Diary

My 2011 Federal Budget Red (Ink) Whine 1

Budget discussions are hard to have with anybody. In the media, figures are usually bandied about with abandon, skewed to prove whatever the bandier wishes. Advanced math is Karl Rove with his little slate. That is not to criticize him. He is one of the few who may really know the truth.

In early 2009, I created a spreadsheet to facilitate the analysis of the budget projections by OMB and CBO. The methodology was simple. You get to input the current level of outlays, the current level of revenues, the average rate of increase of outlays for ten years (or other time), and the average rate of increase of revenues for ten years.

I do not try to predict GDP or changes in tax laws or changes in entitlements, or any of the usual crap. Those projections have been hopelessly flawed in the past. But all they are used for is input into the annual rates of change in revenues and outlays. The math is indisputable. It is almost inconceivable that ten years from now the total debt (not the annual deficit) will be under $30T. It is quite likely to be twice that.

I sent these results to just about every Republican leader I could find. I sent it to major newspapers. I sent it to talk show hosts. I even sent it to the CBO and to Peter Orzsag of OMB. Here is a list of responses I received:

That’s right. None, nada, zilch. Those of you who have followed my diary entries on health care already know my disdain for the mathematical ability of anyone in Government or the Media. But this is all middle school level mathematics.

If I can paste the spreadsheet here, I will. It is better in color. It is still better in interactive form, where you can change assumptions to see the impact. I would be happy to send an interactive version to any redstater who wants one, complete with the formulas. Feel free to repost it anywhere with attribution.

I accuse the government economists, actuaries, and other professionals of dereliction. They can’t all be incompetent. The only other alternative is that they are betraying their professional standards. Politeness gets nowhere. Heritage didn’t respond. Newt’s American Solutions staff yawned. I actually did correspond with a bright young staffer there for a while, but she either tired of it or was ordered to ignore me.

I know that people on Cantor’s and Boehnor’s staffs read RedState. The staffs of Steele and Palin and Newt and others read it. Erick has created a great forum here. So I will shamelessly take advantage of the opportunity to publish my deficit rants here.

If the Republican Party would only create a shadow OMB or CBO to counter the deceit from Washington, it would certainly help our cause.

Since I can’t actually display the spreadsheets, let me describe the content. Each row represents an average annual spending increase from 1% to 10%. Each column represents an average revenue increase of 1% to 10%. Each of the 100 individual cells contains the deficit outcome over a fixed number of years of the corresponding row and column.

Not all outcomes have equal probability. The only honest way to project an expectation and a standard deviation is to “estimate” the probability of each possible outcome. Every statistical tool, every regression, every prediction is only a means to that end. Each assumption of initial revenue and spending and each number of years (say ten years) creates a different sheet. This is the best I can do, lacking the tools to display a three dimensional chart, let alone a five dimensional one. If anyone wants to see the master formula, just let me know.

One of the ways the budget OMB and CBO economists skew the results is to front-load the growth assumptions on GDP; that is, high early increases, followed by tapering off in later years. This causes higher total revenue projections without changing the “average” growth rate. Then too, there are no economic slowdowns and national security spending is projected in a world without new crises. ”Overseas Contingency Operations” are slated to shrink by a trillion or so. Fat chance of that happening! And then there are interest rates. They will have to stay low and so does the rate of inflation. In other words, we should ignore history and trust the fate of the country to a bunch of ignorant clowns and self-serving Wall Street alumni.

If there is interest, I am more than happy to publish a more detailed discussion of the probabilities and what they mean. For now, suffice it to say that this budget risks total collapse of the economy of the United States in return for dubious claims of benefits. It sounds a bit like the risk profile made by Goldman Sachs and other bank executives. It is not really fair to lump them together, since the Goldman Sachs people are an order of magnitude smarter than their competitors. Not surprising, since that is who is creating these plans. I will try to discuss this more in another article.

The fiscal 2011 spending is budgeted at $3.8T against only $2.6T in revenues. Both figures are highly optimistic.

For what it is worth, a cursory look at the past 40 years seems to show average (compounded) revenue growth at a bit over 3% and spending growth a bit over 5%. That would cause a ten year deficit (2011-2020) of more than $22T. Total debt would be over $35T. In twenty years, it would be more than twice that.

Considering the current spending orgy and the attack on capitalism, my own guess is that we will have more like 1% growth in revenues and 8% in spending. That would cause a ten year deficit (2011-2020) of more than $32T. Total debt would be over $45T.

Even if we could finance a $40T debt at 6%, that would suck up more money than the entire federal revenue projected for 2011 and more than half that projected for 2020.

The OMB 2011 ten year budget projects average spending growth of 5% and revenues of 8%. Anyone who expects that should be committed. But even then, the ten year deficit would exceed $16T as opposed to the OMB projection of only $8.5T. As mentioned above, this has to do with frontloading good years.

Any attempts to alter these figures by increased taxation are likely to lead to much lower growth. Thank you, Art Laffer.
A more likely result will be runaway inflation to make all these numbers meaningless. Thank you 1921 Germany.

There are other numbers which suggest that OMB is cheating. They project a cumulative revenue increase of more than 80% with spending going up less than 50% and GDP also up around 50%.

One lesson from these observations is that the OMB and CBO are way off the mark in so many ways…I hope this can be communicated to someone in the GOP or media. I have failed to do so. Meanwhile, stay tuned for my budget whine, number 2, with a bonus on global warming and a possible way out, still in progress.