Monday, October 21, 2013

POS - What People Just Aren't Getting About the Debt Fight

Ok so as we all know, the government just went through a messy hissy fit fight over the debt ceiling and spending levels, which was only ended thanks to a temporary solution that likely guarantees we’ll be having the exact same fight again in early 2014. I just wanted to weigh in on a few things that get lost in the shuffle on the fight over spending, some hard truths that either people don’t understand or are willfully ignoring. Too often people just say the soundbite “we don’t have a revenue problem, we have a spending problem.” Unfortunately, that soundbite is wrong; we do have a revenue problem. And until the folks in D.C. on both sides of the aisle (this is a problem facing both Democrats and Republicans, and both parties aren't facing up to these facts) are willing to face that truth, nothing is ever going to change.

What are we spending our money on?

Yes, we currently have been operating without a budget in Washington for some time now, because both sides cannot come to an agreement on a long term budget. Instead, we get these piecemeal continuing resolutions that agree to fund the government at a set amount for a short period of time. Right now, that funding amount is at the levels set forth in the sequester, for a budget on discretionary spending by the government of $988 billion, if the budget were extended out to a twelve month period. What people don’t realize is what that means. Discretionary spending is money the government is choosing to spend, so that covers the following: our military, education, veterans’ benefits, health (the Centers for Disease Control & National Institute of Health), the Food and Drug Administration, the Environmental Protection Agency, NASA, NOAA, and many more. This slice of our budget is approximately 30% of what the government spends, and these were many of the services that were halted by the government shutdown. But all the focus is on this 30% instead of on the other 70% of where the government spending goes.

So what is the other 70%? 6% of it is paying the interest on our national debt (currently ~17 trillion dollars), and the other 64% is on mandatory spending programs. The lion’s share of that 64% is Social Security, Medicare, and Medicaid, which combined are 87% of the mandatory spending. In other words, about 55% of the total federal budget goes strictly to those three programs. So, unless changes are made to those three programs, all the other cuts in the world aren’t going to amount for squat, really.

Keep reading after the jump, there's more! --->

Why can’t we just cut spending?

Even if we slash the discretionary spending budget even lower than its current levels, we can’t drop that spending to zero. Remember, the military budget comes out of the discretionary spending, so unless you want to defend our borders with paper airplanes and toy guns, you still have to spend money. And military spending is the largest part of that 30% of the budget that is discretionary spending, clocking in at about 57% of the discretionary spending, or 17% of our total budget. And if you don’t want to cut anything from the military, Social Security, Medicaid, or Medicare, and obviously we can’t stop paying the interest on the debt, those five components of the budget total up to 78% of the total spending by the government.  Good luck getting politicians to make hard cuts to any of those four programs, since not paying the interest is not optional.  So, that leaves us with 22% of the total budget to play with between where we can make cuts in mandatory and discretional spending.

So what do we cut? The FDA? Sure, let’s have salmonella and e coli outbreaks all the time in our food. The EPA? I kind of like drinking safe water and breathing clean air, thank you very much. Veterans’ benefits? Hell no, that’s out of the question. Education? Sure, because that’s not going to come back to bite us in the future when we continue to fall further and further behind the rest of the world in education. Infrastructure? Yeah, because why should we spend money to make sure our bridges don’t collapse?  Do you see where I’m getting with this? Making cuts is nice in theory, but not so nice in reality. And most cuts won’t do squat in the grand scheme of things, unless they’re to the big boys of Social Security, Medicare, Medicaid, and the military. But good luck getting politicians to cut those. The Democrats will fight tooth and nail to protect the first three, and the Republicans the military, so pretty much those are mostly off limits.

But the budget isn’t balanced! We need to cut spending!

You’re right, it isn’t. That’s part of why the national debt pile keeps getting bigger every year. Right now, the government spends more than it gets from taxes in revenues, quite a bit more in fact. In 2012, the budget deficit was about $900 billion, which the U.S. had to get in loans, adding the national debt pile. But as I mentioned earlier, the discretionary spending budget is $988 billion and that’s only 30% of our total budget. So, unless we make a drastic, trillion dollar cut to our budget, our budget will continue to be unbalanced every year. And a cut that huge would significantly wreak havoc on the economy, considering that government spending is a major component of GDP. GDP, the measure of economic strength of a nation, consists of the total spending by the government, businesses, and individual consumers. The U.S.’s GDP is about $16 trillion a year. If we suddenly cut that to $15 trillion by cutting out $1 trillion of government spending, guess what happens? We just cut 6.25% of the economy away, which would be a pretty massive drop in GDP. In fact, that would be a worse cut to GDP than the “Great Recession” we just went through a few years ago, which only cut GDP by 4.3%. Still think making cuts and only making cuts is the ideal solution?

Okay, so we can’t really cut spending. Why not raise taxes?

That’s a good question! Maybe we should ask the GOP that, huh? We have not been able to raise taxes due to the GOP flat out refusing to do so. Bottom line, unless we get some more revenues somewhere, nothing is ever going to change when it comes to our national debt.  Here’s some food for thought though: When he was president, Ronald Reagan raised taxes five times (not income taxes, but other taxes like on gasoline, cigarettes, alcohol, payroll taxes).  Also, at the time Regan took office the rate on the top earners in the country for income tax was 70%, and back in the 1950s it was even higher than that! Today it is at 39.6%, for people earning over $400,000 as an individual or $450,000 as a couple. I think we can change where that tax rate is set, and set the earners bar higher, so that those earning over $1 million a year pay a much higher amount. I think that people that own cars worth more than my house can afford to pay more in taxes, don’t you? (And even then, they don’t pay 39.6% because most of the top earners are being taxed on carried interest and capital gains at 15%, not 39.6%. I could go into taxes more but tax fairness is topic for another post on another day.) Ultimately, we need to take a look at all aspects of the tax code and see where we can bring in more revenues, not just on income taxes but on corporate taxes, and some of our goofier tax breaks like the billions a year to the oil industry. But that’s assuming that the billionaires financing our politicians would ever allow their taxes to be raised, so good luck with that.

Well in that case, what do we do about the debt?

Well for starters, balancing our budget would help immensely. Through a combination of tax increases and spending cuts, we can bring things closer in line so that we are not running up a massive budget deficit each year, which will keep the national debt total pile from expanding too rapidly. But it is going to take both. As I’ve shown here, we can’t cut our way out of this mess, and anyone that believes so hasn’t really studied the issue. We need to do both tax increases and spending cuts. Sorry, but that is the cold, hard truth. And the sooner people realize it, the sooner we can find a solution that will put our country on the right path.

In the meantime, even if we do get that mythical balanced budget, something our country hasn’t had in a long time, we still have that $17 trillion national debt pile to contend with. That pile is going to continue to grow every year, even if we aren’t taking out any further borrowing, thanks to the magical power of interest. And every time that pile grows to the point where it hits the debt ceiling, we’ll have to raise it again. So, even if the government finds a grand solution to our annual budget problems, we’re still going to have to keep raising the debt ceiling. Let’s say our interest rate on average on the national debt was at about 2% (it’s in that ballpark, I’m just going to round). That means that the national debt pile is going to grow by $340 billion dollars every single year, regardless of anything else. There is really only one way that $17 trillion is going away – we are going to need to run a sustained budget surplus every single year and put all of that surplus towards the debt until it is gone. And the only way that happens is if we cut spending even further and raise revenues even further.

So what’s the bottom line?

Bottom line is that the GOP can come out and tell me that they want to put our financial house in order, but until they are willing to raise taxes, they’re really full of shit. The Democrats can tell me the same thing, but until they’re willing to cut entitlement programs, they’re full of shit too. The only way this is getting solved is with a drastic increase in revenues combined with a drastic decrease in spending. It will not work if it is merely one or the other. And until the average American gets that through their skull, there’s no chance our politicians will admit that it’s the truth either.

Ok that’s all for today. If you’re still reading at this point I thank you for doing so. I hope you learned something today! If you’d like to discuss this with me more, hit me up on Twitter @MikeCohodes or over on Facebook, or just below in the comments. Also, if you’re curious, here’s the sources for my stats: