Thursday, July 14, 2011

Another Article I Couldn't Sell

Budget Balancing Is Not That Hard

Watching Obama and Republicans in Congress negotiate about balancing the budget leaves me more disgusted than usual with politics.  Obama’s argument is that Republicans are not being reasonable, because they are refusing to consider tax increases as part of the effort.  While I do think at times that Republicans have become a bit too rigid on the mantra of “cut taxes, grow the economy,” Obama’s insistence that a tax increase has to be on the table is also rigid—and contrary to what Obama was saying himself just over two years ago: “[T]he last thing you want to do is raise taxes in the middle of a recession because that would just suck up – take more demand out of the economy and put business further in a hole.”

The Obama of 2009 was making a very Keynesian argument against raising taxes during a recession, and this is not a surprise: the theories of John Maynard Keynes have been all the rage among liberals and progressives for many decades now.  One of Keynes’ arguments was that the right thing to do was to spend your way out of recessions (even if you had to run annual deficits) and pay down those deficits by running a surplus during the boom years.  It’s actually a fine theory, assuming that Congress has the self-discipline to limit spending increases when the economy recovers.  History suggests that this is not the case.

There is a case for running a deficit, in the hopes that government spending on unemployment insurance and other transfer payments may help to revive the economy.  Herbert Hoover did this at the start of the Great Depression, spending $600 million (back when that was real money) on public works projects, and $1.5 billion in loans “to self-supporting works so that we may increase employment in productive labor.”  But we really don’t need to run a deficit, nor do we need to raise taxes.  We just need to set the federal spending machine to 2004.

The Office of Management & Budget’s 2010 Historical Tables Budget of the United States show that the 2011 estimated total federal revenues will be a hair over $2.685 trillion, with spending of $3.614 trillion, for a deficit of just under a trillion dollars.  In 2004, the federal government spent $2.293 trillion (and we were fighting two wars at the time, which Obama promised to wrap up).  If we went back to spending like it was 2004, with 2011’s estimated revenues, that would be a $392 billion surplus.  There would be champagne corks popping everywhere, interest rates would drop to zero, and the economy would come back in a way that would make your head spin.

But can we go back to 2004 spending levels?  There are some differences between now and 2004.  The population of the U.S. is larger by about 6%.  Add 6% to the 2004 spending levels: that gets you $2.43 trillion—still a healthy budget surplus.

What about inflation?  The Cost of Living Adjustment (COLA) is a percentage increase that the federal government uses to figure out how much to increase various salaries and retirement checks each year.  From 2004 to the present, we are talking about a compounded increase of 22%, so at least the portion of the budget that pensions and pay has gone up that much—but even if that is half the total spending, that is still only $2.697 trillion.

Sure, the government is spending a lot of money on unemployment benefits right now—but how much?  There are 14.1 million unemployed people (at least, those that are still receiving benefits), and even if we are putting $200 a week into each pocket, that’s $146 billion.  In 2004, there were 7.9 million unemployed, so really, we don’t need to add $146 billion to the 2004 spending level—more like $80 billion.  Add that to the $2.697 trillion, and you still have $2.777 trillion in spending—or a budget deficit of about $92 billion.  That’s still a deficit—but nothing like the disaster we are looking at right now.

There are a lot of details to be worked out, of course, and I don’t claim that my back-of-the-envelope numbers are absolutely flawless.  Still, you have to ask the question: if our rapidly growing national debt is the crisis that everyone behaves like it is (and I agree—it is), why are we pretending that 2004 spending levels are so painful that we can’t even consider them?  And I’m not just beating up on Obama on this—why aren’t Republicans a bit more willing to say that we can go back to 2004 spending levels, and get this monster under control?  Because it would raise questions about which party was spending money like drunken sailors before the Democrats took control of Congress in the 2006 elections.  And no one wants to confront that.


  1. Unfortunately the OMB figures you are using appear to be out date. More recent figures can be found here .

    The more recent estimate for 2011 receipts is $2.173 trillion considerably less than $2.685 trillion.

    I am not sure what is the source of the discrepancy, perhaps the extension of the Bush tax cuts in late 2010. These sorts of estimates are sometimes based on current law even when the law is likely to be changed so have to be treated with caution.