This article was first published by The McAlvany Intelligence Advisor on Monday, July 14, 2014:

 

Historical government spending in the United S...

Historical government in the United States from 1902 to 2010

Back in February the Congressional Budget Office (CBO) estimated that the for the 2014 fiscal year would be $514 billion, or about 3 percent of the total economic output of the country. Since this was a nearly 27 percent drop from last year, the implication is that all is well, nothing to see here, move along please. After all, the perception has been that the White House has been spending money faster than at any time in history, running up deficits and the to staggering levels. Half a trillion? Is that all? Pocket change!

Greg Valliere, the chief political strategist for the Potomac Research Group, said at the time that this guaranteed that there would be no pressure for any sort of entitlement reform this year. Jack Lew, Obama’s Treasury Secretary, said the numbers bought some time: “We have a little time to deal with the long term.”

Last week both the White House and the CBO revised downward even further the expected deficit, with Obama taking full credit for the result:

There’s almost no economic measure by which we are not better off now than we were when I took office. We are indisputably better [off] than when I was elected….

His budget director, Brian Deese, amped up the rejoicing:

Under the president’s leadership, the deficit has been cut by more than half as a share of the , representing the most rapid sustained deficit reduction since World War II, and it continues to fall.

At the same time, our economy is moving forward and businesses are creating . Businesses have added nearly 10 million new over the past 52 months.

This latest revision downward put the final cap onto any attempt to deal with cuts to for this Congress, for two reasons: one, it’s too close to November and no politician wants to take questions about how he voted on government spending. And, two: there won’t be any vote on cutting government spending, thanks to that little bill passed in February, called the Temporary Debt Limit Extension Act, which effectively ended any discussion, conversation, or debate over government spending until, you guessed it, after the election: March, 2015.

The analysis provided by the White House and the CBO is phony from the start. By comparing the deficit to the GDP, it avoids any conversation about just how much that deficit really is. It also leaves the impression that the national debt will somehow take care of itself if the deficit stays low enough long enough that the economy will outgrow the deficit, reduce it to zero, and all will be well.

Christopher DeMuth, distinguished fellow at the conservative Hudson Institute, however, saw through the haze and ran his own set of numbers. He compared the deficit to the government’s budget, and discovered that

the deficit is 18 percent of spending this year and is projected at 16 percent over the coming decade, before rising sharply to pay mounting and Medicare bills and mounting interest on the national debt….

75 percent of federal program spending is now for Social Security, unemployment compensation, Medicare and Medicaid, food stamps, and housing subsidies….

And then he added:

[These] payments to individuals have become not only the dominant, but also the most politically potent form of spending…. (emphasis added)

In other words, DeMuth is saying that most of the borrowing is to pay benefits. Which means that there is a huge disincentive on the part of those receiving those benefits to have any sort of serious conversation about cutting them!

So that takes both of the big players out of the game: the Congress, which doesn’t want to talk about it, and the beneficiaries who don’t want to, either. The White House is delighted with the situation now that the Congress has abdicated its constitutional responsibility and virtually handed over the government’s gold card, without limits, to the White House, turning it into, among other things, the Spender-in-Chief.

What else is wrong with this picture? The CBO has consistently – some say deliberately – grossly understated the real national debt. It’s frightening enough to consider a national debt of $25 trillion in less than ten years. What is the real national debt?

That’s exactly the question Boston University Professor Laurence Kotlikoff was asked back in January. Here’s the relevant transcript of that conversation:

Host:

You’ve been writing for some time about America’s fiscal problems. A lot of people disagree about how serious these problems are. You argue that they are serious. How bad is it?

Kotlikoff:

I think it’s terrible. I think we are probably in the worst fiscal shape [of] any developed country….

We’ve been piling up debts for over 6 decades … and we’ve been hiding them. We’ve been keeping them off the books and using economic labels – words – to pretend that they are not real liabilities of the government….

The accounting is much worse, far worse than anything that , who ran that big pension , engaged in….

It’s really horrendous because the true debts of the country total about $205 trillion….

So the country really is bankrupt and nobody sees it because of the bookkeeping.

On three distinct points, then, the White House and the CBO have been misleading people: deficits are getting smaller, so the implication is that everything is under control. The deficits as a percent of output have also been getting smaller. The implication is the same: small is good, smaller is better, nothing to worry about. Thirdly, the real national debt is twelve times the nation’s gross national economic output, so far beyond its ability to pay as to be outright silly. But of course this is never mentioned in polite company.

All of this has turned any serious conversation about cutting government spending in order to trim the deficit and start generating surpluses into the “third rail of politics” – touch it and you die.

What happens when the spending binge ends? What happens when the bond market will no longer be interested in treasury paper because of the risk? Kotlikoff says there are only three solutions: raise , cut benefits, or inflate the promises away.

Raising taxes won’t work, he says, because they’d have to be raised by an astounding 60 percent even to come close to making good on those promises. Cutting benefits won’t work because there are too many voters already on the take. And inflating the promises away in a sea of paper won’t work either because it would threaten the very existence of the Federal Reserve. It’s helpful to remember the last time hit double digits in this country, and what the Fed did to quash it. Under Sources below check out the Fed’s own history of the incident.

What this news about deficits coming down really means is this: it’s a sham and a fraud and a cover for the agonizingly painful adjustments just waiting around the corner. The mathematics, unfortunately, is inevitable.

—————————

Sources:

CNN: Deficit continues to drop sharply – CBO

Yahoo: White House: 2014 deficit to drop $100B

Yahoo: White House trims 2014 deficit projection to $583 billion

Yahoo: White House Touts Continued Decline in the Deficit

Washington Times: Federal deficit to drop well below $1 trillion

The federal deficit

The Temporary Debt Limit Extension Act

Christopher DeMuth: America’s Deficit-Attention Disorder

The Hudson Institute

Bio on Christopher DeMuth

Transcript of interview with Laurence Kotlikoff

Bio on Laurence Kotlikoff

St. Louis Fed: Volcker’s Handling of the Great Inflation Taught Us Much

Potomac Research Group

 

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