Wednesday, February 27, 2013

Dumb and Dumber

Sequestration is a dumb idea—plain and simple.   It is a dumb idea if you are a Democrat. It is a dumb idea if you are a Republican.  It is a dumb idea if you are an independent.  Even dumber is that fact that Congress and the President inflicted this dumb (and totally unnecessary) crisis on us and are wasting time now by  blaming each other for who came up with the dumb idea in the first place—rather than solving it.

(For the record, sequestration—across the board budget cuts that will go into effect on March 1--is the handiwork of both parties.  The President proposed it to break the impasse on re-authorizing the debt ceiling in the summer of 2011, a fiscal crisis  brought on by House Republicans who refused to pass a routine bill to increase the ceiling without an agreement to cut spending.  To overcome this impasse, majorities of Republicans and Democrats in the House and Senate then voted for the Budget Control Act of 2011, which included sequestration as a back-up plan to reduce the deficit that was intended to go  into effect only if a congressional “Super-committee” couldn’t come up with an agreement on a better way to achieve savings.  The “Super-committee”—made up evenly of Republicans and Democrats, House and Senate—deadlocked and couldn’t produce a plan, and as a result, the Act required that sequestration be instituted on January 1 of this year. On January 1, 2013, both the House and Senate reached a last-minute bipartisan agreement, signed into law by President Obama, to postpone sequestration until March 1.  And here it is now, with fewer than 48 hours left, and there has been no serious effort by either party, by the House and Senate, or by the White House, to come up with a bipartisan plan to stop sequestration.)

How dumb is sequestration?  Well, let’s say you were the mayor of a mid-size city, your budget is deeply in the hole, creditors are at the door, and you realized you have no choice but to reduce your debt.  Would you:

1.     Cut all of your expenses by the same percentage amount—the money set aside to stop an unsafe bridge from collapsing;  the money allocated to pay the salaries of teachers, police and firefighters; the taxpayer money you asked for to buy nicer furniture for your own office; the money for that all-expense-paid trip to Palm Springs (golf included) that you and the city council want to take to “network” with other mayors (including attending that cool symposium on how to control your city’s spending), and the budget for medical care and shelter for the homeless?

2.    Prioritize your spending, cutting some categories by more, some by less, and some not at all—protecting the money set aside to stop an unsafe bridge from collapsing, the money allocated to pay the salaries of teachers, police and firefighters and the budget for medical care and shelter for the homeless, over new furniture for your office and the trip to Palm Springs?

3.    If prioritizing your spending isn’t enough to close the gap, ask your wealthiest residents to pay a little bit more to help preserve funding for the most essential and effective programs that benefit everyone, but especially, the least well-off in your city?

Most of us, I think, would agree that #2 and #3 are pretty smart, and #1 is just plain dumb.  Yet #1 is exactly what sequestration is all about--it cuts federal programs by the same amount, no matter how  good or bad, how essential or non-essential, how effective or ineffective, how important or  unimportant, how many are helped by the program cut. 

And although there are some in and outside of Washington who argue that sequestration will do no harm,  the sequestration cuts to healthcare will have a real impact on access, quality and public health and safety, maybe not all at once, but before too long, and the longer they are allowed to remain in effect, the greater the damage.  ACP’s State of the Nation’s Health Care report, released last week, documented the impact, including:

1.    Medical research to prevent and cure diseases will be curtailed.  The cuts would result in 2,100-2,300 fewer NIH research grants, and  Research Proposal Grant (RPG) success rates would drop from 18 percent in FY2011 to 14 percent in FY2013.

2.    Funding for programs to train more physicians, especially primary care physicians in under-served areas, will be slashed: 295 fewer scholarships for minority and disadvantaged health profession students,  a loss of funding midway through their training for 14 primary care residents; 2,315 primary care physician and physician assistant trainees adversely affected by reduced funding for the Title VII Primary Care Training and Enhancement Program, and 14,760 fewer public health professionals trained through the Title VII Public Health Training Center Program.

3.    Patient access will suffer and jobs will be lost as Medicare payments to hospitals, physicians, and physician residency programs are cut. Altogether, Medicare will be cut by $11 billion in 2013 under sequestration resulting in a loss of nearly 500,000 U.S. jobs. But the biggest impact will be on seniors and disabled persons who rely be on Medicare coverage to enable them to access quality health care. Although guaranteed benefits will not be directly reduced by sequestration, cuts in payments to physicians and hospitals will force many of them to lay-off staff, curtail services, and limit how many Medicare patients they can see. Physicians and other clinicians may have to lay off as many as 62,000 employees if sequestration goes into effect. In the case of physicians, the sequestration cut is a prelude to a much larger scheduled cut on January 1, 2014 as the result of Medicare’s flawed Sustainable Growth Rate formula.

4.    The federal government’s ability to prevent and control diseases and to ensure the safety of food and drugs will be compromised. Funding for the Food and Drug Administration will be slashed by $191 million and for-the Centers for Diseases Control and Prevention by $444 million over 10 years starting in 2013.

How dumb it that—to train fewer primary care physicians when we know that the country is facing a massive shortage, to lose our edge in  medical research, to make it harder for Medicare patients to find doctors, to make our food and drugs less safe, to make it harder to detect and prevent the next flu outbreak or pandemic? When there are far better ways to reduce unnecessary health care spending?

But before we just blame the politicians for their cognitive impairment when it comes to the federal budget, we should look in the mirror.  Polls show that a majority of Americans want the focus of deficit reduction to be mostly on spending reductions rather than tax increases, but this general support for spending cuts doesn’t translate into support for cutting any specific category of spending.  Rather, a recent poll shows that the public rejects spending cuts for 18 out of 19 categories of spending; the “only exception is assistance for needy people around the world. Nonetheless, as many say that funding for aid to the needy overseas should either be increased (21%), or kept the same (28%), as decreased (48%).”  (Only 22% favored cuts in health care spending, and only 15% supported cuts in Medicare). 

So we Americans want to cut the deficit, we want deficit reduction to focus mainly on spending cuts rather than higher taxes, but we reject cutting anything other than the miniscule amount of federal money spent on foreign aid?  That is, no cuts in any program that benefits us directly.  Now, how dumb is that?

Today’s questions: What is your take on the budget sequestration mess? How should the country get out of it?


PCP said...

That is precisely why the American people elected the guy that made the biggest promises. The guy who basically said spending should continue, expanded entitlements, saying it wouldn't add a dime to the deficit, ignored the very real debt issue(while his central banker enables him by printing money and keeping borrowing rates suppressed) and told the folks the real problem was that the wealthy were not paying their "fair share". Now that he got legislation passed to get them to pay their "fair share".
He's focusing on the next strawman which is deductions for the wealthiest. What he is omitting to telling them is that the real deductions that matter in terms of raw numbers are the deductions that mostly the middle class cherishes, like mortgage, property tax and charitable deductions, tax break on health insurance etc.
Just like he pulled in 60 billion a year on increased taxes and claimed to have addressed the 1200 billion annual deficit. So too will these 85 billion address the spending side of the ledger. Heck the federal reserve prints that in one short month.

As you rightly pointed out the President proposed the sequester. He got his "fair share" last month. He needs to step up and fight the left wing of his party. If he were a statesman he would have done that. Instead after being elected for his second term, which usually frees politicians up from out of political shackles, he has taken clear pivot to the left as evidenced by both his inauguration as well as SOTU address. He claims that 'the price' of compromise just went up.

I hate to say it but, folks, get ready for 4 more years. Of Gridlock. Ain't nothing gonna change. As I said to friends of mine, my slim worry is we get a currency crisis in Obama's second term. I pray not but fear it.

For those like Harrison that look to low T bill rates as evidence that lenders are not sharing that same view and we ought to take advantage of the situation and spend more. I answer with one simple FACT. The federal reserve is buying in the vicinity of 85% of federally issued debt and mortgage securities today. On what basis can you say that it is the market rate? How would we know?
We like hundreds of third world countries before us are monetizing out debt. To be sure we will be given more time by all concerned due to our standing in the world, military might, past glory etc. however do we really want to test the limits of that? Dare we even look over that precipice of calamitous and irreparable ruin?

Folks, we are on borrowed time with this president's policies and agenda. Notice I am not arguing whether it is right or wrong, i am saying it is unsustainable and therefore reckless. The people are being misinformed about the gravity of the situation.
The time for cuts is real, and by that I mean, cuts to medicare, cuts to medicaid, cuts to social security and defense. Taxes on everyone also probably do need to fo up.
There is ample waste in the system to cut sensibly, there is plenty of 'wants' rather than 'needs' in our system and the people are behaving like entitled bullys and the politicians are behaving like selfish cowards, and I am not sure who is leading who into this economic crisis hole we are entering.

I hope for the best but I fear the worst.

Ashok V. Daftary, MD, FACP. said...

The medical profession suffers from a strange dichotomy. We vote like Republicans and spend like liberal Democrats. Let us be honest health care spending increases are bankrupting the nation. Medicare is a driver of the rush to illiquidity.
Can any reader or the author of this blog deny that waste and fraud are rife in our health care institutions?
Despite the sequester the federal budget will be larger than it was last year.
The sequester will reduce federal spending by 2.3%.
In difficult economic times every reader of this bog has made such spending reductions it is time this nation did the same.
Is it not time the ACP and its directors and officers espoused clinical conservatism over medical squandering that is euphemistically packaged as good patient care?

Steve Lucas said...

First let’s all just step back and take a deep breath. The world will not come to an end based on these budget cuts.

Secondly, let’s realize that any decrease in government services are being done to maximize political impact. Politicians are politicians and they are no different than the local school board that will cut football and bus service to get a staff pay increase.

Now on to the “balanced approach” and “fair share” issue. The numbers show that the top 10% of tax payers pay the bulk of our taxes. People like to pick on hedge fund managers and others as not paying enough in taxes; the truth is these folks number in the hundreds. Taking all their money will not solve our budget issue.

Living in a time of higher tax rate I learned that: taxes impact decision making and taxes also have a negative economic impact as they do not allocate resources to their highest and best use. The truly rich will simply change the way the live their life investing in real estate and growth stocks increasing their net worth while not producing taxable income. California and Maryland are examples of states that have lost income due to tax policy.

Our current situation is dumb. Politicians of all stripes have known about the budget issues for a very long time. Unrealistic promises have been made, and people are very willing to believe they can have their cake and eat it too, as long as they get what they want. People will always act in their own self interest.

Slowing the growth of government is a priority and this is only a small step. Going back to points one and two we need to make real changes in government spending if we expect to provide an opportunity for our children to succeed.

People are leaving the US for tax reasons. A friend’s son recently graduated with a PhD and immediately got a job in the EU. I told him he should apply for citizenship, so as not to limit future opportunities, as his current tax status will make that easier than in the future.

We live in a global economy and our position can be challenged if we do not take the necessary steps to control spending and return to our historical level of 18% of GDP. The numbers are there, being dumb is ignoring the numbers.

Steve Lucas

Harrison said...

I do not see austerity as an ideal. It has not worked where it has been tried. The 'sequester' is a dumb attempt to impose austerity. The White House proposed it because the Republican majority in the House seemed very willing to allow the US to default on debt, and that truly would have been a disaster. So the White House offered an across the board budget reduction which included the military, and so the hope was that this would set up a better negotiating position and allow for negotiations over something that wasn't quite as dire as a default.

But lets take a step back.
The left is often accused of being too arrogant to listen to what the right has to say.
I personally think that the opposite is true.
The right refuses to accept the notion that government spending is as important to our economy as private sector spending.
The left actually concedes readily the notion that private sector spending is important.
There exists nobody of substance making the argument that the state should take over major sectors of our economy.
Even health care is private and it is only a small voice on the left arguing for a single payer system.
(Honestly it is the right's refusal to recognize that that will force us towards policies that will bankrupt us and lead us inexorably to a single payer system by default).

Again, a step back. Where did our huge debt come from? Four things. 1. Iraq 2. Afghanistan 3. Tax cuts put in place by Pres Bush and perpetuated by Pres Obama 4. A fiscal crisis brought on by conservative policies that allowed for deregulation of our banking sector and our mortgage loans to be extended and then hidden in bundles as investment vehicles.

What has kept us from emerging from this and growing our way back out of debt? Has it been a hindrance of private sector growth? No. The private sector has pretty much done what is has done in every recession historically. It has slowly bounced back in a predictable way. It is the healthy part of our economy. The part that has not bounced back is public sector spending. Our job losses have been public sector job losses. State and local governments have cut back because they have to, and the federal government has mostly been cutting ever since Pres Obama took office. The Republicans have very successfully not allowed him to stimulate the economy.
The federal government should be borrowing freely right now while money is cheap so that we can grow our economy out of the last recession and this economic slump. Instead we have a vocal sector of the country with very little historical perspective on how we grow ourselves out of economic slumps arguing that government needs to be even smaller.

Yes we have serious priority problems in government spending. It is absurd that we spend $7 for seniors to every $1 for children. Fortunately, through no effort of our own, I think we have smart children.

But US treasuries are a sought after investment.
Our federal government should be borrowing right now to stimulate the economy.
Austerity has a very poor track record.
It certainly has hurt England.
It is very possibly going to kill the European Union.
We should learn from history and contemporary examples.


PCP said...

Harrison repeating something time and again does not make it true.
Your repeated assertion that "US treasuries are a sought after investment" is absurd.
When the vast majority of these securities are being purchased by our Central Banker at clearly overinflated prices and with the federal reserve's balanace sheet leveraged currently at 55:1 (which makes Lehmans 40:1 at the time of its collapse look conservative), with no hope of stopping purchases far less unwinding in sight, what basis have you for such a ridiculous assertion?

If the Fed were it to attempt to return the treasury market to any semblance of a free market tomorrow, by simply withholding purchases( and still not unwinding near 3 trillion of current holdings), it would immediately result in T- bill rates spiking by easily a hundred basis points or more, short circuiting the economy, killing any nascent albeit low(er) mortgage rate driven housing recovery, causing the Fed to run a shortfall whcpich taxpayers would have to bail out. That would be due to downwardly adjusting treasury prices requiring federal capital outlays. All of that would basically collapse the economy.
If that is your definition of a real and robust economy, then so be it.
Pulling back from this precarious situation is only possible with careful planning and an approach that is rational and which involves fiscal discipline while encouraging growth in the private sector economy. Numbers tend to be inconvenient to liberals. They are concrete and relentlessly exert a fiscal pressure. The extremists in that realm, like Hugo Chavez
ultimately resort to things like currency destruction and property confiscation when the system inevitably fails.
We have historically been more sensible than to go down that road. Based on the policy from the Obama/ Bernanke duo, I am not sure how confident we ought to be at this juncture.
Obviously the commodity markets (as yet unmanipulated) agree to some extent given the price of a sterile and non productive asset nowadays, gold.


Harrison said...

I don't know where you get the 55 to 1 number any more than I know where Steve Lucas gets the 18% of GDP number.

I am guessing that instead of measuring our debt against GDP which is the usually accepted way to measure the debt of a state entity you are somehow guessing at hard assets owned by the US and using that in the denominator.

That is a reasonable thing to do for a company like Lehman's. Their assets are easily measured and so a debt to assets ration is something any investor should look at very closely. You don't want to invest in a company that is too heavily leveraged.

But that is not the same for a government entity. We are not a company. Lehman pretended to be too big to fail. The U.S. government truly is too big to fail. And it truly can borrow against it's future because it certainly has one as assuredly as the earth has a future. So the better measurement of debt is against GDP.

That then brings us back to the 18% of GDP suggestion from Steve. I don't know where that comes from either.
Up until about 1900 the US borrowed money year in and year out at a rate of about 7%. It started to grow after that and was around 20% through the 20's. It shot up quite a bit during the Depression into the 30% range.
It shot up a lot more during WWII.
And then it settled back down to about 25% to 30% in the 50's and 60's. It grew from there towards the 33% to 35% range up until about 2008.
With the stimulus package and the recession it grew to about 40% of GDP. It has fallen slightly every year of the Obama presidency.

I suppose if you look over 200 years and throw together all of the years where it was 7% with all of the years it was over 30%, then you might come up with an 18% average, but it isn't very meaningful to do that.

We have had recessions and times of economic growth regardless of our level of borrowing.

I don't disagree that borrowing is a problem.
It most certainly is.
What I'm suggesting is that the way out of it when we are flirting with a return to recession is not austerity.
We need to use the public sector to help grow the economy.
We need to invest, and then the economy will respond and help to grow us out of our debt.

The focus of the debt as our priority is misplaced.
We are not Lehman.
We are not Greece.

We are the world's economic engine.
We are truly too big to fail.
And we won't.


ryanjo said...

Austerity did not hurt the UK. Wasteful programs, subsidizing the influx of Commonwealth immigrants, the NHS giveaways like Pay for Performance programs, heavily subsidized farming, food prices, transportation did. Austerity is what you get when you can't find any more money to waste. The EU won't be killed by austerity either. The rich Germans will be bailing out the poor Greeks, Italians and Spanish, who have social entitlements that would make Mr. Obama feel at home.

Our present course is not sustainable. We can argue how it came to be, but for Obama not to reduce spending is adding to past failures.

Steve Lucas said...


I could not help but be transported back to the 1960’s and the liberal straw man arguments of not accepting any point while weaving some theory based on a concept taken out of context. Wasting time and trying to frustrate your opponent is an old liberal trick, as is trying to win by default.

18- 20% is the historical non war time rate of government spending to GDP. Warren Buffet recently listed returning to18% as a goal to assure our long term financial health. The OMB recently did a financial model based on current spending and the program crashed when around 2050 debt reached 250% of GDP. Debt has grown every year under the Obama Administration.

Government is not a job creator since all government income is taken from other profitable enterprises, thus removing money from its highest and best economic use, investing in those businesses. Only on those rare occasions when a discovery in a government lab is translated into a saleable good or service is there true economic gain.

“We are the world’s economic engine
We are truly too big too fail
And we won’t”

Is simply a fantasy driven by a group with a political agenda. The Washington Post outlined the Obama Administration’s goal of returning the House to Democratic control so as to ram through an environmental and social agenda that will only add to the cost of doing business in America. We live in a global economy with China and India now offering maturing markets and an expanding consumer class along with fewer environmental and labor regulations.

The Fed has indicated it wants to double rates from the current 2% moving to 4% in the next few years. Growing debt along with the proposed higher rates will lead to a slow growth economy at best.

Harrison, you want to believe, but as I learned a long time ago: “Facts are the enemy of truth.”

Steve Lucas

PCP said...

Harrison, it is absolutely accurate that the Fed is leveraged 55:1 and growing.
The Fed's balance sheet is in excess of $3 trillion And growing by $85 billion per month under the QE eternity program.
The feds capital base is $51 billion.
Were the Fed to attempt to unwind their balance sheet their entire capital base would be wiped out within a month or two by the change in treasury prices merely by their announcement of policy change. Every bond trader knows that.
The only reason that this continues unlike with Lehman is because everyone also knows that the US government stands behind the Fed. to back stop it. We also stand behind Fannie,Freddie,FDIC,Medicare,Social Security, States and municipalities, and a host of other implicit guarantees.

Let's talk about the debt to GDP ratio for a second, since you raised that as a better measure of our financial health.
This country's GDP is around $16 trillion. Our Federal Gov't debt has just crossed $16.65 trillion making our debt to GDP around 104% and that excludes the entities mentioned above that we implicitly guarantee.
To have a fair understanding, let's put this into recent historical context since the last 12 years have been an absolute disaster.

When GW Bush assumed office in 2001 the ratio was a little under 40%. When BH Obama assumed office in January 2009 it was around 64%. With trillion dollar deficits as far as the eye can see, the ratio is climbing by 5-6% a year as our stagnant economy(GDP)hardly chalks up a 1-2% growth rate and our debt climbs 6-7% a year.

Regarding your assertion that we can borrow limitlessly against our future because we most assuredly have one
as certainly as the earth has one is quite simply ludicrous. The fact is that the world did fine long before the New World existed in any economically meaningful way and should we fade into the irrelevance the world will exist just fine after the doubtless economic shock. It is sheer arrogance to think otherwise. An engine of global growth we may be, but the only engine. Not really.

I think Steve's point about Gov't spending as a percentage of GDP is very relevant. As is the percentage revenue (taxes) collected. Warren Buffett recently quite correctly noted that a historical average of government revenue has been 18% of GDP, and historical spending has been 21% of GDP and those two numbers side by side were reasonable( in other words we would get away with cheating by a 3% of GDP or so as long as our economy keeps growing).
Recently our tax revenues have been more like 16-17% of GDP, and our spending has been more like 25-26%, the result being trillion dollar deficits. Tax collections will invariably go up as the economy improves and furthermore since rates too have been increased for the wealthy, in fact already they are trending there, however the other side of the equation ie spending coming down, does not even remotely appear to be on the cards as long as BH Obama is in the whitehouse. I think that he believes this economic crisis was an excuse to permanently increase the size of government. I think to his mind, this is not a circumstantial necessity but rather it is all more ideological, and all about social justice. As his former white house chief of staff said....."never let a crisis go to waste".
As I told you in my previous post, the problem is Liberals inconveniently run into numbers, which have no emotions and tend to be stern enforcers. When you say we are not Greece, we actually are too big to fail, I think you miss one very large point, Only as long as we maintain our house in order do we have any leadership standing in the world with which comes other soft power which we leverage tremendously to our economic benefit.
If we continue to ignore our debt and spending, If we continue to print money and monetize our own debt, the fall will be quite rapid and precipitous.
It will take the form of a dollar crisis and hyperinflation and impoverish the masses. Surely that is not an outcome that any of us want.

Harrison said...

I'm not trying to be difficult.
But I think you are wrong.

18% is often cited as the average rate if tax revenue over the last 50 years or so.
An exception is the last several years of the Clinton Admin when it was 19.8%, and we were doing very well as an economy.

Government spending has been much higher than that for a very long time.
And for a very long time it was much lower than that.
Up til the depression it was almost never more than 8%of gdp.
During the depression it was increased.
During WWII it exceeded 50% of gdp for several years in a row.
Then it fell again but stayed around 20% to 30%.
But for the last 20 years or so it has been up around 30 to 33% of GDP.

That is not the same as tax revenues.

It is also not the same as our cumulative debt which has gone up almost every year since 1776.
There was only one year when it went to zero, and that was in the 1800's and it was a disastrous year for our economy.

It is also true that government spending has fallen every year that Obama has been President, since he did the stimulus package.
It is true that we are borrowing at historic highs, and that our debt continues to rise.
But the Obama administration has overseen a reduction in government spending as a function of GDP every year.
That of course makes sense.
Our economy has grown and Congress has refused to allow any increases. Logically the annual debt has to fall as a percent of the overall economy given those underpinnings.

It is not true that public sector spending cannot grow the economy.
FDR did almost nothing else when he took over from the hopeless course of austerity that President Hoover had imposed. No, he was not able to do enough but we had economic growth with this up until about 1937 when Congress convinced him to also try to balance the budget.
Then we slumped again until the boon of public sector spending required in 1940.

I know that the details of history make for a much more complex story.
But this is not exactly a wrong way to look at it.

I do not think we can get to an 18% of GDP spending level any time soon, and I do not think it is true that we were ever there.
If we were, then we would have tax revenues matching spending and we would have years with zero added debt.
We all know that didn't happen.

If I am not understanding what you mean by 18% I am sorry, and I will need you to explain it more clearly.


BDoherty said...
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BDoherty said...
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BDoherty said...

Fact check time, folks (this time with the references):

1. The budget deficit, although reaching an all-time right after the greatest economic downturn since the recession, has for the past three years declined at a faster rate than anytime since WW II. See:

2. The CBO just updated its deficit projections, and now projects that the deficit as a percent of GDP will fall to the lowest level since 2008. It also projects that the sequester spending cuts will slow growth in the economy:

3. One of the reasons that the deficit is coming down is that health care costs, over the past three years, have gone up at the slowest pace in 50 years:

4. President Obama has stated that he is willing to produce a "Grand Bargain" that would achieve the same level of spending reductions in Medicare as called for by the original Simpson Bowles commission report, and is reaching out to Republican Senators who are open to such an approach. The sticking point, of course, is that he argues that the bargain must include tax reforms leading to revenue increases, as also recommended by Simpson Bowles, and the GOP leadership to date has said that revenue increases are off the table. For sure, those of you who distrust Obama can doubt whether he really can or will deliver on entitlement cuts, and can differ with him on the issue of revenue. But factually, it isn't correct to say that he is unwilling to cut entitlement spending. See:

(to be continued)

BDoherty said...
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BDoherty said...

act check, continued:

5. While it is true that spending as a percentage of GDP under Obama has been historically high, revenue as a percent of GDP has been historically low. And a good part of the spending attributed to Obama actually was the legacy of the previous administration. During the 2012 campaign, the highly respected and independent analyzed the claims about spending under Obama, and you can read their report here:

Of note, they found that spending as a percentage of GDP has been at historically high levels, but revenue as a percentage of GDP has been historically low levels: “At issue, however, will be both spending and revenues. So we’ll end by reminding readers that while spending as a percentage of GDP is running at the highest level since the 1940s, tax revenues are also low by historical standards. For fiscal 2009 and 2010, receipts were just 15.1 percent of GDP, and last year they inched up to 15.4 percent. They haven’t been that low since 1950. And prior to 2009, the average since the end of World War II was 17.8 percent.”

Since then, the fiscal cliff legislation (revenue) and sequestration (spending cuts) will change this direction somewhat, but factually, we are spending more as a percentage of GDP, in collecting less in revenue as a percentage of GDP, than historical norms.

6. The CBO testified to Congress last week that the ACA (Obamacare) will extend coverage to 27 million persons in a "fiscally responsible" way that will lower the deficit:

(Yet I don’t see most fiscal cliff conservatives applauding ObamaCare for extending coverage in a “fiscally responsible” way).

Now, none of the above facts suggest that the U.S. doesn't have a deficit and debt problem that has to be addressed--we do, and we must. They do suggest though that the trend for the past three years is heading in the right direction. Yet it also remains true that historically low rates of revenue, and historically high rates of spending, as percentages of GDP, are both key contributors to the debt. And the facts suggest that lower health care spending increases, and the ACA itself, are positive contributors to lowering the deficit.

I know that readers of this blog will look at these (and other statistics) from their own philosophical and partisan perspectives, which is fine and appropriate. And some of you will lean more to the "sky is falling" view of the deficit, others to the "what, me worry" view. I fall in between. I believe that progress is being made, and I certainly believe that the ACA is good thing, both fiscally but also in terms of extending coverage. But I also believe that the longer-term deficit (and accumulated public debt) have to be tackled, including changes in Medicare and Medicaid and other entitlement programs. Most importantly, I believe that ACP and the medical profession must continue to keep its eye on the ball on slowing health care cost increases, which are the most significant contributors to spending and the debt.

Steve Lucas said...

Debt is a problem:

US debt headed toward 200 percent of GDP even after 'fiscal cliff' deal
By Vicki Needham - 01/29/13 12:15 PM ET

Read more:

This is of historical interest and addresses some of our problems today:

One issue clouding our discussion is the use of baseline spending, as we can see from this piece this is a fiction on the part of both parties:

The current administration has accelerated raising the baseline spending of government distorting any reductions.

This link highlights the relationship of government spending to GDP:

Bob makes a couple of good points:

Part of our problem is due to the extended economic downturn, one that was mirrored in the 1930’s where stimulus was applied by the government.

While medical spending has declined it still represents a major cost item that will need to be dealt with now to prevent future problems..

Steve Lucas

Harrison said...


I mostly agree with your post and I think that you state the numbers that I have been clumsily trying to write in a better way.

Of course I'm being arrogant to assert that we have a future as assuredly as the earth.

But it is not an exaggeration to assert that we are not as much at risk of instability related to our debt structure as Greece or Lehman.

We simply are not.
India and China have rising economies but they still pale in comparison to ours.
All other major economies depend on ours.

So your 55 to 1 number really comes close to being irrelevant because it has tremendous meaning to investors that our debts are backed by the full faith and credit of the United States -- which is probably worth even more than our GDP, by a lot.

I would not and hope that I did not assert that we can borrow without regard for any negative consequences.
Of course it is not okay that our debt has risen to more than 100% of our GDP.
And I would not argue that it has.
But it gets hard to be sure that everyone is comparing apples to apples.

Our over all debt has been around since the beginning of our country.
That is not the same as tax revenues as a percentage of GDP and it is not the same as government spending as a percentage of GDP.

It is easy to stir up alarm and confuse people into thinking that we urgently have to balance the budget --- and it would be a mistake to do so when our economy is already sputtering and needs infusions of cash and not a government pull back.

When our country needed cash in 1930 and 31 and 32, President Hoover claimed that there was nothing he could do.
And he resented that he lost the election because he was sure he was the best trained man in America to deal with this and clearly FDR was not at all -- he had no experience whatsoever.

But FDR understood that the country needed cash.
And that approach worked.

We need that now also.
Yes it needs to be measured.
And yes it needs to be aimed at parts of our economy that will take us into the future with job creation and economic growth.

But we need our government to work for us and not just simply focus on being as small as possible.