MORE

As stated elsewhere, America is a consumerism society (http://stopcontinentaldrift.blogspot.com/2011/07/our-consumerism-society.html). Knowing this , companies do all they can to get us to want ever "more," "more" whatever. But we are well into the new normal of this country where we cannot always want more. We are going to have to decide when enough is enough. When we are happy with what we have and concentrate more on maintaining that. The effect on the economy of the country of not always wanting "more" will be severe. In fact a new economy will have to be invented.

There are people who have decided that we have far too much government. Unfortunately our previous president ruined the economy of the country, and we now have Federal revenues of what they were in 1950 as percent of GDP, though we have twice the population we had then. In the meantime in order to keep the country from sliding into a 1930s style recession, our government spent a lot of money; however, the situation is so dire that our government is running up huge deficits that are making some people very nervous. A recent article suggested that we need to cut the Federal budget by $7.4 trillion over the next decade. If we do this, it will put us into a deep depression at least as bad as in the 1930s.* Think of things we have now that we didn't have in 1950, for example, but with twice the population we will have to go back farther. So one better think of what is enough to make you happy and try to arrange your life to protect that. Even the Debt Ceiling Compromise, if totally enacted, may put us into a recession toward the end of the 10 years: http://stopcontinentaldrift.blogspot.com/2011/08/debt-ceiling-compromise-effects.html

The topic of "more" has been in some movies too. For example take Key Largo. At a point in that movie Humphrey Bogart says to Edward G. Robinson (the crook), "I know what you want." Robinson replies, "Whaaat?" Bogart replies, "You want more. That's what you want." Robinson sort of looks off into space and says, "Yes, yes that's what I want. At least I always have." These are not direct quotes but close enough.

Another is The Treasure of Sierra Madre. The grizzeled old prospector says to his two tenderfeet, "Before we go to search for gold, we have to set a goal for how much we want." The tenderfeet don't like it, but go along. In the end the grizzeled old prospector has none of the gold but is being well taken care of by a tribe of Indians because he saved one of their children. He is happy. One of the tenderfeet who has the gold, Humphrey Bogart, gets captured by benditos who don't know what gold dust is and let it be carried away by the wind while Bogart gets killed. The other tenderfoot leaves the gold to go in search of the wife of a dead prospector and apparently he is happy too. I very much like both of these movies because of their morals.

*Recall that Social Security was in existence then but there was no cost of living increase.

DEBT CEILING COMPROMISE: EFFECTS

There are two parts to the debt ceiling compromise: (1) is a decrease of about $900 billion in the Federal budget over the next 10 yrs.; (2) is an additional cut in the Federal Budget of $1.1 trillion over the next 10 yrs (I have seen the figure quoted as high a $1.5 trillion) to be decided upon by 12 congressmen over the next six months. In addition, Part 2 has a "poison pill" proviso in it that, if a Super Committee of 12 congress people cannot come to a recommendation of how the $1.1 trillion of cuts can be made, then there is an automatic decrease in the budget of $1.1 trillion with half coming from defense and half from discretionary spending. If the Super Committee can come up with a compromise, then it will be immediately voted on, without amendments, by congress. I can't see these 6 Republicans and 6 Democrats coming to a compromise so I presume that the "poison pill" proviso will occur.

Steven Rattner made an interesting discussion of this on Morning Joe on August 3rd (http://www.msnbc.msn.com/id/3036789//vp/44000516#44000516). Rattner shows a graph in which are shown the increase in the Federal budget before and after the Part 1 of the debt limit compromise. In 2020 he estimates that the Federal Budget would be 25.9% of GDP, whereas the increase in Federal revenues will be only 18.4% of the GDP. Part 1 of the debt limit compromise, however, will reduce the increase of the Federal budget to 24.4% of GDP, lowering the rate of increase in the Federal Budget so it is approximately parallel to the rate of increase of revenues, and thus shows an annual Federal Deficit to $1.5 trillion, presumably in perpetuity.

Rattner did not consider Part 2 of the debt limit compromise because it hasn't been enacted yet, but, if the poison pill is enacted, the projected deficit in the Federal deficit should be in a gradual decline as percent of GDP with a slow convergence to the Federal revenues.

As might be expected, "defense" hawks in congress object to the provision in the "poison pill" that 50% of the cuts come from the DoD and claim it will ruin our security. No doubt this is overstated as they only need to cut $55 billion from a continuous program from a budget in excess of $671 billion for 2012 to come to $550 billion over 10 yrs. The cuts from discretionary spending are a little more severe in a discretionary budget of about $500 billion in that they would have to cut $55 billion from continuous programs to arrive at the $550 billion, their contribution. There are Departments and Administrations with much larger budgets than this. For example the the Presidents proposed discretionary budget for the Department of Education Budget for 2012 is $77,400,391,000 which is reduced to $66,023,391,000 by a decrease in mandatory funding. Though there are those that propose shutting down the Department of Education, it is unlikely to occur. Some other departments with budgets above $55 billion/year are: Agriculture, Health & Human Services, Treasury, Office of Personal Management, and Social Security Administration. I don't suppose that any of these budgets would be totally or significantly reduced. For example in Agriculture, congress hasn't even been able to get themselves to eliminate the corn-based ethanol subsidy, even though the savings in carbon dioxide emission are marginal, and, if you cut down a forest to grow corn, you come out behind.* Not only is the corn based ethanol subsidy marginal in reducing carbon dioxide, but fields converted to corn from other crops help make these other crops more expensive.

Because Step 1 of the Debt Ceiling Compromise only slows the growth of the Federal Budget, I assume it will not push us into a recession,** but , if Step 2 is invoked, the Federal budget will begin to go negative and detract from our GDP (Gross Domestic Product) along with our negative Net Trade Balance. Both Government spending and the Net Trade Balance are in the equation to calculate the GDP. The net Trade Balance deficit right now is around $500 billion a year so would be $5 trillion dollars over 10 years (If the economy improves, it will be greater, and, if we go into a recession, it could be less.). Though it is only a guess, Step 2 might subtract an additional $2 trillion from the GDP over the 10 years. My reasoning is that if $900 billion decreases the rate of increase about in half, another $900 billion should flatten the rate of increase and allow another $200 billion (to make a total of 1.1 trillion) to start decreasing the Federal budget. As the consumer is pretty well tapped out, it will be left to industry to make up for the estimated $7 trillion from the negative Net Trade Balance plus the decrease in the Federal Budget and to push us into a positive GDP. There is no way we can have a positive Net Trade Balance because we refuse to face up to our addiction to foreign oil. Unfortunately, this addiction also leads us to fund our enemies to fight us. I have no idea if companies can more than make up for the negative estimated $7 trillion contribution to GDP from the Net Trade Balance plus the decrease in the Federal spending.

* Note added January 5, 2012. Toward the end of December of 2011, the subsidy was in fact repealed; however, the tariff and percent of gasoline that must be ethanol has not changed and in fact was increased from 10% to 15% by Obama (http://247wallst.com/2011/12/30/us-ethanol-subsidy-is-history-adm-vlo-peix-gpre-czz-rds-a/ & http://www.nytimes.com/2010/10/14/business/energy-environment/14ethanol.html).

**Actually, whether the $900 billion of Part 1 can put us into a recession is complex because the deductions are back loaded, i.e. they will be more in the out years than the near years over the 10 years. I don't know by how much the back loading is. If, say, $500 billion were to be taken out in any one year, it could push us into a recession, but the back loading is probably not that severe. The same applies to Part 2, but is more serious as the Federal budget actually is reduced.

THE PROBLEM WITH THE FEDERAL GOVERNMENT STICKING WITHIN ITS REVENUES

Senator Rand Paul says the $2.1627 trillion of Federal revenues for FY 2010 is plenty of government. Assuming that the FY 2012 Federal revenues are the same as in 2010, the military/security budget of FY 2012 of $1.2192 trillion* would be 56.4% of the Federal revenues, leaving only $0.9437 trillion ($943.7 billion) to fund the rest of the government. Even of this, about $290 billion of non-military/security interest payments on the Federal debt must be taken from the $943.7 billion leaving only $654.6 billion to fund the entire rest of the government. This sum must be used to pay entitlements (e.g. Medicare/Medicaid and Social Security) which in FY 2010 totaled $700.7 billion for Social Security and Medicare and Medicaid totaled $793 billion with Medicare being about 2/3rd of that total and Medicaid being 1/3rd.** Thus Social Security and Medicare/Medicaid payments by themselves massively exceed the $654.6 billion available for non-defense/security spending. The Social Security and Medicare/Medicaid budgets together total $1.4937 trillion or 69.1% of the $2.1627 trillion of Federal revenues, even a larger percentage than the military/security budget. The military/security and entitlement budgets together total 125.4% of the 2010 revenues, greatly exceeding the revenues available by about $550 billion. Thus nothing is available for the government as we know it, i.e. most of the discretionary budget (Departments of State, Treasury, Justice, Agriculture, Energy, Education, Interior, Commerce, National Park Service, etc. and the Administrations of EPA, NASA, etc., and such Authorities as the Tennessee Valley and Bonneville, etc. excluding the military/security budget). You could shut all these parts of the government down completely, and you would still run a deficit of about $550 billion.

To the credit of Rand Paul, he would not take Military/Security spending off the table for consideration of budget cuts though my understanding is that current plans do take them off the table; however he would not touch Social Security.*** The problem is caused to a significant extent in that Federal revenues are at a 60 year low as a percentage of GDP.**** I don’t see how we can balance the budget without tax increases in addition to budget cuts plus a rapidly increasing economy. And the budget cuts must be carefully made as they could easily push us into a recession or worse through large cuts in Federal and contractor employees and termination of contracts, many of which don’t have release clauses so will have to be paid anyway. This was true, for example, when President Obama terminated the manned missions to the moon project of NASA, though it does save follow-on contracts. * http://www.huffingtonpost.com/christopher-hellman/national-security-budget_b_829676.html.

Consider an article by charliebonds, post 353603, "2012 Military Budget 56.4% of Available" in Investment Analysis Clubs/Macro Economic Trends And Risks, 6 March 2011: For 2012, the White House has requested $558 billion for the Pentagon’s annual "base" budget, plus an additional $118 billion to fund military operations in Iraq and Afghanistan. At $676 billion, that’s already nothing to sneeze at, but it’s just the barest of beginnings when it comes to what American taxpayers will actually spend on national security. Think of it as the gigantic tip of a humongous iceberg. To get closer to a real figure, it’s necessary to start peeking at other parts of the federal budget where so many other pots of security spending are squirreled away. Missing from the Pentagon’s budget request, for example, is an additional $19.3 billion for nuclear-weapons-related activities like making sure our current stockpile of warheads will work as expected and cleaning up the waste created by seven decades of developing and producing them. That money, however, officially falls in the province of the Department of Energy. And then, don’t forget an additional $7.8 billion that the Pentagon lumps into a "miscellaneous" category -- a kind of department of chump change -- that is included in neither its base budget nor those war-fighting funds. So, even though we’re barely started, we’ve already hit a total official FY 2012 Pentagon budget request of: $703.1 billion dollars. Not usually included in national security spending are hundreds of billions of dollars that American taxpayers are asked to spend to pay for past wars, and to support our current and future national security strategy. For starters, that $117.8 billion war-funding request for the Department of Defense doesn’t include certain actual "war-related fighting" costs. Take, for instance, the counterterrorism activities of the State Department and the U.S. Agency for International Development. For the first time, just as with the Pentagon budget, the FY 2012 request divides what’s called "International Affairs" in two: that is, into an annual "base" budget as well as funding for "Overseas Contingency Operations" related to Iraq and Afghanistan. (In the Bush years, these used to be called the Global War on Terror.) The State Department’s contribution? $8.7 billion. That brings the grand but very partial total so far to: $711.8 billion. The White House has also requested $71.6 billion for a post-2001 category called "homeland security" -- of which $18.1 billion is funded through the Department of Defense. The remaining $53.5 billion goes through various other federal accounts, including the Department of Homeland Security ($37 billion), the Department of Health and Human Services ($4.6 billion), and the Department of Justice ($4.6 billion). All of it is, however, national security funding, which brings our total to: $765.3 billion. The U.S. intelligence budget was technically classified prior to 2007, although at roughly $40 billion annually, it was considered one of the worst-kept secrets in Washington. Since then, as a result of recommendations by the 9/11 Commission, Congress has required that the government reveal the total amount spent on intelligence work related to the National Intelligence Program (NIP). This work done by federal agencies like the CIA and the National Security Agency consists of keeping an eye on and trying to understand what other nations are doing and thinking, as well as a broad range of "covert operations" such as those being conducted in Pakistan. In this area, we won’t have figures until FY 2012 ends. The latest NIP funding figure we do have is $53.1 billion for FY 2010. There’s little question that the FY 2012 figure will be higher, but let’s be safe and stick with what we know. (Keep in mind that the government spends plenty more on "intelligence." Additional funds for the Military Intelligence Program (MIP), however, are already included in the Pentagon’s 2012 base budget and war-fighting supplemental, though we don’t know what they are. The FY 2010 funding for MIP, again the latest figure available, was $27 billion.) In any case, add that $53.1 billion and we’re at: $818.4 billion. Veterans programs are an important part of the national security budget with the projected funding figure for 2012 being $129.3 billion. Of this, $59 billion is for veterans’ hospital and medical care, $70.3 billion for disability pensions and education programs. This category of national security funding has been growing rapidly in recent years because of the soaring medical-care needs of veterans of the Iraq and Afghan wars. According to an analysis by the Congressional Budget Office, by 2020 total funding for health-care services for veterans will have risen another 45%-75%. In the meantime, for 2012 we’ve reached: $947.7 billion. If you include the part of the foreign affairs budget not directly related to U.S. military operations in Iraq and Afghanistan, as well as other counterterrorism operations, you have an additional $18 billion in direct security spending. Of this, $6.6 billion is for military aid to foreign countries, while almost $2 billion goes for "international peacekeeping" operations. A further $709 million has been designated for countering the proliferation of weapons of mass destruction, combating terrorism, and clearing landmines planted in regional conflicts around the globe. This leaves us at: $965.7 billion. As with all federal retirees, U.S. military retirees and former civilian Department of Defense employees receive pension benefits from the government. The 2012 figure is $48.5 billion for military personnel, $20 billion for those civilian employees, which means we’ve now hit: $1,034.2 billion. (Yes, that’s $1.03 trillion!) When the federal government lacks sufficient funds to pay all of its obligations, it borrows. Each year, it must pay the interest on this debt which, for FY 2012, is projected at $474.1 billion. The National Priorities Project calculates that 39 percent of that, or $185 billion, comes from borrowing related to past Pentagon spending. Add it all together, and the grand total for the known national security budget of the United States is: $1,219.2 billion. ** charliebonds post # 353603 in Investment Ananlysis Clubs/Macro Ecomonic Trends And Risks of Motley Fool, "Due to declining tax-receipts, increasing debt-service costs, etc., it is unlikely that US revenues in 2012 will be higher than 2010. In fact, it is unlikely they will even be the same. But let’s give the tax-collectors the benefit of doubt and say that revenues for the US Government in 2012 will be $2.1627 trillion. Therefore, the proposed military/security/ war budget of $1.2192 trillion will be 56.4% of total, available revenues." 

**http://www.bankruptingamerica.org/tag/social-security/ (Scroll down to Budget Process: Perception vs. Reality)
*** http://washingtonexaminer.com/blogs/beltway-confidential/2011/01/detailed-look-rand-paul-spending-bill He would cut the Federal budget by $500 billion.
**** http://www.suntimes.com/business/3706985-420/taxes-too-high-theyre-actually-at-60-year-low.html