28 July 2011

I’m Glad He’s Not Partisan

Paul Krugman on the current budget tomfoolery:

There’s actually a simple way to resolve the debt ceiling crisis: non-crazy Republican leaders could support something like the Reid plan — which is, let’s be clear, a huge victory for the right and defeat for progressives — and pass it with limited GOP support and overwhelming Democratic support. Situation resolved.

The Reid Plan, for those who may not know, is to cut spending by $2.7 trillion and increase the debt ceiling by $2.7 trillion.  The cuts are spread out over ten years, and are made possible by winding down America’s involvement in foreign wars (which I support, by the way).  Of course, what Harry Reid means by “cuts” are actually decreases in the rate of projected spending growth.  But even assuming that “cuts” actually means cuts, Reid’s plan isn’t tenable.

Using 2011 as a base year, with a budget of $4 trillion, revenues of $2.5 trillion, and debt issuance of $1.5 trillion, Reid’s Plan simply doesn’t have math on its side.  If projections are correct, the federal government will spend $40 trillion over the next decade, minus $2.7 trillion in cuts, for total expenditures of $37.3 trillion.  Unfortunately, revenue over the next decade is projected to be $25 trillion, which is $12.3 trillion short of budget.  Since the credit card is, for all intents and purposes, already maxed out, the proposed increase in the debt ceiling means that the federal government can borrow up to $2.7 trillion, which still leaves a budget gap of $9.6 trillion.

There are basically four ways to handle this budgetary shortfall:  The federal government can increase revenue, cut spending, increase borrowing, or some combination of the three.  Increasing revenue is very tricky because the federal government has never been able to collect more than 20% of GDP in taxes, save for one very brief period in the 1950s.  It’s currently collecting 17.5% of GDP, and it’s doubtful that it will be able to collect much more, because it appears that 20% is the point where tax avoidance is more profitable than tax payment.

And increasing the borrowing is also untenable.  Assuming a 1% year-over-year growth of GDP, 2011 GDP is projected to be $14.395 trillion, based on a 1% increase of 2010’s GDP of $14.25 trillion.  The current debt outstanding is 14.34 trillion, meaning that the federal government has a leverage ratio of 1 (a leverage ratio, in this case, is the ratio of federal debt to current assets).  Anything beyond that is unhealthy because the federal government will owe than it could possibly pay if all current assets were liquidated.  And this analysis doesn’t even begin to account for the federal government’s liabilities.  Quite simply, more federal debt at this point is going to be nothing short of toxic.

This means that the only viable option is to cut spending, and by more than $2.7 trillion over ten years.  The federal government needs to cut at least $1.5 trillion from this year’s budget, and needs to cut at least $10 trillion total, assuming that GDP averages $15 trillion per year over the next decade, the federal government can collect 20% of GDP in taxes per year over the next ten years, that there is no increase in the debt ceiling, and the cumulative baseline budget for the next ten years is $40 trillion.

As such, one is forced to conclude that Reid, is either, stupid, ignorant, lying, or cowardly given his current proposal.  Raising the debt ceiling is toxic, and a $2.7 trillion cut over the next decade is simply piddling.  And Krugman is a partisan hack for supporting him.

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