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The 8 True Causes of Deficits and the Debt


In less than two weeks the congressional ‘Supercommittee’ is scheduled to release its recommendations to cut $3 to $4 trillion or more from the U.S. budget, as the U.S. blindly plunges into a Greek-like austerity program based on the erroneous economic view that budget cutting leads to economic recovery. At the heart of the cuts will be historic gutting of Medicare and Medicaid. Already Democrats have proposed a minimum of $500 billion—just about what Vice-President Biden offered to Republicans last June and President Obama last July. Not to be outdone, the Republicans countered in October with $760 billion. Supercommittee recommendations for cuts in social security retirement programs may increase that amount to more than $1 trillion.

 

One of the main arguments claiming to justify the cuts in Medicare-Medicaid is that their costs are contributing significantly to unsustainable budget deficits and federal debt levels and must therefore be reduced. But the real causes of the deficits and the debt are hardly addressed by those calling for massive cuts in Medicare-Medicaid-Social Security. So how much is U.S. deficits and debt and what are their true causes?

 

The total US federal government debt rose between 2000 and 2011 by approximately $9.2 trillion, from $5.6 trillion in 2000 to $14.8 trillion today, according to the Federal Reserve’s ‘Flow of Funds’ reports.

 

There are basically eight causes of the $9.2 trillion rise in the US federal debt over the past decade: excess inflationary defense-war spending; the Bush tax cuts from 2001-2011; the direct Congressional funded bailouts of banks and corporations following the banking crash of 2008; Bush and Obama’s successive fiscal (tax cuts and spending) stimulus packages of 2008-11; price gouging by health insurance companies and health services providers; and simple interest on the debt for all the above. The amounts and calculations for each are summarized in Table 1 as follows:

 

TABLE 1

Eight Major Causes of $9.2 Trillion U.S. Debt Increase

 

          Debt Contributing Factor      Addition to Debt     Percent of $9 Trillion Debt

 

1.    Pentagon-War Spending $2,100 billion                       22.9%

 

2.    Bush Tax Cuts 2001-12   $3,150 billion                      34.2%

& Extensions

 

3.    Direct Bank & Other           $900 billion                      9.8%

Corporate Bailouts

 

4.    Bush-Obama Stimulus    $1,896 billion                        20.6 %

Packages, 2008-2011

                (Spending & Tax cuts)  

 

5.    Nonfunding of Part ‘D’       $450 billion                        4.8%

Prescription Drugs Plan

 

6.    Excess Inflation Costs for        

Medicare-Medicaid            $180 billion                       1.9%

 

7.    Lost Tax Revenue from     $255 billion                         2.7%

18 million additional

unemployed

 

8.    Interest on the $9 Trillion    $270 billion            2.9%

                                                           ____________

                                                $9,201 billion ($9.2 trillion)

 

Sources: (1)Office of Management & Budget historical tables & BLS for CPI change; (2) Center for Budget and Policy Priorities, June 28, 2010, based on Congressional Budget Office and Joint Tax Committee of Congress data; (3) U.S. Treasury, TARP Report; (4) (5), Medicare Trustees Report for 2011, (6) Wall St. Journal, New York Times, Economic Policy Institute, Center for Budget and Policy Priorities articles and analyses; (7) Federal Reserve Bank, ‘Flow of Funds’ Report, July 2011 and author’s calculations.

 

Explaining each of these eight causes in turn:

 

The $2.1 trillion in Pentagon and War spending as a contributing factor to the $9 trillion debt run-up over the decade represents just the excessive inflation in Defense and ‘Contingency Operations’ (‘CO’=direct spending on Iraq and Afghanistan) above the normal average consumer price index (CPI) rise of about 2%. War and Defense spending rose annually on average by 8.2% over the decade. The $2.1 trillion thus represents just that increase in War and Defense spending in excess of the 2% average CPI. The $2.1 figure is actually very conservative, since it does not include additional long-term indirect war costs associated with military construction, department of energy, veterans benefits, and the like. It also excludes arguable defense costs in the military and counterinsurgency elements of spending by the CIA, FBI, NASA, State Department, Foreign Aid, and Homeland Security. Also excluded are ‘black’ or ‘off budget’ secret project military weapons development spending that doesn’t show up in public budget data. The latter are estimated at around $50-$75 billion a year. Homeland Security is another $40 billion a year. In total, the US Defense spending is, at minimum, conservatively around $900 billion to $1 trillion a year. The inflation in these additional costs over the decade would easily increase the $2.1 trillion allocated to the $9 trillion debt run-up by another $200-300 billion or so.

 

The Bush Tax cuts contribution to the total debt includes a basic $1.7 trillion estimate for the Bush era 2001-2003 tax cuts from 2001 to 2008, and the Center for Budget and Policy Priorities’ estimate of another more than $1 trillion for 2009-10, plus the two year extensions of the Bush tax cuts agreed to by Congress for 2011 and 2012 costing about $450 billion more. These are also conservative estimates, since they don’t include major oil and energy industry corporate tax cuts enacted in 2004-05 by the Bush administration. Nor do they account for the $1.2 to $1.4 trillion that multinational corporations are hoarding in cash in their offshore subsidiaries today to avoid paying the normal 35% tax rate in the U.S. If the latter were included, the total tax cuts for corporations and investors would add another $400 billion or so to the Bush tax cuts of $2.9 trillion.

 

The $900 billion in bank and corporate bailouts refers only to the $700 billion TARP (Troubled Asset Relief Program) passed by Congress in October. It also includes the roughly $200 billion separately passed by Congress to bailout the government mortgage agencies, Fannie Mae and Freddie Mac. They too ‘went broke’ as a result of the financial collapse of the housing sector in 2007-08 and were bailed out in July 2008. It is important to note that this $900 billion ‘direct’ bailout does not include the roughly $9 trillions of dollars injected into the banks by the Federal Reserve, which was the true source of the bailout of the banks since 2008. The Federal Reserve has a separate set of books that do not add to the US deficit and total debt of the federal government.

 

Then there are the three main Bush and Obama fiscal stimulus packages in 2008, 2009 and 2010, which together amount to $1.89 trillion in tax cuts and spending that have failed to date to bring about economic recovery. They include the Bush April 2008 stimulus of $168 billion; Obama’s February 2009 stimulus of $787 billion and subsequent $84 billion in supplement spending and tax cuts in 2009-10; and Obama’s December 2010 package worth another $857 billion, of which a massive $802 was tax cuts.

 

The escalating health care cost—consisting mainly of unfunded Part D of Medicare and the excessive inflation in health care services well above the average national inflation rate—contributed approximately $630 billion to that $9 trillion US debt run-up from 2000 to 2011. Most of that $630 billion was the $450 billion in Congress’s failure to fund the Part D prescription drug program, requiring the program be paid totally out of deficit spending. The remainder cost is attributable to the excess inflation for health insurance and services directly impacting Medicare and Medicaid costs.

 

Another $255 billion is from lost tax revenue due to chronic unemployment for the past three years. Before the recession began in December 2007, there were 7.1 million unemployed. For the past three years that number has been 25-26 million without change, or about 18 million. Assuming a median annual earnings of $47,000 for the 18 million, an unemployment period of 6 months on average, and an average income tax rate for the group of 20%, the total lost for the past three years in federal income tax revenue is $255 billion. And that does not count lost payroll tax or corporate income tax revenue associated with the layoffs.

 

The final item, interest on the debt is calculated based on a simple assumption of non-compounded interest over the decade, which comes to $270 billion for the $9.2 trillion.

 

In summary, the true causes of the deficits and therefore the $9.2 trillion run-up in the federal debt are wars and runaway Pentagon equipment spending, the Bush tax cuts, the bailouts of banks and corporations, the fiscal stimulus packages of Bush-Obama that didn’t result in economic recovery, the chronic three year long 25 million jobless situation, and price gouging by health insurance and health services providers.

 

Jack Rasmus is the author of ‘An Alternative Program for Economic Recovery’, Kyklos Productions, October 2011; Epic Recession: Prelude to Global Depression, Pluto Press and Palgrave-Macmillan, May 2010; and the forthcoming Obama’s Economy: Recovery for the Few, same publishers, February 2012.  

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