Last week the Congressional budget office came out with a short report which, I think, explains simply its estimates on future deficits. The report points out that the increases in Social Security, Medicare, and Medicaid have been, in the past, paid for by significant cuts in Defense spending. The difference in where we are now is that we can’t decrease Defense spending enough to cover projected increases. For a summary of the report see the section below my name.
Secondly, last week I read a great book entitled: The Great Depression: A Diary by Benjamin Roth, James Ledbedder, and Daniel Roth. It describes what occurred in the depression years from the diary of someone who was interested in making observations. What was interesting about the book was:
1.How really bad the depression was. Not only did many people lose everything they had, but unemployment was so high and bank failures so frequent that massive portions of the population were on public assistance. Tax revenues shrank and those who could pay … say property taxes, razed rental buildings to take the land back to unimproved status to lower tax rates.
2.There were many similarities to the economic situation we face today. Some of the solutions undertaken by the Roosevelt Administration – which did not work – have been tried today. Both the Obama and Roosevelt Administrations tried to “spend their way out of” the recession/depression … and it did not work in the 1930s. The book is an easy read … and a bit repetitive. And a lot of it talks about categories of investments and how they were doing. But it gives one insights to the depression that I have not seen elsewhere. Plus it is a great addition to the understanding of perhaps our most important national security issue – our economy.
Thirdly, about 6 weeks ago, the Administration released its National Space Strategy. A link to the unclassified summary can be found at: http://www.defense.gov/home/features/2011/0111_nsss/docs/NationalSecuritySpaceStrategyUnclassifiedSummary_Jan2011.pdf I was struck by the simple observation that space is … as opposed to Tom Friedman’s Hot, Flat, and Crowded … cold, infinite, crowded … and essential. The number of countries which operate satellites in space is now approaching 60. Plus there are over 22,000 man-made objects in space. Keeping track of them … and avoiding them is a tough challenge faced by both USSTRATCOM and AFSPACECOM. Take a look at this summary and let me know what you think about it.
Finally, this week’s Portrait in Courage highlights the heroism of Staff Sergeant Christopher Ferrell. SSgt Ferrell is an Explosive Ordnance Disposal Team Leader. You can read about his exploits at: http://www.afa.org/Portraits/2010/Portrait_Ferrell.asp
For you consideration.
Michael M. Dunn
Air Force Association
The Outlook for the Economy and the Budget
CBO, February 24, 2011
Although CBO expects that production and employment will expand this year and in coming years, a return to normal economic conditions will take years. Payroll employment, which declined by nearly 9 million between the end of 2007 and early 2010, has recovered by just a shade over 1 million since then. Only by 2016, in our forecast, does the unemployment rate reach 5.3 percent, close to our estimate of the natural rate.
If current laws remain unchanged, as we assume for CBO’s baseline projections, the economic recovery and scheduled expiration of major tax provisions would cause budget deficits to drop markedly over the next few years as a share of output. Still, CBO projects that deficits would average 3.6 percent of GDP from 2012 through 2021, totaling nearly $7 trillion over that decade. As a result, the debt held by the public would keep rising, reaching 77 percent of GDP in 2021.
Suppose instead that three major aspects of current policy were continued during the coming decade: 1) the higher 2011 exemption amount for the alternative minimum tax (AMT) was extended and, along with the AMT tax brackets, was indexed for inflation; 2) the other major provisions in the recently enacted tax legislation that affected individual income taxes and estate and gift taxes were extended, rather than allowed to expire in January 2013; and 3) Medicare’s payment rates for physicians’ services were held constant, rather than dropping sharply as scheduled under current law. If those policies were extended permanently, deficits over the coming decade would average about 6 percent of GDP and would cumulate to nearly $12 trillion. Debt held by the public in 2021 would rise to almost 100 percent of GDP, the highest level since 1946.
Assuming the continuation of those policies, balancing the budget in 2021 would require an additional cut in spending of about one-quarter, an increase in tax revenue of about one-third, or some combination of those approaches. On the spending side, a cut of that size would be a little more than total projected spending on Social Security; almost as much as combined spending on Medicare, Medicaid, and other health programs; and much more than spending on defense. Such a cut would also be a bit larger than all other federal spending—including spending related to transportation, education grants, federal justice, unemployment assistance, and retirement benefits, for example—apart from net interest and the programs listed above. On the revenue side, an increase of that size would be more than a tripling of revenue from the corporate income tax or a substantial increase in individual income tax revenue.Projected Federal Revenue and Spending in 2021 with the Continuation of Certain Policies
During the past few decades, the significant increase in Social Security, Medicare, and Medicaid spending has been accommodated in the federal budget by a marked decline in defense spending relative to GDP. Between 1970 and 2007, outlays for Medicare, Medicaid, and Social Security as a share of GDP increased by a little more than 4 percentage points; over that same period, outlays for defense as a share of GDP decreased by a little more than 4 percentage points.Looking ahead, outlays for Social Security and federal health programs will continue to expand more rapidly than GDP as the baby boomers retire and health spending per person increases—climbing nearly another 4 percentage points in CBO’s projections by 2021. With defense spending running between 4 percent and 5 percent of GDP in the past few years, significantly reducing deficits will require changes to programs or tax payments that people will feel much more directly than they felt those past changes in defense spending.
Budgetary changes of the magnitude that will ultimately be required could be disruptive. Therefore, Congress may wish to implement them gradually so as to avoid a sudden negative impact on the economy, particularly as it recovers from the severe recession, and so as to give families, businesses, and state and local governments time to plan and adjust. Allowing for such gradual implementation would mean that remedying the nation’s fiscal imbalance would take longer and therefore that major policy changes would need to be enacted soon to limit the further increase in federal debt.