The President proposed his budget this week. The document starts with this: "We now face a make-or-break moment for the middle class and those trying to reach it. After decades of eroding middle-class security as those at the very top saw their incomes rise as never before and after a historic recession that plunged our economy into a crisis from which we are still fighting to recover, it is time to construct an economy that is built to last."
That is a statement playing on the political 99% theme which may serve well the President's reelection chances but which fails to address the massive underlying fiscal situation.
In very simple terms the big problem with the budget is not discretionary spending but entitlement spending. The President understands this. On April 24, 2009 he said to his party's Senate caucus. "Entitlement spending, must be dealt with. ... the real problem here is really the entitlements long term ... that's a problem that we've all got to deal with."
Entitlements are Medicare, Medicaid, Social Security, Veterans' Benefits and programs such as food stamps. Calling these "entitlements" means only that politicians do not have to vote on these. And that is precisely the problem. In 2011 Social Security, Medicare and Medicaid accounted for 41% of federal spending. That percentage will steadily increase as the percent of the population over 65 increases.
Treasury Secretary Timothy Geithner said before the Senate Budget Committee that President Obama’s budget has the U.S. on an “unsustainable” fiscal course. “Even if Congress were to enact this budget,” Geithner said, “we would still be left with – in the outer decades as millions of Americans retire – what are still unsustainable commitments in Medicare and Medicaid."
Under the Bush II administration 31.60% of the present outstanding debt was created. Under Obama 31.19% of the present outstanding debt has been created. Neither party has any dedication to fiscal responsibility. The deficits are not a problem particular to either party. They are the result, in large part, of the fact that entitlement spending has increased much faster than the growth in GDP or tax revenue. Both Bush and Obama were cursed by entitlements. Bush made it worse with Medicare D.
The increase in the number of people receiving entitlements coupled with the recession created when the housing bubble burst have created massive deficits.
Unless there is a dramatic increase in GDP (4.5%/year for about 5 years or more) the fiscal situation of the United States will become dire. The massive recent deficits have occurred while interest rates were low. If folks start to ask themselves how the Treasury Department is going to pay the interest on $15.359 trillion of debt, Treasury's cost of borrowing will increase and the interest payment on the debt will increase and have priority to both entitlement and discretionary spending. Once the cost to Treasury of borrowing money increases, that will cause more debt which will cause higher rates. The process has positive feedback. At that time it will be too late to fix the problem.
The only comprehensive plan offered has been Simpson-Bowles which has been ignored by the administration and Congress. Fiscal responsibility doesn't get people reelected.
I do not fault only politicians. Economists were lulled by what they called The Great Moderation. This was the period from about 1987-2007 when business cycles were subdued. Economists thought that they understood monetary policy well enough that they had eliminated big spikes in GDP. They were wrong. Interestingly, the one person who may prove to have been the most clueless was Alan Greenspan who was an expert at convincing folks that he had things under control while he had, in fact, very little experience as an economist and did nothing to mitigate the policies which created the housing bubble.
A few years from now it may be difficult to believe that home loan rates were once 4%.
Dick Lepre
RPM - SF Van Ness
CA DRE # 01143973 | NMLS # 302379
