About the Government Budget Deficit...

First, Paul Krugman notes the decline in corporate profits recently, a key factor in recent revenue increases:

Red tide rising, by Paul Krugman: The fall in the federal deficit since 2003 has been widely used by conservatives — including the Bush administration and all the leading candidates for the GOP presidential nomination — as proof that tax cuts actually increase revenue.

So here’s a heads-up: the good times are about to stop rolling.

The key factor in rising revenue hasn’t been a growing economy — it has been a surge in corporate taxes as a share of GDP.

But now profits are falling. Revenue will follow — and the deficit is about to get bigger again.

Next, Menzie Chinn says not to expect a balanced budget anytime soon:

Budget Deficit Watch: Receipts Stabilize, Deficit Fails to Shrink, by Menzie Chinn: Reader CoRev, in commenting on this post, advises me to look at the actual data for October (instead of the CBO estimate) before declaring a trend deterioration in the budget balance. Well, the data are out.

Here's what the deficit looks like, using Treasury's Monthly Treasury Statement data for October, and historical data.

Figure 1: Twelve month moving average of budget balance divided by nominal GDP (blue, left scale) and in billions of nominal dollars (red, right scale). Budget balance (on balance sheet and off balance sheet), as recorded by Treasury (October statement), divided by GDP interpolated using quadratic match. October GDP assumes 5% nominal GDP growth, in line 1.4% real GDP growth and 3.6% inflation in 2007Q4 (see WSJ survey). NBER-defined recessions shaded gray. Sources: Treasury's Monthly Treasury Statement data for October, and historical data, BEA October 31 GDP release, NBER, and author's calculations.

It turns out that the $55.6 billion deficit is not that different from the CBO's estimate of $59 billion. But it is the trend that is of greatest interest to me.

In addition, nominal receipts are slowing their ascent, while as a share of GDP, they have clearly plateaued.

Figure 2: Twelve month moving average of receipts divided by nominal GDP (blue, left scale) and in billions of nominal dollars (red, right scale). Receipts (on balance sheet and off balance sheet), as recorded by Treasury (October statement), divided by GDP interpolated using quadratic match. October GDP assumes 5% nominal GDP growth, in line 1.4% real GDP growth and 3.6% inflation in 2007Q4 (see WSJ survey). NBER-defined recessions shaded gray. Sources: Treasury's Monthly Treasury Statement data for October, and historical data, BEA October 31 GDP release, NBER, and author's calculations.

Seems to me a fair bet that, given current estimates for a slowdown to around 1.4% GDP growth SAAR in 2007Q4 (see this post), receipts will fall as a share of GDP.

Hence, I stick with the conclusion from my previous post on this subject: A balanced budget is far off.

Some more things to keep in mind as you think about the budget deficit. This is from a report from by the CBO:

Box 2. The Effect of the Aging of the Population on Spending on Medicare and Medicaid In coming decades, the share of the population that is covered by Medicare will expand rapidly as members of the baby-boom generation become eligible for the program, and the share that uses long-term care services financed by Medicaid will also probably increase. Although the aging of the population is frequently cited as a major factor contributing to the large projected increase in federal spending on those two programs, it accounts for a modest fraction of the growth that the Congressional Budget Office (CBO) projects. The main factor is excess cost growth—or the extent to which the increase in health care spending for an average individual exceeds the growth in per capita gross domestic product (GDP). As shown in the figure, if the age distribution of the population were fixed—so that the average age did not increase over time—and there were no excess cost growth, spending on Medicare and Medicaid as a share of GDP would remain essentially constant. That scenario is represented by the bottom line in the figure. The next line shows projected spending on Medicare and Medicaid if the age distribution of the population changes as expected—so that the average age of the population increases—but excess cost growth remains at zero. The difference between that line and the bottom line captures the effect of the aging of the population on projected federal spending on Medicare and Medicaid. The top line in the figure shows CBO’s projection of spending on those programs, which includes the effects of the aging of the population and of excess cost growth. By itself, aging accounts for about one-quarter of the projected growth in federal Medicare and Medicaid spending through 2030. By 2050, that share has fallen to under 20 percent, and by 2082, to only about 10 percent.

And two more graphs from the report:

If revenues begin to fall and the budget deficit begins increasing, we will hear that we need to cut taxes even more to solve the problem, which I hope you realize is a silly suggestion, and that we'll need to cut back on social programs - Medicare, Medicaid, and Social Security in particular to reign in spending. But I hope these graphs make clear that Medicare and Medicaid are not the problem, nor are demographics. I also hope that by now you are also well aware that the problems with Social Security, which are minor,  can be fixed any number of ways none of which is prohibitively costly (or even nearly so). As the CBO report says, "The main factor is excess cost growth—or the extent to which the increase in health care spending for an average individual exceeds the growth in per capita gross domestic product (GDP)." If the deficit does begin to increase as expected, don't be fooled by the misleading rhetoric that is sure to come from those who see it as an opportunity to push their ideology. "Socialsecuritymedicareandmedicaid" is not the main problem.

Comments

[Winslow R.]

Given the deficit is largely a result of war and the ability to wage war with an all 'volunteer' military, I'd like to propose a change in law that would limit enlistment contracts to two years or the time between elections.

Any 'volunteer' could withdraw from service as the political winds shifted. In order to have true 'volunteers' a removal of all contracts of any length would have to be enforced. The current situation seems more like a draft.

Yes, this would likely increase the deficit.

[howard]

as it happens, CoRev doesn't believe that in assessing budget balance, we should be looking at the general fund and not the unified condition.

we are nowhere close to a balanced budget, and it's an open question if we will as long as anti-tax jihadism is still a potent force in america.

[pgl]

Howard - CoRev? Where have I heard that name before? Oh yea, Patrick R. Sullivan's sidekick at pestering the Angrybear comment box with apologies for the fiscal fiasco of this White House. I guess he's decided to be a torn in Menzie's side as well.

[ilsm]

Winslow R,

"all volunteer" is a misnomer.

It, the US military, is supposed to be a professional force.

It would be a good thing to veiw the art of war as something you do once in a while not as a life time avocation.

Truly, Ike was correct: "Every [weapon] signifies, in the final sense, a theft from those who hunger and are not fed." - Dwight D. Eisenhower

The US devotes 4% of GDP, has risen from about 3% with Bush, to continuous mobilization for fictitious enemies and deliver hugely expensive temporary reductions in violence in our newly occupied colonies.

Professional military need wars. All volunteers need only apply when they are really needed.

When that may be is irrelevant as long as there is a lot of money flowing.

[anne]

http://matthewyglesias.theatlantic.com/archives/2007/11/victory_in_iraq.php

November 25, 2007

Victory in Iraq
By Matthew Yglesias

The American political system seems to operate as if spending on defense-related ventures doesn't come at a real cost. Propose a new domestic spending initiative, and people want to hear about your offsets. If you don't have offsets, you need new taxes. And you can't raise taxes. If you want to cut taxes, you can probably get away with it, but you'll face at least some political resistance. Defense spending, though, doesn't count -- it's completely shielded from scrutiny and we think nothing of tossing $10 billion here and $10 billion there until the end of time....

[ilsm]

Anne,

It is corporate welfare, well funded.

The PAC's recycle defense appropriations better than individuals benefitting from entitlements.

Who funds Heritage?

The taxpayer.................

Through grants from from Boeing, Lockheed, General Dynamics........

[anne]

Always, there is the deceiving case made against social programs that are fundamental rights, then the question "what now?" which is meant to be answered that we destroy rights. We could of course simply deny all health care to anyone over 65, or we could try to understand why the French are content to allow life over 65.

Try seeing "SiCKO."

[anne]

There cost be an immediate ample saving for Medicare by simply ending subsidies to private insurers to compete with general Medicare and by allowing a program board to negotiate drug prices. Keeping adults healthier as they age by providing insurance makes for healthier Medicare recipients, as research has just found and as makes sense.

[Mark Thoma]

Teresa Nielsen Hayden Moderates BoingBoing!

[Cyrille]

1 is partly true. Since, at the same time, doubling SSFICA and doubling SS spending would resuly in a slight improvement of the fiscal imbalance, you may well increase spending and increase revenue and still end up with an improvement. Also, since there is no SS imbalance, I feel it should not be part of this calculation. Before calculating (S + N) - (T + N), I will always remove the Ns and do S-T.

2 is true. It would be useful, though, to note that your (I'm not American ;-) ) projected imbalance is equal to your Government imbalance. The SS imbalance is equal to zero.

3 is not true, by some distance. Since a redistributive program would become a spending program, the payroll tax would be removed from the disposable (and taxable) income (whereas it was previously just being stirred within), thereby reducing, for example, VAT revenues. SS being the ultimate Keynesian program (almost everything is spent, and spent locally), the reduction in revenue would be a very high proportion -probably over 50%- of the reduction in spending.

To make up for this, you would need to raise other taxes. It could then be revenue neutral, but still a net increase in taxes: people would pay a higher proportion of their income in taxes.

Besides, SSFICA is a tax in name only. In effect, it is a compulsory purchase of Government bonds with, on average, a zero actuarial value in the exchange (a propriety that comes from solvency). It would make no fiscal difference if SS were run by an NGO, which is why it is best analysed seperately from the Government fiscal balance. To divert some of SSFICA into a spending is therefore an increase in taxes -people are forced from a actuarially neutral exchange into a negative exchange with the Government.

"4. # 3 involves no net tax increase, whether it factors in dynamic effects and it's revenue-neutrality is determined that way, or if it is designed to be revenue-neutral in a static sense and it's revenue-neutrality is determined THAT way (i.e., same overall taxation as percent of overall income). "

Now, I don't pretend to understand that. What is the initial situation and what is the envisaged later one?

You seem to have a problem with what is tax neutrality:
"Now, as I've said before here, perhaps your entire point is simply that, if projected revenues are unchanged but GDP will be lower by the lesser amount that SS recipients would receive, thus increasing overall revenues as a percent of GDP. Is that your whole point?? If so, that's true, but the revenue-neutrality in my scenario could just as easily be accomplished in terms of revenues as a percent of GDP instead of in absolute terms (just by combining the shift in payroll taxes to general funds with enough of a cut in tax rates to produce that result)."

Well, at some point you must decide what you keep constant. My equations were relevant to the neutrality you were talking about so far (revenue neutrality) -I can't speak in generalities and still make a demonstration. So the hypothesis must be set.

Still, it was easier to show in the case of revenue neutrality, but essentially it is the same.

The initial situation is that you collect T (taxes) and redistribute SSFICA from SSI (income from SS) + AOI (All other income). Now, on the population as a whole, in the long run SSS = SSFICA. It's not a net tax.

If you give me a one dollar note and I give you 4 quarters, neither of us took anything away from the other. For the population as a whole, that's what SS does.

Let's take another virtual example. You have a society where everyone is making 100$. On top of that, you have a bizarre government that takes 100$ from everyone, and also gives 100$ to everyone. The net tax is zero, not 100%, not 50%. If the next day the Government started collecting 100$ and not giving anything (same revenues) or collecting 50$ and not giving anything (same % of GDP), that would be a net tax increase.

So your initial net tax rate is T/AOI.
You then suggest reducing SS spending by X, but diverting SSFICA. Income therefore becomes AOI + SSI - X, SSFICA becomes SSFICA - X so net income is unchanged. But you now collect T + Y (not necessarily X, since you may want to change other taxes). in other taxes. So the tax rate becomes (T+Y)/I. The only way to keep that constant is to have Y = 0.

Now, I know you want to count everything in one go, but the thing is, the combination of the law and SS solvency forces you to do otherwise. So if you want to reduce SSSpending, you must first reduce SSFICA (if SS were not solvent, you could reduce SSS without reducing SSFICA -one of the reasons why it IS relevant in policy). Let's call the package policy A. Then, to get back to one kind of neutrality on your aggregate of SS revenue and Government taxes, you need at the same time to increase some taxes. Let's call that policy B.

Now, it so happens that the overall improvement on the fiscal imbalance of A+B is less than what you'd get if you were to do just B. So claiming as you did in one of your earliest posts (and which, to me, was your initial point) that reducing SS spending could be part of improving the fiscal imbalance is not correct -or, rather, it can be part of something that does improve the imbalance, but its effect will be to reduce the improvement.

With regard to whether it's relevant, well, as we saw, one reason why reducing SSS requires reducing SSFICA as well is precisely that it is solvent. Another reason (given by Arne, I think), was that when you have precisely ONE fully redistributive program that happens to be solvent, it is not good policy to start by changing that. Another of Arne's reasons was that if, as many people think is crucial, you want to keep a dedicated funding for SS, it is important to make it solvent.

Those are reasons that make solvency relevant.

As for the combination of features you demand, well someone like Bruce Webb has them in abundance and then some. In particular, not one person here (and maybe not one person in the world) has a similar level of attention.

[BJ Feng]

Gee Winslow and Ilsm, why don't you just disband the entire military until the time "when it's really needed". The military works far better as a volunteer force. Imagine if people like you were drafted. Our forces would collapse from the dissent and outright sabotage from within. We would rather face two enemy soldiers than one of you from within. That's why we have a volunteer military, to keep people like you out. The reason why you believe there are "fictitious enemies" is because they do such a good job that enemies don't want to engage them directly. That allows you walk around pretending there are no enemies, the occasional 9-11 not withstanding.

Anne, of course defense spending is completely shielded from cuts, we're fighting a war on two fronts in case you haven't heard! And why haven't you been affected at all? Why does the war seem like mere fiction from a crude, badly written book to you? It's because of the military spending! Our military is so powerful that you are completely shielded from any harm, but take that away and you could be living in Berlin or Tokyo circa 1944-1945. Perhaps an exaggeration, but isn't it better for you to be shielded from harm, able to roam freely and do whatever it is you do while our enemies have to live in caves, worried about a bomb falling on their heads every time they venture out? No the military budget can't be cut at this time.

[BJ Feng]

As for Medicare, I'm going to ask someone I know who is a medical student and has doctors in his family about cutting the fees paid to doctors for their services. I have a good idea of the answer, fees are already cut to the bone. The solution is to change how the system works, to reduce the number of scans and tests they currently have to do because there could be a slight chance of detecting something unlikely. But if they don't do every scan or test, they could be sued and lose everything in that 1 in 500,000 case. The first thing the lawyer will ask is if that disease or problem could have been spotted with some test, of course the answer would be yes. Then the lawyer will lay blame and say that the doctor was negligent for not proscribing that test, even though 499,999 times, that test would be unnecessary. If people want to be absolutely certain, then they could pay for additional tests themselves. That's the real way to cut medicare spending.

[BJ Feng]

Heritage funded by taxpayers through Boeing and other corporations? In case you don't understand, Boeing doesn't collect taxes, I've never had to file a return with Boeing.

Cyrille, your statement that if the government taxes $100 and then redistributes $100, the net tax is zero. That is wrong. The government always spends what it takes in, but that doesn't mean taxes are zero or even negative when it spends more and runs a deficit. What we have to ask is if the $100 is being spent wisely and in a better way than leaving the $100 to be spent by individuals. In most cases, $100 spent by individuals who know and understand their own needs the most, would benefit them more than having some bureaucrat spend $100 on their behalf.

It is harmful for the government to redistribute income beyond a basic safety net that allows those incapable to live in relative poverty. Remember, our relative poverty is upper middle class when compared to the rest of the world, food is abundant and the type of shelter for the poor would be considered luxurious elsewhere. Most people around the world have to live with their extended families in a single house or hut. Beyond that, automatic redistribution eliminates the incentive to be one of those evil taxpayers and creates incentive to be one of those noble poor receiving money. Do the same in any class, tell the A students that they will have to give up a percentage of their grade to the worst students and see if they spend the same effort studying. You will find that overall scores and grades fall with this type of redistribution, everyone becomes less educated. Same with the economy, everyone becomes poorer when you have excessive redistribution.

[Cyrille]

Yeah yeah yeah