James Pethokoukis

Politics and policy from inside Washington

The U.S. budget deficit is even worse than you think

Aug 25, 2009 18:28 UTC

Oh yes, America’s fiscal situation is a dreadful mess.

The White House says the federal government will run a $9 trillion budget deficit over the next decade. As a percentage of the total economy, the United States looks to have an astounding debt-to-GDP ratio of 11 percent this year, with that number declining to around 4 percent from 2015 though 2019. And total debt held by the public will rise to 68 percent of GDP by that year versus 33 percent in 2001.

Those numbers, however, are actually a bit on the rosy side. In his blog, Douglas Elmendorf, director of the Congressional Budget Office, notes that the forecasts presume no change in current tax laws, such as the continued existence of the Bush tax cuts and the alternative minimum tax (AMT), which grabs more and more taxpayers ever year at a lower and lower income level.

Such forecasts also assume annual spending increases grow at the rate of inflation. But tomorrow is rarely the same as today in Washington. A more realistic scenario — if the AMT were indexed for inflation, most of the Bush tax cuts continued and spending rose as it has in the past — would see the deficit at 8.5 percent of GDP in 2019. That is a level, before the current crisis, not seen since World War Two.

Budget numbers like these are generated on a cash accounting basis. They don’t take into account the underfunding of America’s vast entitlement programs and the annual changes in the net present value of those programs.

Calculated on an accrual basis, much as a corporation would estimate its pension and healthcare liabilities, the annual deficit number would be at least $6 trillion this year.  In 2008, for example, the headline budget number — the one calculated on a cash in, cash out basis — was $454 billion. But if you ran the number as the federal deficit plus the net present value of all those unfunded liabilities, the deficit was $5.1 trillion with total fiscal obligations at $66 trillion. As Elmendorf dryly puts it: “Putting the nation on a sustainable fiscal course will require some combination of lower spending and higher revenues than the amounts now projected.”

And that is The Choice. Does America want to be a low-tax nation with a government that does less than it does now, or a higher-tax nation with an even bigger public sector? Right now, it sort of wants both. You can see that not only in today’s budget numbers, but also in the healthcare debate, where a fair reading of the polls reveals Americans want to contain costs while also having every high-tech solution and test available to them.

The politicians are certainly no better. When the Republicans wanted to fix Social Security, Democrats argued the program was in good shape. And now when Democrats want to trim Medicare costs, the GOP plays the defender of seniors.

So put me down for 8.5 percent in the 2019 debt-to-GDP ratio office pool, OK?


Several reasons or “justifications” were offered to initiate the post 9/11 war against first Afghanistan, then Iraq: the Administration with the assistance of Philip Zelikow, who chaired:”The 9/11 Commission Report: Final Report of the National Commission on Terrorist Attacks” which omits the World Trade Center in its title and loads a justification for war, this same Philip Zelikow is the architect of the war.
One hundred percent of reported commercial aircraft incidents prior to 911 requiring Military intercept were intercepted. Usually military jet intercept takes about 10 minutes – no intercepts occurred on the morning of 11 September 2001. Building 7 of the WTC housed investigations on Bear Sterns and other Wall Street firms, it fell similar to Tower 1 and 2 but was not hit by aircraft. Within the rubble, core columns were diagonally cut as photo evidence shows in a manner similar to demolition by professionals. NAFTA, during the Clinton Administration and Gore (of Cap ‘n Trade and the Green Police who can make your living in your own house a crime) exported much of manufacturing in the US due to labor cost differentials.
So, is this a marketing move by the Defense Industry or is as some have argued, a retaliation against Iraq for attempting to market Oil in “Euros”, away from the US dollar?
Both wars also strategically place US military in the OIL geopolitical region under whatever justification.
Let’s assume the debt moves forward to collapse the US currency, as those who see that comming move to commodities and elsewhere, then the US dollar collapse represents a buying opportunity.
Comments anyone?

Obama: 64 percent of budget deficit is my handiwork

Aug 25, 2009 16:38 UTC

From the Office of Management and Budget:

The Administration contemporaneously acted to address the financial crisis and get credit flowing again through the Financial Stability Plan, and worked to help homeowners facing foreclosure through the Homeowner Affordability and Stability Plan. In addition, the Administration took action to forestall the failure of two of the Nation’s largest automobile manufacturers and to strengthen the non-bank credit market. All together, these efforts—along with the ARRA—increased the deficit in the short run. In fact, 64 percent of the current deficit is directly attributable to rescue and recovery efforts and other countercyclical programs that were essential in preventing a deeper and more costly recession.


There is a reason we have the expression “tax and spend democrat.” Obama has spent more money in 6 months than George Bush did in 8 years, and he spent money like a democrat. Obama promised transparency and then rammed a spending bill through that no-one had time to read. The ones that voted for him were too lazy to research what he really stood for. Based on his factual, documented voting record, he was the most liberal, leftist member in the senate, followed by John Kerry and Hillary Clinton. Now he wants to force socialized medicine down our throats, for another 10 Trillion, and he doesn’t even take care of his brother and aunt, living here in the projects illegally. Wake up, morons!

Posted by Loren Ozanne | Report as abusive

What would the deficit be if McCain were president?

Aug 25, 2009 16:17 UTC

Bruce Bartlett, who has a new booking coming out, was nice enough to run some budget numbers so I wouldn’t have to:

I was looking through the new CBO projections and saw a point worth emphasizing.

CBO projected a deficit of $1,186 billion in January before Obama took office.  It now projects a deficit of $1,587 billion, an increase of $401 billion.  If one goes through the March update (pp. 6-7) and the August update (pp. 52-53) and adds up all the changes to the January estimate, you find that the deficit increase since January consists of $46 billion in lower than expected revenues due to the economy (11.5%), $129 billion in higher spending due to technical re-estimates (32.2%), and $226 billion due to legislative changes to both spending and revenues (56.3%).

This suggests that we would have had a deficit of at least $1,361 billion this year even if McCain had won (January deficit plus lower revenues and technical changes and no legislative changes)—assuming no stimulus and assuming that the economy would have done as well as it has done without it.  That’s only 14% less than the deficit currently projected. And keep in mind that some of the legislative changes are due to higher defense spending and other non-stimulus related programs.

But McCain undoubtedly would have supported some sort of fiscal stimulus.  It might have been more tax- than spending-oriented, but would have increased the deficit nevertheless.  If we assume that McCain’s stimulus would have been half the size of Obama’s that leaves us with an estimated deficit of $1,474 billion under McCain—only 7% less than the deficit now estimated.


The article makes a whole myriad of blanket assumptions about the deficit, but ignores some fundamental differences that also have enormous implications on the overall economy. Without the radical- pro-abortion agenda, there would be millions of people who would earn income, pay taxes and pay into social security. Under McCain, he wouldn’t penalize the biggest sources of energy we have, thus increasing our dependence on foreign oil, and losing more US jobs. We wouldn’t have a major socialized medicine agenda that will cost another 10 trillion, with tax payers-funded abortions. We wouldn’t have the most leftist, liberal, socialist member of the senate selling our country down the river, either. More change than we can stand.

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Budget deficits may be twice as bad as White House is predicting

Aug 25, 2009 14:19 UTC

More to come on this, but the WH is predicting that as a percentage of GDP, annual budget deficits will decrease to around 4 percent over the next decade from 11 percent in 2009. Or will they? The Congressional Budget Office has some doubts (via the Director Doug Elmendorf’s blog):

Those projections generally follow the rules, originally established in
law, that have traditionally governed baseline projections.  However,
some of the resulting assumptions may underestimate potential deficits.
Because they presume no changes in current tax laws, the projections
incorporate increases in revenues that would result from the expiration
of tax reductions enacted earlier in this decade and provisions that
have kept the alternative minimum tax (AMT) from affecting many more
taxpayers.  They also assume that future annual appropriations grow
each year at the rate of inflation.  Those assumptions result in
projected revenues that, as a percentage of GDP, would be high by
historical standards, and projected discretionary spending that,
relative to GDP, would be low by historical standards. Many other
outcomes are possible.  If, for example, those tax reductions were
continued, the parameters of the AMT were indexed for inflation, and
future annual appropriations were to remain at their 2009 share of GDP,
the deficit in 2019 would reach 8.5 percent of GDP, by CBO’s estimates.

The strange Republican embrace of Medicare

Aug 24, 2009 15:08 UTC

Chris Edwards over at the Cato Institute is also unsettled by how the GOP is endorsing the status quo with Medicare spending to score political points:

Yet the taxpayer costs of Medicare are expected to more than double over the next decade (from $425 billion in 2009 to $871 billion in 2019), and the program will consume an increasing share of the nation’s economy for decades to come unless there are serious cuts and reforms. Even the Obama administration talks about “bending the cost curve” to slow the program’s growth.

Yet Republican National Committee chairman, Michael Steele, takes to the Washington Post today to defend Medicare against any cuts, while at the same time criticizing the Democrats as “left-wing ideologues:” … Steele uses the mushy statist phrasing “our seniors” repeatedly, as if the government owns this group of people, and that they should have no responsibility for their own lives.

Fiscal conservatives, who have come out in droves to tea party protests and health care meetings this year, are angry at both parties for the government’s massive spending and debt binge in recent years. Mr. Steele has now informed these folks loud and clear that the Republican Party is not interested in restraining government; it is not interested in cutting the program that creates the single biggest threat to taxpayers in coming years. For apparently crass political reasons, Steele defends “our seniors,” but at the expense of massive tax hikes on “our children” if entitlement programs are not cut.

White House: 10-year deficit up $2 trillion to $9 trillion

Aug 21, 2009 21:44 UTC

My Reuters colleagues break the news that the White House is revising upward its ten-year budget forecast to $9 trillion from $7 trillion:

“The new forecasts are based on new data that reflect how severe the economic downturn was in the late fall of last year and the winter of this year,” said the official, who is familiar with the plans.

“Our budget projections are now in line with the spring and summer projections that the Congressional Budget Office put out.”

The CBO said in June that deficits between 2010 and 2019 would total $9.1 trillion. The official said the 2010-2019 cumulative deficit projection replaces the administration’s previous estimate of $7.108 trillion.

Me: Expect the CBO to also crank up its forecast, which will be higher than the administration’s. Also, this is further evidence that the common wisdom that people don’t care about budget deficits (no matter what the polls say) is wrong. C’mon,  leaking such news on a late Friday afternoon?


FRANK is a moron! Devalued the dollar a little. What planet are you from?

America’s new love affair with Treasury bonds

Aug 18, 2009 15:15 UTC
The always perspicacious Andy Busch of BMO Capital Markets notes how US households are suddenly into bonds — and then looks around the corner:
This has been the major, major shift in the structure of the US Treasury market that was unanticipated. From Q1, US households held $643.9 billion in Treasury debt and that is up from $256.6 billion in Q4 2008. Households bought an astounding 84% of new US Treasury issuances in Q1. The total holdings represent about 1% of US household assets. According to the WSJ, “Although that is the highest since 2001, Treasurys regularly made up 5% of assets in the 1950s, and as recently as 1995 they were 2.6% of assets. History suggests there is plenty of room for households to increase their holdings.”

With the US current account shrinking, the US is less dependent on foreigners to fund it’s deficit as the trade red ink has slowed to below $10 a month ex oil. In the medium term, this is a strong positive for the US dollar as it means the United States is funding itself more domestically. The longer term issue is whether the United States continues down the fiscal path of becoming the Japanese where domestic savers fund a fiscal deficit that is above 180% of GDP.


Gee, maybe the American public is smarter than most think. Real yields on the 10-year are at a 16-year high. We can sell them to the “experts” for a tidy capital gain when the yield hits 1% and the S&P is sitting at 575.

And yes, American savers will finance our debt just like the Japanese have. Not busting up Citi, BofA and GS gives them no other choice.

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Cash for clunkers, a new government entitlement?

Aug 4, 2009 14:55 UTC

The great Stan Collender over at Capital Gains and Games makes a point I wish I would have concerning cash for clunkers:

If the Senate goes along this week, spending will be increased substantially — $2 billion is still a great deal of money — so the dealers and manufacturers that want to sell more new cars will continue to have a federal subsidy to do so and the clunker owners who moved too slowly to get the benefit in the first few days will still be able to participate. … At most this is a reconfirmation that very little has really changed in the budget debate. Even those who over the past few months have been routinely and resoundingly criticizing the federal deficit as being too high are willing to tolerate it being even higher if they personally benefit from the spending increase or tax cut being considered. It’s still everyone else’s subsidies, benefits and tax reductions that are questionable.


I think that this program is the MOST WASTE of money there ever was. Why in the name of sensibleness, are they pouring into the engine a glass like substance that kills the automobile? A lot of these automobiles are really not “clunkers” but good used cars that people that don’t have much mone can buy! How more stupid can our government get only to make money move around? Government needs to keep their nose out of business and let business take care of itself. I hate paying taxes for such foolishness! We close down auto plants, we put more and more people on the street out of work and we come up with some hairbrain scheme to supposidly solve the problem. This country has lost it’s vision and bearing. Only the Lord can straighten it out!

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More on the dangerous dollar …

Jul 24, 2009 20:15 UTC

It is the last part of this bit from Brad DeLong that really caught my attention (bold is mine):

The fact is that the approporiate fiscal policy for the U.S, right now is to pass: (a) a bigger stimulus over the next two years, (b) a standby tax increase to return the federal budget to primary surplus by 2012, and (c) devout and lengthy prayers that confidence in the dollar doesn’t collapse and send interest rates on U.S. Treasuries above the economy’s growth rate–in which case the situation changes from its current value of “dire” to “catastrophic.”


The reality is that we are approaching a SDR world. Which is how it should be.

However, the talk of a devalued dollar is premature. Relative to other world currencies, the dollar is actually strong considering the current environment. While there is pressure, the $ has been rather resilient in the face of a credit crisis compounded by a downturn, volatility and uncertainty. SE Asia and Latin America were not so lucky.

I don’t think Obama will devalue the dollar. China’s reserves are safe. Remember, that the US has top credit-worthiness because, excepting global disaster, it will not default.

This is still a serious correction, that has annihilated global wealth. We should take a lesson from this event. The future will require more precise policy analysis and flexibility in execution, when dealing with economic cyclical variations. The embrace of the boom times, should be accompanied by the tempering of the bust.

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The chances of a US debt default

Jul 17, 2009 18:00 UTC

This is one way of showing the change in America’s fiscal situation — what it costs to ensure against a debt default (via Brookings) using credit default swaps: