Economics is sometimes called “The Dismal Science”, and for good reason. One
president, Harry S Truman, kept getting evasive and contradictory advice from an
economist who kept offering alternatives with his advice. After almost every assertion the professor would then say, “On the other hand . . .”. The President then exclaimed, “This isn’t working. Will somebody please get me a one-armed economist?”, or words to that effect.
I am the first to admit that I am no expert in such matters, but on the other hand (sorry, couldn’t resist) America is supposed to be a nation governed, at least indirectly, by its people. So, as I’m sure Thomas Paine would agree, common sense matters. Therefore I offer here some economic thoughts in a attempt to bring some common sense to the discourse.
I think that economic discussions of millions, or billions or trillions of dollars in the current age are difficult to comprehend. Instead I suggest looking at budget problems as a percentage of Gross Domestic Product. This quantifies expense categories as a share of the total value of the nation’s commerce. In other words, a percent of ALL the business of the nation. You could look at it as the percentage of your own labor is flowing to the government for distribution toward the various purposes.
Wars can be big ticket items, but their cost as a percent of GDP surprised me. I went
to this source, a Congressional Research Service paper. I did a chart of the numbers:
What I perceive from the chart above is that WWII was truly mammoth. It explains why my parents needed to grow a “victory garden” and why the government rationed gasoline, tires, and butter, why we had a willing draft. Only a politically cohesive and collectively fearful nation could throw more than a third of all its productive effort into the war. The chart shows, despite the scary cost figures being tossed around nowadays, that the current war efforts are NOT the budgetary problem they may seem. The cost of the current wars was running 6.2% of GDP in 2008, certainly not nothing, but small as wars go.
Now, consider this chart from Wikipedia’s page on the Public Debt:
The above chart shows the true economic cliff toward which we are heading, and the culprit is the interest on the big three entitlements, Social Security,
Medicare and Medicaid. Note that the interest, in RED, is projected to skyrocket.
This is because the cost of entitlements, mainly Medicare and Social Security, exceeds
the incoming revenue (dotted line). Now even I can understand what’s going on here. The nation is embarked on an all-you-can-eat entitlement buffet that we can not afford.
Now, why are even economic novices like myself getting scared? Note the white top of the bar for 2010 is actually above the dotted revenue line. This means that we are spending money we don’t have now. The warning in the dotted block referring to 2030 and 2040 is about MANDATORY spending exceeding all revenues. In other words, by 2030 entitlements would gobble up the entire revenue, leaving NOTHING for defense or anything else. That’s imaginary stuff because the crisis is NOW, not in 2030. We are beginning, in the words of the old farmer, to eat our seed corn.
I think it is obvious why Congress doesn’t deal with this problem. Any politician who
proposes cutting entitlements will be an instant pariah because the public does not understand the problem. The voting public wants its cake because we think we have paid for it, but we really haven’t. We haven’t had a meaningful budget for many decades, mainly I think because of mismanaging the Social Security trust fund which is nothing more than an accounting trick that uses IOU’s to defer obligations to future generations. Congress, in other words, took Social Security revenue, replaced it with IOU’s, and then spent it. And the public lapped it up – being grass-hoppers and not ants. Interestingly, for all their disorganization the Tea Party seems to represent a visceral awareness of the problem.
A CRS report, CRS Report, ‘Tax Expenditures and the Federal Budget’ , agrees. Here is part of the report’s conclusions:
“Tax expenditures account for a large proportion of the resources the federal government uses to achieve various national goals. By 2007, it was estimated that tax expenditures amounted to about $1 trillion and accounted for about a quarter of total expenditures. When combined with outlays for mandatory spending programs and net interest payments, almost three-quarters of total expenditures are for permanent programs that many claim are more or less on “autopilot.” [emphasis mine.] The proportion of total expenditures subject to annual review by the Appropriations Committees in the appropriations process has been declining over the past two decades. Given the long-term fiscal imbalances, part of the solution will likely involve tax reform and the limitation or outright elimination of some tax expenditures.” (Conclusions continue . . . )
Placed in historical perspective I see the period after World War II as one of tumult and adjustment to a new reality, one full of the bounty and efficiency of science and
technology, and a transition to a global economy. For many Americans it has been the achievement of the American Dream, albeit a dream never quite finished. Demand for the new prosperity has grown side by side with stark discrepancies between the first and third worlds (as well as classes), stoking tribal envy and the resentments of ethnic contrast and spiced with the existence of WMD’s.
But with the aging of the baby boomers, the American growth cycle appears to be at an end. Will the result be a maturing of culture or a rebellion? Can we conclude that happiness is found in deferred gratification, or will denial of excess only breed resentment and political rage? Is there wisdom in the voting public? Can wisdom survive in Congress? Stay tuned.
I hope this exercise helps put the problem in perspective. Doing it helped me. I think. Now, what do we do about it?
Your read is pretty much dead on as far as I know.
It’s worth noting that stimulus and bailouts in the overall context of the or our budget issues aren’t very significant.
I think it was Truman rather than Wilson though.
A little research (I love the internet!) shows that the cost of the wars is now running 6.2% of GDP. Ref: http://www.cfr.org/publication/15404/iraq_afghanistan_and_the_us_economy.html
The cost of the stimuli (Latin, anybody?), as FOX reports the CBO, is:
9.1% of GDP 2010 (projected)
9.9% of GDP 2009
Significant? Well, it’s 50 more than the wars. A billion here, a billion there . . . The Congress Creatures are spending it so fast I can’t keep up.
Oops. That’s 50 PERCENT more than the wars.
Well done on your research. One graph, the CRS study, does more to show the problem than a year of my blogging. It of course is gratifying to see one’s (mine) point confirmed regarding the looming “cliff” so I am biased in my praise for this blog.
Of course there is more “red’ in Duane’s previously posted graph regarding Bush tax cut affects. But the careful reader will look at the ordinate and abssia of the graphs to see the “truth”. Sexy graphics can make the story seem true to the casual reader regarless of who is aruing what point. I for one like the expotential curve in federal spending over the next decade without strong action taken. Duane argues merely to turn the curve (without saying how specifically). I want the damn thing to sink as it did post WWII.
Now stay tuned on Globe editorial pages. I have found a recent and unreported nationally speech by Secretary Gates moving to drastically cut defense spending. He is correct, in my view, in doing so but the consequences of such cuts are not articulated in any way by the current admininstration.
Are we as a country really prepared to “fall back” to a strict defense of our homeland? That will be a result of dramatically reducing the size of our current (50% of Cold war size) Navy, restructing or even eliminating the Marine Corps and putting little or no new “cutting edge” technology into future defense budgets.
All of that quietly being proposed, out of the limelight of press coverage, while not a word of when and how to “fix” entitlements. Americans are sick of the War on Terror so going to say 5 carrier battle groups is no big deal to many. But try means testing or cutting SS and Medicare and just listen.
Anyway, well done. Great blog.
Thanks – your comment means a lot to me. Corresponding with someone who indicates they have absorbed one’s message and honestly considered it makes blogging a pleasure, regardless of whether there’s agreement or not, so that applies to Duane too. However committed he is to his tribe’s ethos, by his replies he too indicates that he has absorbed the message and considered the reasoning.
I struggled for more than an hour yesterday with trying to post my chart of the cost of wars as a percentage of GDP and finally gave up. After reading your comment I was inspired to try again with a “screen shot” and, amazing, it worked. If you visit the post again you will now see it. I feel a small sense of triumph!
The CRS numbers are more valid than the other reference’s. This chart did a lot for me in putting Defense into perspective and made me like the %GDP method even more. Knowing how large the entitlement problem is actually makes me less concerned about the cost of the current War – I hope Gates doesn’t go off the deep end on that. Eliminate the USMC? Good Lord! But even if he does, Congress will sustain a lot of the defense spending anyway, as they always do – even for systems not needed. The eternal ebb and flow!
Thanks again for the positive reaction.
Gates is NOT calling for abolishing the Marine Corps. He is however challenging the money spent to make it remain an amphibious force capable of “invading” a strongly fortified coastal area. He may well be correct in at least evaluating such a decision.
I doubt that we will ever see an Inchon Landing again in warfare, much less the series of “island hopping” in the Pacific during WWII. We have the technology now (without nuclear weapons) to simply blow the island to hell and gone, thus removing it from any stratigic or tactical value.
That of course would be the cost effective way to fight against an island and would save many Marine Corps lives as well. But if you get too worried about the “natives” in such use of military power, then you better keep a “full up” amphibious capability, put the Marines ashore and let them fight “house to house” as we seem to do in Afghanistan today!!
Interesting. Yes, seems obvious that island-hopping won’t happen again.
Hmm. What about my idea for an elite force to seek out and eliminate terrorist leadership worldwide? Maybe they could morph into a smaller force and do that? They certainly have the esprit de corps for it.
I like Gates. He thinks outside the box and has done an amazing job of being non-partisan in a time of intense partisanship, IMO.
We share admiration for Gates. As basically a Republican he has gotten us out of Iraq and at least sustained the fight in Afghanistan for good fundamental reasons.
NOW he is really putting his neck on the line attacking the military industrial complex. It may be very dangerous geopolitically but is being driven out of economic necessity, in my view.
I wish him clear thinking, reasonable support, and of course “Fair Winds and Following Seas”. He is a good ship, standing into harm’s way.
As an afterthought, I disagree with “no more island hopping”. Each island in the Pacific was only a stepping stone to the ultimate source of danger to us. Such are Iraq and Afghanistan today, mere islands being used by the real enemy, Radical Islam, to impede our destruction of that threat.