The United States Budget Dilemma

There is a video going around called “United States Budget Dilemma”.  It’s a great video, made better by its slow pace and the credibility that an innocent party brings to the topic.  Watch it.

I want to add “Level II” to our understanding of the budget dilemma fundamentals.  In the video, the author references the numbers for 2012 in the President’s proposed 2013 budget where according to Summary Table 5 it is clear that “Mandatory Spending” plus net interest totals $2,477 billion while receipts total $2,469 billion.  The video’s very valid point is that even if we cut everything from National Defense to the congressional cafeteria, the budget could not be balanced if we spend our tax revenue on Medicare, Medicaid, Social Security and Interest on the Debt.  Everything else had to be borrowed or printed.  That everything else was $1,319 billion.

While this is true, there are good objective reasons to ignore this fact.  First, 2012 was an atypical year for revenue assuming that both the Bush tax cuts and the Obama Payroll cuts will expire. They won’t be allowed to expire of course but politicians console themselves with the idea that if they really needed to, they could let them expire.  Letting each of these cuts expire would bring in approximately $250 billion.  Remember, we have to find $1,319 billion cuts or another $1,319 – $250 = $1,069 billion to balance the budget.

Another way to look at revenue projections would be to think about waiting out the business cycle and let increased corporate, income and payroll taxes come in.  Historically according to Hauser’s law, we can expect that about 18.0% of GDP to be collected in federal revenue. Yes, revenues as a percent of GDP have been as high as 20.9% of GDP but 18% is typical.  Current US GDP is $14,587 billion so historically we should expect approximately $2,626 in revenue.  Even if we had that level of revenue, it leaves us with a deficit of $3,796 -$2,626 = $1,170 billion.  The practical implication is that using historical numbers and assuming that we spend as much as we promised on Mandatory spending, our discretionary spending would have to be cut $1,170 / 1,319 =… 89% to balance the budget.

To balance the budget with growth alone, the GDP has to grow to 1/.18 = 5.55 times our spending.  That is 21.1 trillion dollars or 44% greater than it is today.  So even if we kept our spending constant and let the economy grow away our deficit, it will have to grow 44% before we can expect our revenue to exceed our current spending.

This is just simple arithmetic.

Can the budget be balanced before the economy collapses?  Maybe not.  To do so requires steep cuts in everything.  Not just the things we want to cut but the things we don’t want to cut like National Defense, Social Security and Medicare.  I don’t know of any serious conservatives talking about that let alone conservative politicians.  What conservative politicians do talk about is tax cuts causing the economy to grow fast enough to balance the budget.  I’ll get to that fantasy next week.