Economy

How to tell who’s serious about reducing the federal deficit

The federal deficit is a major topic of conversation these days, both in the media and around the nation’s water coolers and copiers. In fact, many freshmen Republican Representatives and Senators believe that they have been sent to Congress specifically to shrink the deficit and the related national debt. But it’s become clear to me from reading and having multiple discussions about the deficit that not everyone is serious about actually addressing the problem. Sure, most citizens think they’re serious about eliminating the deficit, but because they don’t have any clue about the scale of the actual problem, they offer up “solutions” that aren’t even tenth-measures, never mind half-measures. And given the positions of the political parties and various politicians, it’s difficult to see how they might even think that their positions amount to a serious attempt to eliminate the deficit.

So how can we tell whether someone is serious about addressing the federal debt? First and foremost, anyone who says that the deficit can be eliminated without significant reforms to Medicare isn’t being serious. According to the Office of the Management of the Budget (OMB), Summary Tables S-3 and S-4 for the Fiscal Year 2011 Budget, Medicare accounted for 17% of the deficit in 2009 and under current tax policies will account for 48% of the deficit in 2020. If the President’s 2011 Budget were enacted as proposed (and it never is), Medicare would actually account for 63% of the deficit in 2020, but that’s because the 2011 Budget assumed that taxes for the wealthy would be going up in January. Either way, however, Medicare represent a massive portion of the deficit and there’s no way to be serious about the deficit without fundamentally changing how Medicare pays benefits and significantly increasing Medicare payroll taxes.

Second, anyone who says that we can eliminate the deficit without cutting defense spending isn’t being serious either. According to the OMB Summary Table S-11, spending by the Department of Defense is greater than spending by all non-security agencies combined by more than 40%. Furthermore, even if we shut down every federal department except the DoD, the annual deficit would only be cut in half. Given that shut down would mean no federal law enforcement, no federally funded scientific research, no road and bridge maintenance, and no food safety monitoring (Departments of Justice, NASA and the National Science Foundation, Transportation, and Agriculture respectively) among others, shutting down every department except for the DoD isn’t a wise idea. Shrinking just the defense budget by 5% saves more money than zeroing out the combined budgets for the seven smallest agencies (by funding). Put another way, there are only four non-security agencies that are larger than the amount of money that would be saved by cutting the defense budget 5% – Health and Human Services, Transportation, Education, and Housing and Urban Development. While I’m sure that there are efficiencies to find in every federal departments, there’s no way to address the deficit without shrinking the defense budget.

Getting out of Iraq and Afghanistan is the third thing that anyone serious about reducing the deficit needs to consider. The problem is that the money needed to keeping soldiers in both nations is paid for using “contingency” or “supplemental” spending bills that are 100% deficit spending. In percentage terms, Iraq and Afghanistan directly account for between 5% and 7% of the deficit.

Fourth, anyone who rejects ever addressing Social Security payments is also not serious. Social Security represents about 20% of the entire federal budget (and expected to exceed defense spending in 2016), and payroll taxes largely cover Social Security payments today. But because Social Security is such a massive program, the aging US population will mean that the impact of Social Security payments on the the deficit will rise fro 2% in 2009 to to between 9% and 12% by 2020. However, because Social Security is such a small part of the deficit at present, fixing it with small reductions in benefits and/or small increases in payroll taxes will be easier and can be done later than the other changes discussed above. As a result, it’s possible to be serious and still reject addressing Social Security today, but not to reject addressing Social Security ever.

And last but certainly not least, anyone who is unwilling to accept any tax increases of any kind is not serious about shrinking the deficit. Individual income taxes accounted for about 44% of federal revenue in 2009, payroll taxes accounted for another 42%, and corporate taxes accounted for another 7%. Combined, these three sources of revenue account for about 92% of all the money the federal government brings in every year. Given that beneficiaries will be unwilling to accept drastic cuts to Medicare services, the Medicare payroll tax is certainly going to go up. Also given that the Social Security payroll tax is reasonably close to balanced with Social Security payments and will likely stay there, there are really is only two taxes left to raise – corporate taxes and personal income taxes, with the lion’s share likely coming from increasing personal income taxes. Serious people can debate how best to increase taxes and how much to increase them, but anyone who says that we can eliminate the deficit without increasing taxes at all is simply not serious about the deficit.

These five points represent a simple way to determine if someone is actually serious about reducing or eliminating the federal deficit. They can be reduced down to three basic points – cut entitlement benefits, cut defense spending, and raise taxes. Anyone who doesn’t accept all three of these basic points isn’t serious about reducing the deficit.

Tomorrow, we’ll look at the stated positions of various organizations and politicians and see how serious they really are about reducing the deficit.

6 replies »

  1. My original comment gotten eaten by the spam filter (smart filter, eh?). Anyway….

    The whole issue of Social Security is a huge ruse to implement neoliberal austerity measures – measures that have never worked, anywhere. There’s no theoretical problem with SS. In the 80’s Greenspan and Reagan raised the payroll tax to cover the future costs of the Boomer Bubble. The problem is that starting with St. Ronnie, every president has been raiding the trust fund. There’s nothing in there except IOU’s from Congress.

    So there is a pretty severe problem with SS at this point. All those future payments will have to come out of the general fund. But the problem is (and has been) with our political leadership that can’t keep its grubby little hands out of the cookie jar rather than it being a problem with the social safety net per se. The pertinent question for our politicians is, “Who’s entitled, you bastards?”

    The DoD budget won’t be cut. The most extreme recommendations make relatively minor cuts after a decade in which the budget doubled. There won’t be serious cuts because the military is the only Socialism that the GOP will approve. It’s also the favored method of “economic stimulus” among the political elite.

    Most people don’t know that there are laws about how foreign aid/reconstruction money is spent. Those laws mean that something like 80% of the money pledged to “rebuild Afghanistan” recycles back to US corporations through consultants and contractors. For example, before they were the bad guys, the Afghan insurgency was gifted with Stinger missiles. Those missiles were mule trained into Afghanistan. Those mules (even though Central Asia has mules) were shipped from the United States to do the work.

    Nobody in Congress or the White House is going to stop that kind of gravy train..or mule train if you prefer.

    It’s all a lot of sound and fury signifying nothing. Unwieldy, bureaucratic systems don’t reform themselves…even for the sake of their own survival. I’ve come to the conclusion that the only thing We the Little People can do is wait (and do our best to prepare) for the eventual collapse of the system. If we’re smart and lucky we’ll get the chance to put it all back together again.

    • Social Security is partly ruse, partly a real problem, but not just because it’s been raided over and over and over again. It is a large percentage of the federal budget (~20% in 2009) and is expected to exceed defense spending in 2016. Social Security payroll taxes were $24 billion less in 2009 than Social Security payments were, but that simple fact means that it did add to the deficit. By 2020, the budget estimates that Social Security will pay out between $117 and $127 billion more than it brings in in payroll taxes while still being about 20% of the federal budget. As a percentage, that’s an increase from 2% of the deficit to about 10% of the deficit.

      For comparison, that would add about the same amount to the federal deficit as Iraq and Afghanistan did in 2010. If we’re going to say that Iraq and Afghanistan are bad because they add to the deficit, then by 2020, we have to say the same thing about Social Security.

      However, because Social security is so close to balance today, we have time to fix it and the fixes aren’t going to be draconian. We can start by talking about cuts to benefits for the wealthy who don’t need government handouts, for example, and see where that gets us. But that’s technically still a Social Security cut.

      I intentionally didn’t dive into the details of what should be cut, how, to whom, and how deep, because those are issues that are up for debate. The need to address all these points somehow really isn’t.

  2. But isn’t the point of the trust to cover the times when payouts exceed incoming taxes? I was under the impression that the Greenspan bump was designed to handle the situation we’re now in that everyone could see coming.

    • Lex – My understanding is that the bump was supposed to cover this, and it will to some extent. And it’s possible that this wouldn’t be an issue without the fact that Congress raids the trust fund every year to keep the deficit from being REALLY big. I chose to follow use the basic approach I saw in the FY2011 budget, which was all receipts were summed up, all expenses were summed up, and the deficit was how much the expenses exceeded the receipts.

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