“Real” Federal Deficit Four Times Official Number

For some time, the Institute for Truth in Accounting has been beating the drum of “accounting truth” in government finances. Recently USA Today picked up on their claim that true federal deficits and debt are several times larger than the official numbers. They ran the numbers and found that “the government ran red ink last year equal to $42,054 per household — nearly four times the official number reported under unique rules set by Congress.” In addition, “Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other debts.”

The reason for the difference between these numbers and the official ones is that the official numbers exclude the cost of promised retirement benefits: Social Security and Medicare. From the story: “Jim Horney, a former Senate budget staff expert now at the liberal Center on Budget and Policy Priorities, says retirement programs should not count as part of the deficit because, unlike a business, Congress can change what it owes by cutting benefits or lifting taxes.”

Yes, but will they? It seems to me that the “real” set of numbers is some weighted average of the official and full numbers, where the weight is the probability that Congress will act to reform retirement entitlements before they drag the official deficit even further into the red. Medicare is already losing money.

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Solving the Budget Deficit: Cleveland Edition

Following the suggestion of one of our readers (as well as Jason’s bold spending cut-dominated march into the breach), I too attempted to solve the deficit using the New York Times’ slick online tool.  Behold, problem solved: here.  I actually produced a budget surplus  – which I’d be more than happy to refund to the taxpayers since it is their money after all and not the government’s. 

To the chagrin no doubt of my fellow classical liberals, I had to use a combination of spending cuts and tax increases given the constraints of the NY Times tool.  Perhaps with greater options I could have done it with fewer or no tax increases, but I could not honestly do so within the parameters of the tool.  Specifically, my combination was 82% budget cuts and 18% tax increases.    

A few notes on my choices: 

I didn’t cut the number of our troops in Iraq and Afghanistan.  I’m extremely reluctant to let deficit concerns dictate specific foreign policies like the troop levels in Afghanistan even if I think that our ends should be correlated with our means.  So I wish I had greater options there since I’d love to prune our overall foreign policy ends and commitments which would allow serious cutbacks in the defense budget.

I also refuse to endorse the notion that the military should “reduce the length and frequency of combat tours. No unit or person will be sent to a combat zone for longer than a year, and they will not be sent back involuntarily without spending at least two years at home.”  Although this is good for service members, it isn’t necessarily the best policy to achieve our missions (which should be the first priority assuming the missions are necessary for our national interests narrowly defined).  Indeed, I would argue that if we need to have a large footprint in Afghanistan, it might make sense to have longer and more frequent tours for many of our soldiers, sailors, airmen, and Marines given that counterinsurgency requires a deep reservoir of knowledge about the problem set, something that can best be gained by more focus on and more time in the theatre of operations.

I’m also loathe to tinker with medical malpractice.  Given that I’m not an expert in this area, I just don’t know enough about how shielding doctors and others from malpractice might harm the very important tort system.  

Given that we have to fund the government in some way through coercive means (even lotteries, if we could raise enough revenue in that fashion, would have to involve coercion since the logic of the system would require a state monopoly), I tried to choose taxes that would have the least negative consequences and perhaps even some positive ones (like a carbon tax and eliminating tax loopholes).    

Also worth noting that I had a much easier time cutting the longer term deficit than the short-term deficit.

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Solving the Budget Deficit

Taking up commenter Bill Bachofner’s challenge, I’m posting my personal solution to the federal deficit using that nifty tool at the NY Times. I ended all short- and long-term deficits with no tax increases (except reducing employers’ health insurance tax deduction) and without raising the Social Security retirement age. Here’s the link. Of course, much of this is politically infeasible right now.

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Spending Cuts Can Be Popular

Marc Eisner notes the politics of fiscal irresponsibility. Such politics never seem to go out of style. Nevertheless, the coalition government in Great Britain is offering an object lesson in how to build political support for deep, wide-ranging cuts in government spending. With the UK’s finances in even slightly worse shape than the US’s, the Conservatives and Liberal Democrats have successfully made the case that there is no alternative. Here are some of today’s figures on polling on welfare cuts:

Making the long term unemployed spend 4 weeks doing unpaid work	All voters	CON voters	LAB voters	LD voters
Support	73	92	58	83
Oppose	17	3	31	14
Don’t know	10	5	10	3

Withdrawing Jobseekers Allowance from those who turn down a job offer or interview	All voters	CON voters	LAB voters	LD voters
Support	66	82	57	71
Oppose	21	8	33	22
Don’t know	12	9	10	6

More stringent testing for people receiving Disability Living Allowance	All voters	CON voters	LAB voters	LD voters
Support	69	86	58	70
Oppose	20	6	32	22
Don’t know	12	8	9	9

Putting a £400 a week maxium on housing benefit	All voters	CON voters	LAB voters	LD voters
Support	68	87	54	76
Oppose	20	6	37	12
Don’t know	12	7	10	12

Those are truly massive majorities.The British government is also cutting defense expenditures drastically and means-testing certain benefits, such as child care, so that the middle classes will no longer receive them. These policies are somewhat less popular but still enjoy majority support.

So how did they do it? One of the key requirements for the political “optics” of the cuts was the coalition government. With a social democratic party in the Lib Dems joining the Conservatives in supporting the cuts, the government was shielded from accusations of heartlessness or right-wing mania. Moreover, supporters of both parties outnumber Labour supporters. In the media, key Labour Party figures have been successfully characterized as “deficit deniers,” the people who caused the problem in the first place.

Coalition government is supposed to slow down the pace of change and create gridlock, just like divided government in the U.S. Nevertheless, it has worked well so far for Britain because it allows a formal structure that ties both parties to each other – neither party wants the coalition to fail, which would surely bring on a new election.

Unfortunately, this institutional characteristic of some parliamentary systems – endogenous election timing – is not available to American politicians. Nevertheless, Britain’s experience suggests that one way out of the fiscal mess in the U.S. would be a bipartisan, cross-chamber coalition of sorts, narrowly focused on solving the budget crisis. Given the midterm election results, the popular mandate is there for a radical fiscal house-cleaning, if anyone decides to take it up. Reasonable Republicans and Blue Dogs can join forces to create clear majorities in both houses and negotiate – in hard-fought, late-night sessions if need be – a package of radical spending reductions and tax reforms needed to close the budget gap.

With a bipartisan mandate, who could run against the results? The anti-tax-hike and anti-spending-cut extremists on both sides will be neutralized. President Obama will have no choice but to endorse the outcome of such a negotiation. Imagine if he vetoed the plan. He would clearly be the one responsible for shutting the government down if it came to that. He couldn’t blame the Republicans – because the cutters would have substantial Democratic support. He’d merely be making himself look even more liberal, which I’m sure his political advisors realize is not the key to victory in 2012.

We can dream, can’t we? As unlikely as this scenario sounds, the bottom line is that spending cuts need not be politically toxic. If you frame the debate as one of responsibility versus madness, voters will choose the former.

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Too Obvious to be True?

Brett Barkely writing in Econ Journal Watch:

Large budget deficits represent a burden on the future, and debt accumulation eventually poses great problems. Economists writing for the public can either highlight such truths, neglect the issue, or try to allay worries or excuse or justify large budget deficits (as anti-recession policy, for example). Economists affiliated or aligned with one of the parties may be suspected of changing their positions on budgets deficits to serve their favored party or win favor with its constituency. This paper investigates selected economists, to see whether their tune changes when the party holding the White House changes. Six economists are found to change their tune—Paul Krugman in a significant way, Alan Blinder in a moderate way, and Martin Feldstein, Murray Weidenbaum, Paul Samuelson, and Robert Solow in a minor way—while eleven are found to be fairly consistent.

But at least he provides a moment of righteous indignation.  We all need that from time to time.

Another article in the same issue argues that “economic enlightenment” is not correlated with education.  Conservatives and libertarians are much more enlightened according to the study (though the definition of enlightenment is pretty much: are you conservative or libertarian?– not that there is anything wrong with that), but within each ideological group the education effects are flat.  Sorta interesting.  Also, regular WalMart shoppers and Nascar fans are more enlightened than the comparison groups.  Seriously, I’m not making this up (though I am wondering if this issue of the journal was written by the Onion Staff).

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Krugman’s Hackery on Deficit Hawkery

Just about everything Paul Krugman writes nowadays is in some way related to rationalizing the Obama deficits. Now, Krugman’s a smarter man than I, but I think it’s pretty clear that his partisanship drives his economic analysis these days, rather than the other way around.

Yesterday Krugman turned a case against the euro into a mind-boggling attempt to justify Greece’s fiscal shenanigans over the past few years:

Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus.

So because the U.S. ran a budget deficit of about 5% of GDP when existing public debt was about 50% of GDP, that makes it OK for Greece to run a deficit of just under 5% of GDP when existing public debt was about 100% of GDP? As for Spain and Portugal, the rigidity of their labor markets contributes to unemployment – and in Spain the popping of an enormous housing bubble has intensified the effect. He continues:

The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment.

Oh really? Tell that to economists who study the classical gold standard. From about 1880 to 1914, prices dropped on average 2% per year, even as the Second Industrial Revolution motored on. And here comes the inevitable payoff:

The deficit hawks are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink. What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro, the governments of Greece, Portugal and Spain denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.

Because everything has to relate back to defending the U.S. government’s unconscionable fiscal excesses. If Krugman really thought monetary pump-priming is always necessary to get a local economy back on track, he would favor abolishing the dollar and breaking the U.S. up into optimal currency areas.

More to the point, Krugman’s (lack of) concern about budget deficits is strangely selective. Back in 2004, he castigated the Bush Administration for “enormous” budget deficits and “irresponsible” tax cuts. So much for the objectivity of the scholar.

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