The 44th President of the United States has stepped into a challenging budget season and announced a controversial $3.6 trillion budget that has lawmakers and citizens alike in an uproar. The 2008 government expenditures totaled $2.96 trillion, making the President’s proposed budget at least a 15% increase in spending. This is in sharp contrast to the President’s words in a news conference on Tuesday, March 24th, “The best way to bring our deficit down in the long run is … with a budget that leads to broad economic growth by moving from an era of borrow and spend to one where we save and invest.” The President and White House Budget Secretary are insisting that the increased spending is needed to invest in the country’s future. This is a factual rebuttal for why the budget is unacceptable based on historical U.S. Federal Government Budget analysis from 1981 through 2008.
Components to the U.S. Budget
There are near-countless subdivisions and levels within the U.S. Federal Government Budget but it all rolls up into three main pieces of information:
- Receipts – taxes and other income
- Outlays – expenditures
- Deficit/Surplus:
- Deficit – occurs if the Outlays exceed the Receipts in a year
- Surplus – occurs if the Receipts exceed the Outlays in a year
Obama’s Proposed Budget Receipts, Outlays, and Deficits Analyzed Versus 1982-2008 U.S. Federal Government Budgets
U.S. Fiscal year runs from October 1st through September 30th. Example: Fiscal Year 2009 covers the period from 10/1/2008 through 9/30/2009.
Over the 28 year period from 1981-2008 Receipts grew at a rate of 5.3% and Outlays grew at a 5.5% rate. This indicates that the government has grown expenditures at a higher rate than taxes and other income, which leads to an increasing deficit. Compounding deficits naturally lead to increasing expenditures for the interest associated with the deficit borrowing, without any adjustments to other government budgets.
Like a business, if the Government spends more than it brings in it has to borrow. In 2008 the government spent $249 billion , or about 8% of the budget, on interest expense associated with the accumulated deficit. Interest expense is the fourth largest budget item after Social Security, Defense and Healthcare. If there are compounding deficits the amount borrowed continues to grow and therefore the interest expense increases. This causes the government budget to increase Outlays solely to pay for the interest on past deficits. Even if all government spending was kept the same as last year the budget must increase to a certain extent to cover the interest from deficits in prior years.
Reagan accumulated $1.26 trillion in deficit, Bush, Sr. accumulated $934 billion, Clinton accumulated $324 billion, and W. Bush accumulated $1.98 trillion. Bush, Sr. is the only former President analyzed who was in office for a single term.
A delicate balance must be struck between the projected Receipts and Outlays in the annual budget because this will ultimately guide the deficit or surplus. The Fiscal Year budget put forth by Obama at $3.6 trillion dollars is at least a 15% increase in Outlays over the 2008 budget. That is larger than any budget increase from 1981 through 2008, and it is substantially greater than the highest year-over-year Outlay increase that occurred in the time period analyzed (1985: 12.2%). Increased spending by the government focused on energy, healthcare, and education is supposed to help by investing in the country’s future. These are important foundations for the U.S., but all investments come at a cost and the return on investment must exceed that cost.
Due to decreased corporate profits, individual incomes and job losses,
reduced consumer spending, and a global credit crunch, the government’s 2009 Receipts are expected to decrease about 28% from 2008. Projected Receipts for Fiscal Year 2009 are $1.9 trillion leaving the U.S. with a $1.7 trillion deficit if Obama’s $3.6 trillion Outlay budget becomes reality. That means his budget plan projects a one year deficit that is almost as large as the accumulated deficit of George W. Bush’s two terms in office.
The proposed budget has the potential to make the U.S. Government Outlays spiral out of control. Consider that the estimated interest expense increase for the projected 2009 deficit amounts to $51 billion, which brings the forecasted annual interest expense for the subsequent year to over $300 billion. That is a 20% increase in interest expense from the prior year to finance the deficit from Obama’s budget. Congressional Democrats and the White House are quick to point out that Obama inherited a substantial deficit in 2009 already from George W. Bush that amounted to $569 billion at the end of January 2009. Four months into 2009 and the deficit is already a $135 billion higher than in 2008. While that is a difficult starting point to recover from, there is no need to compound the problem by spending more money and more than doubling the deficit over the rest of the year.
The primary platforms in the proposed budget of energy, education, and healthcare investments are sound. Government Outlays in these areas will produce a return on investment by way of reducing the trade deficit, elevating our workforce, and reducing cost while increasing quality of healthcare, if executed upon effectively. The major budget issue is the hundreds of billions intended to go to the failing financial sector. The projected deficit can be reduced by at least $700 billion by cutting intended bail-outs for more banks and insurers. Deficit spending for 2009 would then be projected to be $1 trillion, an enormous figure, but considering 1/3 of the fiscal year already put the country at 57% of that $1 trillion proposed deficit would be far more reasonable. Since the primary cause for financial institutions requesting bail-out money is that they are burdened with toxic assets yielding a loss, it does not make sense for the government to continue deficit spending at the cost of increasing an already substantial interest expense to absorb losses incurred on toxic assets. The level of funding being requested by Obama and the private sector is ballooning out of control and yielding no tangible benefits as credit markets remain tight and banks keep the cash on their balance sheets. The bank bail-outs must stop if we are going to keep taxes at the current level without cutting other government agencies’ budgets significantly.
Download the Excel workbook for the complete detailed analysis by clicking the icon. The data source for this information was downloaded from the Financial Management Services Bureau (FMS), a division of the U.S. Treasury Department. Analysis was added to the Excel file downloaded from the FMS website but the data was not altered in any way.
Image Used in this Post
A Storm was Coming courtesy of flickr user MiiiSH under the CC license.
20 Comments
@Jay,
Good work aggregating a lot of this data!
If you want to read some of the professional dissenting opinion of the matter, Dr. Greg Mankiw’s blog has a lot of them. Greg Mankiw is a conservative economist at Harvard, and he was one of GWB’s advisors for a few years. He also wrote THE introductory book for economics.
I gleaned from him that a recent paper proposed that the long-term effect of government spending is a 1x multiplier on long-term GDP: for each dollar the government spends, the net effect on the GDP can expected to be $1 in the long run. The same paper proposes that cutting taxes has a 3x multiplier. He cited this a few times arguing that the bailout should have a much larger percentage of tax cuts.
Doing the math on the bailout (1*.6 + 3*.4)*700,000,000,000 gives us an estimate that the GDP will be positively impacted by 1.26 trillion dollars in the long run. I only hope the taxes on that quantity start to pay off some of the debt all of this deficit spending is creating, because I really don’t want to emigrate to Germany wearing a fake moustache to go to a country that isn’t crippled in debt.
Wie gehts? Wie heißt du, Herr Voytko?
Jake – thanks for the link/info. Regarding the math you did above, the $1.26 trillion GDP increase should (estimate) lead to about $400-$450 billion in tax receipts. Since the deficit spending in a single year is projected to be $1.7 trillion, I would say that the government is going to be paying off this loan for the next century, not including any other bonehead deficit spending they decide to take part in and finance. I’m not sure exactly how incurring trillions upon trillions of additional debt to absorb losses in the financial sector is an investment in our future? Anyone care to enlighten me?
I guess my real point here is: we can EITHER bail out the financial sector OR we can invest in healthcare, energy and education. Given the nature of our current GDP and tax receipt-levels, the U.S. is unable to finance both initiatives. Either reduce the spending level on both fronts or eliminate one of the two altogether. We simply can’t do both and provide a healthy financial future for the country.
To do only one would be wasting a perfectly good crisis.
How about letting the people keep more of the money THEY earned? I don’t have as much a problem bailing out financial institutions because it was government policy that encouraged, then required lending instituions to provide trillions in sub prime lending…which is at the core of this mess. There is a history lesson we need to recall: The more government (or business) artifically manipulates the free market, especially the law of supply and demand, the worse the consequences will be.
What we have here is failure to learn the lessons of history…again.
I am still not so lenient on the financial institutions because they had been lobbying for the deregulation of banking for two decades before the government gave way and instituted the Gramm-Leach-Bliley Act of 1999, which allowed commercial banks to underwrite securities.
One thing on tax cuts: If the government cuts taxes it must also cut spending. All too often the government will give tax reductions without the corresponding spending reductions required to keep the deficit figure from moving. Cutting spending can be good and bad: it will reduce the deficit but it will also reduce GDP, naturally causing a recession. Cutting government spending is all good and well, but those goods/services being eliminated need to somehow be re-allocated to the private sector so as not to totally lose the GDP that the newly cut government spending would normally provide. Except for those programs that are not conducive to privatization, which leads one to ask, “What value do these services really provide if the private industry isn’t willing to operate them?”
Great post Jay
I’m still a major novice at understanding the economy, so maybe you can untangle this for me…
If I read your post correctly, you are suggesting we stop all these bail outs to banks, etc. I get that these bailouts are digging us into a financial hole, but at the same time certain bailouts seem to increase consumer confidence and thus spur more spending and also create new juice for the stock market. For instance, it was announced today that GM and Chrysler won’t get their proposed bail out, and now stocks plunged after a week long surge.
I keep feeling that consumer confidence is the wild card in all these economic plans.
Andrew, I think there is a flip side to consumer confidence, more specifically investor confidence that is caused by the bail-outs. The problem is that it becomes more difficult to assess the strength of a company when the government is doling out unfathomable sums of money to maintain poorly run enterprises. With all the tac payer money that is being pumped into the system, Wall Street is unable to accurately reflect a company’s financial health in terms of their own merit.
Andrew,
It may take me a minute to answer your question because it requires some fairly lengthy explanation of concepts. if you will allow me to proceed:
The over-arching concept to keep in mind during this discussion is that the “economy” is really just a term to refer to the quantitative methodology humans employ measure the value of everything produced in a country. Value can mean many things, and does mean many things in the economy: paperback books, energy, agriculture, consulting services, the list goes on and on.
Consumer confidence mainly drives the consumer spending component of GDP. If consumer confidence is down, people aren’t spending money, therefore GDP will decrease (recede – this drives the term “recession”).
The Stock Market is a fickle mistress and a perpetual bandwagon-jumper. The important thing to remember about the stock market is that prices and performance are entirely decided by the supply/demand ratio of each company’s population of shares of stock. Humans are the ones buying and selling shares in the stock market, thus determining the supply/demand at the micro and macro level. Humans are emotional creatures, prone to over-excitement and over-reaction, leading to illogical and irrational buying and selling of securities based on any and all information, regardless of credibility and the individual’s comprehension of said information.
Now, I promise this is going to be worth it in a minute. Consumer confidence drives GDP, which influences the stock market. If people aren’t buying stuff, corporations aren’t making money, their stock price goes down. In addition to stock price going down actual corporate incomes are down as well, leading to DECREASED taxable income, and therefore DECREASED tax receipts by the government. If people aren’t buying things they aren’t paying TAXES on those things. Therefore, DECREASED tax receipts.
So what we have going on in the U.S. right now is:
1. Decreased personal and corporate incomes leading to decreased tax receipts for the government
2. Declining stock market which leads to an environment that is not compatible with corporations raising capital (the stock market is a major vehicle for corporations to raise money for investments)
3. Business investments are down due to the credit crunch and the under-performing stock market which leads to lower GDP
4. Consumer confidence down plus job losses result in lower personal income tax receipts for the government and a lower GDP
Ultimately, the problem here is that our government wants to spend money they don’t have on investments that will yield a negative return while GDP continues to recede. In order to support government spending increases there needs to be enough positive GDP growth that results from the spending to cover the financing costs through increased tax revenues that naturally result from a higher GDP.
I know, it was long and arduous. But did it make sense to you and clear anything up?
Damn good explanation.
This budget scares the bejesus out of me, and I seriously hope it doesn’t ruin the country. Now, I’ve heard tons of worst-case scenarios that make a whole lot of sense. But in all honesty, is there anyway – no matter how statistically small – that this budget could actually turn out successful?
Yes, Congress could reject it.
The picture of the Capitol is outstanding.
We are in a classic death spiral. This year about half of all federal spending will come from “running the presses.” Next year it will approach 2/3, even by official estimates. Don’t kid yourself, nobody out there is capable of financing this recklessness, even if they wanted to.
The Federal Reserve Promise to Pay Nothing (FRPPN) is the reserve currency of the world and has been for years. We had the power after WWII to make our Federal Reserve Notes, (FRN) then valid and redeemable for gold on demand, the principal currency of the world. We baited and switched. After the FRN was universally accepted, we declared a de facto bankruptcy, closing the “gold window” August 15, 1971.
So gold, in legal tender coin or otherwise, “floats” against the FRPPN. Since 1971 it has floated from the official rate of $35 to the ounce of gold to over $900.
The FRPPN’s status as world reserve currency makes it more vulnerable to violent decline, not less. Everybody holds them, thus no one wants to destroy their value. But no one likes to have their money stolen silently and insidiously, as is done by inflation. What happens when someone tries to cut their exposure to the FRPPN, overplays their hand and causes a big drop in the FRPPN, say 20% in a day or so? Other holders panic, dump FRPPNs, and thus trigger a precipitous collapse of the value of said currency. Panics feed on themselves, that’s why they are called panics.
Really, the question is when, not if. So enjoy these days. Not so far into the future, we will look back to the flush, happy times in April 2009, and wish we had it so good.
You might want to buy a little gold and silver coin, and learn to trade with it. Yes, get some practice actually finding people who recognize it and will honestly and competently trade in it for things you regularly buy. When the mad dash for the exit comes, it will be too late.
Oscar Stilley
os
That all sounded very apocalyptic, and there’s a horrible track record of apocalyptic theories coming true.
Regardless of the debt we will incur from this budget, I doubt it will send the global economy into the downward spiral of no-return you are alluding to.
Maybe we should ask the new super-intelligent robots to solve this problem.
Super intelligent robots to solve our problems, heh? Sounds like another slippery slope. haha
As far as, everything else goes….as Cartman from South Park would say “Just relax guy”. People need to stop feeding into the media frenzy and escape from the mob mentality of freaking out about our economy.
You can relax if you want to, but I don’t plan on being quiet while my unborn kids are spent into defacto slavery.
As a matter of fact, calm will make the problem worse because the democrats will see it as a green light to continue their drunken spending spree.
Honestly, it’s been less than three months and he has already out spent two-term presidents. Do you see any indicator that he will not continue on this trend for the duration of his term?
I get your point and yeah sure it sucks that we have a bunch of crazy eyed donkeys spending cash at an insane pace. But….what exactly do you plan on doing about it for the next 4 years? Not until the Dems lose the majority in Congress will there be the correct check and balance that this country needs.
Umm, it is actually Saddam Hussein and not Eric Cartman who says that line.
Thanks for the correction…haha my bad.
Andrew, Oscar is referring to something totally different than the budget so I don’t think he is trying to say that the debt incurred from government spending in 2009 is going to cause the apocalyptic scenario he indicates. Whether or not we end up eating each others’ pets around a fire in a makeshift encampment, vastly increasing the US government’s debt without the spending resulting in a sufficient increase in GDP will certainly accelerate bringing us closer to his doom and gloom reality.
Point of clarity: Obama has not yet outspent any of the former Presidents analyzed, but his forecasted expenditures certainly do. Also, Obama inherited almost $600 billion in deficit, so really his ’09 forecasted spending (pertaining to his decisions alone) ends up with a $1.2 trillion deficit equaling Reagan’s two term accumulated deficit.
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[...] During the period of 1981 to 2008, Ronald Reagan accumulated $1.26 trillion in deficits, Bush Sr $934 billion in deficits, Clinton $324 billion in deficits, and W Bush racked up $1.98 trillion. This amounts to a total of just about $4.5 trillion in deficit spending BEFORE the current administration even took office. I acknowledge that the Fiscal 2009 and 2010 budgets have only added, and significantly, to this accumulated deficit figure. But it is quite simply unfair to burden the Democratic Party today with a statement like, “Unfortunately, it’s become clear that for the first time in over 30 years, Speaker Pelosi and Democratic leaders in Congress aren’t even bothering with a budget” – when the budget numbers offered by the CBO does not support that statement at all. It appears to be another incidence of partisan rhetoric meant to incite the public in order to win House and Senate seats in the fall. For your constituents, such as myself, who are interested and educated enough to fact check your statements, the statements you made below are merely examples of reasons not to trust you or your party. Please refer to the information contained at this link for supporting facts and documentation. [...]