Federal Budget & Tax

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Friday, July 28, 2006

The National Debt, Pt. II: Why the National Debt Matters

In this installment of my series on the national debt I explain why the national debt matters.

The U.S. government owes a whole bunch of people a whole lot of money. Is this a problem? Well, like most things macroeconomic, the answer depends. Generally speaking, there are two things about which to be concerned when the federal government carries debt.

The first cause for concern is interest rates. When the government borrows money, it borrows from the same marketplace as everybody else in the economy. The U.S. government, however, is a bit different from every other borrower - it borrows massive amounts of money each year. In 2005, it borrowed about $300 billion from the public.

Money can be thought of like any other good in the marketplace; the less there is, the more expensive it becomes. However, instead of calling it "price", the price of money is called the "interest rate." When the government, or any other borrower, obtains funds from the money market, it reduces the quantity of dollars available to everybody else. This drives up the price of borrowing money - interest rates rise.

Now, when theFederal Reserve Board decides that the economy is growing too quickly and fears that rapid inflation will set in, the Fed uses what powers it has to raise interest rates in an attempt to slow the economy down. Conversely, during a recession, when the economy shrinks and unemployment levels increase, the Fed lowers interest rates. The Fed attempts to control the economy through setting interest rates. National debt has the exact same effect on the economy; federal borrowing of money can raise interest rates thereby restraining the growth of the economy.

The second problem of the government carrying debt is the same problem that afflicts anybody who carries debt - it costs money to have debt. For every dollar of debt that the government carries, it has to pay someone for the privilege of owing them money. This cost, as mentioned above, is known as the interest rate.

The U.S. government is bound by law to make payments on the interest on the debt that it owes. The more debt the government carries, the more interest payments it has to make, the less money that could be used to fund other things (or even lower taxes). In 2005, the government spent $184 billion paying interest on the national debt. Consider: non-defense, discretionary spending in 2005 was $465 billion; interest on the national debt represents 40% of that. Consider also that in 2005 the federal government spent a total of $2.5 trillion, and of that amount about 7.5% was spent on paying for interest on the national debt.

For these two reasons, it makes sense to avoid national debt. There are, of course, many nuances to this discussion, centered around what levels of debt are OK and what are not; when is it better to incur debt than not; and other macroeconomic factors that influence and counteract the effects of a national debt.

(click on image to enlarge)

Next: What is the national debt?

(This is part II of a continuing series on the national debt. Part I can be found here)

Posted by Craig Jennings, 02:19:31 PM

Thursday, July 27, 2006

OMB Watch Supporting Publication of Budget Justifications

OMB Watch has partnered with the National Taxpayers Union to draft a letter to the Senate in support of making federal department budget justification reports public documents. The completed letter was sent to the Hill yesterday afternoon with the endorsement of 54 organizations.

Budget justifications are currently submitted to the House and Senate appropriations committees to aid in the formulation of the annual federal budget. Currently, some agencies publish their budget justifications online (see Defense and Energy), but the documents are not required to be available.

Sen. Coburn (R-OK) plans to offer amendments to the FY 07 appropriations bills requiring federal departments and agencies to post their budget justifications within 48 hours of being submitted to the appropriations committees.

Thanks to all the organizations who are lending their support to this important effort.

Read the letter

Wednesday, July 26, 2006

Treasury Dept: Sorry, No Free Lunch

Supply-siders argue that tax cuts do not cause budget deficits because they create so much economic growth that total tax revenues will increase, even at the lower tax rates. In short: tax cuts pay for themselves.

The Treasury Department released a report today which analyzes the economic effect of President Bush's tax cuts and concludes that tax cuts do not, in fact, pay for themselves.

From page ii of the Office of Tax Analysis, U.S. Department of Treasury's A Dynamic Analysis of Permanent Extension of the President’s Tax Relief:

The analysis reveals that the long-run effects of these policies depend crucially on whether they are financed by lower spending or higher taxes in the future and are sensitive to assumptions on underlying parameters. The issue of how, or even if, these policies need to be financed remains a source of discussion among economists. The analysis presented here suggests these policies will result in substantially more economic activity if they are financed by a future reduction in government spending than if they are financed by future tax increases.

So, there you have it. The only remaining question is: Should the government raise taxes or cut spending?

Posted by Craig Jennings, 03:42:22 PM

Tuesday, July 25, 2006

Federal Spending Database Legislation Gains Momentum

Legislation to create a free, public, searchable database (S. 2590) containing grants and contracts spending information is gaining momentum in the Senate this week. OMB Watch testified in support of this bill at a subcommittee hearing last week of the Homeland Security and Governmental Affairs Committee and this week on Thursday the full HSGAC committee will mark up a consensus version of the bill. The bill is expected to pass the full committee unanimously.

The list of Senators supporting the bill has also increased recently, with 10 cosponsors spread out broadly on the political spectrum. This should certainly help for quick and easy adoption of the bill on the Senate floor. The current cosponsors are below:

* = original cosponsor

Posted by Adam Hughes, 05:02:27 PM

Friday, July 21, 2006

New Opportunity to Support Access to Gov't Information

Over the past few months, OMB Watch has been working closely with Sens. Tom Coburn (R-OK) and Barack Obama (D-IL) on a bill to create a free, searchable database available to the public containing information on all federal spending - both grants and contracts. This legislation (S. 2590) continues to move forward in the Senate and OMB Watch remains strongly supportive of it (see the OMB Watch website for more information on the bill and to access previous coverage on this by OMB Watch. You can also read recent media coverage of the effort.)

New Effort for Transparency and Disclosure Underway
To further support transparency and disclosure of budget information, OMB Watch is joining with the National Taxpayers Union to rally support for a legislative effort to require posting of all departmental budget justifications online (excluding any sensitive security information). Budget justifications are contain details of agencies' spending priorities and outline budget allocations from previous years, and are compiled by federal offices and agencies for the congressional appropriations committees in order to help them develop their budgets each year. Currently, there is no way for the public to access these documents and no reason for them not to be available.

Please consider signing-on to this joint letter supporting the disclosure of agency budget justifications. This is a basic good government proposal that will help to bring about a more effective and efficient government.

Deadline for Sign-ons is next Tuesday, July 25 at 6:00 pm. Please email Adam Hughes at ahughes@ombwatch.org to sign your organization on.

Posted by Adam Hughes, 05:52:56 PM

Tuesday, July 18, 2006

Appropriations Update

Congress Daily (subscription req'd) is reporting that even if the minimum wage hike amendment in the House Labor-H funding bill is stripped out and put up for a vote in its own bill, Labor-H appropriations would still not see a full floor vote before September.

The measure also faces criticism from both wings of the GOP -- conservatives don't like the numerous earmarks; moderates argue it underfunds education and health programs.

Despite having more money to spread around, Senate Republicans are facing the same problems with their own Labor-HHS bill. The matter is likely to be discussed in a lame-duck session, if not kicked into next year as part of a continuing resolution.

Posted by Craig Jennings, 09:31:40 AM

Monday, July 17, 2006

Appropriations Update

According to Congress Daily (subscription req’d), the Senate Appropriations Committee will go to work this week:

...the panel [is] scheduled for a marathon session Thursday to consider legislation funding the lion's share of federal discretionary spending, or nearly 78 percent of the total $872.8 billion allotted to the panel for FY07.

On tap are the Defense, Labor-HHS, Military Construction and Transportation-Treasury measures...

Well, good luck with all that. With only one appropriations bill (Homeland Security) passed by the full Senate, it is unlikely we’ll see a full compliment of spending bills before the end of the fiscal year on September 30th.

Posted by Craig Jennings, 02:00:14 PM

Friday, July 14, 2006

The National Debt, Pt. 1: A Very Brief History

A reader writes:

Isn't the national debt a better picture of our fiscal condition?

Where's the good news? Doesn't the administration simply have more payroll tax money, etc., to mask the debt situation?

Excellent questions indeed and an excellent prompt to talk about the national debt. But, the discussion is a bit lengthy for a single post, so I’m going to start a series of posts about the national debt.

There’s been a lot of talk about the deficit lately (it’s getting smaller, tax cuts don’t pay for themselves, etc.), but absent from the discussion is the national debt. However, implicit in discussions about the deficit is the concern that deficits grow the national debt. So, let’s talk about the debt.

When President Bush took office in 2001 the national debt was $5.8 trillion, at the end of this fiscal year (September 30), that number will be $8.5 trillion. Since taking the helm of the nation’s finances, Mr. Bush increased total debt by 47%. President Clinton, on the other hand, presided over a 26% increase in total federal debt ($4.4 — $5.6 trillion). President Reagan increased nominal national debt by 113%.

(click on image to enlarge)

But these numbers are somewhat misleading because they do not account for inflation. A more helpful way to understand national debt is to measure it in context of the size of the overall economy. Measured in these terms, Mr. Bush has increased national debt from 57.4% of GDP to 63.7% (projected). That’s an 11% increase. President Clinton’s are significantly better. Under Mr. Clinton, the national debt actually shrank - from 66.2% of GDP to 58%.

(click on image to enlarge)

Next: Why the national debt matters

Posted by Craig Jennings, 05:05:39 PM

Unending Deficits

When the president repeats his mantra "cut the deficit in half by 2009", one could reasonably assume that the downward trend in deficits would continue past 2009 - as if "half in 2009" was a milestone of sorts. But, au contraire! The "half in 2009" is not a just a milestone but a turning point - the point where deficits start growing again. It’s right there in black and white in the president’s FY2007 budget, but it’s starkly absent in his speech.

From page 223 in the Analytical Perspectives document of the President's FY 2007 Budget:

(click on image for expanded view)

Is Bush is aware that many, many more people hear his words than read his budget? Perhaps he should tell the whole story when speaking and not assume that his audience is familiar with the relvent material. I'm just saying...

Posted by Craig Jennings, 01:57:08 PM

Wednesday, July 12, 2006

Supply Side Debunking

This time from the Wall Street Journal’s Washington Wire - a great analysis of President Bush’s tax policies:

Treasury long-run analyses of the effects of President Bush’s tax cuts “may ultimately” raise total national output of goods and services by 0.7%.
[...]
The Center for Budget Policies and Priorities...says..."A 0.7 percent increase in the economic output that the Congressional Budget Office has projected for 2016 would represent an additional $146 billion [in gross domestic product]," it says. "If new revenues equaled as much as 20% of the additional output, the increase in revenues resulting from making the tax cuts permanent (assuming Treasury’s best-case assumptions) would be $29 billion."

The congressional Joint Committee on Taxation, using conventional analyses, says making the president’s tax cuts permanent would reduce federal revenues in 2016 by $314 billion. That is more than 10 times what the Treasury analysis suggests tax cuts would generate...

(via Brad DeLong)

Washington Wire: Do Tax Cuts Pay for Themselves?

Posted by Craig Jennings, 10:18:53 AM

Tuesday, July 11, 2006

More on the Mid-Session Review

As the spender-in-chief pats himself on the back for managing to shirk the deficit to the fourth largest in U.S. history (via ThinkProgress), let’s take a look at a few things:

1. The surge in tax receipts is the result of a growing economy. Economic expansion is not dependent on tax rates. In fact, President Clinton raised taxes and the economy grew at what most would call a "good" pace. If marginal tax rates are 1% or 99%, an expanding economy will result in increased revenues.

2. The OMB has a habit of projecting of unrealistically large budget deficits so that the president can laud his tax policies for producing lower-than-expected deficits.

In 2004, the president’s budget projected a $521 billion deficit for FY2004 that turned out to be $412 billion
In 2005, the president’s budget projected a $426 billion deficit for FY2005 that turned out to be $318 billion

3. In numerous speeches and comments, the president repeats the refrain "we are on track to cut the deficit in half by 2009." Today, at his self-congratulatory press conference he said "We're way ahead of cutting the federal deficit in half by 2009. As a matter of fact . . . we're now a full year ahead of schedule."

But half of what? In the past twelve months, in the 43 speeches in which he mentions "cutting the deficit in half by 2009", Mr. Bush never - not once - mentioned what he is "on track" to cutting in half of. What OMB’s many budget documents state, but the president never says, is that he is "on track" to cut a $521 billion deficit in half. That’s right - Mr. Bush is going to cut a wildly-off-the-mark and never-materialized budget deficit.

4. The "surprise" surge in tax receipts comes mainly from corporate profits, executive bonuses, and capital gains. Only the well-off are seeing increased earnings, while for the rest of the country, real wages decreased in 2005. See, in other words, there’s a widening income gap. This supposed rising tide is lifting only yachts.

5. When Mr. Bush took office in 2001, he inherited at surplus of $236 billion. Today, he’s bragging about a $296 billion deficit. Things have certainly taken a turn since 2001.

6. The national debt in 2000 was $5.6 trillion. Since then, Mr. Bush has added $2.3 trillion in additional debt.

Posted by Craig Jennings, 01:32:38 PM

OMB Releases Myopic Mid-Session Budget Review

The Office of Management and Budget released their Mid-Session Budget Review today, and has revised down by $127 billion the projected FY 2006 budget deficit from $423 billion estimated earlier this year to $296 billion.

Despite the rhetoric coming out of the administration, this short-term improvement is not the good news they would like it to be. Most of the improvement stems from the horrific job the OMB did earlier this year estimating the budget deficit. Over the last several years, OMB has developed a consistent and dishonest strategy of predicting drastically over-inflated deficits early in the year so that the reality gives the appearance of improvement by the end of the year. This latest review is no different.

Furthermore, claims by the president that the increased tax receipts show a robust economy where all Americans are prospering are seriously off the mark. The mid-session review showed increased tax receipts, mostly from corporations - which rose 19 percent, and individual taxes that were not withheld from paychecks. This type of federal revenues are almost always from executive bonuses and stock market gains - income typically reserved for the most well-off.

Checking the average income growth so far this year underscores this point. Even as the upper end of the income scale is doing well, average wages for workers have not kept pace with inflation, lagging more than 1 percent behind inflation over the last year, adding to a growing income disparity in our society.

The federal budget is on an unsustainable track and the long-term fiscal outlook of the nation is not bright and growing dimmer. Although OMB and the president will trumpet the positive news about short-term budget prospects, several important facts are either obscured or outright hidden in this discussion of the deficit. The current policies creating structural deficits will endanger the ability of the government to repay its obligations, both now and especially in the future. The longer this administration puts off straight talk about the budget and the deficit, the more daunting the challenges of the future will become.

Posted by Adam Hughes, 01:05:38 PM

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