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ItsCalledSoccer
ItsCalledSoccer
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April 11th, 2011 at 10:10:26 AM permalink
One of the hottest political topics is the budget deal that will take us through the end of the current FY 2011 (Oct 10 - Sep 11). I think the eventual CR cut about $35 billion from the remaining FY. The next FY budget is yet to come, it will be VERY interesting.

Anyway, the question asks, how much cutting do YOU think is enough for the upcoming FY 2012 budget? For some perspective ...

According to the 1040 instructions for the 2010 tax year (due this Friday!), the FY09 (Oct 08 - Sep 09) deficit was $1.413 trillion. This amounts to:

* $3.87 billion per day in deficit
* $4,558 per person per year (assumes population of 310 million), or, if your 2010 tax bill was $5,000, you only paid in enough to cover your share of deficit spending, and not for any programs or reduction (and not all 310 million pay taxes, so it's even less)

In other words, the spending cuts in the CR compromise through the end of the current FY amounts to approximately 10 days of spending.

Also in other words, if $1 trillion is cut from the FY 2012 budget, we will STILL be accumulating $413 billion in deficit (at 2009 levels), or ...

* $1.13 billion per day in deficit
* $1,332 per person per year

In other words, the spending cuts in the CR compromise amounts to approximately one month of spending.
thecesspit
thecesspit
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April 11th, 2011 at 10:20:38 AM permalink
The question is, I guess, goes back to a debate I had with AZDuffman... what is the "right" level of long term debt to aim for?

I think we came to a figure of around 1-2% per annum overspend was reasonable to maintain a debt load of 20-35% of GDP. As percentages of GDP and spending, what are the numbers being talked about above?
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
ItsCalledSoccer
ItsCalledSoccer
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April 11th, 2011 at 10:48:29 AM permalink
Quote: thecesspit

The question is, I guess, goes back to a debate I had with AZDuffman... what is the "right" level of long term debt to aim for?

I think we came to a figure of around 1-2% per annum overspend was reasonable to maintain a debt load of 20-35% of GDP. As percentages of GDP and spending, what are the numbers being talked about above?



I don't think the questions are applicable to sovereign governments in the same way that they are to businesses, but in answer to them ...

2009 GDP (to be consistent with the 1040 instructions) was about $14.1 trillion. The 2009 total outlays were $3.52 trillion, or about 25% of GDP. Total revenues were about $2.11 trillion, or about 15% of GDP, meaning, in 2009, about 10% of GDP was borrowed.

The percentage of spending that represents is $1.41 trillion divided by $3.52 trillion = about 40% of total spending is borrowed.

Debt was about $12.9 trillion in FY09. So debt load in 2009 was $12.9 trillion divided by $14.1 trillion, or about 91%. A debt load of 20-35% would be much better, but does not appear to address spending (at least directly).

I don't think the questions are applicable because business is focused on a rate of equity return (how much return you get when you invest in something). Obviously, as debt rises, the potential for equity return increases ... but it's riskier, so the return (sort of) aligns with the risk.

State governments can act like this to some extent, but I don't think a sovereign federal government should. Mostly, because a debt holder can call in debt at any time (for the most part). Should a sovereign government not be able to pay that debt, it defaults and its sovereignty is put at risk. Not that it will go away, but it gets put in the hands of debtors much more than it otherwise would.

I also don't think government should be interested in equity rates of return, but in stability, strength, and defense. I think the preamble to the Constitution contemplates this when it says "PROVIDE for the common defense," which is clearly not a money-making proposition.

(Note: it also says "PROMOTE the general welfare." I think there is a world of difference in the common reading of PROMOTE v. PROVIDE, and I think a critical mistake was made when the government (under FDR) began PROVIDING for the general welfare, a clear overreach.)

Anyway, I don't understand the premise that any overspending on a consistent, permanent basis makes sense. If you overspend 1% - 2% per year (as opposed to 40% in 2009), don't you still end up with a lot of debt and our current situation (although it would take a lot longer to get there)?
AZDuffman
AZDuffman
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April 11th, 2011 at 12:21:08 PM permalink
Quote: ItsCalledSoccer

Anyway, I don't understand the premise that any overspending on a consistent, permanent basis makes sense. If you overspend 1% - 2% per year (as opposed to 40% in 2009), don't you still end up with a lot of debt and our current situation (although it would take a lot longer to get there)?



Not to rehash the discussion from last month, but the Federal Government is not a business nor an individual. The reasons for controlled Federal Debt:

1. There must be a liquid and active market for the debt as even in good times, short-term borrowing is needed. Most federal receipts come Jan-Apr.
2. Many markets are based on the rate of the 30 year T-Bond, such as mortgages,
3. Debt stabilizes governments. You do not invade or revolt against someone who owes you money
4. Budgets in surplus lead to depressions/recessions
Tolerance is the virtue of believing in nothing
thecesspit
thecesspit
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April 11th, 2011 at 1:24:32 PM permalink
Quote: ItsCalledSoccer

Anyway, I don't understand the premise that any overspending on a consistent, permanent basis makes sense. If you overspend 1% - 2% per year (as opposed to 40% in 2009), don't you still end up with a lot of debt and our current situation (although it would take a lot longer to get there)?



I thought so too, but if the over spend is less than the difference between inflation and the rate of growth, you reach a steady state of total debt. The ratio of total debt to GDP balances at (roughly) : overspend/(growth - inflation) (expressed as a percentage).

So if you have a $100 tax take, a growth rate of 5%, inflation at 1% and overspend 2% of your tax take, your national debt sits around 50% of GDP. (As I recall)

AZ's argument is that you need some liquidity in your debt markets to encourage lending for the times you do need debt. And running 0 debt mean that the government at some point is running at a profit (tax take higher than expenditure), which also bring up question of running the government with the wrong objective.

So really, saying "oh my, we have a $1 trillion debt" is meaningless without some sort of scale, just as reports that "BigCompany made $1 Trillion in revenue". Without an idea of costs for that revenue, it needs perspective.
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
thecesspit
thecesspit
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April 11th, 2011 at 1:25:43 PM permalink
Quote: AZDuffman

Not to rehash the discussion from last month, but the Federal Government is not a business nor an individual. The reasons for controlled Federal Debt:

1. There must be a liquid and active market for the debt as even in good times, short-term borrowing is needed. Most federal receipts come Jan-Apr.
2. Many markets are based on the rate of the 30 year T-Bond, such as mortgages,
3. Debt stabilizes governments. You do not invade or revolt against someone who owes you money
4. Budgets in surplus lead to depressions/recessions



I'm not convinced about Number 4 (in the short term). I do agree mostly on 1-3 as we discussed last month (and very elucidating it was).
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
PapaChubby
PapaChubby
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April 11th, 2011 at 1:27:07 PM permalink
I need to clarify some of your assertions. The 2009 deficit was $1.4 trillion as you say, but total government spending was $3.5 trillion.

So the $35 billion in cuts equates to 10 days of OVERspending. It's like they balance the budget for 10 days, and continue to overspend at the current rate the other 355 days of the year.

The $35 billion only amounts to about 3 days of actual spending. A 1% cut in total expenditures.

I'm appalled by the talking heads who try to incite panic over these cuts. "Schools will close! Children will starve! Old people will die! Your food and drugs will be tainted!" Surely we can cut 1% of the waste and inefficiency from government spending without so much wailing. I'd hope that 10% would be readily achievable.
AZDuffman
AZDuffman
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April 11th, 2011 at 1:55:22 PM permalink
Quote: thecesspit

I'm not convinced about Number 4 (in the short term). I do agree mostly on 1-3 as we discussed last month (and very elucidating it was).



I don't quite get why but am going by history. I'll leave it up to someone with a degree in economics to explain the details if there is one around.

Yes, was a good discussion.
Tolerance is the virtue of believing in nothing
RonC
RonC
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April 11th, 2011 at 3:35:10 PM permalink
Quote: PapaChubby

I'm appalled by the talking heads who try to incite panic over these cuts. "Schools will close! Children will starve! Old people will die! Your food and drugs will be tainted!" Surely we can cut 1% of the waste and inefficiency from government spending without so much wailing. I'd hope that 10% would be readily achievable.



I don't know what the "right" number is but most entities can cut 10% from their budget just by getting rid of excesses. They talked about how Medicaid cuts would keep sick children from being helped but what they don't talk about is the reimbursements for transportation that are way out of line with actual costs...one cabbie here in Houston got over $1000 for a single run (about $100 worth in "real" price) for a Medicaid patient because he was paid for each passenger. If we can find those kind of issues and get rid of them, the program saves a bunch of money and still helps those who need help.

We have two parties that are more concerned about protecting a certain constituency without regard to the excesses in either one...Republicans seem to want to protect the rich and don't seem the least bit concerned about corporate bigwigs making gazillions of dollars by leading their companies into bankruptcy and Democrats seem to want nothing cut from social programs, etc. in spite of the obvious excesses. Those of us in the middle may fall in line with one line of thinking or the other, but we're really getting beaten down by both of them...
AZDuffman
AZDuffman
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April 11th, 2011 at 4:03:24 PM permalink
Quote: RonC

I don't know what the "right" number is but most entities can cut 10% from their budget just by getting rid of excesses. They talked about how Medicaid cuts would keep sick children from being helped but what they don't talk about is the reimbursements for transportation that are way out of line with actual costs...one cabbie here in Houston got over $1000 for a single run (about $100 worth in "real" price) for a Medicaid patient because he was paid for each passenger. If we can find those kind of issues and get rid of them, the program saves a bunch of money and still helps those who need help.



Market driven is the way to do this. Give a voucher and then each citizen has a vested interest in finding the best transportation/care/whatever option. Just like the thread a few months back asking if people would pay $1,000 or more for a test to go from 98% certain to certain no cancer. Those whose insurance paid said, "Sure." Those who did not were a little better taking such a small risk.
Tolerance is the virtue of believing in nothing

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