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This article came from the website under the following URL.

hat URL may no longer work in the future and for that reason I wanted to preserve it here on my tax reform website.

Jubak's Journal1/24/2007 12:00 AM ET

State of the nation? Broke

When President Bush gave his State of the Union address Tuesday night, he called for a balanced budget. Too bad that nobody's using an honest definition of "balanced." What you can count on is that the deficit is disastrous and the debt is piling up.

By Jim Jubak

If you or I managed our money the way that U.S. government manages our money, we'd be headed for bankruptcy.

Imagine if someone you knew:

  • Took on a mountain of debt -- to buy a house, say -- at a floating interest rate and never bothered to ask if the future payments would be affordable. That's exactly what the U.S. government does.
  • Used his annual bonus to make the down payment on a Porsche Cayenne and never worried that his current spending had created a huge future obligation for years of high payouts. That's exactly what the U.S. government does.
  • Ran up big credit card debt because the money he was saving for his kids' college education easily balanced out that debt. That's exactly what the U.S. government does.
  • Just kept on spending not only every bit of the monthly paycheck but every dollar that credit card companies and banks would lend, despite knowing that he would have to pay for college and retirement one day. That's exactly what the U.S. government does.

And then, of course, just like most deadbeats, what does the government do after mismanaging our money? It lies about how bad the problem is and clings to the hope that money will fall from the trees to bail it out.

Truth and the budget numbers

I hope you remembered this when you listened to the Jan. 23 State of the Union address from President Bush and the rejoinder from the leading lights of the Democratic Party. I didn't hear an honest number out of anyone's mouth. And it's not as if the White House and members of Congress didn't know better.

David Walker, comptroller general, delivered a primer on how to tell the truth on the U.S. budget in testimony delivered to the Senate on Jan. 11.

But then again, since Walker believes we're headed for fiscal disaster if we keep on the current budgetary course, maybe our politicians just find the truth too painful.

The U.S. government produces two different budget measures, Walker begins, and each presents only a partial truth about our total financial picture.

First and most commonly reported -- this was the number that you heard bandied about most frequently by the president and commentators -- is the unified budget deficit. This is a cash-based number that measures the difference between revenues and outlays for the government as a whole. Although it gives investors a useful read on how much money the government will be looking to borrow in the financial markets right now, it severely understates the size of the deficit since it includes the current surplus in Social Security tax receipts over Social Security payouts. In the fiscal year that ended in October of 2006, the reported unified budget deficit was only $248 billion, instead of the $318 billion originally projected. It's this unified budget deficit number that will get most of the ink when the president talks about "cutting the deficit."

By the way, Iraq expenses are 'off budget'

If you want to correct for the $185 billion collected by Social Security as surplus cash flow in 2006 -- that is, the taxes came in today to pay for benefits promised in future years -- then you have to look at the on-budget deficit, which Walker calls the "operating deficit." The on-budget deficit came to $434 billion in 2006. The on-budget deficit shrank from 2005 to 2006, just as the unified budget deficit did, but the drop was much smaller: to $434 billion in fiscal 2006 from $494 in fiscal 2005.

Both of these still understate the size of the deficit. The Bush administration has been adamant about keeping certain costs out of the budget figures. Spending on the war in Iraq, for example, has been included not in budget resolutions but in special emergency spending bills. They are "off budget" in the language of Washington. That spending, estimated by the Congressional Budget Office at $360 billion overall and $95 billion in the fiscal year that ended in October 2006, aren't in either of these two budget figures. And Iraq funding for fiscal 2007 won't be included in the budget the president will introduce next month, either.

It's a hazy horizon

All budgets get hazier the further out you look, of course, because things are just less and less certain as you look into the future -- although official Washington budgets aren't allowed by law to look too far ahead, just five years, in fact. But only in Washington's budget process is that "haziness" invoked in a systematic way to make the books look better. What are the odds that the Bush tax cuts, set to expire in 2010 will be made permanent or at least extended beyond 2010? Pretty good, I'd say, given the desire of politicians to hold onto their jobs. That would cost about $1.5 trillion in lower revenues through 2016, the Congressional Budget Office estimates. Because making the cuts permanent isn't certain, that figure isn't included in any official estimate of the budget deficit.

Neither is the cost of fixing the Alternative Minimum Tax. The tax, intended to make sure that rich Americans didn't wind up paying no taxes just because they could afford to hire great accountants, has become a trap for more and more middle-class Americans because the level at which the tax takes effect was not indexed for inflation.

With inflation making more and more Americans subject to the tax, the idea of revising the brackets, or at least indexing them to inflation, has strong political support in Washington. But because those changes haven't been legislated, the official budget continues to show higher revenues from Alternative Minimum Tax bracket creep. The Congressional Budget Office estimates that indexing the brackets for inflation would lower federal tax revenue by $513 billion in the next 10 years.

The upcoming crisis is absolutely predictable

This ban on including costs that are probable but not legislatively certain and the prohibition on looking further than five years out -- even though politicians routinely push the costs of their most expensive programs "off budget" by delaying the worst for more than five years -- has led to a veritable industry of alternative budgeting in Washington. Many of these have been created by groups with agendas to push -- higher social spending, lower taxes, more tax cuts, fewer tax cuts for the "rich." But what's most interesting to me about them is that any that look out more than five years see an absolutely predictable budget deficit crisis looming somewhere between 2015 and 2040.

It's caused, surprise, surprise, by the aging of the baby boomers.

The first official baby boomer will become eligible for early retirement under Social Security on Jan. 1, 2008, and for Medicare benefits in 2011. Social Security surpluses -- the surplus of tax receipts versus benefit payouts -- will begin its decline in 2009 and by 2017, unless benefits are cut or taxes increased, Social Security cash flow will have moved into deficit and begun to add to the unified budget deficit rather than diminishing it, as at present.

Don't forget Medicare and Medicaid

But the budgetary problems caused by the growth in Social Security outlays are dwarfed by the increase in spending on Medicare and Medicaid. By itself, the extra demands of Social Security are manageable: According to the Congressional Budget Office, spending for Social Security will reach 4.7% of U.S. gross domestic product (GDP), up from 4.2% in fiscal 2007. But pile the growth in Medicare and Medicaid spending on that relatively modest increase and you've got a backbreaker for the federal budget. According to the Congressional Budget Office, combined Medicare and Medicaid spending will add up to 6.3% of GDP in 2016, up from 4.6% in 2007. By 2030, federal spending for these three entitlement programs will add up to 15.5% of GDP, up from 8.8% in 2007.

This same demographic trend makes growing our way out of this problem very unlikely. Economies of countries with aging populations grow more slowly. It's likely that the real (i.e. after subtracting inflation) rate of economic growth will drop to 2.6% for 2012 through 2016 from a projected 3.1% in 2008, according to the Congressional Budget Office.

The government is digging a huge hole

The result isn't the kind of crisis that the talking heads on TV "discuss" at the top of their lungs. The issue isn't whether the U.S. unified budget deficit is about 3.6% of current economic output -- or 6% of GDP, according to the on-budget deficit -- and therefore worrisome in the present.

The problem is that the United States has dug itself a huge future hole, one big enough to swallow the entire U.S. government budget by 2030 or so, by piling on future obligations for retirement and health care while hiding from the true costs. By 2030, if you assume that discretionary spending (on things like student loans and aircraft carriers) grows at the same rate as the economy and the Bush tax cuts are made permanent, Walker testified, government spending on interest on the national debt, Social Security, Medicare and Medicaid would eat up all -- yes, 100% -- government revenue.

With the passage of the Medicare drug benefit, Congress and the president violated the first rule of holes: When you're in one, stop digging. The present value of all the major reported liabilities, according to the U.S. Government Accountability Office, now comes to $50 trillion. That's about four times the size of the U.S. economy in 2006 and amounts to $440,000 per U.S. household. That's up a mind-boggling $30 trillion from fiscal 2000. In that year, the government's liabilities were just $20 trillion or two times the size of the economy. In absolute and relative terms, the financial picture has gotten much, much worse very, very quickly.

More of the same lies

Think about that when you hear the president promising his budget cuts or the Democrats promising a return to pay as you go. You can't trust their numbers to begin with; they're just more of the lies that got us into this bind. If moves like these are the initial steps in a move toward financial sanity, three cheers, but if they're just bones thrown to those of us who pay the bills now and the children who will pay even bigger bills in the future, then a pox on them all.

Walker finished his testimony by noting that if we do nothing until 2040, balancing the budget in that year would require cutting total federal spending by 60% or raising federal taxes to two times today's level.

Or I suppose the government could just run the printing presses. Printing new currency is one thing Washington is good at.

Comment: Or the government could simply adopt my tax propoal with which all taxes at all levels of government would be eliminated plus all government debts at all levels of government would be paid off, period. End of story.