The Coming Fiscal Train Wreck — Part I

Source: Decline of the Empire

Yesterday’s post Revisited The CBO’s Budget Fantasies focused on the revenue side of future deficits. I recommend you read it if you haven’t already done so. (I did some updates after publishing it.)

It seems clear that the bipartisan Congressional Budget Office has very likely overestimated future economic (GDP) growth, and thus the size of the deficits in the years 2011-2012 (in the baseline case). The CBO also assumes that various tax changes made over the last decade will disappear as scheduled, including the Bush tax cuts, which are set to expire in December, 2012. A more realistic view of our corrupt politics makes it highly unlikely those cuts will be allowed to expire as scheduled.

Today we will look at the outlays part of the CBO’s baseline, including brief looks at Medicare & Medicaid and Defense. Here’s the basic fiscal chart, repeated from yesterday’s post.

This is a slightly edited version of the baseline graph from The Budget and Economic Outlook: Fiscal Years 2011 to 2021. Outlays are shown by the dark blue line, as a percent of GDP. Outlays remain elevated, well above the 1971-2010 average (nearly 21% of GDP). Nominal GDP stands at $15.004 trillion (2nd quarter). Real (inflation-adjusted) GDP stands at $13.270 trillion. (Source: BEA).

The recent debt ceiling fiasco spawned an “agreement” by which there are $1 trillion in backloaded cuts in discretionary spending over the period 2012-2023. There may be another $1.4 trillion cuts by the end of this year, or there may not be. The rule of thumb about spending cuts says: believe it when you see it. Bear in mind the words of Ron Paul when you think about announced spending “cuts”—

One might think that the recent drama over the debt ceiling involves one side wanting to increase or maintain spending with the other side wanting to drastically cut spending, but that is far from the truth.  In spite of the rhetoric being thrown around, the real debate is over how much government spending will increase. 

No plan under serious consideration cuts spending in the way you and I think about it.  Instead, the “cuts” being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases. This is akin to a family “saving” $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.  But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.

In this context, let’s look at future outlays in defense and health-care.

• Defense Spending — According to the CBO’s full report (Table 3-9), the United States will spend 7.978 trillion dollars ($7,978,000,000,000) on Defense over the period 2012-2012 if “discretionary resources grow at the (estimated) rate of inflation after 2011.” All other discretionary spending amounts to 6.121 trillion dollars over the same period under the same assumption. The first round of spending “cuts” recently agreed to threatened to pare $350 billion dollars off future Defense spending increases, or perhaps $600 billion if the next round of spending “cuts” kicks in. As economist Dean Baker points out, if we use that second, bigger number, the proposed “cuts” amount to around 7.5% of future spending.

  As Baker also points out, the “threat” to eliminate this paltry percentage of future spending caused alarm bells to ring with Defense industry lobbyists. This excerpt is from the Washington Post’s page 4 article Defense, health-care lobbyists prepare to go on the offensive (August 4, 2011).

  On the defense side, Lockheed Martin, Boeing and other major contractors and trade groups have spent nearly $70 million on lobbying this year. The sector has also given about $50 million to candidates since 2008, according to the Center for Responsive Politics. The deficit deal includes about $350 billion in guaranteed cuts for the Pentagon and other defense- related programs, plus up to $600 billion in additional reductions that will be triggered if Congress fails to reach a different agreement. Marion C. Blakey, president of the Aerospace Industries Association,
  said in a statement this week that the deal “dangles a Sword of Damocles over our national security” if a compromise is not reached. “The $600 billion in additional cuts to defense that are part of the so-called ‘trigger’ deal are a dangerous approach that could compromise our national security for decades to come,” Blakey said. “. . . National security funding should not be treated as a piggy bank for deficit reduction, while the real drivers of our fiscal problems, such as entitlement spending, are off the table.”g

  A Sword of Damocles? Hanging over our national security? Remember, this is 7.5% of future spending increases we’re talking about here. These trivial “cuts” clearly pose a threat to the Awesome Glory of the Empire, and jeopardize its ability to protect us from various hoodlums wearing turbans & robes. I for one will not sleep well tonight knowing that I am no longer safe. Speaking of not being safe, former U.S. ambassador Dan Simpson, in his Beware those who would drag us into war, urges us to stand up to those who would create a war with Iran to justify future Defense spending. That would be the threat I’m worried about. Needless to say, it will be very, very hard to achieve large cuts in future Defense budgets. It’s completely absurd, but there is it.

• Medicare & Medicaid — If you think the Defense spending problem appears intractable, consider health care. USA Today gave us the bad news in Medicare, Medicaid tab keeps growing—

  The costs of the government’s big health care programs are soaring again, expenses not tackled in the agreement President Obama signed into law Tuesday to raise the nation’s debt limit and cut federal spending

  Medicare and Medicaid spending rose 10% in the second quarter from a year earlier to a combined annual rate of almost $992 billion, according to new data from the Bureau of Economic Analysis (BEA). The two programs are on track to rise $90 billion in 2011 and crack the $1 trillion milestone for the first time.

  The jump in health care spending is the biggest since the Medicare prescription drug benefit was added five years ago and ends a brief lull in the spending increases that occurred during the economic downturn. The latest spending surge in federal health care is driven by more people getting more treatment, not by price increases. Health care inflation is at its lowest level in more than a decade — a 1.7% annual rate — but the aging population and the weak economy are sending more patients to government-financed care.

  “It’s going to get worse before it gets better,” says Dan Mendelson of Avalere Health, an industry consulting firm in Washington, D.C. “There’s no way to control the federal budget without controlling entitlements. It’s just math.”

  Yes, it’s just math. Bill Hicks (a pseudonym) of The Downward Spiral did the math in his Spending on Medicare and Medicaid is Absolutely Out of Control—

  As you can see [in the graph above], going back to the first quarter of 2008, the quarter that marked the “official” beginning of the Great Recession, Medicare and Medicaid spending has in fact exploded by 21%, advancing a staggering $208 billion on an annualized basis during that time. Extrapolating that growth rate forward would cause such spending to double to nearly $2 trillion per year by 2021, the final year of the ten year time frame used in the just completed deficit reduction battle. Even scarier, that total is not far below the amount of revenue (around $2.1 trillion) the federal government took in from taxes last year.

  I think you can see the problem. But that’s not all there is to it. Read my post America, The Fraudulent Society, wherein you will learn that the U.S. blew hundreds of billions of dollars on fraudulent health care spending in 2009 alone! Do you now have any doubts about why health care is the fastest growing industry in America? With all those Baby Boomers retiring, new jobs in health-care are the only sure-fire salvation we’ve got. Good luck cutting Medicare and Medicaid.

I will write a follow-up to this post later this week. That post will discuss CBO estimates of future interest on the debt, Social Security, and government politics & policy. But those subjects are just gravy on the meat & potatoes at this juncture—health care and defense spending lie at the heart of the crisis. It’s easy to see that taken together, these two items alone will cause a fiscal train wreck by 2021. There isn’t enough revenue in the world to pay for all this scheduled but apparently untouchable spending, even if the CBO did systematically overestimate how much money the government will take in. That just makes the Empire’s Decline worse.

This is not a “muddle-through” situation. There is no muddle-through. This is a full-blown fiscal train wreck in the making.

Read more at Decline of the Empire