Excellent column about the deficit

Robert Samuelson of the Washington Post has written an excellent column, entitled "A country in denial about its fiscal future" about the current conflict over government spending.  Samuelson notes that:
"From 1960 to 2010, the share of federal spending going for “payments to individuals” (Social Security, food stamps, Medicare and the like) climbed from 26 percent to 66 percent. Meanwhile, the tax burden barely budged. In 1960, federal taxes were 17.8 percent of national income (gross domestic product). In 2007, they were 18.5 percent of GDP."   He claims that we could achieve this because the military share of the budget declined from 52%of federal outlays in 1960 to 20% today.


Samuelson argues that while the economics of federal spending have changed, the politics haven't. "Liberals still want more spending, conservatives more tax cuts. (Although the tax burden has stayed steady, various “cuts” have offset projected increases and shifted the burden.) With a few exceptions, Democrats and Republicans haven’t embraced detailed takeaway policies to reconcile Americans’ appetite for government benefits with their distaste for taxes. President Obama has provided no leadership. Aside from Rep. Paul Ryan (Wis.), chairman of the House Budget Committee, few Republicans have."


I would argue that, while he is correct about liberals, he misstates the Republican position.  Generally, they all recognize that Social Security shouldn't be changed for current recipients or those approaching retirements, but that changes must be made for participants who are not close to retirement.  These include raising the retirement age, creating private accounts, and possible means testing.  See "Factbox: Social Security Positions of Republican Candidates" Reuters, September 26, 2011.  The same goes for Medicare and Medicaid.  See GOP Presidential Hopefuls: Where They Stand On Health Care, Kaiser Health News, December 23, 2011.  It is only if Republicans gain control of Washington that substantive changes will be made to these programs.

To Reduce the Deficit, Eliminate Amtrak

The Wall Street Journal has an excellent editorial today about the burden of Amtrak on the federal government and the deficit. While Amtrak announced a new record of 30 million passengers in the last fiscal year, it also ran up an operating loss of $560 million, which was paid by the federal government. As the WSJ stated:

“Amtrak announced last week to great media fanfare that the national train service carried a record 30 million passengers last year. A banner year on its 40th anniversary of government ownership, right? Well, no.

Here's what Amtrak didn't trumpet: It lost a near-record amount of money in fiscal 2011, with some $560 million from the feds required to cover its operating deficit.

This isn't an operation that can make up losses with greater volume. The curse of Amtrak is that its operating costs are so high on most routes, and its fares so inadequate to cover those costs, that even as more people hop on board it still can't cut its losses. It currently loses about $54.50 per passenger, and the Sunset Limited line between New Orleans and Los Angeles loses $390 per ticket, according to the House Transportation Committee. Since Richard Nixon nationalized passenger rail service in 1971, Amtrak hasn't made money in a single year.”

I noted last week that the deficit was so large – – 36% of the federal budget – – that the problem could not be solved by cutting around the edges. Rather, entire departments and agencies would have to go. Amtrak is a prime candidate for total elimination. Certainly, all routes outside the Northeast could be eliminated without any damage to the public interest. On those routes, Amtrak competes with airlines, who offer higher frequency and lower fares. Most of Amtrak's loss would be eliminated the cancellation of those routes.

In the Northeast, it is likely that Amtrak could approach breakeven with its high density routes. If not, it could be subsidized by the states through which it passes, rather than by the federal government. In fact, the House Transportation Committee is drafting legislation to privatize the Northeast corridor so that private industry could build high-speed rail.  In any event, there is no need for continued subsidization of  train service by the federal government.

Michelle Bachmann Agrees With My Analysis of the Deficit Problem

I doubt that Michelle Bachmann has read my blog, but her analysis of the deficit problem is close to mine.  At the Republican debate in New Hampshire on October 11, she echoed my theme of several recent posts by quantifying the deficit as a percent of the total budget.  This shows the size of the deficit compared to total expenditures, a relationship of which most Americans are unaware.

The transcript is as follows:

REP. BACHMAN: -- “Our government right now -- this is significant.  We are spending 40 percent more than what we take in. We all paid a lot of taxes this year.  We paid $2.2 trillion in taxes. That's a lot of money from all the American people.  The American government spent a hundred percent of that 2.2 trillion (dollars). But the travesty is they spent 1.5 trillion (dollars) more than that. That's the problem.  Every year, we are spending about 40 percent more than what we take in.

Our answer has to be that we cut back on the spending so we get to balance.  We can't do this because all --

MR. ROSE:  Will cutting back on the spending --

REP. BACHMANN:  -- all around us are young people that are going to be paying for this burden.  And their tax rates won't be our tax rates.  Their tax rates could come at some point, their overall effective burden -- I'm a federal tax lawyer; that's what I do for a living.  And my background is in economics.  Their tax rates some day in their peak earning years, Charlie, could be as much as 75 percent. Who's going to get out of bed in the morning to go to work, if they're paying 75 percent tax rates?  We've got to get our spending house in order and cut back on spending.”

Good work, Michelle.  Keep it up.  Maybe we can educate the American public.

Debit Card Regulation Has Consequences Unintended by Democrats

Every now and then, we try to adhere to the purpose of this blog by focusing on some egregious example of the unintended consequences of a regulation.  The latest example is the debit card fiasco.

As you will recall, led by Senator Dick Durbin, Congress included a provision in the Dodd-Frank law that limited the amount of debit card fees that banks could charge to merchants.  They had previously been charging about $.48 per transaction, but the law now allows a maximum of $.24.  Economist and others warned that, if banks were required to reduce debit card fees, they would offset these losses of revenue by other charges to consumers.  That has now come to pass.

Shortly before the law's October 1 effective date, Bank of America announced that it planning to adopt a fee of $5 per month for depositors using debit cards to make purchases.  Other banks are testing similar fees, although at lower levels.  The B of A fee, in particular has drawn a tremendous amount of media attention and reported outrage from consumers, who have threatened to take their business elsewhere.

The response from Democrats has been predictable.  Since the didn't believe the warnings that restricting debit fees to merchants would lead to price increases elsewhere, they are shocked, shocked when banks follow through and actually raise such prices.  Senator Durbin said,

" After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers.  It's overt, unfair and I hope their customers have the final say.  Earlier this year the Federal Reserve determined that the interchange fees Visa and Mastercard fix for big banks grossly exceed the cost of processing a debit card transaction by some 400%.  These hidden fees were designed to boost big-bank profits by charging small businesses and merchants every time a debit card was swiped."

President Obama also criticized the increase, saying, "“You don’t have some inherent right just to, you know, get a certain amount of profit, if your customers are being mistreated, ... this is exactly the sort of stuff that folks are frustrated by.

The Federal Reserve rulemaking did determine the cost of processing a debit card transaction.  But it considered only the costs.  Thus it stated "As required by the statute, the final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions."

Neither the Dodd-Frank Act nor President Obama considered how business actually operate.  Businesses earn profits -- there is no basis for determining that they should not include a profit element in their fees to merchants.  If the pricing of interchange fees now excludes all elements of profit, the banks must recover those lost profits form the other party to the transaction -- the consumer.  Contrary to the President, businesses do have the inherent right to earn a profit -- that's what the whole capitalist system is about.

Obama's remark betrays a fundamental problem with his presidency -- his distrust, in part based on his years as a community organizer, of the American business system and his effort to restrict its freedom of operation.  His response in an informal interview undermines all the grandiloquent language in his teleprompter speeches and demonstrates his fundamental antagonism to American business.

Final FY 2011 Figures Confirm Enormity of Deficit

I have written twice in recent months about the enormous size of the federal deficit and how the political world talks about the deficit but never discussed its actual size.  The Congressional Budget Office has now updated its figures to the full fiscal year ended September 30, 2011, and has confirmed the enormity of the amount.  According to today's news reports, the deficit for the full fiscal year amounted to $1.3 billion.  The CBO report is available as a pdf on its website.  While the report gives the hard numbers, it fails to  provide the percentage figures that would place them completely in context.

The following table shows the basic numbers:

                                                              Fiscal 2011
                                                        (in billions of dollars)


                                                     Receipts                        2,302

                                                     Outlays                          3,600

                                                      Deficit                           1,298

Thus, the deficit as a percentage of outlays was 36.06% -- more that one/third of the federal budget was paid for by borrowing money.  Another way of looking at the problem is that we spent 56.4% more than our revenue.

Imagine a family spending $100,000 per year, when its income was $64,000.  Obviously, it would have to make substantial cuts in expense in order to survive.  The same goes for the federal government.  The current discussion of cuts of $1 or $2 trillion over ten years is only nibbling around the edges.  To achieve real reductions, entire programs and agencies wil have to be eliminated.

Finally, a Clear Explanation on the Solyndra Loan

The Wall Street Journal has an excellent article today explaining exactly what Solyndra made, and what it did with the federal loan of $535 million.  The title of the article – – "The Loan Was Solyndra's Undoing" – – does not seem quite accurate.  According to the article, Solyndra was in difficulty before the loan, but use the proceeds of the loan to quintuple its manufacturing capacity,  This decision drove it over the cliff.

According to the article, Solyndra used a module of cylindrical tubes to manufacture solar power, while other manufacturers use photovoltaic silicon panels. Solyndra's problem was that its process produced much higher costs than the competing system. Solyndra's tubes cost $4.00 per watt of power to produce, while it could only sell each watt for $3.24.  At the same time, its Chinese competitors were producing silicon panels at less than a quarter of Solyndra's costs, and today produce panels at $.75 per watt.

Solyndra had a plant with an annual capacity of 110 MW, but actually produced only 65 MW in 2010.  However, it used the loan to build a new factory capable of producing 500 MW per year.  It could never make use of the additional capacity because it was simply not competitive with the makers of solar panels.  At least, the company has some physical assets – the factory – that can be sold in bankruptcy, and the government may ultimately get some of its money back.

The Wall Street Journal has another article today reporting that as recently as May, 2011, the company told the government that it was financially healthy.  It also reports the government's excuse for the company's failure – the Department of Energy says that the Chinese suddenly flooded the market with lower cost solar panels.  Based on the other article, this appears to be nonsense.  Solyndra made a different type of solar product, that was higher cost than the Chinese to start with, and there was no way it could match later price reductions.  It's problems were much more fundamental than sudden Chinese competition.

CBO Updates Deficit Data -- Deficit still over 35% of Total Expenses

The Congressional Budget Office  this week updated the its estimates for the federal deficit for the current fiscal year and projected estimates for several years into the future.  The forecast is suspect, however, because it assumes that cost savings deals that resulted from the budget deficit limit negotiations will actually occur and that the Bush tax cuts will expires as required by current law.  They have already been extended once and will probably be extended again -- the last thing we want to do in a faltering economy is to raise taxes.


The forecast for this fiscal year shows minor changes.  The deficit will continue to be 35.7% of total expenditures -- thus, over one/third of the federal budget is funded by the issuance of debt.  The federal government  continues to spend 55.5% more that than it receives from taxes and other sources of revenue.


As reported in the Wall Street Journal, "CBO said that this year's deficit—at 8.5% of GDP—will be larger by that metric than all but two other years in the past 65, exceeded only by 2009 (10%) and 2010 (8.9%.) Spending, at 23.8% of GDP this year, is significantly higher than the historical averages. Revenues are significantly lower at 15.3% of GDP this year."

FederalExpenditures Exceed Receipts by More Than One-third

It seems to me that the recent debate over the debt ceiling has treated the enormous amounts involved in an abstract manner.  It is difficult to get one's mind around figures such as $2 or $3 trillion.  We already know that the Treasury took advantage of the increase in the debt level to raise the total outstanding federal debt to more than 100% of the gross domestic product.  That means that the national debt exceeds the revenue generated by the entire economy in 2010.  And yet, because this can be paid off over time, many on the left do not believe we should be concerned about this.

It may be more relevant for some people to compare the deficit to expenditures on an annual basis.  Recently, I heard a radio talk show host announce that, in the latest month, federal expenditures totaled $300 billion, while its receipts totaled $180 billion– in other words, that expenditures exceeded revenues by more than 40%.  The most recent Monthly Budget Review issued by the Congressional Budget Office (August 5, 2011) generally confirms this.  For the first ten months of Fiscal 2011, federal receipts were $1893 billion, while expenditures were $2996 billion. (Or receipts = 1.892 trillion and expenditures = 2.996 trillion).  During this period the deficit was $1.1 trillion.  This means that receipts were only 63.2% of expenditures, or put another way, we spent 58.3% more than we received.  No family could go through life spending 58% more than their income, and this is also true for the federal government.

Looked at in this light, it is beyond my comprehension how anyone could argue that we do not have a massive problem, or that we need not reduce the size of the federal government to solve it.  Since it would not be possible to raise taxes by 58% without destroying the economy, the only alternative is to reduce costs.  I am afraid that, only if we elect a Republican President and Republican Congress, will we be able to do this.