Blog

Obama's Budget is a Fantastic Comedy

Monday, February 14, 2011, 10:34 PM

Fantasy or comedy?  I couldn't decide which way to label the Obama budget, so I went with both.

The bottom line is that the Obama administration has brought forth the most unbelievable revenue increase that I have ever seen proposed in a budget, a whopping 65% increase in revenues in just four years, which will - miracle of miracles - drop the deficit as a percent of GDP from nearly 11% to just 3.2% over those same four years.

The only problem with this scenario is that it stands virtually no chance of actually happening. Revenue will be far lower than projected and the deficit correspondingly higher.

One of my abilities is spotting bogus numbers quickly, and another is to make reasonably accurate projections without a staff of hundreds. For example, in 2009 I called for the Social Security fund to soon begin dipping into negative territory when the CBO was clinging to the illusion that 2017 was the 'below zero' date. Turns out I was right, and it wasn't a terribly difficult call to make. A little trend projection here, some assumptions about early retirement there, a higher and more realistic assessment of peak unemployment, and - voila! - a reasonably accurate projection was made.

Let's look at the recently released Obama budget, which is so far off the mark that no special abilities are required beyond the ability to suppress the urge to chuckle:

(Source

The green circles show the rosy deficit-reduction estimates, while the red arrows indicate the incredible 65% increase in federal revenues over a single four year period.  65%! How likely is that? Is it realistic?

Perhaps a little history is in order here. Let's start by asking a question: In any other four-year period, have federal revenues increased by 65% or more?

The answer is yes, but it’s a very qualified yes.

In the first chart below, the red bars show the proposed revenue increases on a rolling four-year basis. That is, each year is compared to the revenue period four years prior. The blue bars are the same, only they represent actual history, not projections while the red bars are the Obama team projections.

The second chart is a comparison to CPI to make a point.

Over the past 60 years, there have only been three other years with a similar or higher rate of revenue growth to the one estimated to occur in 2015: 1979, 1980, and 1981.

There are two things we might note about those prior three years ('79-'81) of rapid federal revenue growth. The first is that those same years represent the second, first, and fourth highest rates of yearly inflation in 50+ years of data, coming in at 11.3%, 13.5%, and 10.4%, respectively.

Does the Obama budget assume similar enormous rates of inflation? Nope. It assumes 2% or less inflation in every year of its projections out through 2015.  So it's not inflation that will be driving the enormous revenue growth.

Another reason we might anticipate extremely strong revenue growth is because of a rapid expansion of GDP.

Here again in 1979, 1980, and 1981, we saw something very unusual in the data: Those years clocked exceptionally robust GDP growth at 11.7%, 8.8%, and 12.1%, respectively.  Out of 65 years of data, those were the 4th, 5th and 17th fastest years of economic expansion.

Could that be the driver behind Obama's optimism? Is his team calling for double-digit GDP growth over the next few years?  Do they envision 'top ten' like performance for a couple of those years?

Not according to their published data.

So we can't really defend the projected increase in revenues on the assumption of massive economic expansion either. The Obama team does predict a pretty decent expansion - but on a relative basis, it's nothing spectacular and is less than half that which drove the revenue expansion in the 1979-81 period. 

So the 65% revenue increase will not be driven by either inflation or GDP expansion.

What if we compare the projected increases historically on an inflation-adjusted basis - would that put them in a better and more believable light? 

In this next chart, we simply chart each year's federal revenues after correcting for CPI (we used the Obama budget CPI assumptions for the years 2011 - 2015 to discount the future so everything is in 2010 dollars).

Are these numbers any less fuzzy? Nope. Even on this basis the proposed revenue increases are the largest on record, bar none.

Conclusion

There is almost no chance of the Obama revenue projections coming to pass, unless massive tax increases are part of the deal, and as far as we know, they aren't.

The only other alternative is that the United States might enjoy some pleasurable combination of quite rapid growth, a fall off in unemployment to match, tidy increases in wages, and a low CPI.  But the probability of all of these coming to pass is very, very low (although I will admit that they must be very appealing to an incumbent. Appealing? Yes. Likely? No.)

Here's my prediction; we'll have sub-par growth in 2011 and relatively weak growth in 2012, with a 50% chance of a double-dip appearing in one of those years. As such, revenue growth will be slightly below average between here and 2015.

Using these assumptions, and generously assuming that things more or less carry on as normal and even more generously that the economy magically grows to $19 trillion as the Obama team has assumed, the actual budget deficit will be no less than 8% of GDP each year between here and 2015.

My estimates translate into a roughly $1.5 trillion cash deficit each and every year -- give or take a little -- digging our national debt hole deeper by another $7.5 trillion by 2015.  

This, however, is merely my starting bid. I can easily envision deficits that are far higher in both aggregate and percent-of-GDP terms, due to some combination of rising energy prices and debt overhang dragging the GDP figure downwards, and rising interest rates driving federal costs higher.

The bottom line is that either this budget is a fantasy, or I am completely wrong and we somehow set historical records for revenue growth during a time of low inflation and below average GDP growth.

It is against this backdrop that you should be especially dismissive of any and all partisan rhetoric that proposes to reduce the deficit by trimming this or that program by a few billion here and there. Until and unless you hear about cuts to the big four - Defense, Medicare, Medicaid, and Social Security - you can be certain you are merely listening to partisan talking points aimed at posturing for the next election, not credible plans for attacking the root of the problem.

The US is facing a deficit pattern (deficits higher than nominal GDP growth) that has ruined many a country before. A failure to legitimately address this condition before being forced to do so by global or market circumstances will lead to a far rougher period of adjustment than necessary.  Such a failure even risks it all: a sudden loss of reserve currency status for the US that leads to a sudden repatriation of some $7 trillion in US-dollar-denominated assets currently held off-shore.

Said simply: The risk is a massive inflationary event that forces the Fed to choose between defending the dollar (by raising interest rates) or defending the US economy. It can't do both at the same time.

Related content

104 Comments

TommyHolly's picture
TommyHolly
Status: Bronze Member (Offline)
Joined: Nov 9 2010
Posts: 90
Wow, my OCD kicked into high gear researching this stuff...

green_achers wrote:

Tommy, please show your calculations and explain what you mean by "average private worker."  If it's on the video, I appologize, but my internet connection is too slow for most videos.

You got it!  Private Workers are people that work in the private sector and not for the Government.  Gov Public workers are paid by your tax dollars while Private workers are paid for by privately owned businesses.  So any teacher that works for a Public school is a Public workers and any teacher at a Private school is a Private sector worker.

First, I went straight to the Dept of Education's own website to look for the average salaries of Public vs. Private teachers.  http://nces.ed.gov/fastfacts/display.asp?id=55  You can see the real figure straight from the source is $49,600 for Public vs. a mere $36,300 for private teachers.

*Note: The more I research this NPR report, the more I find how much they fudged the numbers.   Seems that the majority of private schools don't even turn in statistics on teachers salaries because they don't have to unless they belong to the National Association of Independent Schools, (NAIS) http://www.nais.org/  So right off the bat, NPR and the nutty Professor picked and choosed just what schools they want to compare.  For example, Culver Military Academy in Indiana pays it's teachers some of the highest in the nation because it is THE premier High School in the world.  They averaged schools like Culver's salaries which were reported in while NONE of the Catholic High schools and every other Private school across the states reported thier estimated $29,000 estimated average pay.  Funny how NPR didn't mention that???

OK next I took the numbers I posted above and factored in some of the figures for the Teachers who are protesting in Wisconsin.

- Wisconsin Public School teachers contribute a measley 0.8% towards their pensions vs the average private sector's 7% (~6.2%)

- Wisconsin Public School teachers contribute a mere 6% vs the average private sector of 14% (~8%)

- Wisconsin Public School teachers get 2 weeks of vacation to start, up to 4 weeks after 20 years.  (Private school teachers get at least 1 week less comparing the same time on the job.)  (~3.9%)

- Wisconsin Public School teachers get 5 personal days per year and 10 sick days (which can accumulate up to a total of 150!!) while most private schools only give 2 personal days and 5 sick days a year which don't roll over.  (~5.2%)

- Wisconsin Public School teachers get to eat school lunches at a 75cent surcharge. (Our tax dollars pay for the difference.) Total cost is actually around $5.00 so that's a $4.25 difference at 180 days = $765.00

Just these differences in benefits raise the reported average salary of Public School teachers 23.3% over the private sector.  That puts them at nearly $62,000 average salary with benefits factored in compared to $36,300 for the private sector. (Keep in mind, that's without comparing Catholic schools and anyone not affilitaed with the NAIS which makes the difference even greater!)  There are even more differences where Public schools only require an education degree with a minor while private schools require 2 degrees typically, not just a minor.  Then there is job security with the Unions because you can't fire them and let's not forget tenure...  OK it's late.  This is way more than I ever wanted to research teacher's salaries.  No matter if you factor things or not, the point was the Public Unions make more any way you look at it and they are using your tax dollars to pay for it.

green_achers's picture
green_achers
Status: Silver Member (Offline)
Joined: Jan 3 2009
Posts: 203
Well, of course they're

Well, of course they're using our tax dollars, they're in public schools.  I don't understand the point of that.

I was wondering if you meant all private employees or just teachers.  It sounds like you're reasonably comparing apples to apples, so that's good.  Over the years, I have known a lot of teachers, and I knew public schools paid better, but I didn't know how much.

Of course, in most cases, a public school generally has to pay more to attract equally qualified teachers. The work environments tend to be a lot more difficult and sometimes dangerous.  I've known some that were in private schools who wanted to teach in public schools, and others who wanted to stay in private, even though the pay was worse, because of the environment.

Don't know how wide the differential needs to be, but it seems like a conversation that needs to happen.

r's picture
r
Status: Gold Member (Offline)
Joined: Oct 2 2008
Posts: 262
TommyHolly wrote:R, let me

TommyHolly wrote:
R, let me start out by completely agreeing with you about not equally targeting everyone.  If this truly is the case, that is unfair.  I couldn't find any information confirming this though.  Where did you hear they are not taregting Police or Fire Fighter Unions?

From Fox News [et al]:

http://www.foxnews.com/politics/2011/02/17/teachers-march-wisconsin-capi...

"Wisconsin's measure would end collective bargaining for state, county and local workers, except for police, firefighters and the state patrol."

TommyHolly wrote:

Professor Hurd inconvienently left out the following:

-Defined Benefit plans (and the extra low percentage they pay into it.)

-Medical Insurance both current and during retirement... (as well as the % of what they are required to co-pay)

-Sick days, Private Days, Vacation time

-Pensions (and the extremely miniscule less than 1% they pay into it)

-In the teachers case, salary per hours worked (since they only work 180 days out of the year)

The interesting point is not the comparison between public and private workers.  Professor Hurd agreed that public state employees have better benefits than private workers.   In both union and non-union states however,  the public worker benefits are about the same. 

I understand that public employees may have perks you can justifiiably call unfair.  And there are  some absurdities, I heard on NPR no less, such as a jail which can't close down even though it holds only one prisoner because of a union contract preventing the lay-offs of the jailers.  I agree these things need to be fixed.  My question is why can't they be fixed at the bargaining table once everyone understands there is a crisis.  But I could be wrong; maybe the unions are intransigent, but I'd like to see that first.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments