubicon and ending the Roman Republic.  Or, as Lincoln put it, determining whether "government of the people, by the people, for the people shall not perish from the earth."

 

While the solution to cutting spending is going to be tough, our spending problem is not hard to understand.  Chart I shows federal spending as a percent of GDP from the Eisenhower administration through estimated numbers for fiscal 2012, which ended in September.  The Eisenhower administration is a good starting point for post-war budgets because it is the first period of budgetary normality following World War II, demobilization, and the Korean War.  Spending as a percent of GDP gives a crisp number which is comparable over long periods of time.

Average spending for the federal budget as a percent of GDP from Eisenhower through Bush was 20.0%.  In its first year, the Obama administration blew out the budget to 25% of GDP.  That was when the Democrats controlled both Houses of Congress.  In order to lock in the 2009 level of spending, which included the allegedly temporary stimulus, the Senate has not passed a budget since April 2009, even though the Budget Act of 1974 requires it to do so every year (making Harry Reid a scofflaw). 

The government has been funded with continuing resolutions, which means that the current services budget is approved for the next year.  The current services budget does not mean that the same money will be spent next year as this year, but rather that the same level of services will be maintained, including increased claimants for entitlements, pay increases, inflation adjustments, and, for many programs, built-in increments based on population growth.  Expenditures for fiscal 2012, which ended September 30, 2012, came down to an estimated 23.1% of GDP, but it is not clear that that is a trend.  We will have to see when we get estimates for spending in the current fiscal year and for the GDP over the same period.

Obama did not run in the last election as "the 25% man."  He certainly did not run on restructuring spending, instead qualitatively expanding the relative size of the federal government from its post-war baseline and commensurately reducing the relative contribution of the private sector in the composition of GDP even though it is the private sector that must carry the load of government.

Want to see something that will curl your hair?  Chart II shows federal borrowing as a percentage of the federal tax revenues, meaning how much borrowing we are doing each year as compared to how much revenue we are raising from taxes.


What Chart II shows is that we borrowed over 40% over taxes raised in fiscal 2012!  This means that taxes would have had to be 40% higher than they were last year to balance the budget.  And remember, we are not at war in the sense of World War II, nor are we building a stairway to heaven -- meaning investing in some great national enterprise.  This is just the day-to-day spending of the government -- just a day at the office. 

What does the Obama administration plan to do about it?  Denounce the Republicans for wanting to get it under control and increase the pay of the federal workforce, which Obama just announced.

Want to see the effect of all this spending?  Chart III shows the increase in gross federal debt (there is another calculation for federal debt, netting out the Social Security Trust Fund, which the government calls "debt held by the public," but we are not using that here).

As Will Hunting says in the movie Good Will Hunting, "you like apples?  How 'bout them apples?"

What will become of us?  Nothing good if this continues.  The mechanism of financial ruin will be a collapse in the value of the dollar, perhaps occasioned by a return of the rate of interest the government pays on its debt to a normal level.  Currently, due to the unique circumstances of the slow growth world economy, the continued safe haven status of the U.S., and the Fed's quantitative easing, interest rates are at the abnormally low level of about 1.8% on the total federal debt.  Every 1% increase in the interest rate the federal government pays on its debt would add $125 billion to the budget.  An increase of 500 basis points, which would be large but not unprecedented, would add about $600 billion to federal expenditures simply to service the debt.  That could push the deficit to $2 trillion a year. 

It will not happen right away, because we are not in extremis -- yet -- and the world has no good alternative to the reserve and transaction status of the dollar -- yet.  But if that terrible day should ever come, it will come suddenly, and then Humpty-Dumpty will not be able to be put together again -- meaning the currency, not the U.S. of A, which would stumble along in some form, but not the one we know now.  The government would issue a new currency, effectively default on these debts, and the game would start over, but with tumbleweeds blowing through a lot of streets.  Also by that time we would have finished dismantling our military, a project which the administration is embarking on now in order to grab all federal spending for welfare programs in their various forms -- i.e., abandoning its one true constitutional duty to chase the socialist mirage that destroyed so many countries in the last century and saved none. 

The question with the Obama administration is always (1) does it know what it is doing or (2) doesn't it?  And then wondering which answer is worse.  The effect is the same.

But let's not fool ourselves.  A lot of people in the country have come to depend on this spending.  Cutting it back will not be pretty, nor can it be done all at once.  In round numbers, spending needs to be brought back to 20% of GDP, which is historically what the tax base has supported through both the high tax rates of the Eisenhower era and the much lower tax rates of the Reagan era. 

The "easiest" way to bring the country's finances under control is to hold the absolute dollar spending -- not the "current services budget" with its built-in increases, but actual dollar spending -- flat for eight years.  With reasonable economic growth, that would more or less balance the budget.  The only problem with that program is that 10,000 baby-boomers are retiring a day, with their claims on Social Security and Medicare plus the increasing cost of medical care itself. 

Getting spending under control would mean at the least means-testing those programs.  That would be only a down-payment, perhaps solving 30% of the problem.  The rest would have to be done with a sharp pencil.  The right mental image is that the administration clears out at least one floor of the Eisenhower Executive Office Building next-door to the White House, turns it into cubicles, and brings in an army of accountants to go over every item in the budget.

There are three major battles over the next two months on the financial future of the country: (1) the debt ceiling, (2) the second round on the sequester, and (3) the continuing resolution to keep funding the government, given that the Senate won't pass a budget.  Since the administration refuses to concede that we have a spending problem, the debt ceiling is really the only tool the Republicans have to get its attention -- the proverbial club to hit the mule on the head.  The Dem strategy is to pretend that there is no problem and denounce the Republicans for bringing it up. 

This budget battle is a turning point for republican government as significant as Caesar crossing the Rubicon and ending the Roman Republic.  Or, as Lincoln put it, determining whether "government of the people, by the people, for the people shall not perish from the earth."

 

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