Deficits & the Debt





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Published on Nov 18, 2012

From the CBO's Long-Term Budget Outlook, 2012. -- VOICE NARRATOR: The United States is at a decision point that will affect everyone. To understand the issues, start with Federal spending as a percentage of GDP from 1970 to 2087 -- 75 years from now. Here is 2012. So this part actually happened, and this is what is projected by the Congressional Budget Office.

Now look at Federal tax revenue: income taxes and payroll taxes and everything else. The difference between taxes and spending gives us deficits (in pink) or surpluses (in yellow). Spending more than taxes makes pink deficits, and spending less than taxes makes yellow surpluses.

This adds or subtracts from another graph: the total debt, held by the public as Treasury bills and bonds, which goes to back to zero around 2070. So the bottom graph, on spending and taxes, changes the top graph on total debt.

Notice that we are not changing the percentages on the left side. We are just squashing the pictures.

Here is President Obama's first term. There were spikes in spending and in debt. What caused this?

Well, it is not Social Security. That flattens out for the next 75 years. It will be easy to manage. Please do not believe the silly propaganda that we cannot afford it.

On the other hand, Medicare and Medicaid grow continuously. But there is no bulge, at this point. So they didn't do it, either. Let's make them into the top layers.

Here is Defense. The bump starts with spending for the wars in Iraq and Afghanistan.

Here is all the other spending, including Defense. We blend-in Defense.

There is the rest of the spike. It is stimulus spending to fight the recession, plus some of the bank bailouts.

But if we look at the bump in total debt, the wars and stimulus are little slices. So what else is there?

Well, did you notice the dip in tax revenue? There are two causes: the economic downturn means people work less, so they pay less in taxes. And there are the Bush tax cuts, which are supposed to end. Without these two, the deficits would be small.

They complete the causes of the bump in debt. Otherwise, the debt would go downhill.

So this was predetermined, no matter who was elected. It's like "pre-existing conditions". What is important is that this is a short-term problem (if we can call 20 years the short-term). And it solves itself, because the reasons are supposed to end.

But after that, we see long-term growth in spending, due to something different: the long-term rise in medical costs, from the inefficient healthcare system, plus the aging population. So there are two stories: the short-term, and the long-term.

Well the short-term solves itself. The way to deal with the long-term (for now) is a piecemeal approach, little by little. Number one: raise taxes to cover our needs. But do it slowly, while we work on number two: fix the healthcare system to get everyone's medical costs down, because the private costs affect the public costs.

In fact, there is serious doubt about the healthcare projections. An alternative CBO scenario makes them higher, due to the Medicare doctor fix, and other things. But they may also be lower, because Obamacare has efficiencies that are difficult to calculate in the official projections. Plus, every other country already spends only half as much as the U.S. So we may be able to bend down taxes, as well. No one really knows. We just have to work on it, and see what happens.

Even as it stands now, do not be fooled: officially, there is no crisis. Let's repeat that: there is no crisis. "Crisis-talk" is politics. By the laws in effect, as of December 2012, taxes will rise to cover spending. No one would enjoy that, but taxes still stay lower than most modern countries for many decades more. There are surpluses, so the debt will be paid down.

But some Washington politicians are using the short-term build-up of debt, to scare us about the long-term. What they really want is to make the Bush tax cuts permanent, and to level the revenues, first. Of course, this makes the debt explode. Their answer is to cut the safety-net and entitlements, including Social Security.

There is no reason to cut entitlements. It puts people in danger. And it puts the cart before the horse. A better solution is to work on it little by little. First, take care of the short term: as we exit the economic slump, raise revenue slowly, and begin now by returning to the Clinton tax rates, on the wealthiest incomes. This is unlikely to hurt economic growth. Second, work on efficiency in the healthcare system, to reduce our long-term revenue needs.

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