An Easy Budget Compromise

Cartoon by Jim Gibson

The President won’t talk to the Republicans because voters elected him to do his thing. Republicans retort that Nancy Pelosi famously said that we would not know much about Obamacare until it was legislated. Well it was legislated and as Pogo once said, “We are confronted with insurmountable opportunities.”

Here’s my take on this current fiscal madness. There are some real economic and political problems coming down the pike in the next 10 years. Neither party is going to like them. They really ought to be doing something about them. Playing Hatfields & McCoys is entertaining but it won’t help. Sorry to say this but one part of what is wrong about the next 10 years is Obamacare or at least our desire to quickly be like other grown up countries that have national healthcare. But the problem is broader than Obamcare.

As usual these guys take us to the brink so there are presently no good choices. But it seems pretty logical that both sides could agree on a truce that would stall things until January 1 while they focus their attention on what they could reasonably do about our budgeting problems. That would, of course, include Obamacare. Some of you call me Laughing Larry (or LL for short) because I am sometimes too optimistic about things and by things I mean politicians. As usual I will use this space to lay out why these guys need to get focused on the right issues. But do I really think they will listen to LL? Of course not. But I have a choice. I can walk the dog or I can hide away in my basement with a half-gallon jug of JD pretending to be solving national problems.

The case is pretty compelling. Both sides have much to gain through some compromises. After all mutual gain is the basis of compromise, right? So below I use some data published by the Congressional Budget Office in Updated Budget Projections: Fiscal Years 2013 to 2023 http://www.cbo.gov/publication/44172

Republicans often stand up for smaller government deficits and debts. The federal budget deficit as a share of GDP will decline as we approach 2023. But hold on. In 2007 the deficit as a percent of GDP was about 1.2%. It went to 10.1% in 2009 but declined to 4% in 2013. It is expected to remain as high as 3.5% of GDP in 2023. The average GDP during the next 10 years will be about $21 trillion so 3.5% of a big number is also a big number!

Keep in mind that every year there is a deficit, it must be funded with brand spanking new government bonds – bonds that add to the national debt. 

Speaking of the national debt – the net debt in 2007 before the crisis was a reasonable 36%. It rose to 75% of GDP in 2013 and is supposed to top out at 76% next year. It is expected by the CBO to remain at 74% in 2023. So the nation’s debt doubled and the best we can do is maintain that doubling over the next 10 years? Seems to me we have it all backward. Why aren’t we trying to move it back to 36%?  Please do not tell me that these elevated deficits and debts will not have a negative impact on long-term economic growth and employment. Business as is in the government is not good business.

The Democrats won’t like the future either because it means that government interest expense, Social Security, and healthcare will eat up an increasing share of government expenditures. Thus both mandatory and discretionary programs will command much smaller shares of the economy in the future. See the table below. There you will see how healthcare, pensions, and interest expense will gobble up an additional 4% of GDP and that the CBO expects much of this will come out of the hides of other mandatory and discretionary programs.

Neither side has much wiggle room – because taxes and spending will be at all-time highs as a share of the economy in 2023. Tax revenues will have risen from 19.1% of the economy before the recession to 22.6% in 2023. Government spending will have gone from 17.9% to 21%. In short, government will be bigger in 2023 – not just absolutely but relative to the size of the economy. This will make it even harder to afford better government programs – military or otherwise.

So while the deficit might fall for a while, everything else really stinks – future debt, interest expense, growth and the flexibility of government to help people who are not sick or old.

My conclusion is that they ought to pay attention to the costs of Obamacare but they really need to get on with the task of changing all the budget lines. Neither side seems willing to do that…at least not yet.

Projected Spending for Major Budget Categories

(Percent of gross domestic product)

     2012       2023        Dif

Major Healthcare                         4.7           6.1        1.4

Social Security                              4.9           5.5        0.6

Net Interest                                  1.4           3.2        1.8

Other Mandatory                          3.5          2.4       -0.9

Defense Discretionary                  4.3          2.7       -1.6

Non-Defense Discretionary          4.0          2.7       -1.3