Dr Fragen in the operating room

On the Fence


My brother wrote and sent the following out to some friends via email. I’m re-posting with his permission. For the record, he’s brilliant and not overly political. This was originally sent on Sept 6, 2012.
I never do this (hit reply to all) but, in this instance, I can’t resist.
First off, the facts about the federal budget. As you can see from the attached spreadsheet (provided courtesy of the US Office of Management and Budget), federal tax receipts have averaged 17.8% of GDP from 1950 – 2011. Yes it has fluctuated from a high of 20.6% to the recent lows of 15.1% (the effect of the stimulus checks the government sent out 2008 and again in 2009), but across ALL tax regimes, the feds seem to take about 18% of GDP as their “revenue.”

On the spending side, federal outlays averaged 20% from 1950 – 2011; if you exclude the last 3 years of profligacy, the long term average is 19.8%. This is across history that includes wars, energy instability, several world-wide debt crises (albeit not in Europe) and all sorts of things. So, to recap, across a long time span, the federal government has run a deficit of about 2% per year. We can afford to do this because, among other things, out economy grows at a rate in excess of 2% per year (usually) so the 2% deficit of 10 years ago only represents 1% of today’s GDP. AS LONG AS GDP GROWTH IS MORE THAN THE STRUCTURAL DEFICIT, WE CAN KEEP DOING THIS. And the opposite is true.
In the 3 years since this President took office, federal outlays have averaged an astounding 24.5% of GDP. This will “shrink” to 22.9% of GDP over the next five years as the savings from the Affordable Care Act kick in (please note that this last bit was dripping with sarcasm.) The fact is, we are spending too much, full stop. That is all there is to it. You can monkey with the tax code to burden shift, but you aren’t going to collect more than 20% of GDP as federal “revenue”.
Right now, our federal debt level, the accumulated annual deficits, is about $15 trillion (or 100% of GDP, and this doesn’t count state obligations, including unfunded pension obligations). Because we are the United States of America and our dollar is a reserve currency and because we have a 250 year history of respecting the rule of law, property rights, etc. (they are inter-connected), we get to borrow at a blended rate of about 2%. This means that we have an annual interest bill of $300 billion is manageable. It represents about 10% of federal outlays.
Over the past three years, we’ve run deficits equal to 10.1%, 9.0% and 8.7%, taking our national debt from 65% of GDP to 100% of GDP. Over the past 50 years, since WWII, we’ve NEVER had deficits this big. The biggest were during the Reagan years, when we defeated communism by outspending them. But good things came out of those expenditures, like modern telecommunications, radar, medical advances, etc. I don’t see the same benefit from the current expenditures on food stamps for 1/7th of the US population (how does 1/7th of every man, woman and child in the US QUALIFY for the program?)
The “problem” is that our current government attaches multipliers to things like food stamps (1.7x) and unemployment (1.9x) so that they can delude themselves into thinking they are “expanding the economy” or “creating jobs” when all they are really doing is giving away government cheese.
If we continue with “four more years” our debt will be more than 125% of GDP. If long term interest rates begin to creep up, and they will, then we are well and truly hosed. When you multiply a 4% interest rate time 125%, it means that our interest bill will be 5% of GDP. Put another way, a quarter of our budget will be for interest. At that point in time, we can choose to pay our creditors or we can choose to bring Uncle Sugar back to reality.
To quote Bill Clinton, this is the math. And as for Mr. Clinton, his surpluses were created BECAUSE he cut spending from 20% of GDP to 18% of GDP at a time when receipts were going up. To repeat, Bill Clinton did not tax the rich to create prosperity, as the Democratic party seems to believe. He cut spending and then was the unwitting beneficiary of the Tech boom and the subsequent flood of capital gains income (unleashed, by the way, when he LOWERED the long term capital gains tax rate from 39% to 20%). That is the math.
As for the Rolling Stone article, the first snipe against Romney is that he is a hypocrite. Here he is proselytizing on the national debt when, in fact, he is a rapacious consumer of debt. He uses debt to buy companies through leverage buyouts. So since he borrows a lot, what could he possibly know about repaying the national debt?
This is a common misunderstanding caused by confusing the concept of debt, and a deficit. No doubt Mr. Romney (via Bain Capital) borrowed other people’s money and took on a great amount of debt to buy companies. But MOST OF THE TIME, the companies he bought generated an annual surplus (commonly known in the private sector as a profit) and repaid this debt. If that didn’t happen, he wouldn’t be rich. Yes, sometimes the companies were overleveraged and sometimes they exported jobs to places with cheaper labor, less stringent environmental laws, etc. (all legal) but, on balance, the stuff he bought performed and he repaid lots of debt that he borrowed. That actually makes him qualified for the current problems America faces.
I could go on, but I won’t. If you want to think that Republicans are cruel, don’t care about the poor, the impoverished, women, old people, whatever. I don’t really care and neither does reality. What reality cares about is the basic fact that, right now, with this President, we are on an unsustainable path of debt accumulation. And the funny thing about unsustainable situations is just that, they are unsustainable. The world is a self-correcting organism. If we over-borrow, then we get to choose between paying interest to foreigners (ie, following the rule of law and, after all, we are a nation of laws and not men) or making the guns we need to defend ourselves against them. Forget social programs, forget gay marriage, forget public education (teacher’s spiked pensions). All that stuff goes out the window when your debt load becomes unsustainable. If you don’t believe me, just ask Argentina or Greece or Spain or Italy or Ireland or Iceland.
When you listen to the President talk about his vision of the future, see if it includes anything about the unsustainability of the debt load. Or see if it is just a bunch of high rhetoric demonizing the other side and promising a lot from Uncle Sugar for his good supporters.
And then think about the future that that produces for our children. And then decide who you want to vote for.
I’m an American. I love my country and all that it has done for me and all that I’ve been able to do because I was lucky enough to have been born here. That is a gift I don’t want to see squandered for the next generation of Americans.