2010 May 12 Wednesday
Spending Cuts And Tax Increases Coming To US

David Leonhardt of the New York Times lays out argument for how the US government budget deficit is so large that neither spending cuts or tax increases alone are likely to be able to balance the US federal budget.

As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs).

Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.

There's no way to close that gap without reducing consumption. That means lower living standards. The cost of closing that gap will wider with each year that the total government debt grows. Eventually the need to cut and tax will be forced by the market via a sovereign debt crisis where US and foreign investors become unwilling to buy US Treasury bonds. Greece and California both serve as models for what is coming for the United States: A several years long crisis period with increasingly severe cuts and troubles. Even basic services will get cut. Expect much less from your government in the future and you won't be disappointed.

The basic problem is that the American people do not want to admit they are living beyond their means. Even worse, I believe the gap between what we can afford and what we are getting is even bigger than the US federal budget deficit suggests. For example, State and local government pension plans and employee benefits are out of control. State and local governments are therefore accumulating obligations beyond their means to pay.

The US trade deficit is another substantial amount by which Americans are living beyond their means.

At 3.5 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama's stimulus package adds to demand. Moreover, Obama's stimulus is temporary, whereas the trade deficit is permanent and growing again.

When world oil production starts shrinking every year the ensuing financial crisis will be so severe that lots of currently sacrosanct spending programs will get cut. Do not rely on US government entitlements programs for old age. The US government will be forced to make cuts as severe as those made by Greece.

Share |      By Randall Parker at 2010 May 12 11:31 PM  Economics Sovereign Crises

Sal said at May 14, 2010 4:02 PM:

Yeah, spending cuts on the way! Never gonna happen...

Randall Parker said at May 14, 2010 8:32 PM:

Sal, The spending cuts will come when the market becomes unwilling to buy new debt issues. Necessity is a mother.

Sal said at May 15, 2010 10:51 AM:

Sal, The spending cuts will come when the market becomes unwilling to buy new debt issues. Necessity is a mother.
The fucks in DC are going to print cash like crazy. Just watch.

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