Wednesday, February 16, 2011

Balancing the budget

I happen to agree with Sessions, which I'm sure colors my judgement, but I don't see how any thinking person who has looked at the facts can not think that Mr. Lew and the President are being extremely disingenuous in their statements. In 2008 we had a deficit of $460 billion on a total outlay of $2.97 trillion (roughly 19% of GDP). I think this is way too high, but that's irrelevant to this discussion. In 2010 we had a deficit of $1.29 trillion on outlays of $3.46 trillion (roughly 25% of GDP). Obama is increasing that to $3.8 trillion (25% of GDP) in his proposal and never bringing it down from there. He also never gets back below 20% of GDP in spending. He balances the budget by assuming away entitlement spending, stating that there will be reductions he doesn't specify, ignoring interest on the debt, and assuming he can get receipts (taxes) up to 20% of GDP.

This is like my saying that I make $50,000 and I started this year $50,000 in debt and spent $52,000. I'm looking at bankruptcy, so I come up with a plan for the bankruptcy judge: I'm going to get out of the hole by making loans against my retirement and spending $55,000 this year (and increase from there every year in the future) and by ten years from now I'll be making $100,000 and only spending $100,000 (if we ignore debt repayment) so then, when my budget is balanced, we can start to worry about how to pay back those loans and catch up on retirement.

This would be horrifically misleading even if I had a good plan for increasing my income, but the budget assumes receipts at 20% of the GDP, which is a record level. No matter how high taxes go, we have never taken in more than 20.9% of GDP (1946) or sustained more than 19%. (see here) The OMB uses static scoring, so they just assume that if they charge more in taxes that they will get proportionally more in receipts, but reality doesn't work that way.

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