Redesign the Paradigm

In the previous blog U.S. Fiscal Responsibility – An Assessment of Growing U.S. Deficits and Debt Obligations I discussed the factors contributing to the U.S. debt, potential dangers if irresponsible fiscal policies continue, and a strategic direction for returning to fiscal responsibility. Of equal importance are receipts (tax revenues) and outlays (government spending) and how those allocations are distributed, which will be discussed in this blog.

As of October 2010 the U.S. debt has grown to $13.5 trillion, a 131% increase in a decade. Bush administration fiscal policy resulted in a record $4.22 trillion increase in U.S. debt. This was principally caused by lost revenue from the enactment of the 2001 and 2003 tax cuts, the wars in Iraq and Afghanistan, and increases in federal spending that added $700 billion a year to the budget. These spending increases were not matched with additional tax revenues expected from the economic growth the Bush tax cuts were projected to provide. The Obama administration soon outpaced the debt increases of the Bush era by racking up $3.53 trillion in less than 2 years. Debt increases from the Obama administration were driven largely by hundreds of billions in stimulus programs to spur the economy out of recession, a $1 trillion down payment on the new health care program, and escalations in spending for safety net programs and education. The $786 billion financial sector bailout (TARP) decisions were shared between both administrations in 2009. The following table lists the growth of the federal debt over the past decade, debt percentage of Gross Domestic Product (GDP), and the associated administration.

There are basically two recognized effective methods to control debt, increase revenues (taxes) or decrease outlays (spending). Increasing taxes is obviously unpopular. Serious independent analysis of the effects of increasing taxes versus a potential loss in tax revenue if the country is overtaxed should be conducted.  Reducing some taxes like capital gains and dividends may actually stimulate economic growth thereby generating more tax revenues in the long run, but widely implemented individual and even corporate tax cuts have not been proven to stimulate significant enough economic growth that would result in additional tax revenues. GDP percentage increases were only marginal after the 2001 and 2003 Bush tax cuts and were less than the GDP growth levels of the previous Clinton era.  GDP growth did peak  after the ERTA tax cuts in 1981 but only dropped a few percentage points after portions of those cuts were rescinded in 1986 (see table below). It could be argued that the 1981 and 2001 tax cuts were implemented during periods of recession which would restrict some of the GDP growth, but the recessions did not last the duration of the administration. In any case, tax revenue collection after the Reagan ERTA cuts averaged an increase of 6.5% a year from 1981 to 1986, the Clinton OBRA tax hike averaged a tax revenue was increased to 7.7% per year from 1993 to 2000, and the Bush tax cuts only generated an average tax revenue of 3.8% per year.  Tax revenue collections were not increased during tax cuts as many claim but during periods where tax receipts were increased.  Of more relevance are the significant increases in the debt levels during periods of tax cuts and the debt level increases in general during the Reagan and Bush administration’s policies on supply side economics – illustrated in the following table.

The belief that decreasing taxes will generate additional revenues or will not increase debt levels does not hold merit. A realistic tax policy that has fiscal debt reduction as one of its core principles should be created by independent experts without political agendas. This policy needs to address the best mix of tax maintenance practices combined with increases or decreases in those sectors that will only be allocated after careful analysis of long economic changes and their effectiveness in generating budgetary surpluses required for lowering debt. Current tax receipts for 2009 – 2010 plus projections for next year, 2015, and 2020 are listed in the table below. Data is according to the Office of Management and Government – Budget of the U.S. Government, Fiscal Year 2011 and may be subject to change depending on administration.

This budget increases taxes over the next decade presumably in accordance with economic growth projections but is a representation of a Democrat proposal not the work of an independent group and as illustrated in the following table accompanied by large increases in spending. Careful consideration should be assigned when taxes are increased in the private sector. The goal is to indeed to increase tax revenues but not at the expense of stifling growth in small and medium sized companies, the backbone of jobs in the U.S. Additions in tax revenues should be combined with strict analysis of spending programs to identify those sectors that would be identified to receive reductions in funding. Current outlays for 2009 – 2010 combined with projections for 2011, 2015, and 2020 are listed in the table below. The source is again Budget of the U.S. Government, Fiscal Year 2011 and projections may again be subject to change in the event of a change of power in Congress.

The next table is divided into non-discretionary and discretionary spending. Non-discretionary represents budgetary expenses that are required by law and have built into them cost of living adjustments (increases).  These types of outlays require new legislation in order for budgetary changes to take effect.  It is also the most politically difficult type of spending to make cuts in. Non-discretionary spending includes Social Security, Medicare, and Medicaid and represents 56% of outlays. Discretionary spending includes security (military) expenditures and non-security expenditures which consist of a variety of programs like net safety programs (assistance to families  / individuals for financial hardship), education, transportation agriculture, energy, etc. Combined discretionary spending equals 38% of outlays.

Clearly proposed outlays under the Budget of the U.S. Government, Fiscal Year 2011 continue the escalation of the debt and represent Democrat fiscal policies which like those of prior Republican policy are not in line with fiscal responsibility. Less spending is necessary but where to cut? Interest payments on the national debt are not up for negotiation. Failure to meet those obligations would produce rapid detrimental consequences. Non-discretionary expenditures represent the largest potential for cuts despite legislative difficulties and a political nightmare for any lawmaker foolish enough to try, but from a long term perspective may be exactly what is necessary. Social Security and Medicare outlays begin to increase dramatically by 2020 driven by increasing numbers of retiring baby boomers. This will be a very difficult decision; folks have paid into these programs for decades as a type of insurance for retirement. We may be witnessing the last generation of recipients that will collect the full amount of entitlement benefits as well as an increase in what constitutes retirement age in order to restrain from further deficit spending.

This brings us to discretionary spending of which military expenditures consist of more than 64%. Some sources claim that when military spending ($782 billion) is combined with military related national security expenses buried across all the government departments a more accurate picture of what the U.S. allocates for defense may be as much as $895 billion. The U.S. congress will soon have to decide whether to continue the funding for two potentially unending wars ($136 billion for 2010) while spending more than the next top 15 other countries combined and forward deploying to over 100 bases worldwide all in the name of maintaining a strong “defense” is more necessary than fiscal responsibility. As debt continues to grow many ask if it is necessary to spend $782 billion a year to fight low intensity wars and guerilla insurgents? The cessation of wars in combination with serious analysis of where spending is occurring combined with an assessment of the viability of the programs in a 21^st century environment will soon be required.

Non-military discretionary expenditures represent the final sector that will require budgetary cuts. There are numerous programs here, many essential to the stability of the country and some that have become far too bureaucratic and overfunded. The largest of these programs (25%) include a variety of net safety programs created to provide assistance to low income families and individuals that face financial hardship. Other programs that are currently under scrutiny are listed in the table below. There are numerous places where these programs can be cut. Many programs designed to provide aid in times of temporary hardship have become indefinite sources of social welfare. It will require more independent analysts to determine the realistic cost versus benefits of the programs and what the long term effects of cuts may result. Some programs may actually require increases, for example: additional allocations for programs that support innovation and promising new technologies that if developed would stimulate economic growth and increase jobs.

In light of the information above, increasing tax revenues is unpopular politically and the public is not on board. Some groups would like to see the reduction of entitlement and social programs, while some other groups want to limit what many consider run away military costs. The simple truth is that for our government to become fiscally responsible, all of the above measures, to some extent may be necessary. What is going on with our federal budget is similar to what took place over the past decade with individual citizens, we have been running up our debt and now many of us are faced with the painful challenges of paying off our individual debt or facing bankruptcy and years of poor credit which would effect our standards of living. The U.S. Government is no different, just on a macro scale. It is time to face the hard choices and do what is necessary before our debtors force us to do it and with potentially more painful consequences.

http://www.nationalpriorities.org/

http://www.cbpp.org/cms/index.cfm?fa=view&id=1258

http://www.wallstats.com/deathandtaxes/

http://www.grabgadget.com/wp-content/uploads/2008/11/wallstatsdatlarge.jpg

http://fc00.deviantart.net/fs29/f/2008/140/5/7/Death_and_Taxes__2009_by_mibi.jpg

http://www.mint.com/blog/wp-content/uploads/2009/07/DAT2010mint.jpg

http://www.gpoaccess.gov/usbudget/fy11/pdf/budget.pdf

http://www.gpoaccess.gov/usbudget/fy10/pdf/hist.pdf

http://www.cbo.gov/doc.cfm?index=11659

http://www.factcheck.org/taxes/supply-side_spin.html