By Emil Pulsifer, Guest Rogue
I recently shared a table with a stranger. He was mature, educated, and gets his news from a variety of sources including MSNBC, CNN, C-SPAN, and others. We discussed a variety of topics ranging from the need to address climate change, to the development of alternative energy sources and campaign finance reform. Yet, when it came to budget policy he could do no better than to repeat the common wisdom that in order to address the "$16 trillion debt" a mix of spending cuts and tax increases are necessary, and that tax increases could not target the wealthy exclusively because "even if you confiscated all of the income of the rich it wouldn't be enough to fix the problem." Medicare would have to bear the brunt of the spending cuts, he said. These claims are all elements of the meme promoted by "responsible" media organizations, but in many respects they happen to be wrong.
There is certainly room for spending cuts in the current budget, in particular the bloated Defense Department. In 2011, "national defense" spending totaled 4.7 percent of the U.S. economy. In the late 1990s and early 2000s, when Clinton era "peace dividends" reached their peak, national defense spending was just 3.0 percent of GDP. See Table 8.4 of this report.
The Cold War is over: The Soviet Union no longer exists, and China has irrevocably converted to gung-ho capitalism. There is simply no excuse for this level of "defense" spending. In 2011, U.S. GDP was $15 trillion dollars. If national defense spending had been at Clinton era levels as a percentage of GDP, the savings in that year alone would have been 1.7 percent of GDP or roughly $250 billion dollars. Extend this over 10 years and the savings would total $2.5 trillion, or slightly more than the $2.4 trillion total savings touted by Republican Alan Simpson and Democrat Erskine Bowles in their new debt reduction plan. And because we're talking about defense spending as a percentage of GDP, and GDP is expected to grow, this actually underestimates the dollar savings by about a third. Sure, there is already supposed to be some savings in coming years from the military drawdown in Afghanistan, but Congress may not allow this: Already there is a bipartisan movement afoot to restore the much smaller $43 billion in military sequestration cuts due to take effect this year.
But ignore all of this, if you like, and concentrate only on the tax side. The federal government ran a $1.1 trillion budget deficit in 2012. However, this is falling fast, as the tepid recovery takes hold and federal tax collections increase, according to the Congressional Budget Office, which projects the deficit to shrink to 2.4 percent of GDP by 2015 even if federal laws governing taxes and spending remain the same as they are now. In dollars, CBO's tables show a $430 billion deficit by 2015. See the Budget Projections data.
But ignore this too, and pretend that the deficit will continue to run at $1.1 trillion without a break, and as far as the eye can see. After all, the CBO also projects deficits to increase after 2015 because of demographic changes influencing entitlement spending, reaching $978 billion by 2023. Is it really true that a tax increase on the wealthy couldn't balance the budget with a deficit of this size, without spending cuts?
Well, no. There's that $15.8 trillion U.S. GDP in 2012. Gross domestic product is a measure of national output, but by definition it is also a measure of national income: The money from those sales of goods and services went into somebody's pocket, either corporations or individuals; and the "domestic" part insures that the figure excludes net imports and therefore doesn't include money sent out of the country to foreign manufacturers.
True, corporations have costs, such as labor, which have to come out of income before profits are calculated: an important caveat because it is profits, not income, which are subject to corporate taxes. However, those labor costs are income for the labor receiving those wages and salaries, and individual income is taxable. In general, any business costs are someone else's income (corporate or individual). Corporations also distribute a large amount of their net profits to owners, shareholders, and executives in the form of dividends, bonuses, and other profit sharing arrangements. That $1.1 trillion deficit was just 7 percent of national income, then. To completely balance the budget in 2012, the federal government would have had to collect this much, and no more. Since this is larger than the projected deficit in every coming year through 2023 (the limit of CBO's current projections), such revenue would result in large annual budget surpluses and a total surplus over the 10 year budget window.
Because the share of national income received by major corporations and the wealthy is far higher than 7 percent, this would scarcely necessitate confiscatory tax policy. In fact, it would scarcely be onerous.
And this actually grossly overestimates the additional tax burden necessary. The reason is that GDP isn't frozen at 2012 levels. The CBO projects that by 2023 it will grow to $25.9 trillion from last year's $15.5 trillion, or about 67 percent over this period. So, the additional taxes necessary would come from a national income base that is actually much larger than at present, meaning that they take less income as a percentage of income.
Of course, there is an important distinction to be made between national income, which is identical with GDP, and taxable income, which excludes huge amounts of national income through various loopholes, deductions, and credits in tax law and other federal laws. For example, the wealthy pay no Social Security payroll tax on wage and salary income above $113,700 because of a cap (which is also adjusted upward annually for inflation). The list of loopholes is endless. That doesn't change the size of the actual income base, however; and loopholes can be eliminated through tax simplification, whether or not on a means tested basis.
Most of the argument against using taxes alone to deal with the debt problem is based on an absurd misconception: That debt management means paying off the national debt. First of all, nearly one-third of the $16.7 trillion "national debt" isn't real debt: It's "intragovernmental holdings" or debt from the federal government to itself, in the form of the fictitious and fraudulent "trust fund" balances. What counts is marketable Treasury debt held by other parties (everyone from domestic investors to foreign governments), which has to be serviced with real interest payments.
Second, of the $11.9 trillion in actual debt held by the public, absolutely NONE needs to be paid off. It's amazing how many business savvy individuals don't understand this. Treasury debt outstanding is no different than a revolving credit account at a large corporation: This is NEVER paid off, and the size of outstanding debt will rise as the corporation grows because its operations and liquidity needs grow. Similarly, Treasury debt outstanding need never be paid off and can safely grow as the economy grows.
The important thing in both cases is that the debt doesn't grow faster than the corporation or the economy does, except in times of economic downturns. The reason why this is important is that debt has to be serviced by paying interest to the holders of the debt, and if debt grows faster than corporate or economic income, those interest payments start to weigh more and more heavily on the budget of the corporation (or the government), eating away more and more available funds.
This is a very serious problem, but one which needs to be addressed by preventing debt from growing as a percentage of GDP, not by paying off the debt. If the budget is balanced, no more dollars are added to the debt each year. The size of the debt then freezes, while the size of the economy (and thus the government's revenue collections) continues to grow. Servicing the debt thus takes less and less, not more and more, of the budget funds available. Even if the budget isn't balanced, but is simply brought sufficiently close to balance, this occurs.
Fixing the deficit with a targeted tax increase will also decrease U.S. debt levels to a safe amount in coming decades, by reducing the amount of net interest the government must pay to service its debt. Interest on the debt is predicted to grow faster than any single entitlement in the coming decades, but you won't hear much about this. See Table 5-1, Long-Run Budget Projections, to see how fast net interest increases as a percentage of GDP, versus Social Security, Medicare, and Medicaid.
Both political parties depend on contributions from the wealthy and corporations, because that's where the money is. The party leaders know this. Once upon a time, when labor unions were strong, the Democrats could depend on the financial support of the organized working class. From the end of World War II through the 1960s, about a third of the nation's non-agricultural workers belonged to a union. They paid dues and supported lobbying and activism. In 2012, that had dropped to 11.3 percent. In the private sector, the rate was only 6.6 percent, according to the Bureau of Labor Statistics. It didn't have to be this way, as high income countries like Germany and Canada show. But it is, and increasingly, for party fundraising purposes, corporations and the wealthy are the only game in town. They must be placated. So, the debt chimera lives on, and someone else must take the heat. You.
What good is economic theory when corruption rules the day.
Who do we want to spend our hard earned money, corrupt defense contractors or corrupt infrastructure contractors.
Corruption, serving this country for the last 100 years.
Posted by: Ruben A. Perez | March 21, 2013 at 07:10 AM
Awesome write-up. Thanks for doing the hard research and putting it together in one place.
I love it when $.1 trillion (100 billion) is "slightly more."
Posted by: Petro | March 21, 2013 at 09:34 AM
If we want to engage with our readership better, lets use a word that's better understood than "chimera", lest this come across as a blog for intellectuals.
Posted by: morecleanair | March 21, 2013 at 01:24 PM
And, Arizona's utility's rate structures defeat the value of independent energy conservation measures and solar energy.
We build our debt on our children's backs.
Posted by: Rate Crimes | March 21, 2013 at 01:30 PM
It is a blog for intellectuals, or wannabes.
I grew up reading challenging stuff where I had to look up words. Thank God.
Posted by: Rogue Columnist | March 21, 2013 at 01:38 PM
I think chimera has something to do with a she-goat. So that would fit the discussion.
When it comes to our nation's governmental economics we are pretty much goat-f@#ked.
Posted by: Ruben A. Perez | March 21, 2013 at 02:35 PM
The word "chimera" can refer either to a firebreathing mythological monster, or to "a horrible or unreal creature of the imagination". Most discussions of the debt and its exigencies unconsciously invoke the first definition. My title was intended to suggest that the debt, as a crushing national problem, is the product of misunderstanding and hysteria.
The federal government is not "bankrupt" and the size of the economy, together with the government's sovereign power of taxation is quite adequate to comfortably manage the debt.
The government doesn't have to borrow as much as it does: that it has been doing so during a period of severe economic downturn and a sluggish recovery, rather than insisting on cutting spending to match plummeting revenues (thus decreasing demand, further depressing the economy, and insuring even lower revenues, in a vicious cycle) is a credit to the comparative sense of the Obama administration -- though I suspect that Republicans would have sung quite a different tune had one of their party members occupied the Oval Office.
Posted by: Emil Pulsifer | March 21, 2013 at 03:09 PM
Wait. What? I thought a chimera was one of those decorative clay chimneys you put out on the patio for the illusion of warmth. Dang Gum IT!
Posted by: eclecticdog | March 21, 2013 at 05:49 PM
Republicans are using the debt fear to obstruct Obama initiatives. True believers in this ultra- reactionary GOP hate government and act against Obama with this emotion to motivate themselves. The reality is that once in power Republicans expand deficit spending like drunken sailors.
Corporate controlled media by GE and others perpetuate the deficit crisis illusion. US government is by big business for big business. They own the politicians and the country.
Posted by: jmav | March 21, 2013 at 08:45 PM
I like your analogy of our national debt being like corporate debt used to run a business, debt that never actually needs to be paid off.
The analogy I like to use for managing our national debt is that of an American family. Earnings of $150,000 a year, with job security, would certainly justify a mortgage of $450,000 for a growing family, even though the debt is three times yearly income. Housing is, after all, a necessary commodity, and what counts is your ability to service (manage) the loan, and not necessarily its size.
The republic is a big boy. We should figure America can compete sufficiently to provide for essential services -- especially when our total debt is a mere fraction of our GDP, and, as opposed to a family, when managing the national debt does not even mean paying it all off.
Posted by: chuco35 | March 21, 2013 at 09:53 PM
Conservative estimates of fraud and waste in the federal budget is between 10 and 20 percent.
To discuss the budget without allowing for the waste in the calculations is to result in formulas which have no meaning in reality.
Ignoring $720 billion out of a $3.7 trillion budget is like trying to balance your own checkbook, while supporting family members who are hooked on heroin. You may want to ignore the cost of the heroin, but it's there, whether you like it or not.
Posted by: Ruben A. Perez | March 22, 2013 at 07:05 AM
Chuco -- I think your analysis rests on your phrase, "with job security." The truth is, there is no such thing. Emil's piece contained a similar phrase: "while the size of the economy ... continues to grow." With that sort of optimism, I can see why there's little hesitation to increase debt-load. Good luck with that.
Posted by: Ray Stern | March 22, 2013 at 02:44 PM
Ray, there is nothing extraordinary about a prediction that an economy will continue to grow. Every developed nation in Europe and the Americas has an economy that has seen long-term growth since the industrial revolution.
If on the other hand you are saying that another major short-term economic crisis like the Great Recession could add significantly more to the national debt, you're right.
As a percentage of GDP, debt held by the public, excluding debt held by the Federal Reserve System, jumped from 30.7 percent of GDP in 2007 to 56.6% in 2011. The last time it was that high was in the early 1950s when the level of debt as a percentage of GDP was decreasing from the record highs of WW II.
But here's the thing: in 1946 this debt was 98.0 percent of GDP. The nation did not collapse. Far from it. By 1962 it had dropped to 38.5 percent of GDP. Yet, in dollars, this debt was the same in 1962 as it was in 1946, about 218 billion. See Table 7.1:
http://www.whitehouse.gov/omb/budget/Historicals
That's why it's important to use debt as a percentage of GDP and to remember that simply by growing the economy, debt can be brought under control.
Posted by: Emil Pulsifer | March 22, 2013 at 04:17 PM
Ray, also note that nowhere above do I suggest "increasing debt load". Quite the contrary.
If you take a look at the CBO Budget Projections data at the link provided, select Table 1-6 showing federal debt projected in CBO's baseline. In 2012, debt held by the public as a percentage of GDP was 66.8 percent (note that this includes Fed holdings, unlike my numbers in the comment above). By 2023 this is expected to be 69.4 percent, which is not a large increase. This assumes current law.
By contrast, I suggested raising taxes on the wealthy and corporations in order to BALANCE the budget, which would reduce debt as a percentage of GDP. Not until the economy recovers, but when feasible.
Posted by: Emil Pulsifer | March 22, 2013 at 04:26 PM
Ruben, a "conservative" estimate of waste, fraud and abuse in federal government isn't "10-20 percent". Even Darrell Issa, a House Republican who used a committee meeting to pound this point home, could only come up with 7 percent:
http://www.washingtonpost.com/business/capitalbusiness/federal-government-continues-to-lose-billions-to-waste-fraud-and-abuse/2013/03/08/a3fb7736-82b5-11e2-b99e-6baf4ebe42df_story.html
Ruben wrote: "To discuss the budget without allowing for the waste in the calculations is to result in formulas which have no meaning in reality."
This is a non-sequitur. Spending, revenues, deficits, and debt are well defined numbers independent of the question of how much of the spending involves payments that shouldn't have been made or that were larger than necessary.
To assert that no meaningful discussions of fiscal matters can occur without discussing waste, fraud, and abuse is like saying that you can't discuss the family check register without discussing waste, fraud, and abuse. Obviously you're not an accountant.
Posted by: Emil Pulsifer | March 22, 2013 at 04:41 PM
"...when managing the national debt does not even mean paying it all off."
Right, Chuco, or even any of it. Debt held by the public (net of Fed holdings) was about the same in dollars in 1967 ($219 billion) as it was in 1946. Yet, this debt as a percentage of GDP declined from 98.0 percent to 27.1 percent over this period. High marginal income taxes on the wealthy helped keep deficits under control while allowing plenty of healthy economic growth, even as spending increased.
Posted by: Emil Pulsifer | March 22, 2013 at 04:58 PM
In case I didn't make it clear in comments above, here's another way to put it: the record debt racked up by the nation during WW II was never paid off or even paid down to speak of. It was simply rolled over until economic growth made it increasingly irrelevant to the nation's finances.
Posted by: Emil Pulsifer | March 23, 2013 at 03:09 PM
Reserve holdings) at the end of 1940 was $40.3 billion. By the end of 1946 it was $218.1 billion, which means it more than quintupled in six years. The lowest it became in dollars in subsequent years was $191.3 billion in 1951. See Table 7.1.
Posted by: Emil Pulsifer | March 23, 2013 at 03:36 PM
That last comment got chopped. Should have read:
To provide some additional context, debt held by the public (net of Federal Reserve holdings) at the end of 1940 was $40.3 billion. By the end of 1946 it was $218.1 billion, which means it more than quintupled in six years. The lowest it became in dollars in subsequent years was $191.3 billion in 1951. See Table 7.1.
Posted by: Emil Pulsifer | March 23, 2013 at 03:40 PM
Emil, when I saw the word chimera in your title I assumed you meant the in the biological sense - an organism composed of at least two sets of gametes. So before I even read it I pictured a debt that is considered benign and even healthy when the GOP in power but that morphs into the malevolent "twin" when the Democrats take over (not exactly going in the most scientifically or metaphorically accurate direction here but, whatever).
When the bad (Democratic) side of the chimera emerges, it is believed by all Serious People that a radical course of medical treatment is necessary, one that is likely to be debilitating or even deadly to the economy.
Posted by: Donna Gratehouse | March 24, 2013 at 01:58 AM
Donna - If the GOP would restrain themselves and limit their hatred to the working class and the poor, they could probably actually be quite fiscally conservative. Problem is, their misanthropy becomes equally inflamed when they contemplate foreigners, and they blow the savings on blowing them up
/myUnhingedSundayRant
Posted by: Petro | March 24, 2013 at 09:41 AM
Donna, you're certainly right about Republican attitudes toward debt being radically different when one of their own kind is in office, at least from Ronald Reagan on.
Debt held by the public (net of Federal Reserve holdings) was 21.7% in 1980. By 1988 it was up to 36.4%, a 68 percent increase over his eight years.
From 1988 through 1992 (Bush Sr.) it rose from 36.4% to 43.4% of GDP.
Under Clinton's second term it actually dropped from 43.3% to 29.5% (well, really 27.2 because of the difference between fiscal years and calender years, the timing of budget legislation, and the fact that presidents take office in January of the following year).
Bush Jr. took it back up, though not nearly as much as you might imagine because of the wars; most of the increase occurred when the economic crisis hit. By the end of fiscal year 2008 it was back up to 37.1% of GDP, or an increase of 1/3 over the period.
Posted by: Emil Pulsifer | March 24, 2013 at 04:39 PM
P.S. It's also interesting to note that during Clinton's first term, when Democrats controlled both houses of Congress, this debt stayed about the same during his four years, unlike under Reagan or either Bush. In 1992, it was 43.3%, and in 1996 it was also 43.3%.
This is important because conservatives often claim that Clinton got "lucky" with the budget surpluses which occurred during his second term. The figures show that Clinton (and the Democratic Congress) was actually fiscally conservative during his first term.
Incidentally, the conservative claim that the dot.com boom was responsible for Clinton's second term surpluses is nonsense. You can eliminate all growth in federal capital gains revenues during the boom and you still get surpluses, albeit smaller ones. Clinton's tax increases brought in more money as the economy enjoyed strong growth throughout his presidency.
Posted by: Emil Pulsifer | March 24, 2013 at 04:48 PM
Also note that the annual deficit in Clinton's first term was already on a steady track of reduction: in 1992 it was 4.7% of GDP, and it decreased steadily each year until by 1996 it was 1.4% of GDP. Second term budgets just continued this trend, with the last deficit in fiscal 1997 of 0.3% of GDP, converting to a small surplus the next year and growing steadily after that. This represented the steady accumulation of revenues after the early tax increase as the economy grew strongly each year thereafter.
See Table 1.2:
http://www.whitehouse.gov/omb/budget/Historicals
Posted by: Emil Pulsifer | March 24, 2013 at 05:00 PM
great read good comments, sans trolls and loons. Love it. I'll be sure not to share it w/ my oc-cali fb friends! Their heads might explode from the sanity and the smartness. I am, however, going to memorize the arguments and send like-minded people here if I can. h/t to C&L for plugging this blog. Thank you, really impressed.
Posted by: colinjames | March 26, 2013 at 08:17 AM