Archive for the 'deficit' Category

State Tax Revenues Plunge

Kurt Brouwer November 10th, 2009

The fact that state tax revenues are falling should not be a surprise given that we have been in a recession.  Nor, should it be surprising that income taxes have fallen far more than sales taxes or property taxes.  Historically, the bulk of income tax revenues come from higher income folks whose income is far more volatile.  This is all predictable, but I imagine this predictable outcome is still quite a shock to the powers that be in our state capitols:


Source: Nelson A. Rockefeller Institute

My prediction?  We will see a lot of interest on the part of politicians for additional sales taxes such as the value-added tax (VAT) as used in Europe.  This would not be so bad if it replaced an existing tax, but that will almost certainly not be the case.  The VAT will be increasingly touted as a way to ‘solve’ the state funding or Federal funding shortfall.

Hat tip: Barry Ritholtz

How do we fix the Federal deficit?

Kurt Brouwer October 21st, 2009

In my post on the $1.4 trillion budget defict ($1.4 Trillion Federal Budget Deficit), I wrote:

…Neither the Republicans nor the Democrats can claim any glory when it comes to spending control.  Politicians seldom get criticized for spending our money, so they keep right on doing it.  We can assign blame to different players and parties, but that still begs the question: ‘What the heck do we do?’

…We cannot run such massive deficits indefinitely on that much there is agreement.  But, where is the plan for how we bring spending and revenues more closely into balance?  If there is one, I have not seen it.

In response, one of my readers asked this in a comment:

So how do we go about fixing the deficit?

Answer #1: Balance the budget. 

One obvious answer would be to argue for balancing Federal spending and revenues.  There is one problem though, which is that we have only had something like 12 years out of the past 78 (since 1930) in which we had a balanced budget or a budget surplus.  So, being a practical sort, I am suggesting that a balanced budget is a pipe dream.

As you can see from the chart below, Federal spending (red line) and receipts (blue line) have been out of balance for long periods.  The pattern seems to be that deficit widens during recessions (gray bars) and narrows during times of economic expansions.  However, the trend for many years — with the exception of the late 1990s — has been to be in deficit. That is, Federal spending has almost always outpaced tax revenues.

Source: St. Louis Federal Reserve

As you can see, Federal spending and revenues seldom balance. Here is the same chart covering the period 1970 - 2008:

Source: St. Louis Federal Reserve

Must we balance the budget?

It would seem that we seldom actually balance the budget and we primarily operate in a deficit.  So, that begs the question: do we need to balance the budget?  In terms of a family or a business, the answer is unquestionably yes because the family or the business would eventually go bankrupt when it ran out of cash to spend.  Some families or businesses could last longer than others, but eventually the reckoning would come.

But, the Federal government is different because it is a permanent entity unlike a family or a business.  And, it can issue debt that is backed by the government’s ability to tax us in order to pay off the debt.  So, to answer the question, does the Federal government need to balance its budget, the answer is not necessarily.  It might be better for monetary reasons to do so, but it’s not absolutely necessary.

If we don’t have to balance the budget, what should we do?

Answer #2:  Keep the deficit in an acceptable, long-term range:

We have not balanced the budget very often, so an exact balance may not be necessary, but we should try to keep deficit spending in a range of $200 billion or less in times of economic expansion and $400 billion or so in times of recession.  Over time, that range would expand a bit to keep pace with inflation.

As you can see from this chart of the deficit/surplus, keeping the deficit in a reasonable range is something we have done quite well, until recently.  In normal times, keeping spending and receipts within shouting distance is doable, with a bit of fiscal restraint from our leadership.  The blue line indicates a deficit when it is below zero and a surplus above zero:

Source: St. Louis Federal Reserve

Tax revenues plummet while spending soared

Recently, the long-term pattern of manageable budget deficits has changed — for the worse.  Spending under the Republican Congress (until the 20006 elections) was largely unrestrained.  Fortunately, beginning in 2003, the economy recovered and tax revenues recovered along with the economy so that the deficits were not bad.  But, then the economy began falling into recession and tax revenues fell off while spending picked up.  Then, with the the financial panic of 2008, economic activity cratered and tax revenues plummeted at the very time that spending went up dramatically.

Now that the recession is winding down, government spending should get cut back and tax revenues should pick up.  Unfortunately, there is no sign that spending is being cut.  In fact, Congress has shown no ability to cut spending or even to stop increasing it.  Hence, the red line is shooting north.  And, individuals are making less money and many millions are unemployed, so individual taxes are down.  However, the big revenue killer is corporate income taxes.  Companies have not made much money in a long time and corporate tax receipts are down about more than 50%.  That hurts.

On its Tax Vox Blog, the Tax Policy Center made this point quite well:

…Corporate income tax revenues took the biggest hit, down by more than half from 2008. The deep recession wreaked havoc on corporate profits, leaving a large majority of firms with no tax liability. The consequent $165 billion drop in corporate taxes accounted for nearly 40 percent of the total revenue decline…

Source: Tax Vox Blog

Big deficits as far as the eye can see

Tax Vox continues:

Total federal revenue in 2009 amounted to just 14.9 percent of GDP, the smallest fraction since 1950 and far below the 26 percent of GDP spent by the federal government. That gap will narrow in coming years but CBO projects that it will average more than 4 percent of GDP over the next decade, and that’s only if the 2001-2006 tax cuts expire in 2011 as scheduled. Extending those cuts, even only for President Obama’s broad middle class, will mean deficits as far as the eye can see.

Fiscal restraint 

Congress controls the Federal government’s spending so Congress is the root of the problem.  Or, maybe you could say that we are the problem because we elect representatives who do not focus on fiscal or spending restraint.  This is not a partisan comment because it applies equally to Republicans, Democrats and Independents.  Our representatives in Congress get their clout through passing legislation which means spending government dollars.

In other words, Congress is the solution as well as the problem.  I believe Congress needs some kind of powerful restraint from its bipartisan spending habit.  Ideally, voters would elect fiscally responsible folks to Congress, but that has not happened or it may be that life in Washington brings out the spendthrift in the best of us.  Absent voters, where will the restraint come from?

Divided government & the Clinton years

As you can see, we have been in deficit for most of the past 38 years.  The only time period where we were in surplus was 1997-2000, the last four years of President Clinton’s presidency.  During that period we had divided government, with President Clinton (a Democrat) on one side and Congress (controlled by Republicans) on the other side.

Looking back on that time period, it occurred to me that divided government may have its merits.

See also:

Can our government borrow unlimited sums?

Government: It ain’t broke yet, but just wait

50 Ways the Feds Waste Our Money

Cash for Carts (golf carts that is)

Kurt Brouwer October 19th, 2009

In a post on the Cash for Clunkers program, I joked about a similar program for appliances.  But, I should not have joked because such a program was included in the economic stimulus program passed earlier this year.  CNBC reports [emphasis added]:

Dollars for Dishwashers? Appliance Rebates on the Way (CNBC, August 20, 2020, Christina Cheddar Berk)

…The government’s so-called “Cash for Clunkers” program has been grabbing headlines, but it’s not the only federal program putting money back into consumers’ pockets. A new government program is poised to help appliance manufacturers the same way “Clunkers” gave a jump start to auto manufacturers.

As part of the Obama Administration’s economic stimulus bill, nearly $300 million was set aside to fund a state-run rebate program for consumers purchases of Energy Star-qualified home appliances.

Like the “Clunkers” program, the plan takes aim at energy guzzlers. However, unlike in the popular auto program, consumers will not have to turn in their old appliances in order to buy a more efficient one and qualify for the rebate. However, the exact criteria remain unclear because states are still drafting their individual plans, with the hope of having the programs up and running by the end of this year…

Great line that says so much, ‘…the exact criteria remain unclear…’  It really is impossible to parody Congress anymore.  And, of course, the fact that Cash for Clunkers has been a fiasco will not stop implementation of Dollars for Dishwashers.

Now, we find that even Dollars for Dishwashers was not the end of the government’s effort to subsidize our purchases.  We also have Cash for Golf Carts.

Cash for Golf Carts 

As part of the American Recovery & Reinvestment Act of 2009 (ARRA), there is a stimulating program that is helping golfers buy electric golf carts.  I am not knocking golfers with this post, in fact, I play golf from time to time.  I even spent several years of my wayward youth caddying at a tony country club.

However, I really don’t see why we need to borrow money — that’s what economic stimulus really means at this point — to subsidize golfers who want to buy a cart, do you?

One problem with very large government programs is that there are always unintended consequences.  I suspect the legislators who worked on this program did not really intend to give electric golf cart sales a boost, but who knows what evil lurks in the heart of the vast golf cart lobby? This editorial from the Wall Street Journal describes  program [emphasis added]:

Cash for Clubbers (Wall Street Journal, October 17, 2020)

…Uncle Sam is now paying Americans to buy that great necessity of modern life, the golf cart.

The federal credit provides from $4,200 to $5,500 for the purchase of an electric vehicle, and when it is combined with similar incentive plans in many states the tax credits can pay for nearly the entire cost of a golf cart...which is typically in the range of $8,000 to $10,000. “The purchase of some models could be absolutely free,” Roger Gaddis of Ada Electric Cars in Oklahoma said…

Free.  When it comes to almost any consumer product, if you make it free, you can in fact stimulate demand. That’s not exactly news though.

The golf-cart boom has followed an IRS ruling that golf carts qualify for the electric-car credit as long as they are also road worthy. These qualifying golf carts are essentially the same as normal golf carts save for adding some safety features, such as side and rearview mirrors and three-point seat belts. They typically can go 15 to 25 miles per hour.

…The IRS has also ruled that there’s no limit to how many electric cars an individual can buy, so some enterprising profiteers are stocking up on multiple carts while the federal credit lasts, in order to resell them at a profit later…


This golf-cart fiasco perfectly illustrates tax policy…politicians dole out credits and loopholes for everything from plug-in cars to fuel efficient appliances, home insulation and vitamins…then insist that to pay for these absurdities they have no choice but to raise tax rates… 

This is kind of funny in a way.  We don’t generally think of golfers who tootle around in golf carts as needy, but they are just responding to incentives, so you can’t really blame them.

However, if you think of this as a wasted and misguided use of our money, then it’s not so funny.  And, if you multiply this sort of idiocy thousands of times in many different industries, then it starts to get infuriating.

Congress & the vast golf cart industrial complex

I doubt if anyone in Congress is in thrall to the vast golf cart industrial complex, but the American Recovery & Reinvestment Act is now funding well-to-do golfers who want a FREE personal golf cart.  I shudder to think of what’s next.

See also:

50 Ways the Feds Waste Our Money

CRASH for Clunkers

Clunking toward health reform

Convicts Cash In On Fed Stimulus

We’re in the best of hands


Collateral Damage From Cash for Clunkers

$1.4 Trillion Federal Budget Deficit

Kurt Brouwer October 17th, 2009

Source: Washington Post

As you can see, the red ink is flowing in Washington DC.

In a way though, this record budget deficit is a little less bad than it could have been.  As you can see from the next chart, also from the Washington Post, earlier this year the deficit was projected to be even larger, more in the range of $1.75 - 1.85 trillion.


Source: Washington Post

But, where do we go from here?  As I read through this piece from the Washington Post, I was not reassured that anyone in Washington DC actually has a handle on this.  Or, at least, the WaPo reporters could not find anyone who really has a plan [emphasis added]:

Record-High Deficit May Dash Big Plans (Washington Post, October 17, 2020, Lori Montgomery and Neil Irwin)

The federal budget deficit soared to a record $1.4 trillion in the fiscal year that ended in September, a chasm of red ink unequaled in the postwar era that threatens to complicate the most ambitious goals of the Obama administration…

…At about 10 percent of the overall economy, the gap between federal spending and tax collections is the largest on record since the end of World War II, and bigger in nominal terms than the past four years of deficits combined. Next year is unlikely to be much better, budget analysts say. And Obama’s current policies would drive the budget gap into the trillion-dollar range for much of the next decade.

This is the type of record we really don’t want.  And, I think we need to get past the partisan sniping.  Neither the Republicans nor the Democrats can claim any glory when it comes to spending control.  Politicians seldom get criticized for spending our money, so they keep right on doing it.  We can assign blame to different players and parties, but that still begs the question: ‘What the heck do we do?’

The WaPo article continues:

…A combination of factors combined to produce the $1.4 trillion gap. A deep recession caused tax revenue to plummet by more than $400 billion this year, while the government’s economic rescue efforts swelled federal spending. In all, the government spent $3.5 trillion in fiscal 2009, while taking in only $2.1 trillion in taxes, the Treasury Department said. Among the outlays: $113 billion in stimulus cash, $154 billion for the bank bailout and nearly $96 billion in capital payments to Fannie Mae and Freddie Mac, the troubled mortgage insurance giants that the government took over last year.

…”In the short term the deficit is not our primary problem,” said Heather Boushey, a senior economist at the left-leaning Center for American Progress. “The unemployment rate is near 10 percent, and the key thing is to get the economy growing, which will increase tax revenues. But in the long term we do need to think about the deficit problem and do something about it.”

Economists universally agree that the nation cannot run such massive deficits indefinitely. The question now facing Obama, budget experts said, is how to bring spending and revenue more closely into balance in the years ahead, after the economy fully recovers…

We cannot run such massive deficits indefinitely on that much there is agreement.  But, where is the plan for how we bring spending and revenues more closely into balance?  If there is one, I have not seen it.

MEDICARE-Underestimating the cost

Kurt Brouwer October 12th, 2009

As we have noted before, Congress has a tendency to underestimate the costs of a program it is considering.  In yet another example of this, this chart demonstrates that Medicare costs have been significantly underestimated by Congress at the time of enactment:

Source: Carpe Diem

Medicare: What will it really cost?

The ironic part about the current discussions of healthcare reform costs is that proponents of the plan initially said — and some are continuing to say — that healthcare reform would save money.  Unfortunately for them, the Congressional Budget Office (CBO) pointed out that the legislation before the House of Representatives (H.R. 3200) would actually add significantly to the deficit by as much as $1 trillion over the next 10 years.

That news caused many in Congress to gulp hard, yet the CBO estimate is almost certainly low if history is a guide.  I thought it would be useful to look at how far off previous estimates from Congress on Medicare costs have been  in the past.

When Medicare was passed, various future estimates of costs were made by Congress.  Those estimates were wildly off base, so much so that it is doubtful that Medicare would have passed, had there been an accurate cost estimate.  The chart above shows that the actual costs for Medicare programs run from a minimum of 200% over budget up to 1700% over budget.

Lyndon Johnson & Medicare cost estimates

There is an interesting interview on National Public Radio [emphasis added] which presents evidence that President Johnson deliberately underestimated the cost of Medicare to get it passed.  The interview is with James Morone, co-author of the Heart of Power: Health and Politics in the White House.   In it, the show’s host, Renee Montagne, asks the author about comments President Johnson made about the original cost estimates for Medicare.

Democrats Could Learn From LBJ’s Medicare Push (National Public Radio/Morning Edition, August 26, 2020, Renee Montagne)

[NPR-Montagne]: There are tapes of Johnson showing a different side of how he worked [Medicare's passage].

[James Morone, co-author of The Heart of Power: Health and Politics in the Oval Office]: Johnson maneuvered every step of the way getting this bill through Congress, and one of the things he did — and this is a little dicey in today’s climate — was suppress the costs. So this young kid gets elected from Massachusetts, Ted Kennedy, in 1962, and Johnson is explaining to him [over the phone] how you get a health bill through. And what he tells him is don’t let them get the costs projected too far out because it will scare other people:

“A health program yesterday runs $300 million, but the fools had to go to projecting it down the road five or six years, and when you project it the first year, it runs $900 million. Now I don’t know whether I would approve $900 million second year or not. I might approve 450 or 500. But the first thing Dick Russell comes running in saying, ‘My God, you’ve got a billion-dollar program for next year on health, therefore I’m against any of it now.’ Do you follow me?”

[JM]: We believe, after looking at the evidence, my co-author [David Blumenthal] and I, that if the true cost of Medicare had been known — if Johnson hadn’t basically hidden them — the program would never have passed. America’s second-most beloved program would never have happened, if we had had genuine cost estimates…

That is an amazing piece of history and it seems authentic as it is based on tapes LBJ made of his various conversations.  Most people don’t realize this, but the various pieces of healthcare reform legislation now before Congress use an interesting technique of which LBJ might approve.  Taxes and fines and Medicare cuts would start right away, but spending on the program would be delayed until 2013 or so.  So, the 10-year estimate only has 6 or 7 years of actual expenditures built in.  Nice.

Can we trust Congress?

For a variety of reasons, estimating costs of government-run health insurance reform seems to be quite difficult, even assuming our leaders are trying to do so fairly and honestly.  So, I would not take current estimates of the cost of health insurance reform as being cast in stone.  In fact, I would assume they are very low as Congressional estimates for Medicare have always been in the past.

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