NOV 16 - 30, 2004

VOL. 2 ISSUE 22

NOVEMBER 24, 2004 – We frequently hear numbers.  Our deficit ceiling just got raised to $8 trillion.  Our annual deficit is running over $450 billion.  But these numbers don’t mean much unless you realize what our nation’s revenue situation really is.

For example, an $8 trillion debt might not be such a big deal if we have revenue of $10 trillion a year to work with – we can simply pay it down over 10 or 20 years by reigning in spending a bit.

But the reality is we only take in as a nation $2 trillion a year.  That is the gross sum of collections made by our Internal Revenue Service, including individual, corporate, employment, unemployment insurance, estate, gift, and excise taxes.  In other words, the gross intake from every source of revenue by our federal government each year, including taxes on liquor, gas, and sales taxes, adds up to just slightly under $2 trillion a year; $1,952,929,045 to be exact.

Now you have some context into which to put our over $8 trillion in debt and our annual $450 billion-plus deficits.

In order to balance the budget, we need to cut our spending by about 25%.   ¼  of all spending must be eliminated just to stop us from continuing to fall in deeper and deeper – and this becomes more and more difficult as the interest we owe on our massive debt continues to skyrocket.

Before you start thinking cutting ¼ means just rolling up our sleeves and cutting spending on everything, somehow, by about 25%, you need to consider what the federal budget is actually made up of.

For fiscal year 2003, almost 10% of what we spent was just to pay interest on the debt.  That is unchangeable, and, in fact, will only grow as our debt has increased by another 6¼%.

So, we have to cut 25% of our spending – just to balance the budget, we haven’t gotten to paying down the debt yet – but we only can work with 90% of the budget.

Defense spending makes up 22% of the budget, and Social Security/Medicare make up 37%.  So, combined debt interest, defense, and retirement spending make 66% of the federal budget.

Which, leaves just 34% of the budget.  Another 3% is law enforcement and general government operations.

Social and development programs, the one thing that seems malleable to those who wish to cut, make up just 31% of the budget, or a total of $605 billion.  Included in that number are things like unemployment payments, education, health research, college loan programs, agriculture programs, FDIC insurance of savings.  Only about $55 billion total goes to programs for the poor, like food stamps, Medicaid, etc.

This is why you no longer hear the President or conservatives talk about balancing the budget through spending cuts.  That old rhetoric about how just by cutting programs for those poor, lazy minorities you could balance things out is replaced by the reality that even entirely eliminating such programs doesn’t even come close to making a dent in things – you could entirely eliminate programs for the poor and still have about $400 billion of deficit, or about 20% of all the rest, much of which is uncuttable.

And this is to just balance the budget, without paying down a single dollar of the debt.

And don’t forget to add to this the fact that Social Security/Medicare is about to balloon as the Baby Boomers are just about to retire en masse, and the fact that you can’t simply eliminate all of the programs for the poor.

And so you get the new rhetoric of hocus pocus “Growth is on the way,” the idea being that some new, incoming mysterious wealth will appear and work it all out for us.

It is a nice magic elixir.  Both Bush and Schwarzenegger have made their livings on selling it.  Both have come in as a new breed of borrow-and-spend Republicans, offering the best of all worlds:  no painful spending cuts and no new taxes.  Just put everything on the credit cards, but don’t worry, new income will take care of it all.

Half the nation chooses to believe this, half doesn’t  But to reach a useful conclusion as to whether this is truly possible, we need again to look at the actual numbers.

As the budget expenditures we currently have are the ones that have been arrived at after 4 years of the supposedly cut-favoring Republicans in charge, you can figure that whatever there is to be cut has mainly already been cut.  No one, in fact, is suggesting any major cutting of any kind.

Which leaves us with the idea of growth.  And it is important to remember that by “growth” what is meant is “growth in collected tax revenue.”  It is a very important distinction that sometimes get lost.  People hear, “All we need is growth,” and they think that means growth in GNP or personal incomes.  That is in no way the case.  If people earn more money but don’t pay it in taxes, it won’t help the nation’s fiscal problems at all.

Our total revenue for 2003 was $1.95 trillion.  $75 billion of that consisted of excise, estate, and gift taxes, which don’t increase in relation to GNP.  In addition, the President has talked of cutting these taxes.

Which leaves $1.75 trillion in total revenue.  In order to balance the budget - still without paying down any of the debt - we need to increase this by about 25%.  In order to do that, we need to increase the nation’s income by far more than 25%, as the increase has to net 25% after deductions.  And you have to figure basic cost-of-living increases in the government’s spending.

But let’s not complicate things beyond comprehension, and so stick with the 25% figure.

The total growth in national revenue during the first four years of the Bush administration has been – 6.8%.  Yes, that is a negative number.  The President’s tax and fiscal policies have so far decreased national revenue, not increased it.  Even with the supposed growth of the economy over the past couple of years, government revenues have continued to decline.  In fact, over the last two years they have decreased by more than 8%.

If even in the face of a period of economic growth government revenues are declining more and more, rather than increasing along with growth, this means that even as the economy grows the deficits will continue to increase, not decrease.

Last year saw a decrease of total government revenues from FY 2002 of 3.1%.  If you extrapolate that over the next four years, you get a decline of 12.4% in our national revenue, not a growth – even if the economy continues to grow as it has.  If you use the average of the last two years and extrapolate that for four, we will have a decrease in revenue of about 16%, making our deficit situation more than 50% worse, not better.

And this doesn’t even account for increased interest payments or cost-of-living and inflational spending increases.

And this does assume continued economic growth along the lines we have seen in the past couple of years.

So if we use the last two years as an example, GDP, the most used measure of economic growth, increased by about 7.9% total for the two years.  At the same time, tax revenues decreased by about 8%.  It is not difficult to see that things simply cannot add up.  Economic growth has not meant growth in national revenues.

During the boom period of the Clinton administration, the four years between 1996 and 1999, total economic growth was about 15.6%.  So even if the nation continues to have a four years like the boom times we had in the late 1990’s, we will simply be continuing the growth rate we have seen over the last two years, which means we will continue to see a decline, not increase, in government tax revenue.

And so the deficits, even if growth soars like in the old days on a constant upward trajectory, will continue to grow and grow.  So even in the most optimistic of economic scenarios, things simply do not add up.  Our nation will be seeing not shrinking but increasing deficits and debt, regardless of how hot the economy is.

The President is talking about more tax cuts now to further stimulate the economy.  But the reality is the economy is about as stimulated and growing as it has ever been, and already the revenue is declining.  More tax cuts can only exacerbate the situation, even if they somehow increase growth.

It is nice to take one side or the other politically, to be a bear or a bull economically, but there is no question that unless taxes are raised in some manner, whether by closing loopholes or other means, no realistic amount of economic growth is going to allow the nation to cut its soaring deficits, never mind pay down its debt.  And another round of tax cuts would be national economic suicide.

And just in case you were wondering whose money is it anyway, about $1.1 trillion of our annual tax revenue comes from the Blue States, while only $850 billion comes from Red States.  Yes, the Blue Staters, even if they are not the majority according to the electoral college, are responsible for contributing almost 20 percent more to the nation than the Red Staters.  It is even more striking if you take out the states that are truly 50/50 but went Red by within 1 percentage point or so.  Solidly Blue States contribute over $1 trillion annually to the national coffers, while solidly Red States contribute a little over $600 billion - nearly twice as much of our national money belongs to the Blue States as the Red States.

So when the current Red State-run Congress and President are drawing up their spending plans, you are really seeing a scenario out of an old Danny Devito movie, where one group is busy spending Other People's Money.  Rumors of plans by  Blue Staters to cut back their spending or shift their 401K money from mutual funds and stocks into money markets would truly be a serious threat to the economy and success of the Red State administration in charge.

Economically, the Red States are like the Middle East.  They have only one true economic power center, and that is Texas, and it relies mainly on oil revenue for its wealth base.  The Blue States are much more diverse and have a number of major economic power centers, including New York, Illinois, and California.  Just as eliminating our dependence on foreign oil is the key to dealing with the power wielded by Middle Eastern nations, if the axis of Blue power in the country teamed up to develop alternative energy, it would eliminate the one financial bastion the Red States have. 

Littering the California desert with solar towers like the one being installed in Australia, each of which can generate enough power to supply 200,000 homes, would be a serious blow to the oil economy, both abroad and domestically.  And domestically, that would mean eroding Texas' power.  And if that were to occur, the Red States would be rendered powerless economically, just as the Middle Eastern nations would suffer under the same situation, as they are one-dimensional economies.

For the Red Staters in particular, they are already an economic minority.  Losing their oil money would literally make them paupers.

The Red Staters may think that since they have all the power of the government they don't have to play nice, but the other true power center, the economic power of the nation, is governed by the Blue Staters.  And so the Red Staters better not overplay their hand or they may learn the hard way what happens when you bite the hand that feeds you.