Wednesday, May 4, 2011

The Deficit, Part Deux

A commenter named bilber wrote a long response to my post, 10 Things You Need to Know About the Deficit" and I felt it deserved a full response, so I'm posting it below.  His comments are in italics, mine in regular type.

I appreciate a good debate...

1). The last year that Republicans did a budget was '06 for the '07 year. The deficit in '07 was $167 Billion. The Democrats took the House and Senate in '06. They could raise taxes anytime they wanted after January 1, '09. They didn't, and they failed to do it again in the lame duck session in '10. Do they EVER take responsibility? Taxes affect behavior -- CBO does static analysis. It ALWAYS overstates the revenue from taxes and understates the revenue from cuts.

And what caused the deficit to rise so much after 2007, which was the height of the bubble economy?  The chart I posted shows it pretty clearly.  We were in a deficit all decade despite not being in a recession.  Then, several million people lost their jobs, home prices collapsed, which caused tax revenues to plummet, magnify the visibility of the tax cuts, unpaid-for wars and prescription drug benefits, etc.  

Although it is silly to imply that had the Democrats raised taxes in 2007 or 2008 that they ever would have become law, despite what many think, most of them also don't believe in raising taxes in a recession.  It's true that they tried to let the top end of the Bush tax cuts expire late last year, but I don't believe that was nearly enough.

It's interesting that you would mention ever taking responsibility, since there has been none from the Republican Party for the many disastrous policy choices and incorrect analyses of the past decade.  I used to be a Republican, and supported a number of stupid decisions at one time.  But, ultimately my loyalty is to evidence and objective data more than my party, or what I believed growing up.  There was no way to keep believing some of what I had since I had been proven so resoundingly wrong.

2). Look at that chart for one second. It is essentially flat! Therefore, taxes are NOT the problem, spending is! See any spending charts that look essentially flat? Nope!

Well, actually you'll notice that right now taxes are about 15 percent of GDP, and they perhaps average 17.5 percent since the '50s (sometimes over 20 percent).  But let's be generous and say it's only a 2.5 percent difference.  Given that GDP in 2009 was $14.12 trillion, that's about $350 billion a year difference, or $3.5 trillion over 10 years.  To put that into perspective, the House Republican plan says it would cut $4.4 trillion over 10 years.  The Fiscal Commission is at $3.9 trillion, while President Obama's is $4 trillion.  It's the same ballpark.

Even if that were not the case, the logic here doesn't follow at all.  The deficit is simply revenues minus spending.  Neither is inherently the problem.  Any real solution is going to have to include both.  Spending is a problem if it's going to waste.  Be specific, and on something that actually adds up to a significant number.

Finally, the main point I was making with point #2 is that the President has not raised taxes, but in fact lowered them.  This is not common knowledge.  Perhaps I could have been clearer.

3). Oh, be serious! The budget shot up from $2.8T to $3.8T and the deficit shot up from $167B to $1.6T. It really makes no difference at all what you want to try to label it, it is SPENDING!!! This dodge is exactly like me putting on 10lbs and trying to call it muscle mass! 

Your point here essentially boils down to, "oh, come on!"  My point is that the vast majority of the spending increases would have happened under a Republican or a Democratic president because they were automatic.  It is not because President Obama went on a binge, and you don't engage the point other than yelling, "spending bad!"

4).OK, and is this new? The US defense total budget is $800B. Cut it in half and you don't even get the current deficit under a T. Cut it all and we are still running $700-$800 B. THE PROBLEM IS ENTITLEMENTS!!! 

Cut it in half and you get to $4 trillion over 10 years, which again is what the main parties' plans are roughly trying to cut from the deficit.  If you want to contend that's nothing, be my guest.

Why do you feel the need to make this a binary debate?  The problem is not a single thing; that's true in much of life, and it is much more so with a complex subject like this.  There are many, many causes, and a reasonable solution is going to require multiple pieces.  This is both a huge piece of it, and as one of the most wasteful areas of government spending, something conservatives should want to attack with ferocity if they believe their own rhetoric.

5). Transfer payments to individuals -- FICA, Medicare, Food Stamps, Unemployment, Farm Programs, etc are $2.2 Trillion. We are buying votes with over half our budget. 80% of the people receiving those payments are not "needy". Most are better off than the youngest quartile of the population. Quit stealing from current and future children and buying votes from greedy geezers!

I agree with you that a lot of farm subsidies make no sense, and also that the interest groups who get Social Security and Medicare, etc., strongly resist any change in benefits, and that's a problem.  I am for cutting a lot of subsidies and means testing Social Security in some fashion.

However, to contend that votes are bought with food stamps and unemployment...well, if they are, it's an extraordinarily inefficient way to do it, because the voting percentages there are much lower.

Statistically, aid to poor people in a recession is one of the most economically beneficial things that can be done.  It is almost all spent, and spent quickly, which is just what a demand recession like this one needs to be stabilized and reversed.

I hope we can also agree that the worst subsidies we have are the ones that go to the richest people, such as to oil companies, and mortgage interest deductions for mansions, for example.  What is the benefit of these policies?

Here's perhaps the central problem: Americans want big spending cuts, except that they don't actually want to cut specific programs.  Also, they don't want to pay for the programs they don't want to cut.  There is a lack of leadership in Washington, true, but to a large extent, we are getting the government we deserve because we turn on politicians who try to actually solve the problem.

6). OK, and this is news??? Helloooo ... and where were you decades ago when this was clear? Expecting Boomer mass suicide or something?

Saying the same thing I am now...what that I've said gives you another idea?  Everybody knew this was coming, but it was easier to kick the can down the road.  Both parties are guilty of this.

7). Not financially. Earmarks are "leverage" in the overall corruption of using one group of people and future generations as coerced campaign donors to buy votes. They are political credit default swaps.

A separate argument that one can make.  For the purposes of this discussion, though, my point is to let people know that they are not relevant to the deficit debate.

8). Liberal "facts" are all about "projections". Look at the "actuals" .... pretty flat. Look at the big bump in "near in projections" 10-12. Look at FICA / other non-interest ... again, flat. THEREFORE, what this is about is Democrat ASSUMPTIONS / PROJECTIONS about the future. Is anyone surprised that they at least claim to believe that their policies work?

Look at their track record -- when Democrats instituted Medicare in '65, they said it would cost $9B in 1990 -- in fact it cost $67B

And conservatives opposed the Civil Rights movement in 1965 too.  How relevant is this today?  We have a lot more recent examples we can point to, such as predicting that the Iraq War would cost $50-60 billion (actual so far perhaps $1-3 trillion), that the 2001 tax cuts would create massive numbers of new jobs and still pay off the deficit (actually was one of the worst economic decades in US history and ran large deficits), or really almost any prediction the previous administration made on any controversial issue.

Second, the CBO is not "liberal".  They are non-partisan.  Their numbers are not perfect, but neither can anyone else's be, since predicting such things is incredibly complicated.  But, their predictions hold up immensely better than any conservative think tank you can point to on a regular basis.

Finally, as with Social Security, one of the main reasons Medicare cost more than expected is that the program was expanded to cover a lot more things than it originally did.  The comparison isn't apples to apples.

9). OK, so what IS it like? Infinity? It is a WHOLE lot more like your family budget than it is like infinity -- it is much larger than your family budget, but it is limited like your family budget just the same. If government spending created wealth, every nation on earth would be filthy rich. The government IS a HUGE family budget, and our US family is way bankrupt from exactly the kind of fuzzy thinking in #9.

I don't even know where to start with this.  The concept is counter-cyclicality.  We decrease our budgets when we have tougher economic times.  The government increases theirs to smooth out these conditions.  The whole point of the safety net is to run counter to consumers' budgets when there's a recession.  It's one of the main reasons we haven't had another Great Depression since we had the original.

Second, the idea that government spending doesn't create wealth is insipid.  In some cases it doesn't, such as transfer payments, buying bullets for the army, or paying interest on the debt.  In other cases there is no question that it does, such as when the Defense Department is creating the Internet, sending soldiers to college through the G.I. Bill, or building mass transit systems that drastically improve the business environment in cities.  Again, you make this into a binary...some spending is good, some is bad.  Some is wasted, some creates enormous wealth for the rest of the country, and funds things the private sector would never do on its own.  And everything in between.

Our problem is not so much spending, as that we spend on some dumb things, and we won't pay for the things that we do want.

10). Continuing to pile on more debt will certainly be catastrophic. Stopping our debt addiction will only be catastrophic if the current administration plays suicide roulette. As long as we pay the interest on the debt and any redemptions, there is no default. The interest is around $400 B, but will rocket shortly if we don't quit borrowing since we need to jack interest rates to fight inflation or simply to inscent purchasers to buy debt from a bankrupt nation. All our debt is short term -- interest doubles and the payment is $800 Billion. The BEST way to prevent that from happening is to STOP BORROWING!!! It may be the only way left to somewhat save ourselves from ourselves.

Our revenues are just north of $2T per year. That means that we could stop borrowing, pay the interest on the debt, and still have $1.6 Trillion and change to spend. Say $500B for defense and a Trillion for everything else. 

This is just not how the market works.  The reason we are able to borrow so easily now and pay such incredibly low rates on it is because nearly everyone else around the world thinks there's no way we'll default or not be able to overcome this disagreement.  They may very well be wrong.  If we don't raise the ceiling, those assumptions collapse, and exactly what you're trying to prevent - interest rates going up in the long term - go up immediately.

If you're pushing for just immediately cutting back to a balanced budget, that's one thing to argue in theory, but neither Republicans nor Democrats are going to get anywhere near passing anything that would do that (yes, even with the amendment that Republican senators have supported, some presumably because they know it has no chance to pass and so it has no downside, and others because they're economically illiterate).

I go back to the countercyclical point above.  I have been a deficit hawk for many years, long before it became the popular issue of a party looking to shift blame for its disastrous policies onto the other party.  Cutting spending with 9 percent unemployment makes no sense.

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