Simple Math Guide to the Federal Budget Crisis

 

The only possible solutions to this problem are:

A) Money Given < Money Promised 

B) All The Money Tomorrow >> All The Money Today

The only probable solution is ‘B’. This guide is to help you or your listeners understand why.

Really?

You or your audience probably doesn't believe there is a crisis. This is understandable, since over the last 70 years we have bred Politicians to now promise us increased benefits/lower taxes without ever raising taxes/lowering benefits. There has always been ‘More Money’ to cover the difference, and not many people knew or cared where it came from. It turns out it comes from borrowing it from other countries (China) or from ourselves (Selling Bonds to the Federal Reserve).

Just Borrow More Money!

As of December 2012, The US is still able to to borrow ~1.3 Trillion every year.  When people or other governments begin to doubt that the US will be able to pay back all of the money it borrowed, they will raise their interest rates to cover the increased risk of lending money to the US. We already have seen the US credit rating drop due to concerns about the US being able to get its deficit and debt under control. What happens when the US starts getting charged higher and higher interest rates? More importantly, what happens when no one is willing to lend the US money?

 

Some have declared that not increasing the debt ceiling is the solution to 'fixing' the budget problem. Well a 'solution' is only a solution if it could happen.  So what happens if the debt ceiling isn't raised?  Lots of fighting, but mainly this:

 

 

We can safely assume the debt ceiling will always be raised, since it always has been.  If all the US Representatives are magically replaced and they refuse to raise the debt ceiling, the what I describe will just happen sooner.

 

There is a limit to how much the Government can borrow.  Eventually it will run out of people to willing to lend it money. This will happen within a decade or so, since the amount it has to borrow to pay for what it promised to give is more than other countries have to lend. But that analysis requires more than simple math:

 

Therefore I have compiled this Simple Math Guide to the Federal Budget Crisis. Use this to inform yourself, or in your  conversations with uninformed citizens, or even Socialists (if you must). You may even have to challenge Capitalist Conservatives who think the economy can grow fast enough to prevent disaster.

 

It is not a comprehensive analysis. It is meant to give people an understanding of the amounts and time frame involved, so that they don’t waste time listening to anyone who says it can be fixed in a matter of years to get elected.

This guide is based on simple numbers that come from the Government. There is no economic theory used, or any other theory. You only have to know how to add, subtract, multiply and divide. The years it takes for 15 to become 24 at 3% compounded interest can be verified easily.  If you or your listener disagrees with a number, look on any number of Governments accounting websites and confirm it before moving on.

What You Need to Know and Accept

These are facts that must be acknowledged by your listener (or you, the reader) beforehand, otherwise there is no use in talking to them (or reading on).

• Social Security is part of the General Budget, and is not insulated from the budget crisis.
  • The money you send to SS is not being saved in a box to be given to you. It is being used to pay people on SS today.
  • Today’s Congress decides how much to give today’s SS recipients. You are not guaranteed to get at least what you put in. You could get more (which is what’s been going on since its inception), or you could get less. They can raise the retirement age, and they can lower it.
  • If the US is bankrupt, SS is bankrupt, along with every other Federal Agency.
  • If Senator Dick Durbin or others say otherwise, they are lying.

• Citizens of the US are not slaves, and will change their behavior when circumstances change for whatever reason.

• The total cost of the Wars in Iraq and Afghanistan since 2001 to today are:
  • Iraq = $809,440,508,000 (or 810 Billion)
  • Afghanistan = $593,464,019,000 (or 600 Billion)
  • Total = 1,410 Billion or 1.4 Trillion.
  • 1.4 Trillion over 12 years averages to ~120 Billion per year

If you or your listener doesn't agree with any of the above, stop reading / walk away.

Math Facts:

• The Rule of 72 for estimating time to double an amount at a certain interest (or growth) rate.
  • Years to Double = 72 / Interest Rate
  • If your country’s GDP grows at 3% a year, the economy doubles in 72/3 or 24 years.
  • If your country’s GDP grows at 6% a year, the economy doubles in 72/6 or 12 years.
  • If your country’s GDP grows at 7.2% a year, the economy doubles in 10 years.
• One Trillion Dollars is 1 Million piles of 1 Million Dollars. (1 Million x 1 Million)
• One Trillion Dollars is 1,000 Billion Dollars.
• 100 Billion Dollars = 0.100 Trillion, or 1/10th of a Trillion
• 1.3+2.2 = 3.5
  
  
  
  

The Deficit Only

We will start by determining what is necessary to eliminate the yearly budget deficit, leaving the overall debt to be paid back for later. In 2010, the US Federal Government spent $3.5 Trillion. It took in $2.2 Trillion total from all revenue sources, and borrowed 1.3 Trillion to make up the difference (the deficit). In simple math terms:

 

To eliminate the deficit (the amount borrowed), Revenue has to increase and/or Spending has to decrease.

Let’s try increasing Revenue only. The 2.2 Trillion dollars of Revenue would have to increase by 1.3 Trillion to become 3.5 Trillion. It would have to increase ~59%:

That was easy. Oh wait...

How to Increase Revenue by 59%?

Raise All Tax Rates and Fees 59%!

The simplest math is to increase all tax rates, fees etc, by 59%, thus increasing the amount paid by 59%. Every person’s and every corporation’s total amount of taxes paid would have to increase by 59%. If someone’s current overall tax rate (total of all money paid to Fed / total earned) is 10%, they would have to now pay 15.9%, or 5.9% more of their income would go to taxes. This includes people who don’t make enough to pay Federal Income Tax, but still pay Payroll taxes. The total amount paid (SS, Medicare/Medicaid, etc) will increase 59%. Every Corporation will have to pay 59% more than they do now.

This will never happen.

No Politician will ever propose that all tax bracket rates increase by 59%, nor will any vote for it. Any that does so would be voted out of office in the next election. But let’s pretend that they did it anyway.

Assume the Imperious Curse is used to make them do it. This means that a tax rate of 30% would increase to 47.7% (17.7% is 59% of 30%). People that paid 10% are now paying 15.9%, (they have 5.9% less income), and those that paid 30% are now paying 47.7% (17.7% less income). Can this be maintained? Citizens of the US are free, not slaves. Some people who are in the 30% tax bracket are not going to keep doing what they are doing if they lose 17.7% more in taxes for nothing in return. (Remember, we are just trying to not borrow to pay for what we spend, not for increased benefits.) If you think all of them will, you probably don’t know much about people.

There will be people on the lower end who were just getting by at 10%, and at 15.9% cannot afford to work simply because they don’t have enough left for transportation costs. This we know because politicians tell us about them all the time.

Furthermore, their employers who were paying a 35% corporate tax rate are now paying 55.65% (20.65% is 59% of 35%, which is the current US corporate tax rate). This means that any corporation that currently makes 3% profit per year will be operating at a loss.

If a corporation makes 1 Million, it pays $350,000 in taxes to the Federal Government. If it makes 3% in profit, that means $30,000 per year. But at 55.65%, it will have to pay $556,000 per year, or $176,000 more at 0% profit. Assuming profits are no longer desired, they still have to either increase their Revenue (charge more) and/or reduce Spending (head count, benefits, pay, etc). It used to take in 1 Million in Revenue, Spend 970,000 total in taxes, pay, cost of raw materials,  etc, and have $30,000 left over. If it doesn't cut anyone’s pay or benefits (if it does, then there is less Revenue to the Government from the employees income), then it has to increase the cost of its products 17.6% to bring in $1,176,000 (ignoring the 55.65% tax on the $176,000 increase.) in Revenue at 0% profit. It can stay in business if its customers still exist after they pay their own increased taxes, and don’t decide to buy somewhere else.

 

If you went to the store with $90, and bought a case of Green Giant canned peas for $10.00, and the next time you went you had $84.10 and the peas cost $11.76, would you still be buying the same amount of peas? Would you look for cheaper peas, eat less peas, or eat a substitute?

Even if you use magic to make every corporation operate at a loss and still remain in business, you still need to accept that every taxpayer will continue to work at the same output level for significantly reduced pay. This is not probable.

Therefore:

The deficit will never be eliminated simply by increasing taxes in a short period of time, even if you take into account the use of magic.

Raise Them 59% Over a Long Time

Can the rates be raised in increments instead of all at once? Sure they can, but does that help? At the end of whatever length of time you give it to reach 59% more than today’s rates, people will still be altering their behavior to compensate (they are not slaves). And don’t forget about the overall Debt that still has to be repaid. The longer it takes to eliminate the deficit, the larger the Debt will be when the US starts paying it off. But mostly, you are depending on future Congresses to not increase spending over the period.

So therefore:

The deficit will never be eliminated simply by increasing taxes in a long period of time, even if you take into account the use of magic.

Grow the Economy Over Several Years.

In 2010, US GDP was ~$14.5 Trillion. Revenue was ~2.2 Trillion, Spending ~3.5 Trillion, and we Borrowed ~$1.3 Trillion. What GDP is required for Revenue to be 3.5 Trillion? Since the tax rates are not changing, GDP would have to increase by the same 59%:

 

GDP can’t increase by 59% in one year. Rather than describe the impossible logistics associated with such an increase (inflation, labor shortages, etc), we can just look at historical yearly percent increases in GDP. The largest single yearly increase in GDP (2005 Dollars) between 1990 and 2011 is ~5%. If we include the Reagan years (1980 to 2011), it’s ~7.5%. Average it all going way back to 1945 it’s ~6%. For the last 10 years, it’s averaged about 3%.

How many years would it take to increase GDP to 23.05 Trillion at 3%? To double GDP at 3%, it would take ~24 years (72 years/3%). After which GDP would be 29 Trillion, and Revenue would be ~4.4 Trillion. To reach a 23.05 Trillion GDP at 3% increase per year, it would take ~16 years. Does this mean the Deficit can be eliminated in just 16 years?

Yes. But during this 16 years of 3% growth, spending has to NEVER INCREASE above $3.5 Trillion in number of dollars (not $3.5 adjusted for inflation).  Meaning over the course of 3,480 House seat elections (16/2*435), 266 Senate seat elections (16/6*100) and 4 Presidential elections, none of these Governments would increase overall spending beyond 3.5 Trillion, as Revenue increased from 2.2 to 3.5 Trillion, and as GDP increased from 15 Trillion to 23.05 Trillion. Is this plausible?

Does anyone believe that future Congresses would limit themselves to simply moving the same $3.5 Trillion around, when each year $3.5 Trillion would be worth less due to inflation? They already call a decrease in the planned increase a ‘Cut’. How will they react (and what will they call) a freeze in spending where ‘freeze’ means the planned increase in spending is 0% instead of the planned % increase does not increase?

The population will grow over this time. Will the number of seniors on SS increase? If the SS budget does not increase and the number of seniors on it does increases, then every year every senior on SS will see the number on their SS check go down. Medicaid will either have to pay less to doctors every year, or cover less people every year. These two groups vote, and each member of these groups will have 8 opportunities to vote for a new US Representative, ~3 times to vote for a new Senator, and 4 times to vote for a new President.

Future Congresses will never freeze spending, and if they do they will be replaced by people who get elected promising to not only increase it but restore what wasn't increased in the previous two years.

Therefore:

‘Compromise’

How about a combination of Taxes and Growth? This would take more than simple math to figure out, so let’s use the numbers given to us by the current Government.

Each side is speaking of no greater tax rates than pre-Bush, and are telling us that keeping the middle class Bush tax cuts ‘costs’ ~$220 Billion/year in lost Revenue, and the ones for the rich ‘cost’ $80 Billion/year in lost Revenue. Yes, that is correct. ~$220 Billion per year from the middle class, only ~$80 Billion per year from the rich.

 

If you thought the tax cuts for the rich ‘cost’ $800 Billion per year in lost Revenue, it is because you heard someone say ‘...increasing taxes on the rich would reduce the Federal Deficit by $800 Billion…’ but didn't hear the ‘…over 10 years.’ part, or the news program cut that part out.

Now stop and think about that. When politicians talk about the ‘Budget Deficit’, they do so as the difference between Revenue per year and what is spent per year. They talk about the 1.X Trillion dollar deficit, not the 10 Trillion dollar 10 year deficit. The Debt is discussed as the sum of every year’s Deficit. As in ‘The US Debt is 16 Trillion.’ So when anyone says that some tax increase will reduce the DEFICIT by $800 Billion over TEN YEARS, they are mixing definitions to mislead you (lying).

Uninformed people hear ‘$800 Billion’ and ‘Deficit reduction’, and think that the $1.3 Trillion Deficit will be reduced by $800 Billion, a ~62% reduction. In reality, the 10 year increase in the DEBT will be reduced from 13 Trillion to 12.2 Trillion, a ~4% reduction. If they wanted to tell the whole truth, they would say the total US Debt will be 27 Trillion after 10 years keeping rates the same, 26.2 Trillion (a 3% reduction) increasing taxes on the rich only, or 24 Trillion (an 11 % reduction) increasing taxes on everyone.

So the rate increases being debated by the current Congress would reduce the Deficit by ~$300 Billion per year, to 1.0 Trillion per year. If the cuts are extended for the middle class, but not the rich, that would make the deficit 1,300 – 80 = 1,220 Billion or 1.22 Trillion.

 

Redoing the math above for 1.0 or 1.22 Trillion is not enough of a difference to change the conclusions.

The No Math Method

All of the above can be distilled down to even fewer numbers if we use history as a guide. First we make a plot of Revenue per year, but as a percentage of GDP and change in GDP per year, using the Government’s numbers:

 

 

History shows that from 1945 on, Revenue to the US Government as a percentage of GDP doesn't change much. It ranges from ~16% to ~22%. Think of the variation in tax rates and tax policy from 1945 to today. No matter what they were, the Government pulled out at most 20.6% of the GDP (but never in successive years), and at least ~16% but not in successive years.

 

Look how it does not stay the same year to year. When the % of GDP got near 20%, something happens that causes it to drop. When it reaches ~17%, something happens that causes it to rise. This happens when GDP growth is accelerating (1950 to 1980) and when decelerating (1980 to 2010). (Yes I know that 3% of 15 Trillion is more than 6% of 2 Trillion. This is not about the numbers, it’s about the trends.)

 

Since this is historical data, it shows how people change their behavior when circumstances change. This chart takes into account everything that happened and every decision (and vote) made by free people deciding for themselves what to do when circumstances changed (or stayed the same). When taxes were raised, and Revenue as a percent of GDP increased to 20%, people adjusted their behavior. Some made less by working less overtime, or retiring earlier. Some business owners or Corporate leaders decided not to expand or couldn't raise the capital, and there were more decisions made as there were people alive. GDP and Revenue to the Government were affected by the combination of all these decisions and went back to 18%. The other side is true as well. When Revenue dropped to below ~16% of GDP, it started climbing back up.

The last 10 years included the effects of 9/11 and the Sub-Prime Mortgage collapse that brought about the Financial Crisis of 2008. Blame whoever makes you happy. Just because you know who to blame doesn't change the fact that our Economy will continue to pay for these losses.

Now is a good time to talk about the Wars in Iraq and Afghanistan. Since 2001, the US has spent about $1.4 Trillion dollars on them. Not $1.4 Trillion per year, but $1.4 Trillion over 12 years. That’s ~120 Billion per year. So if we never went to war, the deficit today would be $1.18 Trillion instead of $1.3 Trillion. This assumes that the Government wouldn't have spent it on something else. Clean up after another terrorist attack, for example. Or a war defending Israel.

But in general:

2010 Spending was 3.5 Trillion, with Revenue of 2.2 Trillion (~15% of GDP) and a 1.3 Trillion deficit. If Revenues were 18% of GDP (0.18 x 15 Trillion) or ~2.7 Trillion, the deficit would still be $800 Billion.  But we already know that today’s politicians are only willing to increase taxes on the wealthy, which would reduce the deficit to $1.22 Billion.

Still Disagree?

If you or your listener still think that the US can eliminate the deficit through Growing the Economy and/or Raising Taxes, here is something else to think about. All of the above ignores the effects and costs of ObamaCare. Does anyone really believe that ObamaCare will reduce costs?  There are already Senators complaining about Medical companies in their states having to layoff workers due to the taxes imposed on Medical devices.

Government Spending Did Not End the Depression

If you or your listener starts talking about how Government Spending got the US out of the depression, then they need to read something other than the Huffington Post. The Government spent money to build the factories to make the machines to fight in WWII. It had to borrow money to do so. Who did it borrow it from? What was a War Bond and who bought them?

After WWII, the factories here in the US had no competition. All of Western and Eastern Europe was devastated by war, and so was Japan, North Africa, Western Russia, and parts of the Middle East. These places needed to be rebuilt, and the only economy still standing was in the US. Wealth increased in the US as we traded our goods and services for a profit with other countries who needed the basics to live. We had the Supply to meet a large Demand. This is how we got out of the depression. The debts incurred during the depression (and WWII) were paid off by the net transfer of wealth to the US from places rebuilding.

If the US didn't enter the European theater and/or Germany (or Russia) won, then Germany (or Russia) would have rebuilt Europe (with slave labor). The Great Depression in the US would have continued. I had a person actually say to me: “There’s no economic difference between building a plane that is destroyed in combat and making it to throw in a ditch.” The difference between winning and losing the war should be enough of a difference for most people, but not True Believers. Communist Russia tried this. They made things for no other reason than to give people something to do. How did that turn out?

But I digress.

Cut Spending

Going back to simple math. We want to eliminate the Deficit, meaning reduce it to zero:

 

We know that Revenue cannot be increased by 1.3 Trillion dollars. The current Congress is only willing to increase it by 300 Billion Dollars, so we have no choice but to reduce spending by 1.0 Trillion dollars.

Cut What?

In 2010, the Federal Budget was 3.5 Trillion spent as follows:

Without cutting any of the $1.984 Trillion in Entitlement Spending, and knowing they can't stop paying the $196 Billion in Interest Only payments on the current Debt, they would only have $132 Billion to spend on what they previously spent $1,277 Billion on.

Does anyone believe that any politician would cut each and every entitlement program 30%? Does anyone believe if they did they would not lose to the opponent that promises to reinstate the funding?  I don’t and you don’t either.

 

Maybe it’s possible that some of the 1.984 Trillion in Entitlement programs can be cut. The breakdown:

30% of 1,984 Billion is 595 Billion. Reducing Federal benefits to SS and Medicare/Medicaid only still leaves 42 Billion left to cut. But what is ‘Other’? Unemployment Insurance for one, and all other federal money that is a benefit such as Veterans benefits, Federal Welfare, etc. The current crop of politicians has already shown itself unwilling to cut unemployment insurance benefits, and continues to try to increase them.

 

Does anyone believe that Congress would (or could) ELIMINATE all federal unemployment insurance or Veterans benefits?  Furthermore, the Entitlement Spending amount listed above is for today’s retirees. If we take into account the rise in number of retirees, and the increase in their number relative to the number of people working, the only way to not cut Entitlements and eliminate the Deficit is to cut everything else to nothing. No Military, EPA, FBI, Department of Agriculture, etc. 

Let’s pretend Congress has been put under the Imperious Curse again, but this time been told to reduce the TOTAL budget by 30% without cutting Entitlements, meaning cut 1.0 Trillion out of the combined budgets of Defense ($694 B), Non-Defense ($431 B), and Pork ($152 B).

 

Well Pork would be the 1st to go, so that leaves only $848 Billion left to cut from Defense and Non-Defense. The total budget for both is $1,125 Trillion. So therefore:

 

Assuming no one cared that defense was cut by 75%, is it conceivable that the FBI take a 75% cut? How about the CIA? Homeland Security? Do you really think the EPA will be cut 75%?

 

Even if they cut defense to zero, they still have to cut all the other Federal Agencies by ~36%. If they eliminated all Non-Defense agencies ($431 B), they would still have to cut $417 B from Defense, meaning cut it by 50%. This means the Federal Government reduces down to Entitlements, and a Military half the current size. No FBI, EPA, etc.

Can you imagine what would happen if the US military is cut in half? That means ½ the number of everything and everyone. Maybe you like that idea. If you do, you haven’t thought it through. Now before anyone (once again) mentions the cost of war in Iraq, remember that the cost of both the bad war (Iraq) and the good war (Afghanistan) averages to 120 Billion per year, and is currently very little now in Iraq. Not fighting the Iraq war would not have changed the budget crisis.

Let's talk about cutting Defense by 50% across the board and what that means. Have you heard some in Washington say the greatest threat to US security is the Deficit and Debt? This is why they say that. Trust me when I say, If Defense is cut by 50%, the US will end up fighting another war in North Korea and/or Israel and/or Iraq and/or Pakistan. These Wars will cost more than 120 Billion per year.

And even if no Wars started, does anyone believe that the US Government won’t increase Defense spending if other Countries (China, Russia, Iran) begin a race to catch up to the US?  Does anyone believe they won't begin a race to catch up to the US?

Therefore:

Because we know that any deal will be altered by the next Congress to reduce taxes and increase entitlement spending. We also know that as GDP rises (and some get richer) Congress will work to stop one by stopping the other.

The Final Outcome

Politicians will not allow the US Federal Government to default, since that would mean they would lose power. Forced with cutting 30% of the budget, they know they will never come to an agreement, and they will know that any agreement will be voided after the next election. They also know that not coming to an agreement will mean someone else (The President) will make the cut decisions. This will be unacceptable to them.

 

Therefore:

This method has been used throughout history for the same reasons, most recently in Greece. Greece is in crisis because they joined the EU and stopped printing their own money.  Then they found that they had to borrow the difference between what their government promised and the tax revenue it collected. Then they discovered that the people lending it money (Germany mainly) didn't want to lend them anymore.  The Greek government now has no choice but to cut spending on everything. The Greeks that are dependent on government checks have begun to riot, going as far as to burn down banks with people in them.

For ‘Print More Money’ to work, it has to happen happen fast enough to cause high inflation or ‘hyperinflation’. Hyperinflation for this guide means the rate of inflation is higher than the Government can react to.

 

Consider this: Using magic printing presses, the amount of money in circulation doubles over night. Everyone’s bank account doubles, money in people’s pockets double, etc. Everyone’s paycheck (not benefit check) doubles.  Furthermore, everyone knows that it has happened, and everything doubles in price.  The US Government would then find its stream of Revenue has doubled without ever raising tax rates.  Now its Revenue is projected to be $4.4 Trillion over a year, but it is still Spending at a rate of $3.5 Trillion. The US Government now has a projected Surplus of $1.4 Trillion.  Inflation has cut its spending by 50% since $3.5 Trillion now is worth half of what it did before the magical event.  

Have you heard politicians claim the Debt is just like a Mortgage? This is half right, meaning it’s a lie of omission. The Deficit/Debt is like taking out an Interest Only 2nd Mortgage (and 3rd, 4th, etc) every year even if the rates go up. Soon you will be ‘underwater’, meaning you will owe more than your home is worth, and then no one will be willing to give you another Interest Only Mortgage. Lacking this ‘income’ source, you will now have to decide what to cut or lose your home.

 

Q:Why do non-politicians, Conservative reporters, pundits, etc, keep talking as if the debt crisis can be solved?
A: Because they need something to talk about. They cannot fill hours of each day, day after day, simply repeating what I said above.

Q: Are all Democrats stupid?
A: No. Most believe the lies they are told by others that increased taxes can fix it.

 

Q: Are all Republicans cowards for not speaking the truth?
A: Most are. Some simply believe the lies told by others that a growing economy can fix it.

 

Q: Will the Government Default and then collapse?
A: No. People will vote to protect their politician’s power.

 

Q: But how can the Government avoid Default if it can never cut spending enough and/or raise revenue high enough?
A: The same way Greece put off default before it joined the EU: Print More Money. The resulting inflation will devalue the deficit and debt. This is the only possible and probable outcome, since politicians will be able to deflect blame. They will be able to claim they didn’t raise taxes or cut benefits.

Q: So what do we do?
A: Nothing. There is nothing you can do if you desire to remain living in America. I’m told New Zealand is nice, but people wanting to immigrate have to compete with each other. They only let in the most qualified people who can contribute the most to their society.

Q: So does Hyperinflation mean the debt disappears and all the things the Government gave people with the borrowed money end up being free?
A: Debts do not disappear. If you and others don’t pay back the loan you got from a bank, the bank’s future interest rate will be pressured upwards, or what it pays employees will be pressured downwards.

 

High inflation means that EVERYONE will be paying off the Trillions in accumulated Debt. People’s paychecks will be worth less (same number, less buying power), and so will people’s benefit check. Everyone will pay more in the form of higher interest rates on all borrowing (cars, homes, etc). Also realize that wages lag inflation. So if you are barely making it now, and prices rise 10% before your wages do, you may find yourself having to decide between rent and food. This is where the predictions of food riots originate.