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Basic facts left out of the spending debates

With the non-stop attention on spending, deficits and debt, the popular understanding seems to be that Obama is a big spender and we must endure radical spending cuts and deep austerity to get back on track. The facts don’t support that analysis.

The Congressional Budget Office (CBO) tracks the historical figures on spending, deficits, size of government. It is truly interesting reading. Here are the stunning size-of-government numbers that should inform our discussion:

2009  3.518T

2010 3.4516T (did spending go DOWN? Yes, yes it did)

2011 3.598T

2012 3.538T (Again!)

2013 3.553 T (projected)

No news organization is reporting these figures, which seem like important context for discussions of budgeting, spending, deficits and debt.

More context: no President, going back 40 years has held spending steady for five years. If Bush had held spending constant for HIS first five years he would have reduced the debt by 346 billion (assuming revenue didn’t change, which is a bit of a stretch – as all that borrowed money was a stimulus for the economy). If he had held spending constant for all EIGHT years – He would have reduced the debt by a total of 2.256T (and that leaves 2009 out of the discussion).

Over five years, spending is up 1% – less than inflation, less than population growth. Obama has, in essence, shrunk government.

Meanwhile, the economy has grown, in the aggregate by 12.2% (from $13.974T in 2009 to 15.682T in 2012 – nominal figures) – the result, beyond the steep decline in annual deficits, is a notable reduction in the size of government.

In Bush’s final budget year, government spending exploded to 25.2% of GDP. In 2013, government’s percentage of GDP is down to 22.2%. Those numbers are notable – as they are as low or lower than 6 of Reagan’s years in office. 

Beyond the numbers, the lack of reporting on these fundamental facts about our economy point to an amazing victory for the right wing’s takeover of not just right wing media, but media.

Deficit spending: Part 2 how to balance the budget

It is usually helpful to understan how we got to where we are before trying to fix it. So we left the story with spending at 3.5 Trillion dollars in 2009. Now, 5 years later, spending is at 3.5 Trillion dollars?!

Total government spending per person in constant 2005 dollars

Has there been a time in modern history when US federal spending has held constant for 5 years? There has not. Not since 1973 (as far back as the CBO/OMB data linked above goes).

This is an astounding thing, and not one our media has mentioned. There are in fact a few nominal dollar spending CUTS 2009 to 2010 and 2011 to 2012 – but that isn’t as important as just holding government spending constant and allowing the economy to grow – a fantastic way to cut deficits.

The impact of this has been to lower government spending as a percentage of GDP from the high of 25.2% to the 2013 percentage of 22.2% - which turns out to be as low or  lower of a percentage of GDP than SIX of the years Reagan was President.

So the path to reducing (and ending!) the deficit is to keep a lid on spending. Obama has done that (with some help from slow Medicare spending growth (to his credit that was what Obamacare was designed to do)). If Obama’s 2nd term is EXACTLY like his first term, we can expect to see 12% economic growth, which translates to (conservatively) another 500 billion reduction in the deficit through growth alone. If we can get Congress to keep a lid on spending, that would put the deficit at 345 billion just by doing “nothing”. Indeed efforts to cut spending (ie auserity) tend to have the contrary effect of increasing government outlays and shrinking revenue.

While there is nothing wrong with shrinking areas of government that are too large, where you do it in the business cycle is hugely important. Bush added government stimulus to a roaring economy and brought on the Great Recession. Removing stimulus now (ie cutting spending) would be to apply a headwind to the still-too-small recovery. An OK policy applied at the wrong time.

So how do we get rid of the last 345 billion? Going back to Part I of this post, defense skyrocketed 356 billion between 2000 and 2009. Should we simply undo that run-up in spending? It may be tempting to the peace/fiscal responsibility crowd. But a more useful approach is to look at where defense was as a percentage of GDP in our last balanced budget.

2000 3% of GDP

2009 4.7% of GDP

2013 4.3% of GDP

So while a growing economy and frozen spending is bringing the big picture back in line (deficits down by 40% already) – defense took a disproportionate share of the doubling of government spending in the 2000s. So just holding it constant doesn’t fix the over spending on defense.

Working from the reasonable stance that the year 2000 balanced budget 3% of GDP is a reasonable approximation of the correct amount of spending on defense, the United States would spend 470.5 billion (15,681b X .03) on defense. The 2013 projected defense spending is 701.5 billion – so to return to a balanced budget, defense should be cut by 231 billion dollars per year.

That leaves the deficit at 104 billion dollars. Less than 1/10th of the deficit we had in 2009 – just by growing the economy and spinning down from a decade of foreign adventuring.

We finally turn to increasing taxes. And not just any taxes. The most wealth inequality boosting taxes of them all. “Death” taxes and capital gains taxes.

It is an economic truism that you tax what you don’t want. In the United States, payroll taxes are about 25%. And capital gains taxes are 15% (for the vast majority of us – 20% over 400k).

Raising taxes on non-earned income is appropriate for three reasons: It lowers the deficits, it shrink wealth/income inequality and it has the lightest touch on the economy overall (and of course rates have been MUCH higher historically)

40 billion from raising the capital gains rate from 15/20% to 20/25%

14 billion from estate taxes

Leaving us 50 billion in deficit spending – finally something small enough to drown in a bathtub!

Closing tax loopholes is almost cliche at this point. But it is discussed so often as it is a relatively painless way to both restore fairness and simplicity to the tax code AND reduce deficits.

Regardless of how often it is brought up, their is wide agreement that at least 50 billion is available from closing loopholes.

Note – lowered interest expense due to the eliminated deficit (and thus debt is lower than expected) is ignored. Let’s use THAT money to start paying down the debt!

Deficit spending: Part 1 – how we got here

There is fear and outrage at how large our deficits are. And, at 1+ trillion out of a 16 trillion dollar economy – there well should be. This is part one of a two part post. It is an analysis of how we got here, and a clear look at WHY we are here. The media likes to portray Obama and or Bush as big spenders. This post looks at the facts in that regard. The facts (based on comparing the last balanced budget to Bush’s last budget year) indicate claims that Bush left the United States of America with a one trillion dollar structural deficit are correct.

2009 is the pivotal year. To the casual eye, it appears Bush had declining (but HUGE) deficits from the mid 400 to mid 100 billion dollar range (once the tax cuts took effect). Then in 2008 the deficits turn on a dime and explode to nearly 500B.

deficit chart 1940-2012

Inflation adjusted chart of deficits

And in 2009 deficits triple! So, the question MUST be asked – what happened!?! (spoiler alert: TARP barely effected the deficit; ARRA (aka the Stimulus) also barely effected it). Let’s compare the picture from fiscal year 2000 (reference year because that is the last year the budget was in balance).

2009 budget changes from year 2000 budget:
356B Defense
(314B) Revenue   [2004 revenue (.998T)- 2004 revenue with no tax cut (1.416) less 25% of economic growth arguably due to stimulative effects of tax cuts]
+154B Tarp
+21B Interest expense
+26B Investments in education, training employment and social services
+180B Health (non Medicare)
+124B Income security
+49B Veterans affairs
+360B Energy, Natural resources, housing, transportation and Community/Regional Development
+50B ALL other functions of government

~1.6T in debt- that is the net effect of Bush budgets – and the similarity of that figure to the deficit itself in notable; almost ALL of Bush fiscal policy was deficit creating. HUGE growth in government, led by the defense runup, the cuts to government revenue with NO cuts in spending; beyond that, 360 billion mostly in the category “Commerce and Housing credit” (one presumes the fabled Bush “ownership society”/the housing meltdown).  And of course the beginnings of the uptick in safety net spending due to the Bush recession (largely caused by the Bush runup in spending and other polices (ie ownership society (although Clinton also set the stage with low income loan requirements and relaxing government banking regulations)).

Of the above – $203B is due to Obama. The rest is the decade long runup in Bush spending.
+114B ARRA (Stimulus)  (the rest spent in later fiscal years)
+89B Obama spending increases in March 2009 appropriations bills

The reasons the numbers don’t add up to 1.4T is the figure for “revenue lost” is calculated for one year (2004), but applied in 2009 – when we had a larger economy and minor disparity in numbers pulled from a variety of sources.

Deficits are a function of tax cuts with no corresponding spending cuts; rather increased spending

If we ended the Bush/Obama tax cuts

CBO data that verifies that 1.2 trillion of the 2009 deficit belonged to Bush.

CBO projects that the deficit this year will total
$1.2 trillion, or 8.3 percent of GDP. Enactment of an
economic stimulus package would add to that deficit.”

The CBO report came out on January 7, 2009 – two weeks before Obama was sworn in. So we KNOW 1.2 trillion of the 2009 deficit (the inauguration of the 1 trillion+ budgets) came in under Bush

______________________

OK – so 2009 is the critical year in that the deficit goes from scary to terrifying. Let’s look at what has happened since (all data Treasury unless otherwise noted):

2009 1.4T
2010 1.3T
2011 1.3T
2012 1.1T
2013 900B (projected by OMB)

We are one third through 2013, so projections are likely reasonable, but the latest OMB report will be more accurate – reflecting the fiscal “cliff” outcome and continued slow recovery.

The 200B per year drop in the deficit since the crisis ended in 2011 is notable – adding up to a 35% reduction already (Obama promised 50% and delivered 35.7%). The data above is the accurate background for part II – how to get out of debt. It really is not hard and many Americans are embarrassed our government pretends it is such a huge challenge.

One thing our politicians are missing is analysis like the above – which shows where and how we got here, and of course points the way to how we get out.

{a note on tax cuts. It is very hard to winnow out the actual impact of tax cuts – both on revenue to the treasury and on GDP (interrelated problems). Here the tax cuts receive 25% of the credit for economic growth from 2000 to 2004. How and why would be another post. The second note is that the effect of any stimulative tax change is short term – the economy jumps up as people respond to the new money in their pocket, then reverts to pre-stimulative rates. And of course tax cuts which create deficits (as Bush’s did every year) should, in theory, have zero long term effect.}

GOP led ACC takes aim at homeowners and small companies

So the Arizona ACC just put a bullet in the solar renewable market. Corporations no longer have access to the funds the corporations put into the system to fund solar projects (all funds for APS renewable energy incentives ultimately come from a surcharge on customers – the residential incentive is down to $.10/watt – or about $500 on a 20k project).

So who does get the money? APS – for utility level solar projects. In other words – if you are a monopoly provider/ginormous corporation – the Arizona Corporation Commission has your back.

If you are a customer of APS – you are welcome to pay into the system (which was designed to expand distributed energy) – but you will see no benefit from it.

Elections have consequences. Arizona citizens voted in the right wing GOP anti-solar extremists. And this is their first of many, many actions to kill renewable energy in “the sunshine state”

Arizona solar industry unloads on corporation commission for cutting commercial incentives – Phoenix Business Journal.

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