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Continued from here:

Right, in Part II we surveyed US government spending. While spending spiked to 23.7% of GDP in 2010 (the highest since 1946) due to the financial crisis, it otherwise gradually declined over the past few decades to about 19% of GDP in the early 2000s. The decline appears primarily due to decreased defense spending.

We also noted that total US government spending’s among the lowest in the developed world. Despite this, the accompanying decline in tax revenues over the decades now leaves us in a situation where spending’s at 160% of revenues in 2010. What does that mean in terms of the government’s budget deficit and, of course, debt?

– The primary budget deficit was $1.1 trillion, or 7.5% of GDP, in 2010. Please ignore this piece of fiction…

– The real/total budget deficit (including interest) was $1.3 trillion, or 8.9% of GDP, in 2010

– This is nothing new for US politicians, of all stripes: In the past 50 years, there’s only been a half-decade of budget surpluses, pretty much all in the late 90s simply as a consequence of a post-Cold War run-down in defense spending

– A Democratic or Republican political philosophy implies v different (and increasingly deadlocked) views on the scale & composition of revenues & spending. Neither philosophy’s a license to incur almost permanent deficits in the past 80 years

– The two parties’ increasingly hysterical debate is presented as democracy. Judging by their collective record on deficits, what’s really on offer here is dumbocracy

How can budget deficits be reduced/eliminated?

– Suggesting/believing the scale of the 2010 deficit will be gradually reduced as we move away from the 2008 financial crisis seems wishful thinking when we see the same deficits in 2011/12 and are faced with an ever-increasing mandatory spending requirement (e.g. 100 K Americans join Medicare every month)

Long-term, the assertion that lower taxes creates higher GDP growth rates is certainly not proven. Arguing current spending levels are justified (or even too low!) is sheer bunk also when it must be consistently funded with deficits/debt

– To suggest an 8.9% of GDP deficit can be eliminated solely by relying on raising taxes OR by cutting spending is sheer lunacy also. The obvious & most sensible answer is a deficit elimination plan based equally on tax hikes/spending cuts

– If we assume defense spending reverts to a post Cold War low of 3% of GDP, and a (heroic) 25% of Other Discretionary spending’s eliminated, that only amounts to 2.9% of GDP

Since Defense/Discretionary spending’s mostly for thegreater good‘, politicians could reasonably hope some of these cuts would go unnoticed. Of course, this ignores the biggest (non-defense) spending shortfall – crumbling US infrastructure – so expect plenty of privatization there in the years to come…

– With inevitable future increases in Interest & Mandatory Spending, a cut of at least 1.6% of GDP’s needed in Social Security/Medicare/etc. entitlements. Most of these entitlements are in the form of direct payments, so these cuts are an immediate hit to people’s wallets

– Even worse: Estimating that individuals pay about 2/3rds of current government revenues, they’ll suffer the brunt of any tax hikes (unless the powerful corporate lobby suffers a staggering setback!). This represents another 3% of GDP hit to people’s wallets

– These direct tax hikes/payment cuts are obviously the most unpalatable for people – therefore, they’re completely unpalatable to politicians…

– The parties appear deeply divided, but I believe Democrats/Republicans are completely united in their desire to avoid facing election(s) where they have to present such direct tax hikes/spending cuts to the electorate as a fait accompli or even as a ‘choice’

– They’re also likely united in their desire to distract the electorate with debate about the ‘correct‘ level of taxes/spending (and through simple obfuscation of the facts/situation). Until politicians demonstrate the ability to balance budgets for a couple of years, this type of debate’s pretty pointless (and indulgent)

– Just to be (completely) subjective for a minute, and to reiterate my point above, yes I have absolutely no faith that US politicians will take the necessary steps to eliminate the budget deficit for any single year, let alone on a sustainable basis

OK, we’ve now covered US GDP and the sorry state (and history) of government taxes, spending and deficits. Let’s keep this short and sweet, and save the inevitable consequences of all this – US government debt – for our last post. In fact, I can think of a couple of (quite subjective!) posts to follow…but let’s finish up & digest the facts & figures first!

To be continued…