The Emperor Has No Clothes

[Note: This is a recent Martenson Insider post that I am making public. A couple of members thought this topic deserved wider attention and conversation, and I agreed.  Thanks go to MikeP for the title change idea.] 

The NYT had an editorial this past weekend (Feb 6, 2010) that trotted out some dangerous mistruths about the deficit and framed the issue as a left vs. right political game.

I hardly know where to start, but I will note that we've had massive accumulations of new debts under every single administration since the early 1980s, and that it hasn't seemed to matter which party has controlled which branches of government.  One could be forgiven for suspecting that, when it comes to deficit spending, there aren't two parties, but only one.

The real truth is that we have a culture of reckless spending in DC that transcends either or both parties, and I always lose a bit of trust in those who attempt to paint it otherwise.  This is simply not a partisan issue.

The second objection I have to this editorial rests with its attempt to step past our deficit by painting it as self-evidently necessary (emphasis mine):

The Truth About the Deficit

When the White House released its new budget last week, including more spending to create desperately needed jobs, Republican leaders in Congress denounced President Obama for driving up the deficit and demanded that the Democrats halt their “reckless” ways.

The deficit numbers — a projected $1.3 trillion in fiscal 2011 alone — are breathtaking. What is even more breathtaking is the Republicans’ cynical refusal to acknowledge that the country would never have gotten into so deep a hole if President George W. Bush and the Republican-led Congress had not spent years slashing taxes — mainly on the wealthy — and spending with far too little restraint. Unfortunately, the problem does not stop there.

Americans should be anxious, for reasons including the huge deficit. But the cold economic truth is this: At a time of high unemployment and fragile growth, the last thing the government should do is to slash spending. That will only drive the economy into deeper trouble.

I disagree.  I happen to think that that an economic crisis is an excellent time to take a good hard look at spending habits, and, if they aren't serving you, to slash them mercilessly.

The cold economic truth is that spending wildly beyond your means doesn't make sense in any economic environment.  All it does is trade temporary relief today for deeper economic pain later on.

But there's another assumption baked into this editorial that is desperately off the mark.  It is the idea that government spending is helping to lower unemployment and stabilize fragile growth, which implicitly assumes that the spending is both necessary and appropriately directed.

What if neither were actually true?

For the record, I would have an entirely different view of government spending if it were spent on different things.  For example, I am really taken by the new high speed trains (and stations) that China has received for its government expenditures:

(Source) 

Now that's a good use of public monies!  Awesome.  I would love to see such modern investments being made in my own country.

Instead, as we gaze across the federal budget pie, it's pretty obvious that our major expenditures have relatively little to do with long-term investments or capital improvements:

(Source)

More than half of our money is being spent on mandatory entitlement distributions, which simply means money going towards providing basic living expenses and health care.  Both are important to the recipients, but these expenditures are centered on current consumption, not long-term prosperity.

Now take a look at the remaining parts of the pie, specifically defense spending.  As enormous as that $744 billion wedge is, it understates the true extent of our security expenditures, because black-book spending and portions of the DOE, DHS, and other budgets that are dedicated to defense activities are hidden over there in the "Nondefense" pie wedge.

Some estimates suggest that our yearly defense outlays now approach $1 trillion.

Let's put that in context.  Here are the projected revenues for the 2011 fiscal year:

(Source)

If we divide defense spending of $744 billion by projected individual income taxes ($1,121 billion), we find that 66%, two-thirds (!) of all such receipts, are consumed by defense spending.

It pretty much goes without saying that a nation cannot be prosperous in the long run if it is spending two-thirds of its individual income tax receipts on defense expenditures.

Of course, we've managed to hide this over the years by going deeper and deeper into debt, so most people are not directly aware that two-thirds of their April 15th contributions are mainly headed either overseas or into the coffers of defense contractors.

Only 17% of our entire 2011 budget is going to go to nondefense spending, and the lion's share of that is for programs and hires that are already in motion or in place.

84% of all receipts are going to go towards mandatory spending in 2011.  Let that sink in for a moment.  84%.  Let me type that slowly:  e.i.g.h.t.y. f.o.u.r. p.e.r.c.e.n.t. 

And 94% of all revenues are entirely consumed by mandatory spending plus the interest payments (also arguably "mandatory").  So no matter how much politicians say they want to "cut spending', rest assured that they have backed themselves into a very sharp corner.  There's no maneuvering room left.

In FY 2011 expenditures are slated to exceed revenues by 49%.  Forty-nine percent.  49% (!).  Okay, now I am scaring myself.

Now matter how you slice these expenditures, they are unsustainable.

Think of how intense the future budget battles would be if the government had to live within its means.  Imagine if each wedge of the budget had to be shrunk by a third to bring expenditures in line with revenues.  Politically, I just can't see this happening, which is why I continue to believe that every effort will be made to print our way out of the problem.

As a side note, I somehow missed this article from Friday, notable because it is the first public trial balloon that I've seen floating the idea that the Fed might not stop its thin-air money-printing program:

Official says Fed might buy more mortgage-backed securities

Friday, February 5, 2010

The Federal Reserve would consider reopening its program to support the mortgage market if interest rates spiked or the economy showed new weakness, Federal Reserve Bank of New York President William C. Dudley said in two new interviews.

Remember, I thought that the end of March would be the time when we would get our read on whether the program would involve renewed efforts at borrowing and printing our way out of our easy-money debt pile-up.  Looks like we're right on track.

Now, back to the editorial.

The idea that there's no room to cut government expenditures without seriously impacting the economy is pure bunk.  We could easily trim defense spending without impacting our economy in the slightest, if we chose to reduce the amount of money we are sending overseas to maintain 700+ foreign military bases and prosecute two wars.

Next, we might also imagine that if we diverted money being spent on military expenditures into, say, high speed trains, wind farms, natural gas pipelines and distribution stations, and an upgraded electrical smart grid (for example), we'd get far more immediate and lasting economic benefit (and improved national security too, I might point out) than we would out of so-called "defense spending."

The cold economic truth is that we are slowly bankrupting our country.  And we are spending our money on things that do not contribute to our collective long-term prosperity.

Instead, I wish that this editorial, and dozens of others like it in other newspapers, would take a deep breath and ask the deeper and harder questions about our national priorities, challenges, and opportunities, and then call for a significant departure from the business-as-usual budget fiasco that is slowly but steadily leading us towards a vastly diminished future.

In short, somebody has to say it:  The emperor has no clothes.

Until we can have a legitimate discussion about the true economic costs and opportunities lost associated with our current expenditure regime, I do not see much hope that we'll magically navigate ourselves to a better, more prosperous future.

That's the real truth about the deficit.