DC Cuts: How the Federal Budget Went from a Surplus to a Trillion Dollar Deficit in 10 Years

By Bob Long

This book by former Division Controller at a Fortune 500 company dissects the federal budget from the point of view of someone far outside the Beltway

o Find out how the budget went from a surplus to a string of trillion dollars deficits

o Understand why government revenues have dropped to record lows relative to the size of the economy

o Discover where your tax dollars are being spent

o See what it takes to balance the budget again in 5 years

DC Cuts provides a detailed line by line look at the recent trends in government revenues and outlays and identifies where and how the budget has spiraled out of control.

• Language: English
• Publisher: Bob Long
• Release date: Mar 23, 2013
• ISBN: 9781301248551

Bob Long

Bob Long was born in the Bronx, NY and grew up in a close-knit blue collar family. His education and work experience is in engineering and finance, as a senior executive at Fortune 500 companies and a small business owner. He has worked in a variety of industries including transportation, finance, healthcare and technology. He has many interests including fishing, gardening, sports and surfing the Internet. He likes to write about subjects for which he has a passionate interest and can draw on his experience as a engineer, businessman and outdoors-man. He currently lives in Texas with his wife of 25+ years, 2 teen age children and bunch of dogs.

Book preview

DC Cuts

How to Federal Budget Went From a Surplus to a Trillion Deficit in 10 Years

By

Bob Long

Smashwords Edition

Copyright © 2012 Bonjour Limited Holdings LLC

All rights reserved

Texas, USA

ISBN: 9781301248551

Table of Contents

Introduction

Charting a Course for the New Era of Surplus

The Balanced Budget Plan

Is It Revenue or Is It Spending?

Where or Where Did the Tax Receipts Go?

Bushwacked, Embalmad and Buried in Debt

How Fast Can They Grow

There and Back Again

Holding Outlays to a Measly $4.1 Trillion

If You Like Big Gummint

Glossary

Chapter 1

Introduction

I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt. If we run into such debts, we must be taxed in our meat and drink, in our necessities and in our comforts, in our labor and in our amusements. If we can prevent the government from wasting the labor of the people, under the pretense of caring for them, they will be happy. - Thomas Jefferson

Evolution of the National Debt

From 1789 when George Washington began his first term in office until 1916 on the eve of World War I, the Federal Government of the United States of America adhered to the advice of Thomas Jefferson and accumulated a total debt of only $3.6 billion. The population in the early 20th century was just over 100 million people, so after the first 140 years of the nation’s existence the national debt worked out to about $35 per person. For an average family their portion of this debt amounted to little over 1% of their annual income. In other words the national debt could be paid off with the proceeds of 3 days work from every household in the country.

Eighty four years later by 2000, federal debt had grown to $5.6 trillion while the population had increased to 284 million people. Now the money owed per person was about $20,000, an increase almost 600 times the amount owed in 1916. The size of the average family had shrunk from over 4 to 2.5 people and income was up, but the time that households would have to work to pay off their share of the debt had increased to 1 year and 3 months.

But there was good news about government finances at the turn of the millennium. For the first time in many years the money coming into the U.S. treasury was exceeding the amount being spent and this positive development was expected to continue indefinitely into the future. This new financial equilibrium, if maintained, would enable the government to continue to meet all its obligations while erasing the debt that it had accumulated over the previous century.

Unfortunately this brief interval of fiscal sanity soon evaporated in the self serving world of Washington D.C. and by 2009 modest annual surpluses from 1998 through 2001 had been replaced by a deficit exceeding $1 trillion. By 2012, the National Debt had exploded to an incomprehensible $16 trillion! This is roughly $52,000 per person and every household in the USA would have to work for more than 2 years and turn over every penny of their income to the government in order to pay off this debt. To make matters worse projections for huge annual deficits continue into the future which will result in additional borrowing that will just dig the debt hole deeper and deeper. By 2016 the national debt is projected to exceed $20 trillion. Massive deficits are now the new normal in Washington and the idea of financial responsibility and a balanced budget a distant dream.

Temporary versus Structural Deficits

The National Debt grows as a result of deficit spending by the Federal Government. Deficits occur when government outlays exceed receipts for a fiscal year. When this happens Washington simply borrows money to make up the difference and the National Debt is the accumulation of this borrowed money.

Companies in the private sector commonly borrow money to fulfill a specific objective such as starting a new product line, acquiring equipment or a facility or even to get through a rough patch in the economy. This is not a problem as long as the cash coming into the business over time is sufficient to cover the payments needed to service the loan. However when the company starts routinely borrowing money to cover ongoing operations, it is on the path to financial ruin. The same rules apply to individuals who borrow money for large purchases such as houses and cars. Their income must be sufficient to cover the payments on the loan as well as their other essential needs.

Similarly, the federal government can borrow money for investments in fields such as infrastructure, transportation, energy and education if it believes that is better for the country in the long run. But those investments eventually need to pay off by promoting faster growth, more prosperity and ultimately greater tax revenues. It is charitable to say that the returns on many recent government initiatives have been less than stellar. Investment results like falling test scores, failing levees, bridges to nowhere, high speed rail without profits and bankrupt energy companies do not help reduce the debt.

Government also uses deficit spending in response to emergencies such as wars or economic recessions. These temporary deficits are not necessarily bad things as long as the debt accumulated is paid down at least in part by running annual surpluses during prosperous times. For example the country ran a large deficit during World War I but paid down the debt with surpluses throughout the good times of the Roaring Twenties that followed.

But when government outlays continue to exceed receipts even when a peace time economy is operating at its full potential, the deficit is structural in nature and is the equivalent of a company borrowing to cover the cost of operations. Structural deficits can only be addressed by explicit and direct government actions such as reducing spending, expanding the tax base, and/or increasing tax rates. The government has an advantage over companies and individuals in the private sector since it can postpone the need to address structural deficits by printing more money. In the short term this may seem like an easy or painless solution to addressing excessive debt, but if it continues past a certain point, it can lead to inflation or even worse hyper inflation. Needing a wheelbarrow to carry cash to the supermarket in order to buy a loaf of bread is neither a painless nor easy resolution to a structural deficit.

There certainly is a cyclical or temporary component to the current deficit. As the economy improves and unemployment goes down the deficit will shrink. However there is now an underlying structural deficit that will not go away without policy changes by the government. Even with the economy operating at full steam, large deficits will remain and debt will continue to accumulate. This debt will feed itself as higher and higher interest payments force more borrowing.

To understand how we came to current situation let’s briefly review the history of federal outlays and revenues since the beginning of the last century.

1900 to 1950

During the first half of the 20th century, deficits occurred in response to three traumatic events, World Wars I and II and the Great Depression. During both wars spending surged as a necessity, while during the Depression outlays increased due to New Deal initiatives while revenues declined as a result of chronic unemployment. In between during the 1920’s there was a surplus every year which paid off some of the debt from the first war. Government spending (blue line) and receipts (red line) for this era are shown below in Figure 1.1.

Figure 1.1 Receipts and Outlays 1900 - 1950

1950 -1975

With the exception of a couple of years during the Korean War, from 1950 through the early 1960’s federal spending more or less remained in line with receipts. Then in 1965 U.S. involvement in the Vietnam War ramped up, increasing military spending. Persistent deficits were run until the end of the conflict in 1973 except for a brief interlude in 1969/70 when LBJ paid for the war with a temporary income tax surcharge. After this tax expired deficits returned and persisted for the next 28 years which is the very definition of a structural deficit.

In 1974, Congress shirked the responsibility of voting on annual Social Security benefit changes instead creating a formula to automatically calculate increases. This may have removed a headache from Congress but it put a large segment of the federal budget on autopilot, delinking it from the reality of revenue growth and deficits. Congress also passed the Congressional Budget Act of 1974 which is the genesis of a ruinous concept called baseline budgeting that we will discuss later in this chapter. Figure 1.2 illustrates the receipts and outlays during this period.

Figure 1.2 Receipts and Outlays 1950 - 1974

1975 - 2012

In tune with the drug and free love culture of the 1960’s, Washington evidently became addicted to the concept of deficits and free money. After the War in Vietnam ended with the Paris Accords in 1973, there were no corresponding years with surpluses to pay down the debt. In fact from 1970 through 1997 there was not a single annual budget surplus. Even a blind squirrel finds a nut every once in a while, but 5 consecutive Presidents and 14 Congresses could not find a way to balance the budget even once. Finally there were the 4 consecutive years of surpluses as the 20th century ended and the 21st began; but this brief respite