“The Penny Plan” to Eliminate the Federal Deficit

four cents
Creative Commons License photo credit: Robert Couse-Baker

We all know that Uncle Sam’s trillion plus dollar budget deficits are unsustainable. Debt is now larger than Gross Domestic Product and we are well on our way to Greece-level debt (and that excludes our “off the book debt,” see sidebar for our true debt levels . . . around $77 trillion). Adding insult to injury, the states are running huge debts of their own.

At some point, Uncle Sam is going to have to sober up and face reality. The reality is that the budget deficit needs to eliminated and budget surpluses must become the norm (American households need to listen up as well).  One solution that I recently came across was “The Penny Plan.” They describe the plan as thus:

The One Cent Solution is beautifully simple: If the government cuts one cent out of every dollar of its total spending (excluding interest payments) each year for six years, and then caps overall federal spending at 18 percent of national income from then on, we can:

  • Reduce federal spending by $7.5 trillion over 10 years.
  • Balance the budget by 2019.

Moreover, instead of using inflated budget “baselines” to claim nonexistent spending “cuts” a common practice in Washington, the One Cent Solution calls for real cuts.  Under the One Cent plan, the sum of all discretionary and entitlement spending will have to go down from one year to the next, by one percent or more.

Another cool feature of the Penny Plan is that it comes with anther great Remy video shown below.

But alas, I fear even this attempt may be too little too late. Even with a balanced budget by 2019, we will still add trillions of dollars to the national debt. Thanks to President Obama’s policies, the national economy will still be struggling to recover over the next few years. This is a recipe for an explosion in our debt-to-GDP ratio. Check out this history of recent debt ceiling increases to see how unsustainable our path already has become.

And if it all becomes too depressing, turn to Remy again for some more amusement with “Raise the Debt Ceiling.”

Cut Federal Spending, Don’t Raise Taxes

Creative Commons License photo credit: SOGKnives

In my previous blog blasting Nouriel Roubini for suggesting that Uncle Sam should raise taxes to close the budget deficit, I made this statement: “Tax increases will only hamper the ability of the economy to recover and worsen our fiscal condition in the long-run.”  Of course, you don’t have to take my word for it . . . so I thought I would review some pieces in the academic literature (at the international, national and state-level) that make the same arguments.

First, Harvard economists Alberto Alesina and Silvia Ardagna examine the economic effects of fiscal policy (pdf) in countries the constitute the Organization for Economic Cooperation and Development (OECD) from 1970 to 2007.  They find that:

“As for fiscal adjustments those based on spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based on tax increases.  In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.”

Second, UC Berkely economists David Romer and Christina Romer (former Chair of the Council of Economic Advisors to President Obama), examine the economic effects of U.S. fiscal policy (pdf) since 1947.  The find that:

“The resulting estimates indicate that tax increases are highly contractionary.  The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.  The large effect stems in considerable part from a powerful negative effect of tax increases on investment.”

Finally, economists Stephen Brown, Kathy Hayes and Lori Taylor examine the economic effects of fiscal policy of the U.S. states (pdf).  They find that:

“If anything, most public services do not appear to justify the taxes needed to finance them . . . this finding would seem to imply that other state and local public capital has been increased to the point of negative returns, perhaps because a growing stock of other public capital is indicative of an increasingly intrusive government.”

You decide . . .

The Real Federal Debt

Creative Commons License photo credit: TimothyJ

I’m so sick of this debt ceiling debate because it is all a ruse.  The federal debt, as defined by the debt sold by the U.S. Treasury, is only a small fraction of all the obligations that the federal government owes.  Thankfully, I just found this nifty debt clock (in the sidebar) from the good folks at the Institute for Truth in Accounting.  Here is how they derive their higher estimate:

The Institute’s Debt Clock is an estimate of the nation’s publicly-held federal debt, intergovernmental debt held by the various branches of the government, the unfunded obligations related to social insurance programs as well as the pensions and retirement benefits promised to military veterans and government workers.The debt represented by notes, bonds and bills are known to the penny and can be seen here.

Estimates of the unfunded portion of America’s obligations are not so precise.Unfunded obligations include Social Security, Medicare, pensions, etc, and the components of the estimate come from several agencies, the most important of which are from the Social Security Administration’s trustees.

Typically, the trustees make their actuarial estimate and release it on April 1st, each year.This figure represents the trustees’ best estimate of the demographic factors that will affect the receipts and payments that the system will pay for old age and medical benefits for the many Americans receiving benefits. This year, the trustees have deferred issuing their estimate because they want to have more time to calculate the effect of the new health care law.Their estimate must cover the next 75 years rather than the 10 years of taxes and the six years of benefits the Congress used to estimate reform’s costs.We expect that their estimate will be released  in June, at which time we will reset the Institute’s Debt Clock.

Click here for a more detailed explanation.

Watch it and weep . . .

The Debt Ceiling: How High Will It Go?

Square Money
Creative Commons License photo credit: The.Comedian

The Congressional Quarterly has a fascinating infographic showing when the debt ceiling has been increased in the past back to 1980.  Here are some factoids that I found interesting:

  • Since the “Great Recession” began in 2008 the debt ceiling has been raised 5 times increasing to the current $14.29 from $9.82 trillion–an increase of $4.47 trillion.
  • In contrast, it previously took six years to increase the debt ceiling 5 times between 2002 and 2007 increasing the debt ceiling to $9.82 trillion from $5.95 trillion–an increase of $3.87 trillion.
  • The difference between total U.S. debt and GDP is now a mere $700 billion.  The question is not if, but when will U.S. debt exceed GDP.
  • The trajectory of the growth in debt has significantly accelerated in the past few years.
Not a pretty picture . . . hat tip to Vermont Tiger.