Green Room

Economic Malcontentery

posted at 9:02 pm on August 29, 2009 by

President Barack H. Obama and his Windy-City White House have admitted that their projected deficits were far too low, so they’ve upped the 10-year total to $9 trillion, more or less matching the CBO. But aren’t they still playing fast and loose with their figures?

Illth care

Obama swears that ObamaCare won’t add even a dime to the deficit; thus he has not included any costs from that program in his projection. But wait — nearly every non-White House source believes it will be very expensive, costing anywhere from $750 billion to $3 trillion.

Which means, I fear, that even the expanded Obamic deficit projection is significantly low — and we’re actually looking at adding nearly $11 trillion (taking the mean average of the projection boundaries), not a “mere” $9 trillion, to the national debt by 2020.

Medicare malpractice

In addition to the problems with ObamaCare, the administration also estimates that they will save an additional $200 billion (per year?) on Medicare. According to AP:

Democrats also are calling for cuts in Medicare spending, using some of the savings to help uninsured workers. A House bill would result in a net reduction in Medicare of about $200 billion, though Obama has insisted the reductions would not cut benefits in the health program for the elderly.

Five’ll get you eight that the administration is including this as “deficit reductions” in their budget estimates, since no “new government programs” have yet been enacted specifically to eat up that supposed reduction (the reductions are counted immediately; the spending won’t be counted until it’s actually spent).

In the event that this amazing Medicare savings (without cutting any benefits!) fails to eventuate, the deficit increases by another $200 billion — if that alleged savings is allegedly a one-shot — or by another $2 trillion, if it’s supposedly a structural change. So the national debt rises by a total of more than $11 trillion (best case) to as much as $13 trillion (worst case).

The joy of tax

Economist John Mauldin, in his weekly e-letter, notes the following point about some of President Obama’s assumptions underlying the recent budget estimate:

Instead of fiscal discipline, we are hearing increased demands for more spending. Please note that the very rosy future deficit assumptions assume the end of the Bush tax cuts at the close of 2010. But raising taxes back to the level of 2000 does not make the projected future budget deficits go away.

I mean, seriously, does anyone think Pelosi or Reid are going to lead us to fiscal constraint? Obama talks a good game, but he has not offered a serious deficit-reduction proposal, other than further tax increases. And by serious, I mean we need cuts on the order of several hundred billion dollars.

Liberal squawking notwithstanding, most of the Bush tax cuts went to middle-income taxpayers. Obama has sworn that he won’t raise the taxes of anyone making less than $250,000 a year… which means he wouldn’t be able to cut the Bush tax cut much at all. And even if the president proposed breaking his word on this issue (“read my lips…”), it’s very unlikely that wavering members of the House and especially Senate would go along with it, since the congressional debate would have to be flooding the airwaves in 2010, swamping almost every other issue in the November elections.

So that’s one assumption that appears to be busted from the git-go; who’s going to vote for massive tax increases right before an election? Let’s assume no significant tax increase on the middle income, including allowing the Bush cuts to die “quietly” (yeah, right — quietly!)

So how much is the net hit on the deficit projection due to the unlikelihood of repealing the Bush tax cuts?

Mind, we’re not talking about an actual deficit (if any) was created by the tax cuts; that’s a whole different argument. I’m asking how much the Obama administration estimated the Bush tax cuts were costing per year, and how much of that amount they expected to recover from killing them. In other words, how much deficit reduction did they include in their calculations that they’re not actually getting?

The leftist Economic Policy Institute is just the sort of econ think tank that Barack Obama would find trustworthy; it was founded by various liberal economists (including Bill Clinton’s future Secretary of Labor, Robert Reich) in 1986, and it consistently presents the view from the Left. Their 2005/2006 position paper on tax cuts estimates the deficit impact thus:

In the recently completed fiscal year 2005, the combined effect of the tax cuts passed since 2001 was $225 billion without interest. When the interest costs from greater debt is included, the tax cuts raised the deficit by $260 billion, a sum that would wipe out most of last year’s unsustainable $317 billion deficit.

I wonder if they consider Obama’s trillion-dollar deficits, marching into eternity, “sustainable”…

I think it reasonable to assume that the current administration accepts the estimate that the Bush tax cuts increased the deficit by at least $260 billion per year; how much do they expect to “recover” by killing the tax cuts? It would be hard for me to believe, given the urgency of the budget-deficit problem, that Obama would have low-balled the savings. I think it’s not unreasonable that he would have “estimated” savings of about $200 billion per year, or 78% of what he (and liberal economists) imagine the cuts are costing the economy.

So bursting that soap-and-change bubble, adds another $2 trillion over ten years to the national debt, bringing the adjusted total increase up to $13 to $15 trillion.

Very interesting…

Finally, Mauldin quotes from economist Richard Russell:

“The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let’s say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day [sic; more like $1.7 billion per day — DaH]. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof.”

But Russell is assuming only nine trillion dollars added to the debt; splitting the difference, what if it’s really $14 trillion, going from $11 trillion today to $25 trillion by 2020?

Under Russell’s formula, an increase from $11 trillion to $20 trillion (182%) yields an increase in budgetary “debt maintenance” from $340 billion up to $618 billion, or 182%; so the equation is roughly linear.

That makes it easy to calculate with the new figures: An increase of the debt from $11 trillion today to $25 trillion — 227% — should result in a corresponding increase in debt maintenance from $340 billion per year to $773 billion. But wait, there’s worse! A perception of increased financial risk for the United States could force us to raise the interest rates for U.S. Treasury securities, which would of course dramatically raise the interest payments on the national debt. That $773 billion could easily rise to a trillion dollars or more… just to pay the interest on the debt.

It could easily become the largest component of the entire budget, en route to gobbling up the whole thing, lock, stock, and kaboodle.

Like a spiderweb, the pieces all fall into place

Such a huge chunk of the budget going to pay mere interest on the debt will have a devastating effect on our economy (Mauldin sarcastically suggests we borrow money to pay the interest on the money we borrow). But the frustrating thing is that economists cannot agree whether such a collapse would produce massive inflation, as in a typical recession — or massive deflation, as we had in the Great Depression. Alas, the strategies individuals should follow are completely different for each of these options: You don’t want to be holding gold during deflation, for example; you want to be holding cash.

The only thing that might lessen the march towards economic collapse would be to drastically reduce spending; that means not only not enacting the rest of Obama’s grandiose and delusional agenda, but actually rolling back the budget by an additional $300 to $400 billion from where it was in 2008. Such fiscal discipline would also have the serendipitous effect of keeping Treasury securities at lower interest rates, as default would be less likely in a scenario of economic responsibility.

Some kind of stimulus would almost certainly still be needed to stave off a double-dip recession; but we could do an awful lot to mitigate the damage caused by such spending by spending it more wisely. That is, Barack Obama’s syllogism is simply false: It really does matter to the economy what you stimulate.

Instead of shoveling money to pet projects of liberals, if our “stimulus” included things that actually create wealth directly or indirectly, rather than just spreading the existing wealth around — we would encourage our economy to grow. Instead of focusing on dividing the pie, focus on baking a bigger one.

What kind of stimulus am I talking about?

  • Repair and upgrade of infrastructure, including water distrubution, road building, the electricity grid, and hardening our electronics against the electromagnetic pluse (EMP) effect;
  • Building a bunch of new nuclear power plants;
  • Dramatically upgrading and improving our border security;
  • Offering low-cost loans to recent or even start-up small businesses;
  • Fully privatize Social Security, Medicare, and Medicaid (paying the transition costs), and so forth.

And that is the only long-term solution to such fiscal problems: growth, growth, growth. Knowledge is being created all the time; wealth is the application of knowledge and human industry to natural resources; thus an increase in knowledge should normally trigger an increase of real wealth. As knowledge always increases, in this day of survivable recording media (the Dark Ages could not happen again), the normal state should be a continuing rise in real weath over time.

The theory is sound; it’s only its application that has been wanting in recent years.

Cross-posted on Big Lizards

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I aver that the left’s theoretical understanding of governance and the left’s practical application of governance yield increasing poverty for a society. There is no possible way they can formulate and apply policy to increase wealth. It’s like adding 11 billion and 3 billion and getting 9 billion.

Think North and South Korea. The left likes North Korea. The right, South Korea. The current U.S. leaders could convert the US into Zimbabwe.

We must stop all increases in government spending, and repeal the stimulus plan and TARP to survive the next two years.

NaCly dog on August 29, 2009 at 10:07 PM

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”

— Robert A. Heinlein

cthulhu on August 29, 2009 at 11:24 PM

Dramatically upgrading and improving our border security

Can we use predator drones?

Question: Didn’t you mean “raise” in the assertion “Obama has sworn that he won’t cut taxes of anyone making less than $250,000 a year… ” or am I missing a cleverly sarcastic statement?

ExpressoBold on August 30, 2009 at 9:45 AM

Question: Didn’t you mean “raise” in the assertion “Obama has sworn that he won’t cut taxes of anyone making less than $250,000 a year… ” or am I missing a cleverly sarcastic statement?

ExpressoBold on August 30, 2009 at 9:45 AM

An outdated expression is “Have all the air you want – it’s free.”

How’s that for sarcasm?

ericdijon on August 30, 2009 at 11:25 AM

ExpressoBold:

For some reason, I made a number of typos and wordos in this post; for example, I mistyped trillion as “billion” several times (I’ve corrected that, as well as the one you caught… thanks!)

Apologies,

Dafydd

Dafydd ab Hugh on August 30, 2009 at 7:45 PM