Tag Archive for: USFederalDebt

Budget; What Budget?

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Estimated Reading Time: 3 minutes

Our leaders have failed at a national balanced budget. They do not even begin to address whether we are anywhere near the possibility of a balanced budget.  Charges are flying back and forth about whether anyone wants to cut Social Security and/or Medicare as some demagogue the issue.  It is time to take a simple “helicopter” view of what is actually happening.

In 2022, our federal government spent $6.48 trillion.  The breakdown:

  1. Social Security — $1.22 trillion, comprised of three parts: Payments to seniors $1.03 trillion, $144.7 billion for disability; $48.4 billion – other.
  2. Defense – $1.03 trillion, composed of $759.8 billion for defense and $271 billion for veterans.
  3. Medicare $756.1 billion.
  4. Transfers to states – $1.21 trillion.
  5. Transfers payments – $619.3 billion. Only $36.3 billion of that is paid for by the recipients as those are payments related to unemployment insurance.
  6. Interest payments – $483.5 billion.

The government received $5.03 trillion in revenue:

  1. Payroll Taxes – $1.50 trillion comprised principally of $1.09 trillion Social Security and $344 billion for Medicare.
  2. Income taxes and other taxes — $3.50 trillion.

Clearly, there are many items to discuss.  First, you can see that Social Security already has expenditures exceeding collections.  There is no fund saved somewhere to make up the difference. If there were no massive payments for disability and “other,” the fund would be solvent. No question that there are many deserving recipients of disability benefits but there are many who are not.  The disability recipient pool expands dramatically any time there is an economic downturn, and no one polices that.

Notice the expenditures for Medicare are more than twice the revenues.  This is after significant increases in the tax base occurring in the ACA passed during the Obama Administration.  Not clear how this can possibly get close to being balanced.

Why so much money is paid out to the states instead of the states making their own tax collections remains a mystery. Over $600 billion of this is for medical care programs. That means the federal government is funding over $1 trillion for unfunded medical care.

The taxpayers of the states are unwilling to vote themselves to be taxed, but the feds are willing to simply print more money.  The feds enjoy supplying the funds because it gives them control over the state and municipal governments.  Without all these transfers the budget would have been close to balanced. 

The interest payments are already skyrocketing with the return to more normal interest rates.  Our irresponsible elected officials were willing to incur greater debt when the interest rates were much lower.  They had to know that would change and we would have a serious problem.  The massive amount of interest has already increased from over $300 billion to $783 billion annualized and it is a good bet that will go higher.

Some people keep harping on the fact that we should increase tax collections on wealthy individuals and corporations.  We have already increased tax collections as the reduced rates spurred higher collections.  The top 1% of earners pay 40% of income taxes while earning a far smaller share of that income. Does anyone really believe we can close this $1.45 trillion budget imbalance simply by collecting more from large corporations and the very financially successful ones? If we collected 100% of high-earners’ income we would still be nearly a trillion dollars short of a balanced budget.  Seems implausible to me. 

If we combine the four factors of defense, social security, medical care, and interest payments, the current amount being paid out is $4.4 trillion. That is almost the entire revenue of the federal government.  Since two of those expenses are programs people have paid into to receive benefits and defending the country is the primary aspect of what the federal government should be doing, there is little flexibility.  The problem is everything else the federal government does and for the most part badly.

Our President is spending much time criticizing Republicans about phantom proposals to cut Social Security and Medicare. On the other side, Republicans are swearing fealty to an unsustainable system.  Biden appears unwilling to negotiate on reducing any element of the budget to create a positive atmosphere to raise the debt ceiling. He is proposing even greater levels of expenditures. All of these talking points may change but currently makes little sense.

The CBO (Congressional Budget Office) has stated unless there is a change, the increase in the national debt will be $19 trillion over the next decade. The CBO likewise stated federal spending on Social Security and Medicare will explode over the next decade.

You can evaluate for yourself whether our current national finances are sustainable year after year with trillion-dollar deficits. It seems to me something has to change and change quickly.

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This article was published in Flash Report and is reproduced with permission by the author.

 

 

Krugman’s Accounting of the National Debt is Jailworthy

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Estimated Reading Time: 6 minutes

The national debt has risen at a blistering pace over recent decades and is now higher than any era of the nation’s history—even when adjusted for inflation, population growth, and economic growth (GDP).

Denying this reality, Nobel Prize-winning economist Paul Krugman recently wrote two columns for the New York Times in which he claimed that the debt is an “overhyped issue” and “isn’t all that unusual” from a historical perspective. His attempts to support these assertions employ the kind of fraudulent accounting that could land a corporate executive in jail.

Projections v. Realities

Krugman insists that taming the “federal debt should be well down the list” of government “priorities” after “climate change” and “child poverty” because debt projections have become “much less dire” over the past decade or so. In reality, the debt is far higher than projected, and Krugman’s own words prove it.

In 2009, when the Democrat-controlled Congress and President Obama began racking up debt and projecting $9 trillion in deficits over the coming decade, Krugman wrote that “even if we do run these deficits,” federal debt would be 90% of GDP in 2019, or “substantially less than it was at the end of World War II.”

The debt in 2019 turned out to be 109% of GDP, which is 21% higher than Krugman projected and just 8% below the debt from World War II.

That was one year before government reactions to the Covid-19 pandemic drove the debt/GDP ratio to unprecedented heights. This was mainly caused by state government lockdowns that crushed the GDP as the federal government spent liberally on “Covid relief.”

Even though GDP rebounded as lockdowns were lifted, and the worst inflation in 40+ years has temporarily reduced the debt/GDP ratio, it is still higher than any other period of U.S. history, clocking in at 123% of GDP at the end of 2022.

Worse yet, the national debt is on a trajectory that makes the current debt look small by comparison. Under CBO’s decade-old projections, which have thus far undershot reality, the U.S. debt/GDP ratio is on track to eclipse Britain’s after it was intensely firebombed during World War II.

Because the debt from WW II was highest in U.S. history, Krugman and other scholars used to argue that the modern debt situation isn’t awful by comparison. What they failed to mention is that the war debt was a passing anomaly caused by the deadliest and most widespread conflict in world history, while the modern debt is a systemic, escalating problem driven by ongoing federal policies.

If left on autopilot, the debt is on track to double WWII levels in the coming three decades and grow thereafter to about nine times the peak of WWII.

Current Law v. Current Policy

Beyond ignoring his own debt projection, Krugman spins a yarn that is diametrically opposed to reality by exploiting his readers’ ignorance about differing types of debt estimates published by the Congressional Budget Office (CBO).

At various times, CBO has calculated two major types of projections for the national debt. The first reflects current law and is called the “extended baseline,” while the other is based on current policy and is called the “extended alternative fiscal scenario.” There are often major differences between these projections, as shown by the chart on the cover page of a 2011 CBO report.

The main reason for these differences is that federal laws are commonly rife with accounting gimmicks and other provisions that understate future debt.

A prime example is the 2010 Affordable Care Act, informally known as Obamacare. This legislation was enacted with a CBO analysis showing it would “produce a net reduction in federal deficits of $143 billion” over the coming decade. In reality, most of the deficit-reducing provisions of the bill weren’t implemented, while nearly all of deficit-increasing ones were.

The chasm between what the Affordable Care Act specified and what actually occurred is so great that its true costs are still unknown. Congress’ Joint Committee on Taxation wrote that it hasn’t calculated the realized budgetary impact of Obamacare “because of the many modifications to that law,” and CBO says it “cannot readily provide a retrospective analysis” of the law.

The bottom line is that the current law scenario made the Affordable Care Act seem like it would lower the debt, but the actual outcome was so different that federal budget agencies don’t know the real number.

Bait and Switch

With those facts in mind, watch how Krugman craftily jumps between current law and current policy projections.

In another of his columns about debt that proved to be dead wrong, Krugman declared in 2013 that “budget office projections show the nation’s debt position more or less stable over the next decade.” Emphasizing that point, he wrote, “So we do not, repeat do not, face any kind of deficit crisis either now or for years to come.”

Krugman’s basis for that claim was CBO’s current law projections, which showed the publicly-held debt/GDP barely changing from 76.3% in 2013 to 77.0% in 2023, a rise of only 1%. What Krugman neglected to reveal is that the current policy projection showed the debt growing by 14% in the same period. And for the record, it has actually grown by about 28%, or 28 times the current law projection cited by Krugman.

Fast forward to 2023, and Krugman is arguing that CBO’s latest debt projections have become “much less dire” since 2011. To support this claim, he compares current policy projections from CBO in 2011 to current law projections from CBO in 2022. He then compares those projections for 2035, thereby avoiding a comparison with actual outcomes.

Adding another layer of deceit, Krugman refers to the 2011 current policy projections in his recent column as “the most realistic scenario.” Yet, he cites the 2022 current law projections in the very same column without giving his readers a hint that he is using the least realistic scenario. He also does the same in his 2009 and 2013 columns.

In short, Krugman stealthily switches between CBO’s current law and current policy projections to weave a counterfactual narrative while avoiding his own failed projections.

Interest Payments

In one particular case, Krugman does compare a projection to an actual outcome. This is CBO’s 2011 current policy projection for interest payments on the national debt in 2021. Krugman correctly notes that CBO projected interest payments would be 4.4% of GDP in 2021, but they turned out to be less than half of that.

Krugman, however, skirts the fact that this outcome comes at a steep cost. During the Great Recession of 2007–2009 and the Covid-19 pandemic, the Federal Reserve suppressed interest rates by minting money to buy federal debt. This temporarily lowers interest payments on the debt, but it also shifts wealth from middle-income households to high-income ones and stokes inflation, which hurts people in the present and drives up interest costs in the future.

In the words of Federal Reserve economist Christopher J. Neely, “unexpected inflation will tend to raise the cost of servicing future U.S. debt” because investors won’t buy it unless interest rates are high enough to account for the inflation.

Krugman gives a tepid nod to that reality by writing that interest payments “will rise as existing debt is rolled over at higher interest rates,” but this is a far cry from admitting all of the harm this portends.

Consequences

One of the most nefarious aspects of government debt is that it hurts people through economic mechanisms that aren’t always obvious to them. This murkiness is aggravated by politicians who run up debt and falsely blame others for the common effects of excessive debt.

Those effects—documented in publications of the Government Accountability Office, the Congressional Budget Office, the Brookings Institution, and Princeton University Press—can manifest gradually or abruptly in the form of:

reduced “living standards” and “wages.”

“higher inflation” that increases “the size of future budget deficits” and decreases “the purchasing power” of citizens’ savings and income.

“losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt.”

increased “probability of a fiscal crisis in which investors would lose confidence in the government’s ability to manage its budget, and the government would be forced to pay much more to borrow money.”

The consequences of government debt are not just potential dangers lurking in the future. They may have already begun. Although association does not prove causation, the rapidly rising national debt of the past few decades has been accompanied by episodes of historically poor growth in GDP, productivity, and household income. These economic outcomes cause a host of negative impacts on human welfare in areas like education, nutrition, healthcare, and life expectancy.

And when such problems occur, politicians and people like Krugman use these hardships to justify running up even more debt. Hence, the harmful effects of government debt continue and escalate.

Conclusion

During the infamous Enron corporate accounting scandal of the late 1990s to early 2000s, the federal government prosecuted and jailed Enron’s executives because they “hid Enron’s true financial condition” and “materially understated” the “amount of debt carried by Enron….”

Paul Krugman has been doing that with the U.S. national debt for more than a decade. Although the right to free speech forbids laws that would punish columnists who mislead their readers like executives who mislead their investors, Krugman’s actions have the potential to cause more harm than Enron’s. That’s because Enron’s deceptive statements were measured in billions of dollars, while Krugman’s are in the trillions. Thus, Krugman’s disinformation can damage the entire country and generations to come if lawmakers and voters act on it.

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This article was published by The Heartland Institute and is reproduced with permission.

Getting Serious About Responsible Defense Spending

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Estimated Reading Time: 5 minutes

Another Congress, another debt limit showdown. It might seem there is nothing new under the sun.

But something is different this time: In my conversations with members of Congress in recent weeks, conservatives repeatedly mentioned their willingness to tackle the thorny challenge of military spending reforms, in addition to the out-of-control non-defense spending conservatives typically confront. This boldness is a refreshing change from the Washington status quo.

For too long, Republicans considered it a victory to increase defense and non-defense spending by equal dollar amounts, without cutting a dime from the deficit. Congress accepted the D.C. canard that a bigger budget alone equals a stronger military. But now, facing down a record debt to the tune of $242,000 per household, conservatives are ready to tackle an entrenched problem and confront the political establishment, unaccountable federal bureaucrats, and well-connected defense contractors all at once in order to keep the nation both solvent and secure.

Our national debt stands at over 120 percent of GDP, the largest sum since World War II. Most of this debt is the result of a bloated federal bureaucracy, of domestic programs that Congress allows to run at a deficit, and of bipartisan spending sprees like the “emergency” Covid-19 packages. Republicans owe it to their constituents to use the debt limit as an opportunity to reduce spending and shrink the administrative state.

Most Republicans generally give lip service to the idea of cutting spending, but blink when it comes down to the wire. In the end, Democrats hold defense spending hostage from Republican hawks and Washington plays along, with bigger defense and discretionary spending as the deficit balloons. As lawmakers face an impending debt limit deadline yet again, they can’t behave as they’ve done in the past. Defense and non-defense spending must both be on the table.

Today’s Pentagon is approaching a 13-figure annual budget. Congress needs to put away its kid gloves and put the Department of Defense and other agencies alike under the knife to excise wasteful spending. It is a top priority to save our nation, particularly the next generation, from the yoke of debt and an unaccountable, over-funded federal bureaucracy.

Of course, paramount to the goal of fiscal sanity is the goal of a strong national defense. A robust military deters any would-be attackers and protects American interests around the globe. On our military readiness, however, the sirens are blaring: Heritage’s 2023 Index of U.S. Military Strength rated the state of our nation’s military as “weak” for the first time. Our military is too outdated to fully protect American interests at home and abroad. We need a stronger military overall, and especially a force able to deter the rising threat of communist China and 21st-century threats.

The task at hand today is to achieve both goals: restore fiscal sanity and ensure our military protects our citizens from today’s threats. Republicans must defund unnecessary programs and unneeded bureaucrats, while also ensuring our military is ready to confront the nation’s threats. It will not be easy, but with enough political will, it can be done.

To get into the right mindset, Congress should refamiliarize itself with Oakland A’s general manager Billy Beane, who was handed a team in 2002 with the third-lowest payroll in the MLB, one-third as much as the Yankees. By defying the prevailing practices of MLB old-timers, who valued the looks of their players ahead of on-base percentage, Beane took a more efficient, data-driven approach and squeezed the most out of every dollar. He took his band of misfits to a 103-59 season and a postseason berth—the same number of wins as the well-funded Yankees.

Congress needs to take a Moneyball approach to our national defense, a much larger contest with life and death consequences if we get it wrong. Instead of engaging in a debate over topline spending numbers and throwing money at old programs and systems, Congress should insist that every dollar is used to advance military lethality and readiness while saving taxpayers as much as possible.

My colleagues at the Heritage Foundation are committed to helping our lawmakers find more savings. In February, we’ll convene top experts in national security and defense to scrutinize the Pentagon’s budget, line by line. Already, we’ve identified some top ways in which Congress can help our military give the taxpayer a square deal. Here’s a sample:

First, Congress and the Pentagon should ruthlessly target wokeness and waste. In the middle of a recruiting crisis, Secretary Lloyd Austin and the Pentagon prioritized onerous vaccine requirements and anti-American “diversity, equity, and inclusion” programs. And at a time when the military is increasingly weak, appropriators have jammed about $1.4 billion in non-defense research into the defense budget. Appropriators should immediately slash any program that doesn’t contribute to improved warfighting capabilities.

Second, Congress should go after inefficient and outdated weapons systems and other programs. Individual members of Congress have often insisted on funding programs that serve the wants of their home districts or of defense contractors, putting special interests ahead of overall readiness. For instance, the Army asked to terminate the CH-47 Chinook helicopter for three years running, but Congress keeps adding money back in.

The Pentagon has been telling Congress it has too many bases and facilities for years now. In 2016 the Pentagon estimated they were carrying 22 percent excess infrastructure: unnecessary bases, buildings, and facilities. But since 2005, Congress has been unwilling to consider closing any infrastructure, despite estimated savings of over $2 billion a year. A frustrated Pentagon has now given up on asking for authorization to consider a closure process. It is time for Congress to authorize a new round of Base Realignment and Closure (BRAC), which overcomes parochial interests to close down unneeded bases in a fair and strategic manner, and to apply the same philosophy to the rest of the budget, regardless of how much defense contractors protest.

Third, the United States must insist that its allies do their part, particularly in Europe. Our friends across the Atlantic have for decades enjoyed the protection of the American military and were content to spend less than the NATO goal of 2 percent of their GDP on defense while Uncle Sam protected their backyard, even while countries such as Germany enjoyed budget surpluses. It is time for them to end their free riding, pick up the tab, and meet their NATO obligations. We should use our considerable leverage to insist on it. This doesn’t mean abandoning Europe—far from it. But pushing our allies to take a greater role in defending their own continent will allow the United States to repurpose funds, troops, and programs to counter the larger global threat of communist China.

There are far more programs and ways for Congress to right-size the Pentagon budget, but the first step is to stop running the same old Swamp playbook and start playing Moneyball. Congress has the chance to show it can walk and chew gum at the same time, keeping our homeland safe while prioritizing Americans first, if it is willing to make the hard decisions necessary to do so.

Conservatives on the Hill must step up and face the challenge head-on, or face the righteous fury of the American people if they vote for business as usual. I am optimistic they’ll make the right choice.

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This article was published by The American Conservative and is reproduced with permission.