SOLVING THE DEFICIT ~ PART I
Author’s Note: For source information, see Note 4
A. INTRODUCTION
As the debate over the deficit rages on, I am astounded to find that the solutions being discussed are limited solely to spending cuts. Even traditionally liberal commentators seem afraid to say the “T” word and to at least raise the possibility that part of the problem may be inadequate tax revenues. The country has fallen under the collective delusion - all evidence to the contrary, as I will show - that the problem is too much spending, too much government. While I suspect that President Obama and his advisers recognize full well that we will need to raise taxes to eliminate the deficit, I can also understand why they might choose, for tactical reasons, to let the Republican budget cutting mania run its course before putting tax increases on the table. Let the Republicans, after years of grandly promising to deal with the deficit by slashing “unnecessary” Federal spending, actually try to deliver on those promises. Let’s see their grand plan and then let’s see how the voters like it when they begin to see the details and understand the implications.
My hope is that we will then be able to engage in a meaningful discussion of what government does, what we are willing to give up, and what we are willing to pay for. Do we really need FDA food inspectors and environmental protection? Are we willing to pay taxes to provide insurance benefits for low-income children and elderly nursing home residents? Is the research on cancer, Alzheimer’s disease, and heart disease funded by the National Institutes of Health really worthwhile? Is it smart to slash funds for job training and education at a time our students are falling seriously behind students in other countries in basic math and science competencies? Do we need to spend on defense as much as the combined military expenditures of the 20 next largest countries?
These are questions are worthy of public discussion, provided that the opposing sides are willing to set aside ideology and politics and present their positions and clearly and honestly. Unfortunately, the chances of this happening seem to be somewhere between negligible and none. Our political leaders are betraying the country. Instead of making good faith efforts to address the serious economic problems we face they seem unable to do anything except recite whatever ideological nonsense they think will enhance their chances of re-election.
I hope Americans will make intelligent choices, but I am increasingly worried they will not. A sizable portion of the American populace, unlike citizenry of other developed democracies such as Great Britain, Germany, France, Canada, Korea, Australia, and Japan, is convinced that their government is their enemy, a threat to their liberty and their financial well being (see Note 1 for additional thoughts on this issue) and they are calling for drastic cuts in Federal spending. I am particularly disturbed by the tactics being used by those on the political right. While honesty and candor are not in great supply on either side of the political divide, I feel that those on the political right have made shameless use of distortions and outright lies in presenting their case to the American people. They have also exploited social issues for political advantage, used inflammatory political rhetoric to divide and inflame voters, and helped inject so much anger into the political process that compromise and rational discussion seem impossible. At present, the government of the United States appears to be approaching a level of dysfunction that make me wonder if it can meet the very serious challenges we face.
And the mass media have failed the American public just as badly as their political leaders. Some outlets are little better than propaganda machines. But even more responsible media outlets have done a miserable job of providing factual information to Americans about the most pressing issues of the day. Instead, they seem to have concluded that their job is essentially to take dictation from representatives of opposing viewpoints and then give each side equal time or print space. No challenges to factual inaccuracies, no follow-up questions, no information about the issues. As long as they give equal exposure to each side, they seem to think they are engaging in “fair and balanced” reporting.
Voters seem to be following the bad examples set by their political leaders, although it is difficult to know who is really following whom. Whatever the case, voters seem all too ready to embrace empty slogans without making a serious effort to test their validity and there is ample evidence in the polls that an alarming proportion lack even a rudimentary understanding of the issues or of the likely consequences of the simplistic solutions they support. Their belief in the right-wing agenda is an article faith. It does not appear to be “reality based” or susceptible to empirical evidence or rational debate. I fear that, at a time when reasoned discussion is essential to developing policies to address critically important issues that will shape this country’s future, the discussion will be driven more by a blind faith in ideology than by fact-based, rational analysis. What follows is my humble attempt to provide factual information on the deficit in the hope that it will result in a reasoned and useful discussion.
B. THANKS FOR THE DEFICIT
(1) The Growth of the National Debt from Washington to Bush
Table I-1 summarizes the contributions made to the national debt by each administration since George Washington, expressed in both current and constant 2005 dollars. Constant dollars are the preferred metric since, without adjustment, expenditures in 1970 dollars would be greatly understated relative to expenditures denominated in 2005 dollars. To avoid any accusations of excessive subtlety, I have used color to highlight the differences between Republican administrations (red) and the lone Democratic administration of Bill Clinton (blue). I have not included President Obama’s deficit numbers. We’ll get to those later.
TABLE I-1
|
Current Dollars
|
Constant 2005 Dollars
|
Debt at End of Term(s)
|
Total Increase (Decrease) in Debt
|
% Contribution to 2008 Debt
|
Debt at End of Term(s)
|
Total Increase (Decrease) in Debt
|
% Contribution to 2008 Debt
|
All Other
|
$712
|
|
12%
|
$1,512
|
|
28.4%
|
Reagan
|
$2,052
|
$1,340
|
23%
|
$3,065
|
$1,552
|
29.2%
|
GHW Bush
|
$3,000
|
$948
|
16%
|
$3,907
|
$842
|
15.8%
|
Clinton
|
$3,410
|
$410
|
7%
|
$3,836
|
($71)
|
-1.3%
|
GW Bush
|
$5,803
|
$2,393
|
41%
|
$5,325
|
$1,489
|
28.0%
|
Total
|
|
|
100%
|
|
|
100%
|
When Ronald Reagan - the hero of the small government/low taxes crowd - took office in January 1981, the national debt was $1,512 billion (in constant $2005 dollars). When he left office in January 1989, the national debt was $3,065 billion. In short, Reagan took all of the debt accumulated by the 39 previous Presidents over more than two centuries and doubled it in only eight years. Moved pretty fast for an old guy! Bush I and Bush II added another $1,995 billion while Clinton actually reduced the debt slightly. Altogether, the 39 presidents preceding Reagan were responsible for 31.4% of the debt in place at the end of 2008, the next three Republican administrations contributed 71%, and the lone democrat actually reduced it slightly by 1.3%.
Figure 1 presents the deficits on a year by year basis since the beginning of the Nixon/Ford administrations. Again, I have used blue to highlight the deficits of Democratic and red for those of Republican presidents. Think I’m making this stuff up? Go see for yourself!
FIGURE 1
C. BUDGET BEFUDDLEMENT
One of the frustrating aspects of the current debate over deficits and the national debt is that people from opposite ends of the political spectrum make wildly contradictory claims which they support with seemingly valid data from legitimate sources such as the official Federal budget, the Congressional Budget Office (CBO) or the Social Security Trustees’ report. Contributing to the problem is the fact that a relatively small but still significant portion of the Federal budget consists of trust funds whose revenues and outlays are classified as “off-budget”. Unfortunately, the distinction between on-budget and off-budget items is not consistently observed in discussions of deficits and the national debt and this adds unnecessary confusion. So in discussions of the Federal budget it is critically important to be clear about whether the numbers being cited are on-budget, off-budget, or the combination of the two, which is commonly referred to as the Unified Federal budget.
(1) On-budget, Off-Budget
Off-budget programs are generally financed by special taxes levied specifically for their support. Social Security is financed by a payroll tax on individuals (FICA) and by matching contributions from employers. Unemployment benefits are similarly financed by taxes imposed for that specific purpose. Medicare is funded by a mix of payroll taxes (which go into a trust fund), user fees, and premiums. the Trust funds were placed off-budget in the hope that segregating them from the rest of the Federal budget would minimize the intrusion of politics into program operations and policy decisions. The practice has been moderately successful and, at worst, fairly benign. Unfortunately the huge surpluses that have accumulated in the social security trust funds over the past sixty years have provided politicians with a convenient mechanism for manipulating the deficit numbers. As I will explain in more detail below, the deficit looks smaller when social security is included in budget calculations and politicians who want to minimize the size of the deficit prefer to include it for that reason. And, of course, politicians who want to emphasize the seriousness of the deficit problem prefer to exclude the social security trust fund from their calculations.
To eliminate confusion about the contribution of social to past, present, and future deficits, I have elected to exclude it from all of the discussions that follow. The reader therefore needs to keep in mind that all of the numbers that will be cited in this report reflect on-budget items only and do not include social security. Social security is the only trust fund that requires separate treatment. There are several reasons for doing this:
(a) When included in the calculation of past deficits, social security surpluses have resulted in understatements of the deficit.
(b) As of 2010, FICA tax revenues are insufficient to cover the cost of current benefit payouts meaning that that, for the first time in its history, the program has the potential to become a significant part of the deficit problem.
(c) Unlike Medicare and Medicaid, which will add even larger amounts to future deficits, there are relatively easy fixes for social security, assuming that Congress can set ideology and politics aside long enough to act responsibly.
(2) Social Security
As mentioned earlier, social security is financed primarily by a dedicated tax, paid by both employees and employers, that is a familiar line item on every worker’s pay stub By law, FICA tax revenues can be used for no other purpose than the payment of benefits, although that has not stopped the Federal government from systematically borrowing money from the funds over the past 50 years. Until very recently, FICA tax revenues have been substantially greater than benefit payouts resulting in combined trust fund “surpluses” of $2.5 trillion dollars. I use quotation marks because the so-called surplus is really an accounting fiction that serves little purpose other than to generate confusion. In reality, the Federal government has, for the past 50 years, spent those excess FICA revenues to fund general government operations. As a result, the trust funds are now comprised entirely of government debt obligations, which is a fancy way of saying that they contain IOU’s from the US government. In order to redeem those IOU’s the Federal government would have to dip into general tax revenues, which would require, raising taxes, cutting spending in some other part of the budget, or, following recent practice, borrowing it from the Chinese.
This may come as a surprise to people who have looked at reports from the Social Security Trustees showing that trust fund revenues still exceed expenditures and will continue to do so for years to come. This illusion is sustained by including the interest paid by the government on its debt obligations as revenue. This is a perfectly legitimate accounting practice, but the unfortunate reality is that those interest payments are made in the form of additional government debt obligations. So while there may be a surplus in accounting terms, these debt “payments” are not actual dollars that can be used to pay benefits. The CBO estimates that when the books are closed for 2010 total revenues will be around $788 billion, an amount that includes $119 billion in interest payments, made with government IOU’s. Actual cash income will thus be only $670 billion. And since benefit payments will be around $706 billion the result will be a $36 billion cash shortfall. So, despite having an accounting surplus of $82 billion, social security will run a cash deficit of $36 billion that will have to be covered by the diversion of general tax revenues thereby adding $36 billion to the deficit.
Unfortunately, social security deficits will grow at an accelerating pace if Congress does not enact reforms. The principle reasons for this accelerating growth will be surging enrollment as baby boomers reach retirement age and longer life expectancies. And to further exacerbate the problem, as the proportion of retirees in the population grows, the number of workers paying FICA taxes to support each retiree grows ever smaller.
Figure 2 shows the CBO’s projections for Social Security over the next 10 years. The light blue line shows the most recent projections of actual cash surpluses and deficits. The darker blue line represents the “accounting deficit” when the IOU’s issued by the federal government to cover interest payments are included as revenue. The light blue line, of course, is the one that really matters, since it represents the amounts by which cash revenues will fall short of cash benefit payouts and the amounts that will have to be transferred from general tax revenues in order to meet benefit payout obligations. And, of course, these are also the amounts that social security will add to future federal budget deficits if Congress fails to enact reforms.
FIGURE 2
I have modified Figure 2 to reflect the larger deficit that will occur in 2011 as a result of the supposedly, one-time, 2% reduction in FICA taxes enacted late in 2010, too late to be included in the CBO’s calculations.) After flirting briefly with solvency in 2014 and 2015, Social Security heads south into deficit territory. And the latest Trustee’s Report from Social Security shows that beyond 2020 the downhill slope of the blue line just gets steeper and steeper. The deficits for just the 2011 to 2020 period alone will add up to $202 billion. Again, since there is no “locked box” containing 2.5 trillion actual dollars, these deficits will have to be financed with general tax revenues and will thereby add to future on-budget deficits.
While there are relatively easy fixes for the social security deficits, the same cannot be said of the rest of the Federal deficit. The problem there is not that solutions are difficult or impossible to find. Rather it is that the ideological gridlock that has developed around the issue of the deficit threatens to make agreement on common sense, practical solutions impossible
Having clarified some of the more confusing aspects of the Federal budget we can now move on to a review of the history of deficits and the national debt.
D. REVENUES AND EXPENDITURES - EISENHOWER TO BUSH
The roots of our current problems with deficits debt can be understood only if we examine trends in Federal spending and taxation over the past six decades. From the mid-fifties, spending, as a percentage of our national income (GDP) has risen gradually over the 63 year and now consumes 1.7% more of our GDP than it did in 1955. Tax revenues, on the other hand, have gone up and down over the same time period - usually falling during Republican administrations and rising during Democratic administrations - and now generate 2.8% of GDP less than in 1955. That spending has increased is not surprising, since we have added a few programs along the way, programs like Medicare and Medicaid to name just two. In 2008, the 2.8% of GDP decrease in tax revenues translated into $403 billion; the combined costs of Medicare and Medicaid were $599. So in 2008 we are paying $403 billion a year less in taxes while having added two programs that, in 2008, added $509 billion more in spending. Is it just me, or is there something wrong with this picture?
TABLE I-2
On-Budget Spending and Tax Revenues as a % of GDP
|
|
Revenues
|
Spending
|
Surplus (Deficit)
|
1960 (End of Eisenhower Administration)
|
15.8%
|
15.7%
|
0.1%
|
1968 (End of Johnson Administration)
|
14.7%
|
17.9%
|
-3.2%
|
1976 (End of Nixon/Ford Administrations)
|
13.3%
|
17.3%
|
-4.0%
|
1980 (End of Carter Administration)
|
14.8%
|
17.5%
|
-2.7%
|
1988 (End of Regan Administration)
|
13.3%
|
17.2%
|
-3.9%
|
1992 (End of Bush I Administration)
|
12.6%
|
18.1%
|
-5.5%
|
2000 (End of Clinton Administration)
|
15.7%
|
14.8%
|
0.9%
|
2008 (End of Bush II Administration)
|
13.0%
|
17.4%
|
-4.4%
|
Change from Truman to Bush II
|
-2.8%
|
1.7%
|
|
Source: See Note 5
The long-term trends shown in Table I-1 are presented graphically in Figure II-1. Tax revenues (green line) and expenditures (red line) are presented as a% of GDP. Recessions and the timing of the Korean and Vietnam wars are also indicated.
Note: The data points on the graph represent expenditures and revenues for Federal Fiscal years (FFY) and are thus slightly out of synch with Presidential terms. For example, Ronald Reagan was inaugurated on January 20, 1981. The dotted black line indicating the start of his term passes through the data point representing the revenues and expenditures for FFY 1981, which began 10/1/1980 and ended on 9/30/1981.
Generally speaking, during periods of normal economic growth, spending and tax revenues tend to grow or decline at roughly the same rate as the US economy (GDP) as long as there are no major changes in Federal programs or tax policies. Unfortunately, even when spending and tax policies are relatively stable, the US economy does not grow in a steady, predictable fashion but is subject to cyclical ups and downs that economists refer to as the “business cycle”. If the “down” periods are bad enough, we call them recessions. Recessions typically produce decreased tax revenues and increased expenditures for mandatory “safety net programs” such as unemployment insurance, food stamps, Medicaid and others. While attempts may be made to cut back in discretionary spending, total spending either increases or, at best, does not decline as much as tax revenues. The result is an increase in the deficit, which is represented by the pink shading in Figure I-1. The good news is that when the economy comes out of recession, tax revenues increase, safety net expenditures decline, and - all other things being equal - the deficit shrinks.
Between the Korean and Vietnam wars, the economy grew steadily with relatively modest deficits just under 1% of GDP (A). Between 1969 and 1982, the Vietnam War and three recessions resulted in fairly large increases in the deficit but, as Figure II-1 shows, they decreased following each of the first two recessions. This was not the case, however, following the third and fourth recessions that occurred in quick succession at the end of Jimmy Carter’s Presidency and early in Ronald Reagan’s first term. This time the “all things being equal” condition did not apply, in part because the economy did not have time to recover between the two recessions, but also because Reagan reduced tax revenues from 14.8% of GDP in 1981(when Carter left office) to 13% of GDP in 1988 at the end of Reagan’s second term. Tax revenues remained depressed until the end of the Bush I administration but spending fell only modestly from its peak during the 1981 - 1982 recession. The result was that the structural deficit was reset to around 2.7% of GDP (B).
We can estimate the relative contributions of tax cuts and spending increases to changes in the deficit from 1980 through 2008 by using average revenues and expenditures from 1951 to 1980 as baselines. Over this 30-year period, on-budget revenues averaged 14.8% of GDP and outlays averaged 16.4%, yielding an average deficit of 1.6% of GDP.
TABLE I-3
Mean On-budget Revenues, Outlays, and Deficits as % of GDP
|
|
Revenues
|
Spending
|
Deficits
|
Historical (1950 to 1980)
|
15.2%
|
16.5%
|
-1.3%
|
Hypothetical Balanced Budget Baseline
|
15.8%
|
15.8%
|
0.0%
|
Reagan, Bush I, Bush II
|
13.2%
|
17.4%
|
-4.1%
|
Deviation from Hypothetical Baseline
|
-2.6%
|
1.5%
|
-4.1%
|
|
Clinton
|
14.3%
|
16.0%
|
-1.8%
|
| Source: See Note 10 |
|
|
|
|
A balanced budget during this period would have required revenues and expenditures to equal 15.8% of GDP. Using this number as a hypothetical basis for a balanced budget, we find that the three Republican administrations following Jimmy Carter combined declining revenues equivalent to 2.6% of GDP with spending increases, equivalent to 1.5% of GDP. The average deficit during these three administrations was 4.1% of GDP of which 2.3% (56% of the deficit) was the result of lost tax revenues and 1.8% (44% of the deficit) the result of spending increases. The reader will note that, in contrast to the “borrow and spend” Republicans, Bill Clinton succeeded in eliminating the deficit by the end of his second term with a combination of tax increases and spending cuts. He still ran a net deficit over the entire course of his administration, but we were at least headed in the right direction when he left office. It is a mark of the effectiveness of the right-wing propaganda machine that the tea-party along with many other lower- and middle-income Americans are convinced that our deficit problem is the result of runaway Federal spending.
Does the Republican leadership really believe their own propaganda or are they just cynically exploiting the naiveté of American voters? Personally, I have difficulty imagining that the economic wizards advising Ronald Reagan and George W. Bush were surprised to find that cutting taxes while increasing spending resulted in an increased deficit. I am more inclined to believe that the conservative agenda really is, as has been often observed, to (a) cut taxes, (b) increase spending, and (c) create a crisis that can be used, in the inimitable words of Grover Norquist, “to get the Federal government down to the size where you can drag it into the bathroom and drown it in the bathtub.” But maybe I’m being too cynical myself. Maybe there is a more benign explanation. I am open to suggestions.
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Next Installment - SOLVING THE DEFICIT ~ PART II
In which I show that:
1) President Obama inherited a terrible mess from his predecessor that included the worst recession in 80 years and a structural deficit of $642 billion (caused in no small part by the of $277 billion in tax cuts he pushed through.
2) The $1,550 billion deficit of 2009 was made up of the $642 billion deficit inherited from Bush, $415 billion in decreased tax revenues caused by the recession, $409 billion in mandatory spending also caused by the recession, and $84 billion in discretionary spending (the only part under the direct control of Obama).
For conservatives who think we eliminate the deficits without raising taxes, I provide a budget cutting “tool kit” with enough budget details that he or she can make informaed decisions about where to make those cuts.
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NOTES
NOTE 1 - Having grown up in Canada, I find the attitude of American conservatives toward their government somewhat mystifying. While Canadians view their government as sometimes bumbling and inept and occasionally susceptible to small-change corruption, they take it for granted that its intentions are generally good and that most of what it does if for their benefit. They certainly do not believe that it is actively conspiring to strip them of their freedom and turn them into slaves. It has occurred to me that Americans’ paranoia about the Federal government may go all the way back to the early debates over Federalism that had as much to do with slavery as with anything else. The Southern States feared a strong Federal government because they perceived it, quite correctly of course, to be a threat to the institution of slavery on which the entire Southern economy was based.
Coded appeals to racial fears and strong support of States’ rights along with attacks on the Federal government and the “elite” liberal establishment have since been used by George Wallace, in his surprisingly successful Presidential campaign, and by subsequent Republican Presidential candidates. Wallace railed against the growing powers of the federal government, especially the courts and the bureaucracy which he held up to ridicule. He pointed out that “federal judges and bureaucrats had been elected by no one and were increasingly usurping powers of the individuals and states”. He liked to portray them as underworked self-important "pointy-headed" intellectuals who had “their heads in the clouds and their lunches in their trademark attaché cases”.
Nixon’s Southern strategy employed similar tactics but without the blatant racism that characterized the Wallace campaign. Ronald Reagan kicked off his 1980 campaign for President with a speech on States’ rights in Philadelphia, Mississippi, where three civil rights workers had been murdered 16 years earlier. In his first campaign, Reagan made frequent references to “welfare queens” [2] reinforcing the belief of many blue-collar workers that the Federal government was using their tax dollars to provide lazy blacks with generous benefits. Federal government. Lee Atwater, who served as Deputy Campaign Director for Reagan, Campaign Director for George H.W. Bush, and then as Chairman of the Republican National Committee was quoted as follows in a 1981 interview: “You start out in 1954 by saying, ‘N****, n*****, n******.’ By 1968 you can't say ‘n*****’ — that hurts you. Backfires. So you say stuff like forced busing, states' rights and all that stuff. You're getting so abstract now [that] you're talking about cutting taxes, and all these things you're talking about are totally economic things and a byproduct of them is [that] blacks get hurt worse than whites.”
The 1988 Bush I campaign, of course, was distinguished by the notorious Willie Horton ad. (The ad was run by an “independent” political action committee and was never tied directly to Atwater or the Bush campaign.)
In 2011, Hispanics have replace blacks as the supposed beneficiaries of Federal permissiveness and largess, but the underlying message - that minorities, with the support of “country club liberals”, are getting breaks from the Federal government at the expense of “hard-working, patriotic, (and white) Americans”, - remains unchanged.
And of course, corporate America has been more than happy to pile on support for any group that wants to weaken the Federal government. Corporations, their lobbyists, in conjunction with wealthy right-wing ideologues like the Koch brothers, have poured billions of dollars into think tanks, advocacy groups (phony and otherwise), and political action groups that have waged an effective campaign to persuade millions of Americans, in the North as well as the South, that a strong Federal government is a terrible idea and a threat to their well-being. The activities of these groups include sponsoring rallies and protests, setting up phony front groups to run ads on radio, TV, and in print media, free op eds for cash-strapped newspapers (like the Baltimore Sun), letters to the editor from “concerned citizens”, direct mail campaigns, “push” polls that actually convey misinformation to unsuspecting voters, and the list goes on and on.
[2] "'Welfare Queen' Becomes Issue in Reagan Campaign". New York Times. 1976-02-15. p. 51.
Nixon’s Southern strategy
NOTE 2 - The following excerpts from an article in the New York Times by Ron Suskind nicely summarize the differences between “faith based” and “reality based” styles of thinking.
“Faith, Certainty and the Presidency of George W. Bus
By RON SUSKIND, The New York Times
Published: October 17, 2004
Bruce Bartlett, a domestic policy adviser to Ronald Reagan and a treasury official for the first President Bush, told me recently that ''if Bush wins, there will be a civil war in the Republican Party starting on Nov. 3.'' The nature of that conflict, as Bartlett sees it? Essentially, the same as the one raging across much of the world: a battle between modernists and fundamentalists, pragmatists and true believers, reason and religion.
''Just in the past few months,'' Bartlett said, ''I think a light has gone off for people who've spent time up close to Bush: that this instinct he's always talking about is this sort of weird, Messianic idea of what he thinks God has told him to do.'' Bartlett, a 53-year-old columnist and self-described libertarian Republican who has lately been a champion for traditional Republicans concerned about Bush's governance, went on to say: ''This is why George W. Bush is so clear-eyed about Al Qaeda and the Islamic fundamentalist enemy. He believes you have to kill them all. They can't be persuaded, that they're extremists, driven by a dark vision. He understands them, because he's just like them. . . .
''This is why he dispenses with people who confront him with inconvenient facts,'' Bartlett went on to say. ''He truly believes he's on a mission from God. Absolute faith like that overwhelms a need for analysis. The whole thing about faith is to believe things for which there is no empirical evidence.'' Bartlett paused, then said, ''But you can't run the world on faith.''
………………………………..
In the summer of 2002, after I had written [in] an article in Esquire that the White House didn't like [about] Bush's former communications director, Karen Hughes, I had a meeting with a senior adviser to Bush. He expressed the White House's displeasure, and then he told me something that at the time I didn't fully comprehend -- but which I now believe gets to the very heart of the Bush presidency.
The aide said that guys like me were ''in what we call the reality-based community,'' which he defined as people who ''believe that solutions emerge from your judicious study of discernible reality.'' I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''
NOTE 3 - . The constant dollar adjustment involves choosing a base year and then adjusting dollars from prior and subsequent years so that they represent equivalent purchasing power. The base year adjuster (referred to as a “deflator”) is 1.000. For prior years, it is less than one and becomes smaller as the further back it goes in time. For later years the reverse is true. (The deflators used in this paper have a base year 2005 can be found in Table 10-1 of the 2012 Budget.)
The deflated value of a dollar for Year NNNN is the Year NNNN current $ amount divided by the year NNNN deflator. For example, the deflator for 1981 is .4789. A $10,000 expenditure in 1981 is thus equivalent to 10,000/.4789) = $20,881 in 2005. Another way to understand the conversion to constant dollars is to consider what would have happened to $10,000 borrowed in 1981, Ronald Reagan’s first year in office. Debt used to finance Federal spending behaves in exactly the much the same way as debt used to finance the purchase of a home as long as we assume that the person who took out the mortgage has never made a payment on it. So for the past 30 years we have been paying interest on every one of those dollars that Reagan borrowed. Now interest rates are currently very quite low - a 5-year treasury bond is currently at 1.5% - but rates were much higher in earlier years. The rate for a five-year bond in 1980 was over 11% (remember how inflation spiked in the Carter years?) and today’s rates are the result of a long, steady decline, accelerated over the last decade by Federal Reserve policies and, more recently, by the economic crisis that caused a flight to the dollar. (One of the many ironies of the current financial crisis is that the currency of the US - the country most responsible for the crisis - enjoyed a rise in value and the cost to the US of borrowing money dropped almost to zero. Regardless of how much tumult the US economy may be in, the US dollar is still viewed as the safest harbor available in an economic storm.) In any event, let’s assume that we have been paying an average interest rate of 3% on that $10,000 that Reagan borrowed. With compounding over 24 years the accumulated interest would be $10,328 in 2005 and we would now owe $20,328. The reader will note that this comes pretty close to the number we came up with ($20,881) when we used the constant dollar deflator to estimate the equivalent in 2005 dollars of $10,000 in 1981 dollars.
NOTE 4 - Wherever possible I have provided original source citations for data cited in this series. In addition to these citations, I have posted Excel workbooks containing the underlying data for Tables, Figures, and my calculations for derived numbers.
Workbook 1 - Budget 2008 to 2012.xls
Workbook 2 - Budget Historical Data.xls
Workbook 3 - CBO Projections Jan 2011.xls
The workbooks can be found at Google Docs at:
Each workbook contains an index with clickable hypelinks to the data sources for specified Tables and Figures. The hyperlinks do not work in Google.docs but will work if you download the document to your computer.
NOTE 5 - Current dollar data are from 2012, Historical Tables, Table 7.1. Workbook 2[7-1].
Constant 2005 dollar figures were calculated by dividing the current dollar amounts in Workbook2[7-1] by the dollar deflator index from Table 10.1 (Workbook2[7-1])
NOTE 6 - Budget of the United States for 2012, Historical Tables, Tables 1.1 and 1.3. My calculations are in Workbook 2[Graph Data]. I was unable to find an on-budget/off-budget breakdown of historical deficits in constant dollars, so I took the current dollar amounts for on-budget deficits [1-1 Cur$] and divided them by the CBO Chained Price Index numbers from Table 10.1 to convert them into 2005 constant dollars.
NOTE 7 - In Federal budget jargon, mandatory expenditures are those that have permanent authorization from Congress. They generally involve long-term programs that are expected to remain in place for many years to come. The authorizing legislation remains in effect until it is repealed or modified by Congress. If Congress does nothing, the legislation remains in place. Most of the so-called “entitlements” such as Social Security, Medicare, Medicaid, and unemployment benefits, are mandatory expenditures. Discretionary expenditures, on the other hand, are authorized through appropriations that must be renewed annually and this requires Congress to make a decision each year about whether to renew, reduce, or eliminate each of these expenditures. The largest discretionary expenditure by far is for Defense.
Mandatory programs tend to be the really big programs that millions of people depend and in which reductions will produce real and immediate distress in large numbers of voters. While cuts in discretionary programs such as Defense will also produce distress in industries that depend heavily on Defense related contracts, fewer people are involved, the effects are less immediate, and the people affected are less vulnerable and in a better position to cope. In short, the political cost of cutting mandatory programs is much higher than the cost of cutting discretionary programs and it is natural then that when budgetary problems arise, Congress prefers to go after discretionary rather than mandatory spending. The problem is that discretionary spending makes up only 38% of the Federal budget. And if you do exclude Defense, discretionary spending amounts to only 17% of the Federal budget.
NOTE 8 - Table I-2 is based on 2012 Budget of the United States, Historical Tables, Table 1.2. It is in Workbook 2[Table I-1].
NOTE 9 - 2012 Budget of the United States, Historical Tables, Table 1.2. See Workbook (2) [1-2%] Workbook (2) [Index] and click on “Figures I-3 and III-1 SOURCE DATA” to see the Table on which Figure I-3 is based.
NOTE 10 - Table I-3 is based on data from 2012 Budget of the United States, Historical Tables, Table 1.2. See Workbook (2) [1-2%]. My calculations can be found in the same worksheet.
The term “reality based” was used disparagingly by a senior aide to President George W. Bush in a discussion with Ron Suskind of the New York Times in 2002 which was widely quoted at the time. According to Suskind the aide said ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.'' See Note 2 if you want to be even more appalled.
