15 Apr 2011

The Republicans Are Not Going to Fix the Budget

Economics 12 Comments

I’m sure many people have already heard this, but just for those poor souls who rely on me for their financial news: You know the amazing budget deal cut last week, in which the Republicans wanted $60 billion in slashed spending but compromised on only $38 billion? Well, the CBO says it’s more like $352 million. Not that I think the CBO is a bunch of disinterested scientists, but I think their number is likely more accurate than what Boehner and Obama are saying.

And about that radical Ryan plan, which allegedly gets our country on the right direction and is something really refreshing and new in Washington: Do you know that even according to his own numbers–which put off all the really tough and unspecified budget cuts down the road, for future politicians to implement–the federal government doesn’t actually balance its budget until the year 2038?

Let me say that again: The crazy, radical, slashing Ryan budget plan–on its own projections–has the federal government spending more than it takes in, this year, next year, the next year…all the way to 2038, at which point we will finally have a balanced budget.

(BTW I have seen that figure touted in several places, but can’t find an official source. Any help?)

12 Responses to “The Republicans Are Not Going to Fix the Budget”

  1. Steve says:

    When Congress appropriates money it provides agencies with Budget Authority – i.e. legal authority to spend money on grants, contracts, loans, etc…. Most agencies generally do not use all of their Budget Authority in one year. Thus, actual outlays in any given year reflect a mix of outlays based on new Budget Authority and outlays based on old (prior years) Budget Authority.

    When Congress cuts spending – i.e. provides agencies with less Budget Authority – the reduction in outlays does not all occur in one year. It is spread out over several years.

    The $352 million figure cited in the press reflects the Congressional Budget Office’s (CBO) estimate of the reduction in nonemergency outlays that will occur in FY 2011. There will be additional savings in 2012 and beyond.

    The $352 million figure is derived from this table – http://www.cbo.gov/ftpdocs/121xx/doc12109/ContinuingResolutions.pdf

    CBO has informed congressional staff that the total reduction in outlays will be in the range of $20 billion to $25 billion.

    Sadly, it seems no one in the press has bothered to ask CBO about this.

    • bobmurphy says:

      Steve, I am aware of those subtleties, and to its credit the NPR story (one of the places where I heard about this) quoted a former CBO person (or maybe somebody’s budget director, I can’t remember) who explained it that way. To paraphrase then, here was the guy’s explanation (which I thought was hilarious, since he thought it was vindicating the Republicans):

      “Yes, when they say there will be $38 billion in savings this year, what they mean is that over several years, spending will be $38 billion lower than it otherwise would have been. So their figure is accurate.”

      No, it’s not. They quite clearly said they would cut $100 billion out of this year’s budget, then they reduced it to $60 billion, and now they are claiming they are saving $38 billion from this fiscal year’s spending. They are not doing that, as you yourself admit.

  2. ListenEllipse says:

    I want to get something straight, when Republicans say their plan will balance the budget in 2038, that means federal income will equal federal expenses in that year, right? But that says nothing about the 12+ Trillion national debt which will be even higher in 2038. So when do they plan on paying off the outstanding national debt? 2100?

    • bobmurphy says:

      Right, and it might even be worse than that–I have seen some people saying that we’re just talking about non-interest expenses here. I.e. that once you factor in the higher interest payments on the accumulated debt, that you wouldn’t even have a nominally balanced budget by 2038. But don’t quote me on that, because I’m not sure I trust the person who said it.

      Anyway, in either case you are right, at the very best Ryan’s plan would halt the growth of the federal debt by 2038, and even then only if we are talking about the explicit Treasury debt. (I.e. it’s possible the total actuarial liabilities of the government continue to grow faster than revenue that year, factoring in the obligations of Medicare etc.) I think under Ryan’s plan the federal government finally starts running actual budget surpluses after 2038, at which point the outstanding federal debt would begin declining.

      Note for wonks: In some graphs, you will see the federal debt as a share of GDP under Ryan’s plan start declining before 2038. But that’s because they assume the economy begins growing faster than the nominal debt at some point. E.g. in the year 2035, the Ryan budget assumes the feds will still borrow money on net, but that the nominal GDP will grow fast enough so that the debt as a % of GDP will go down that year, even though the absolute dollar amount of the debt will still be rising.

  3. GOP_man says:

    Duude… get real. I think Mitt Romney is a pretty smart guy.

    • bobmurphy says:

      I imagine you are being sarcastic, but I agree Romney is a pretty smart guy. So is Obama, and so is Ben Bernanke. I would vastly prefer that they were a bunch of bumbling fools. They’re not, and that’s why I am so alarmed about the future.

      • GOP_man says:

        No no, I’m serious dude. I think our foreign policy needs to be no more apologizing! It needs to be “you do what america says or we bomb you off the face of the earth!” Then people will finally respect us.

  4. AP Lerner says:

    “The crazy, radical, slashing Ryan budget plan–on its own projections–has the federal government spending more than it takes in”

    Let’s focus on this statement for a moment. Actually, lets’ focus on the opposite, when the federal government taxes more than it takes in, which is a requirement for the Federal government to balance the budget and pay down debt. When the Federal government taxes more than it takes in, it, obviously, is removing income from the private sector. Or, to use rhetoric that the folks on this blog relate to, when the federal government taxes more than it spends, it steals income from the private sector.

    Now let’s look at the external balance. Because of the US’s dependence on foreign petro, the external balance will remain in perpetual deficit. The US private sector must send a portion of its output to a Middle Eastern desert so they can continue to drive their SUV’s.
    Nothing above is theory. It is a statement of fact.

    Now let’s look at Joe Average American. Because simple minded neo liberal politicians, Mr. Murphy, and Austrian economists claim a balanced budget is a good thing, Joe is sending more and more of his output to the Federal government than he receives in return. His savings go down. Because the only place he can obtain petro is from foreign sources, he must send a portion of his output to a Middle Eastern desert, again, reducing his savings. As this goes on and on, Joe cannot maintain his standard of living because so much of his output is being sent away with no hopes of return. To maintain his standard of living, he begins to borrow. And borrow. And borrow. Until he can’t borrow anymore.

    Folks, this is what happens when you try to maintain a balanced public sector budget and the external balance remains in deficit. Anyone that claims the US can balance the Federal budget w/ out even mentioning the external balance is ignorant to the monetary system and the world we live in.
    Mr. Murphy, is there any evidence that supports a balanced public sector budget supports growth when the external balance is in deficit? Of course not.

    Maybe Mr. Murphy could explain why the 7 times the US has balanced its budget and paid down, they all ended in depressions just a few years later. The depressions of 1819, 1837, 1857, 1873, 1929, and today all were preceded by public sector budget surpluses.

    Also, could anyone explain why the US, which is a monopoly issuer of its currency, needs to borrow that currency to spend? This just seems silly.

  5. Cody says:

    AP Lerner,

    “Actually, lets’ focus on the opposite, when the federal government taxes more than it takes in, which is a requirement for the Federal government to balance the budget and pay down debt. When the Federal government taxes more than it takes in, it, obviously, is removing income from the private sector. Or, to use rhetoric that the folks on this blog relate to, when the federal government taxes more than it spends, it steals income from the private sector.”

    Your implied point is false. It is true that if the government were to spend less than it taxed, it would be stealing income from the private sector.

    Have you considered though, that when a man enters my house and removes money, whether he spends that money right away has nothing to do with whether it has been stolen? You may shorten that last sentence to: “Or, to use rhetoric that the folks on this blog relate to, when the federal government taxes, it steals income from the private sector.” The income was removed, whether it was later spent, swum through, or burned.

    If the government spends more than it taxes, it is still removing income from the private sector. It is either promising to do so in the future (issuance of debt) or devaluing the currency in the hands of the private sector (printing new money). You are implying that when government does not tax more than it spends, it is not stealing from the private sector. This is false

    “Now let’s look at the external balance. Because of the US’s dependence on foreign petro, the external balance will remain in perpetual deficit. The US private sector must send a portion of its output to a Middle Eastern desert so they can continue to drive their SUV’s.”

    The external balance of what, pray tell? We are sending them dollars, and receiving oil, or petrol, as you say it, in return. So, in effect, we send money, which we earn in exchange for our labor, to the ME. Do they send us nothing of value in return? On the contrary, they send us fuel. They send literally the lifeblood of a modern economy, in exchange for our money. From our perspective, our money translates into fuel. From theirs, their resources translate into money. We are not simply sending them money. Your theory that we are is fallacious.

    “Now let’s look at Joe Average American. Because simple minded neo liberal politicians, Mr. Murphy, and Austrian economists claim a balanced budget is a good thing, Joe is sending more and more of his output to the Federal government than he receives in return. His savings go down.”

    False. Joe sends that proportion of his income to the government which the government demands of him, regardless of a balanced budget. You imply that balancing the budget means more money from Joe, and it doesn’t. Taxes held static, the budget can still be balanced. We can cut government spending. If taxes remain static, Joe is not sending more of his output to the government.

    “Because the only place he can obtain petro is from foreign sources, he must send a portion of his output to a Middle Eastern desert, again, reducing his savings.”

    False. I suggest you check the stats on where America gets the largest percentage of our oil. Hint: not the ME. Beyond this single critical error, Joe can buy from the corporations who in their day-day business go out of their way to make it clear they do not buy “petro” from ME sources. Literally, there are plentiful and commercially available sources of fuel which deal in zero ME oil. In addition, he need not draw down his savings, if he doesn’t buy fuel. Of course his savings decrease, if he is going about buying things.

    “As this goes on and on, Joe cannot maintain his standard of living because so much of his output is being sent away with no hopes of return. To maintain his standard of living, he begins to borrow. And borrow. And borrow. Until he can’t borrow anymore.”

    False. As stated above, Joe is trading his output for fuel. His return is fuel. If he had no hopes of return, he would not be impelled to send his money away, would he? If his fuel returns are not serving to produce a sustainable output, then he must either increase his output/fuel efficiency, or switch jobs. His standard of living is not dependent solely on fuel cost.

    “Folks, this is what happens when you try to maintain a balanced public sector budget and the external balance remains in deficit. Anyone that claims the US can balance the Federal budget w/ out even mentioning the external balance is ignorant to the monetary system and the world we live in.”

    False. There is no external balance deficit. An external balance deficit is theft. Some might include charity, but in charitable giving the return is in satisfaction. If you are giving money in return for nothing, then you are either being compelled by coercion, or defrauded. If you are sending away money and receiving fuel in return, you are performing a trade. Value for value. The return is oil. The return is oil. The return is oil.

    “Also, could anyone explain why the US, which is a monopoly issuer of its currency, needs to borrow that currency to spend? This just seems silly.”

    Your implication is that a dollar issued at the press is interchangeable with a dollar issued from the vault of a bank. This is true.

    However, the value of a dollar in general is a valuation of the credit of the US Treasury divided by the number of dollars in circulation, or a version of that. But remember your implication: the dollar issued at the press is interchangeable with all other dollars. So, in printing the new dollar you intend to spend, you decrease value of all dollars by around [1/(# dollars in circulation) x 1/(# dollars in circulation +1)] x (current dollar value).

    Borrowing the dollars it wishes to spend does not immediately change the value of the dollar in general (though over time the precipitated change in the US Treasury credit rating will do so if debt gets too high) but the increase in the number of dollars in circulation by simply printing money does so. Thus, debt issuance is considered a more creditable route than the printing press for budgetary purposes, if you will forgive the wordplay.

    If you still think it foolish, consider France under John Law, the Wiemar Republic and where that silliness led, or the hilarity of Zimbabwe.

  6. AP Lerner says:

    “You are implying that when government does not tax more than it spends, it is not stealing from the private sector. This is false”

    If I hire you to do a job for $10 an hour, but tax you at $11 an hour, aren’t I taking all your income? Now do this on a grand scale. If the federal government consistently runs surpluses, it consistently removes income from the private sector. Which means the only way the private sector can save is by selling goods abroad. But wait, the US cannot net export because of the petro deficit.

    Homework project. Go back to the 90’s and look at the correlation of the public sector deficit and the savings rate. There is a now famous cover of the WSJ that celebrated the shrinking of the deficit on the cover, and then later asked why the savings rate was near zero. Back then, everyone that understood the monetary system, and the relationship between the public, private, and external sectors said a massive credit bubble and debt deflation would occur.

    “The external balance of what, pray tell? “

    The trade deficit/capital surplus

    “From our perspective, our money translates into fuel. From theirs, their resources translate into money”
    Right. Fuel we consume, then consume some more. Then consume some more. We continue to send output abroad. Which is fine. We are so efficient and well to do that we can consume all our output, and the output of foreign countries, but when the government is consuming a larger % of the output by taxing more than it spends, and when we continue to send output abroad, then there is nothing left to save. See the 90’s

    “Taxes held static, the budget can still be balanced. We can cut government spending”

    Let’s say Joe works for the defense department, and his contract got cut as part of cuts in spending. HE must take another job for less income. Or let’s say he is on Medicare, and he no longer gets medical services. Let’s say he is on SS, and his check just got cut in half. Sure, his taxes remained static, but the other side of the equation got cut.

    What you, and many on this blog, including the author, fail to recognize is for every deficit, there is a surplus. No way around it. And if you cut one deficit, you are cutting a surplus. Rules of math apply across economic ideologies.

    “alse. I suggest you check the stats on where America gets the largest percentage of our oil. Hint: not the ME”

    It was just a frame of reference. I am very aware of the composition of the US trade deficit.

    “alse. There is no external balance deficit. An external balance deficit is theft. Some might include charity, but in charitable giving the return is in satisfaction.”

    Huh? The US does not run a trade deficit?

    “(though over time the precipitated change in the US Treasury credit rating will do so if debt gets too high)”

    Right, because the rating agencies are credible. I wish I had read this line before responding to your post.

    “Thus, debt issuance is considered a more creditable route than the printing press for budgetary purposes, if you will forgive the wordplay.”

    Debt issuance is a monetary action, not a fiscal one. It’s a reserve drain.

    “If you still think it foolish, consider France under John Law, the Wiemar Republic and where that silliness led, or the hilarity of Zimbabwe.”

    Hyperinflation is a political event, not monetary.

  7. Cody says:

    Not sure you’re still paying attention, AP, but I have had some time to ruminate on what you have said.

    “If I hire you to do a job for $10 an hour, but tax you at $11 an hour, aren’t I taking all your income? Now do this on a grand scale. If the federal government consistently runs surpluses, it consistently removes income from the private sector. Which means the only way the private sector can save is by selling goods abroad.”

    The example seems flawed. You are either implying or unknowingly assuming the government employs everyone who pays taxes. The government also pays every single one of its employees more than it taxes them. If the government runs a surplus, it is taking in more in taxes (sometimes from people who are not on the government payroll! gasp!) than it is spending. Period. Consistent surpluses mean the government either carries a balance, returns taxes taken in beyond the spending budget, or spends more to use up the money. The implication that a surplus disappears is true only when the government makes its policy one of monetary contraction, and “destroys” all of the surplus taxes.

    Homework: How many governments in history have run surpluses and not in some way spent them again?

    I think you are also saying that the private sector can only save if the total amount of money in the economy increases.

    Let’s say that production on one year increases 10% over the year previous. So, without any change in the money supply, effectively there is 10% more goods and services available to be bid on by the same money supply as last year (we are ignoring foreign balance for now.) As the supply of goods and services increases and the supply of money stagnates, we all know what we get. The prices go down, the value of the currency goes up. The value of the currency goes UP?!

    So, effectively every dollar anyone has in the bank is worth 110% of what it was worth last year.

    The question I pose you is: Is saving a matter of having additional currency available on account, or is saving having additional buying power available on account?

    “Right. Fuel we consume, then consume some more. Then consume some more. We continue to send output abroad.”

    Right. And they continue to send their output to us. And we use their output to create our output. And we sell our output for money. And use some of that money to by more of their output. Unless you are in the habit of burning vats of gasoline to no purpose, you probably use their output in creating your output, too.

    It’s like food. The farmers, they produce it. You send them money, they send you food. You eat food. You continue to consume, and process, and expel the food, meaning you will need more later, but also meaning you can do your job during the day without collapsing from hunger pains, or dying of starvation. With the support of the food you buy, you live a life which in its productivity supports your food-consumption addiction. And you might even manage to save! Despite sending the farmers your money With No Hope Of Return, Bum Bum Bummmmm!…

    Why? Because the food costs less than the value of what you produce with its nutritious support. And if your production exceeds your consumption, you can save a portion of the …dare I say?… surplus.

    To be cont’d…

  8. Cody says:

    “Let’s say Joe works for the defense department, and his contract got cut as part of cuts in spending. HE must take another job for less income. Or let’s say he is on Medicare, and he no longer gets medical services. Let’s say he is on SS, and his check just got cut in half. Sure, his taxes remained static, but the other side of the equation got cut.

    What you, and many on this blog, including the author, fail to recognize is for every deficit, there is a surplus. No way around it. And if you cut one deficit, you are cutting a surplus. Rules of math apply across economic ideologies.”

    As for the first point, I see what you’re saying: government spending is income to someone, and that income is taxed, so in cutting spending the government is cutting tax revenues. True.

    From your own example, let’s say Joe the Spy makes 70K a year. Then, the government cuts his job. He becomes, oh, Joe the Plumber (different kind of plumber, hehe…sorry) and makes, oh, 50K. We assume he reports it, because he loves his country. So, the government cut his salary, oh, 35K (assumed time looking for a job, trying out for the mob, etc). From the government perspective, they cut 70K in spending, and they get, let’s say, (35 x .25) = $8,750 less in taxes. Because, as I pointed out above, the government taxes its employees less than it pays them.

    On balance, from your example, the government cuts real spending (70,000 – 8,750) = 61,250. Because, you see, not all taxpayers are on the government payroll. And the government taxes its employees less than it pays them.

    “Huh? The US does not run a trade deficit?”

    The US runs a trade deficit. I was speaking of the idea of an “external balance,” under which descriptor you posted essentially that we are sending money somewhere in exchange for nothing. We send 800 billion dollars overseas, and we get 800 billion dollars’ worth of oil in return.

    “Right, because the rating agencies are credible. I wish I had read this line before responding to your post. ”

    My mistake. I was not speaking of credit rating agencies per se. Rather, I was trying to get subtly at the foolish idea that if the people we owe money to now feel we are taking on too much debt to easily repay in the future, they are capable of rating our credit on their own. Creditors have ways of doing that.

    “Debt issuance is a monetary action, not a fiscal one. It’s a reserve drain.”

    I was trying to answer your question about why we borrow instead of just printing. Borrowing devalues the dollar slower.

    “Hyperinflation is a political event, not monetary.”

    Right, and recessions are a socio-psychological event, not economic. It behooves one to take care just how much glossing over things we want to do. The implications, intentional or not, quickly become ludicrous.