Welcome to the Long Run (Even Liberals have began to notice it)

Our national debt problem has become so obvious that even liberals are noticing it. First it was the San Francisco Chronicle and more recently The Washington Post. But these same folks have a funny way of placing the blame. The standard narrative is as follows: life was wonderful under President Clinton, then George W. Bush screwed it all up with his reckless spending and unnecessary wars, and now poor President Obama has to deal with the mess he inherited from George Bush.

Joel Achenbach at The Washington Post put that narrative in only slightly more politic form:

"The peace dividend at the end of the Cold War combined with the booming economy of the 1990s (and some tech-bubble tax receipts) to create an unexpected dilemma in 2000: what to do with the budget surpluses that were forecast for years to come? ...But a decade later, we're back in debt madness. The causes of this reversal are not a mystery: tax cuts, two wars, a new Medicare drug benefit, two recessions, massive bailouts and a huge stimulus package -- very little of it paid for in any conventional sense. Obama never misses a chance to remind the public that he inherited an enormous deficit..." [Emphasis added.]

I count six "causes" of our debt problem there, with five of those six being clearly associated with President Bush. So Mr. Achenbach was being generously bi-partisan with his analysis: one of six causes can be associated with Barack Obama. No bias there. You can check the box for objective and unbiased reporting from The Washington Post.

However, Achenbach's analysis of causes is almost completely wrong. He includes non-existent to minor "causes" and leaves out the primary cause: the explosion of entitlements.

Look at Achenbach's first "cause": tax cuts. The figure below shows federal revenues from 1960 through 2008.

Federal revenues were following their long-term trend through Bush's second term. For four decades, 1960 to 2000, revenues averaged 18.2% of GDP. In 2006 and 2007, the last two fiscal years under budgets passed by Republican Congresses, revenues were 18.5% and 18.8% of GDP, or above average.

The swing up in the late 1990s and the swing down in the early 2000s can be attributed to that "tech-bubble" that Achenbach mentioned. The NASDAQ index went from 323 in October 1990 to 5133 in March 2000 (a 1,489% increase), and then back down to 1108 in October 2002 (a 78% drop). I would say such drastic market swings had bigger impacts on revenues than changing the top marginal tax rate. In any case, revenues were completely back to average, and then some, by 2006 and 2007.

Do you see any massive upswing in federal spending in that chart, whether due to recessions, wars or bailouts? In fact, spending over Bush's eight years, 2001 through 2008, averaged 19.9% of GDP, or below the 1960-2000 average of 20.3% of GDP. Bush spent less than his predecessors.

The difference of spending and revenue is the deficit. The average deficit in Bush's eight years, 2001 through 2008, was 2.0% of GDP, or less than the 1960-2000 average of 2.1%. Bush's deficits were less than his predecessors'.

The costs of the "two wars" in Afghanistan and Iraq were miniscule by historical standards, as shown in the chart below. The peak year under Bush saw defense spending of 4.7% of GDP, or below the 45-year average of 5.3% of GDP. Bush's peak year was below Jimmy Carter's lowest year, which was in peacetime and was, in fact, the lowest point of defense spending over a 50 year period of US history.

All that taxing, spending and deficits show up as federal debt held by the public. In 1994, after 40 years straight of a Democrat-led House of Representatives, the public debt stood at 49.3% of GDP. By 2007, after 12 years of a Republican-led House, it had dropped to 36.6% of GDP. Look at the graph below and tell me that Republicans caused our current debt problem.

What about the TARP bailout? We all remember that President Bush asked for authority to use up to $700 billion under TARP. But just this March, the Congressional Budget Office estimated that TARP would end up costing only $109 billion.

Over half of that cost, $56 billion, is the TARP money spent on the car companies and the Home Affordable Modification Program. That is, General Motors, Chrysler and Fannie Mae, not Wall Street, got the lion's share of TARP. The estimated cost of the "Wall Street" part of the financial bailout is expected to be just $53 billion. (The CBO expects $34 B lost forever to General Motors and Chrysler, despite what you might have heard about GM's loans being "paid off.")

Now for the one fairly big thing you can blame on George W. Bush and the "compassionately conservative" Republicans who followed him: prescription coverage under Medicare, or Medicare Part D. Concerning its cost and how it compares to other Medicare expenditures, see the chart below.

The Medicare Modernization Act (MMA) of 2003 will add 1% to 2% of GDP to federal spending in the very years, 2020 and beyond, we most need to cut spending. It adds to the very entitlement, Medicare, which is busting the federal budget. President Bush should not have pushed and signed it, and Republicans in Congress should not have voted for it. There, you can check the box for objective and unbiased commentary from Randall Hoven: one of Achenbach's six "causes" can be attributed to President Bush.

But let's compare fiascos. MMA was originally estimated to cost $394 B over its first ten years. Obama's stimulus cost $787 B in one fell swoop. I also expect ObamaCare to be bad for our debt problem as well, despite the fudged numbers that show a small deficit reduction due to massive new taxes and massive Medicare cuts.

But the real problems really were "inherited." They were inherited from FDR and LBJ. The problems are the entitlements, primarily Medicare. You don't have to take my word for that. Take the words, for example, of the Congressional Budget Office, the Government Accountability Office, or President Obama himself.

CBO: "The federal budget is on an unsustainable path, primarily because of rapidly rising spending on health care..."

GAO: "The ‘Status Quo' is not an option. We face large and growing structural deficits largely due to known demographic trends and rising health care costs."

Obama: "When it comes to health care spending, we are on an unsustainable course that threatens the financial stability of families, businesses, and government itself."

Funny how virtually everyone, from President Obama himself to little old me, knows that health care expenditures are the primary drivers of our debt problem, with Social Security being a close second. Yet Achenbach mentioned entitlements only tangentially: Bush added prescription coverage to Medicare.

While we know all this, what were the two major domestic accomplishments of two consecutive Presidents, one Republican and the other Democrat? Prescription coverage under Medicare, and Obamacare. Yet neither one provided any real structural reform that would bend the cost curve down for health care. They both just added coverage and costs.

In that respect, both parties are at fault. Achenbach's bigger point then, that we have a deficit of will, is correct. Yet with the exception of Paul Ryan with his Roadmap, no one is pushing real Medicare reform or any entitlement reform at all. If anything, politicians simply want to add more stuff to them.

Let's be clear. The real causes were not those listed by Achenbach. The real causes were the great "accomplishments" of the New Deal and the Great Society: Social Security and Medicare. They were Ponzi schemes, budget time bombs. The short run is over and I hope you all had a good time, because the long run is here and now.

If your politician is not talking entitlements, meaning real reform and cutting spending on them, he's not serious about economic issues. The first Social Security check was sent 70 years ago. That's a long time to ignore the biggest icebergs we are headed for.

All of this at the Matchett-PI link at post#2:

The Week /CuttingGovernment is All Upside

GILDER TELECOSM FORUM MEMBER # 1(05/05/10):

Marc Farber (Bloomberg): I can tell you, all governments will eventually have to be bailed out in the western world. It’s either going to be through money printing, as I think, or default. They are over indebted, especially if you consider the unfunded liabilities like future pensions, social security, medicare, medicaid and so forth.

It does not add up, they will all default or they will all print money. But the outcome won`t be pretty, that I can assure you.

GEORGE GILDER, Gilder Telecosm Forum (05/05/10): Or someone will try the New Zealand solution, the only real remedy, imposed by a Labor government two decades ago, when they shocked everyone by zeroing out all government programs. The result was an amazing boom, particularly in agriculture, where huge farm subsidies and regulations were abolished and the entire department dismantled. New Zealand moved from being a massive net importer of food to provoking Wisconsin to protect its dairy products from unfair competition from down under. Abolishing government programs turned out to be all upside.

This is not a problem. It is an opportunity. The key to doing it is rescission of pensions extorted from the government by public sector unions, which are unconstitutional self-dealers trading their campaign agitprop and contributions for runaway benefits and absurd early retirements.

GILDER TELECOSM FORUM MEMBER # 1(05/05/10): Any recommended reading on the New Zealand solution?

GEORGE GILDER, Gilder Telecosm Forum (05/05/10): The entire saga was told in detail in a Heritage Foundation tape that I gave to Steve Forbes (and he lost without mentioning). I bet Heritage could track it down and has paper records of the contents. It is the best libertarian story ever told. It is definitely worth chasing down. They zeroed out all the departments and all spending had to be justified from scratch. It changed New Zealand from a Third World basket case into a thriving economy for several decades.

Everybody expected disasters, but cutting government (except defense) is all upside.

Imagine zeroing out the department of agriculture, department of commerce, department of education, department of labor, etc. etc. Think anything bad would happen?

Isn’t it interesting that the left foiled every effort to reform medicare and social security while there was still time for baby boomers to invest the money and prepare; but all of a sudden they are for cutting boomers off of everything? O’haha is even setting up for death panels to deny care to the elderly “to save money.” What he’s really doing is killing off millions of voters that are onto the left and remember the constitution. Stalin starved those who opposed Utopia. Obama and his friends will do the same while appealing to our greed.

Isn’t it interesting that the left foiled every effort to reform medicare and social security while there was still time for baby boomers to invest the money and prepare;

I still don't believe that it is too late to make Social Security solvent. If Chile was able to do it and prosper, we can do it. It was AMERICANS ( i.e., Men from the Chicago School of Economics ) who helped them restructure their social security system.

There really is no reason why we can't do the same here. We can for instance start by passing a law PREVENTING Congress from borrowing (AKA raiding) from the Social Security Trust Fund to use for today's spending.

People might laugh at the term -- LOCK BOX -- since Saturday Night Live made it a joke... but we really need to start by implementing it now.

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