What's wrong with this picture? Look at the CBO's 2012 ten year outlook chart below. The arrow shows the real problem that lies behind our economic future. While we are projected to go from an 8.7% GDP deficit in 2011 to one that's around 1.4% GDP in 2022, nearly the entire reduction is the result of projected revenue increases. While revenue increases are relied upon to the tune of 5.6% GDP, spending reductions over the period amount to a mere 1.7% GDP contribution to deficit reduction! That is, we are relying on tax and GDP increases by a ratio of 3.3:1 over spending reductions in our half-assed effort to deal with our budgetary fiasco! This is insane, considering the fact that our recent spending increases have contributed TWICE as much toward our deficits as tax and revenue decreases when compared to their 40 year averages. Some of the revenue increases over the period are assuming a sufficient recovery that would bolster corporate and personal income increases with the balance relying on tax increases. The fact that even this picture is a fantasy was revealed with the failure of the congressional "super committee" to forge a deficit reduction deal that amounted to ONLY a $1.1 trillion dollar reduction in spending over the 10 year period - that's out of an estimated $44 trillion dollars in estimated spending over the period! Bottom line: over spending AND lower revenue are the mutual problems that threaten our future economic prosperity, but relying three times as much on revenue increases as spending decreases to tame our budget deficits represents an approach that is 180 degrees out of phase with reality. .
Technically speaking, because we will be running persistent deficits for the next 10 years, discounting changes in GDP and taxes, we will continue to see an ever increasing mountain of debt. No problem, federal reserve policies will maintain some degree of economic growth to mask Mt. Everdebt.
It doesn't have to be this way. It takes a commitment from both sides to do what each considers an anathema. Conservatives should prepare to bend to allow tax and revenue increases back to about a 1.25% GDP level above their 40 year average of 18% GDP. The Democrats need to face reality - spending has contributed nearly $2 dollars toward our current deficits to every $1 dollar in decreased revenues. From a 40 year average of around 20% GDP, spending was increased to nearly 25.5% GDP at it's peak. Over the next 10 years, spending should be reduced to about 19.25% GDP in order to reach a balanced budget in 2022. Placing the overwhelming burden on revenue increases by a 3.3 to 1 ratio over the next 10 years is a slap in the face of reason. In fact, the ratio should be the same as what go us in this mess to begin with - 2 to 1 spending reductions over revenue increases with the two meeting at around 19.25% GDP in 2022. But, neither side can see this simple mathematical reality. .
Math is not the strong suit of a politician. By the way, we should not just be targeting a balanced budget within ten years, which will simply in the process add to the debt. We should also be targeting progress in decreasing the debt. I think balancing the budget within five years and beginning to pay down the federal debt over the next five years is ideal. This should not be hard considering that we should be in an expansion within the next five years. Understanding that the average expansion lasts around four to five years, we could begin a process of contractionary fiscal policy and simply fiscal responsibility. The goal should be to eliminate the debt, something that only the nitwit President Andrew Jackson did.
I agree, BUT... My reservations have to do with the unwillingness of Democrats to affect such a large decrease in spending, especially in the large entitlement areas, over just a 5 year period, and the unwillingness of Republicans to raise taxes and reduce defense spending. Reducing our annual spending by nearly $840 billion dollars over just 5 years is way out of line with current partisan political abilities, considering these buttheads couldn't even agree how to cut it by $1.1 trillion over 10 years. Bringing budgets to a balance by 2022 may still prevent the substantial interest outlays that will cripple the nations economy in the 2025-2035 period. [By continuing on the present course we are guaranteeing that somewhere in that time frame, interest outlays will become the number one spending obligation - higher than defense and higher than the entitlements.] .
This is typical American politics... neither side of the aisle cares what happens after their terms are up, so in order to defend their popularity bid spending they ignore the fact that the following generations of politicians will most definitely play the same exact game.
It seems like for a fiat currency, eliminating the debt is overrated. Maybe even detrimental. We'll just inflate our way out, if necessary. I don't really have a position on this, I'm just tossing out ideas for the sake of discussion.
Both Left and Right are locked into their own sacred economic ideologies. Both worry that they will disappoint their base constituency if the appear to compromise - especially considering the degree to which each would be required to do so. The Democrats will certainly balk at the level of spending reductions necessary to afford a $2 spending decrease for every $1 increase in revenues. Unfortunately, that is the level that would restore a balanced budget with outlays and revenues brought to a 19% - 19.5% GDP level. That level represents a revenue increase to about 1.4% GDP above the 40 year average (17.9% GDP) and a decreased level of spending to a target of around 1.7% GDP under the 40 year spending average (21% GDP). The Republicans don't have it nearly as bad since the necessary revenue increases aren't totally dependent on tax increases alone. This is due to the fact that whatever economic recovery takes place also aids their end of the bargain by the effect that such recover and growth would have on increasing the necessary revenues. That means tax increases alone aren't necessarily required to shoulder the entire burden of the required increases in revenues. But there still may be a substantial need for tax revenue increases to return to their 40 year average (or just above that 18% GDP level). It's hard to imagine either side being willing to step up to the plate and agree on these measures. They'll likely pitter-patter about, selling half-assed measures to the public in order to at least appear as effective leadership and thus be re-elected. They'll probably perform these charades until such a time that US interest obligations become crippling to the ability of the government to borrow sufficient funds to continue in their little ideological game. . .
The CBO's analysis rests on sound mathematical grounds. Assuming that we continue to follow the same patterns we have been following for the last twenty years or so, we will grow our way out of our deficits. That's really the only way to actually eliminate a deficit--other than increasing taxes. Cutting spending just cuts revenue, which prevents any headway on solving the deficit problem. That's a fairly reasonable assumption. No substantial spending cuts are required to address the deficit. GDP growth alone will eventually solve the problem, if we only increase spending to account for inflation.
Contrary to public perception, you have a point. At least there are quite a few sources that believe that the point where "public debt" (debt held by the public) becomes destructive to GDP is somewhere around 80% to 100% Debt to GDP ratio. Bank for International Settlements (BIS): The real effects of debt . And from the European Central Bank's research paper: The impact of high and growing government debt on economic growth The debt held by the public is currently $10.8 trillion. The current annual GDP level stands at around $15.4 trillion. That represents a public debt to GDP ratio of about 70% - well below the 80% to 90% GDP critical point. However, as the CBO pointed out (2011 Long-Term Budget Outlook): In conclusion the CBO then goes on to state, .
In the short-run, no. In the long-run (within the next one to two years), absolutely. Any person who understands economics knows basic fiscal policy. One cuts taxes and increases spending during an economic downturn. One increases taxes and decreases spending when the economy is in an expansion. Follow these basic rules, and implement them at the right time, and you get a balanced budget.
