Thursday, November 15, 2012

Deficit Math

I was recently asked the following question on Facebook by a high school classmate of mine:
In 2011 the fed gov collected $2.303 trillion in tax revenue. Interest on debt that year totaled $454.4 billion, mandatory spending (read entitlements required to be paid by law) totaled $2.025 trillion. So mandatory spending plus interest on debt exceeded total revenue by $176.4 billion, that is without one dollar being spent on discretionary gov (read military, DHS, FBI, CIA, education, energy, etc.). In 2012 the shortfall increased 43% to $251.8 billion. So what is BO going to do to fix this?
This is my answer:

Ok, so when we think about deficit reduction, I always like to start with a graph from the Center for Budget Policy and Priorities. ( Graph is here. and shows that there are, in 2012, three major factors driving the deficits: a war (mainly in AFPAK currently), the Bush tax cuts, and the economic downturn + economic recovery measures. So, the three things he should do is end the war(s) in AFPAK, end the Bush tax cuts (for everybody, or at least on the top earners), and do more stimulus in the form of infrastructure purchases (e.g., rebuilding after the hurricane). That last will push up the deficit in the close years, but shrinks the impact of the economic downturn overall. The remaining deficit is a rounding error.

Now, what has he done? He's moved toward an exit for most of the troops in AFPAK. He's pushing a jobs bill of some sort, which is a wait-and-see proposition. He could do nothing on the fiscal cliff and close a big chunk of the remaining deficit, but I suppose he & Congress will cut some sort of foolish deal on that. If we're lucky, they'll rearrange the defense cuts to fall on the programs the Pentagon has been trying to get rid of for a while now, and keep just the 3% tax hike above $250k, plus a similar bump on cap gains & dividends.

In the out years, past 2030, the biggest driver is expected to be healthcare costs, so the Obamacare health cost controls are a first try at reining those in--if healthcare keeps growing as it is, we're all in serious trouble. Social Security needs some rejiggering, ideally by adjusting the maximum payroll tax to whatever it would have been if they'd passed inflation-based increases like they were supposed to over the past 40 years.

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