Busted

The Congressional Budget Office (CBO) released its projections for Federal spending, revenues and the deficit for fiscal years 2010 through 2019. 

Over this period, the Federal debt is projected to increase by an additional $6.7 trillion; from an already staggering $12,302,465,487,917 (Yes the Federal Reserve tracks it to the penny.)

In other words, over the next 9 years, the amount of debt issued by the Federal government is expected to increase by over 54 percent. In and of itself, debt is not necessarily a bad thing.  In fact, were it not for the ability to borrow against future income, we would have no economic growth.  Businesses could not invest in new machinery or technology.  Consumers would for the most part be unable to own their own homes, and governments would find it impossible to finance important activities ranging from national defense to the construction of interstate highway systems.


Debt is also best used when opportunities exist.  Borrowing today to purchase a house in 5 years time makes little sense, but borrowing to purchase the house of your dreams at a particularly low price – even if that borrowing may create some hardship – may make a great deal of sense.


In many ways, therefore, the recent ramp-up in the Federal deficit is a good thing.  It was done at a very opportune time.  There is currently a low interest rate environment, inflation is somewhat tame due to a damper on labor costs, and weakness in other major currencies is keeping the dollar from free-falling in the face of expansionary fiscal policy.  In addition, there are plenty of opportunities for the Federal government to make important infrastructure, research and technology investments which will pay dividends in the future. 


Unfortunately, the CBO report shows that all of this borrowing was not used to finance investment but rather to transfer income from one segment of society to another.   This is because the Federal deficit is driven by a general imbalance between revenues and expenditures and the bulk of those expenditures, 71 percent, reflect transfer payments.  In other words, 71 percent of the deficit is due to money being borrowed from one group of people and funneled to another groups.  These may be transfers from younger Americans to the retired, from the rich to the poor, from urban citizens to rural citizens, but they are all transfers of wealth.   

There may be good reasons for many of the transfers (i.e. providing a safety net to the blind and disabled), but many of the so-called “entitlement” programs, do little more than benefit a favored constituency over the general public. In addition, these transfer payments have become so large that they influence the productivity of the economy overall.  In fact, according to the CBO report, transfer payments over the 2011-2020 period account for 14 percent of total Gross Domestic Product (note that this does not include interest payments which are transfers to investors).  That is 14 percent of the entire production of the economy being transferred from workers, entrepreneurs, investors, etc. to retirees, the poor, the disabled and those who cannot or for some reason choose not to work.  This discourages work and encourages consumption – which will lead to reduced future economic growth, and larger transfer payments and budget deficits.


The size of these transfer payments also makes it difficult to reduce the deficit.  While it would only require a 26 percent reduction in transfer payments to eliminate the entire deficit over the 2011-2020 period it would require a 54 percent reduction in “discretionary” spending which would mean the elimination of every civilian Federal government program and one-fifth of all defense spending.  Obviously, no discretionary spending freeze or reduction of this size will ever be considered by congress, and since the transfer programs all have large, well funded constituencies, it is 100 percent certain that the Federal deficit will not only continue into perpetuity, but it will continue to grow over time, continuing to dampen economic activity, job growth and future tax revenues.