Sunday, January 2, 2011

Excellent NYT Article By Krugman

Paul Krugman spells out what kind of government budget bad craziness we can expect next year:
As the Center on Budget and Policy Priorities points out, the incoming House majority plans to make changes in the “pay-as-you-go” rules — rules that are supposed to enforce responsible budgeting — that effectively implement Mr. Kyl’s principle. Spending increases will have to be offset, but revenue losses from tax cuts won’t. Oh, and revenue increases, even if they come from the elimination of tax loopholes, won’t count either: any spending increase must be offset by spending cuts elsewhere; it can’t be paid for with additional taxes.

So if taxes don’t matter, does the incoming majority have a realistic plan to cut spending? Of course not. Republicans say that they want to cut $100 billion in spending, which is itself small change in a $3.6 trillion federal budget. But they also say that defense, Medicare and Social Security — all the big-ticket items — are off the table. So they’re talking about a 20 percent cut in what’s left, which includes things like running the judicial system and operating the Centers for Disease Control and Prevention; they have offered no specifics about where the cuts will fall.
Okay: Get it? (Now remember, this is the "deficit reducing Republicans" who just won an election promising to get that crazy old federal debt problem under control.)

Republican step one: For every dollar you raise federal spending in one place, you have to decrease federal spending by a dollar in another place. Sounds like a start.

Republican step two: For every dollar that you lose in federal revenue by lowering taxes... just don't worry about it.

Republican step three: The only parts of the federal budget through which the $13,000 billion total federal debt can be paid off is (from the chart below) the areas of "Safety Net Programs" and the other "Remaining Fifth" (almost half of which includes Veteran's benefits).

So, let's do some math: Out of the $3,600 billion budget, Republicans have decreed that they will not cut, touch, or adjust two thirds of it, $2,400 billion, and they have decreed that they will not raise taxes. From the remaining $1,200 billion, the Republicans have found $100 billion in cuts. Considering that the most recent budget deficit that did not include the depression-avoidance / emergency bailout measures was approximately $500 billion, the Republicans are barely putting a 20% dent in the budget deficit with $100 billion in cuts.

But here is the down-and-dirty reality of what the Republicans are pretending they are going to do: They are JUST going to balance the $500 billion budget deficit (assuming it has not gone up in the past 3 years, which it has) only by making cuts to the $1,200 billion part of the budget that they have not declared off limits. In other words, they are claiming that they are going to literally cut the entire spending of the federal government (excluding the military, Medicare/Medicaid, and Social Security) almost in half. Of course, if they want to start paying off the $13,000 billion federal debt, they will need to cut it even more... a lot more.

Just to give you an idea of how preposterous that is: If we completely shut down the entire government — save military, Medicare, and Social Security, as per the Republican plan — there would be a $700 billion budget surplus. So with the Republican Plan as it currently exists, if the federal government was completely shut down and did nothing except collect taxes and pay the national debt (plus military, Medicare, Social Security), it would still take 20 years.

Do you believe them? Do you think they'll do it? Me neither.

Actually, I'm kind of morbidly curious how long the rest of the world will continue to let the United States continue this. We already owe the world $13,000 billion. As long as other countries continue to loan our budget $500 billion a year... everything is fine. Hell: The U.S. feasibly could go on forever as long as other countries are willing to pay for our overspending with their own money.

(Don't you wish your own life was like that? You purposefully spend increasingly more money than you earn every year for dozens of years in a row. At the end of each year you just go around to all your neighbors on your block and borrow increasing amounts of money from them. And they actually give it to you! In addition, you pay them the interest on the money that you've already borrowed in previous years by borrowing money to pay that too.)

Granted, when that finally comes to an end — whether you, the Republicans, the Democrats, or I like it or not — the $500 billion (and more) budget deficit is going to disappear all at once. The age of the "balanced budget" will have involuntarily arrived. (And, of course, that's just one problem: Social security, trade imbalances, and interest on the national debt still need to be paid (or fail) at the same time.)

I'm quite certain I'm going to live to see it happen.


Anonymous said...

What is going to happen is simple and it will happen very quickly.One day soon the bond rating of the US treasury bonds and notes will be downgraded and from their it will not take long for the entire government to collapse,because the USA will not be able to borrow money at a good enough interest rate to service the national debt.It will have the net effect of a valueless currency as exists in Iceland now.It is going to happen,should have already but the rest of the world isnt big enough...YET.This is going to be a horrendous moment in time and it will lead to some serious riotous behavior on the part of the citizens who will not be collecting their promised social security pensions and medical benefits.It has all been brought about by the greed of the corporations who were built by hardworking American citizens,good and decent people who have been sold out by a federal government that is squandering billions and has sponsored/passed legislation that allows the corporations to take american jobs to foreign lands and turn americans into hamburger making paupers.The only fault the citizens of the USA can be handed is for tolerating the sadest decline of a country in modern times.It is coming very soon and it can not be avoided.If the politicians had the balls to set laws in place to either tax the shit out of the goods returning to the states after being made elsewhere for next to nothing(but never sold to American citizens at a discount!) in order to create tax revenue.Or return the manufacturing jobs to sustain the population,tax-base it could be turned around in 12-15 yrs.,but,it isn't going to happen as the corporations have the politicians in their pockets and it is only a matter of time before the above bond rating scenario brings the curtain down on the whole show,GOOD NIGHT IRENE!!!This is truly sad to see happening in my lifetime.

Jungle Jil said...

I understand what you are saying... but to be honest, I don't think that bond rate cutting scenario is going to play out simply because "too big to fail" doesn't just apply to certain companies, but to certain countries as well.

Instead, what you are going to see happen is countries that fund the United States budget deficit say that they will not loan the United States money unless the United States does such-and-such. In other words, America will be everybody's drug-addicted crack whore, who is going to do exactly what everybody (like China) tells them to do or they'll just cut off that nice flow of cash happiness for a year to prove who's the boss.

After all, having the United States on a leash will be a lot better than having the United States as some really stinky roadkill in the middle of the world's economic highway.

Anonymous said...

In this year, you will see almost every single state (except North Dakota) go bankrupt and find themselves unable to borrow money to pay existing obligations let alone past debt. The first poster has it right. But first comes the individual states experiencing this exact scenario. If anyone thinks the USA is on the road to recovery has a rude awaking ahead. We are being lied to on all levels, all maybe in the hopes that spending increases so that tax revenue will increase.
The states know that they no longer can turn to the Federal Govt for help, and investors know that they will never see a return on their investments to the states.
Don't ever think that anything is too big to fail. No nation has ever taxed or borrowed themselves into prosperity.

Jungle Jil said...

I think that a lot of states require balanced budgets. Not sure about that. Also, state budgets (and failure thereof) are not interwoven with the national and world economy like the national budget is.

Hmm... if states started coming up 15% to 20% short in their budgets, it wouldn't be cataclysmic: Roads wouldn't get repaired or plowed; schools wouldn't get new textbooks; welfare recipients would probably have the greatest problems if they faced cutbacks.

But overall, most state governments (a) aren't already massively in debt, and (b) if taxes were to fall 10% or 15% short of a planned budget (how much lower could it suddenly drop in the course of a year or two) it would be something that could be fairly easily solved with belt-tightening measures at the local/state level.

As far as "too big to fail", I think you have to define "fail". Obviously The United States will continue on as a country, will still have an economy, an infrastructure, tax revenue.

The United States is the biggest importer on earth, largest consumer of oil and natural resources, largest financial markets with largest overseas capital investment. Nobody wants to see the United States crater because it would knock the rest of the world's economy totally in the dirt for decades. You can't just throw 20% of the world GDP out the window and think that the repercussions will remain localized to the 50 states. Too big to fail, I say... but no: Not too big to deflate over a decade or two like a balloon left in the corner.